<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SOVEREIGN SPECIALTY CHEMICALS, INC.
PIERCE & STEVENS CORP.
SIA ADHESIVES, INC.
OSI SEALANTS, INC.
MERCER PRODUCTS COMPANY, INC.
TANNER CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2891 36-4176637
NEW YORK 2891 31-1557383
DELAWARE 2891 16-0951610
ILLINOIS 2891 36-2361148
NEW JERSEY 2891 02-0352196
NEW HAMPSHIRE 2891 22-3061500
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
225 WEST WASHINGTON STREET
CHICAGO, ILLINOIS 60606
(312) 419-7100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT B. COVALT
225 WEST WASHINGTON STREET
CHICAGO, ILLINOIS 60606
(312) 419-7100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copy to:
CARTER W. EMERSON
KIRKLAND & ELLIS
200 EAST RANDOLPH DRIVE
CHICAGO, ILLINOIS 60601
TELEPHONE: (312) 861-2092
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9 1/2% Senior Subordinated Notes
due 2007, Series B.............. $125,000,000 $1,000 $125,000,000 $37,879
- --------------------------------------------------------------------------------------------------
Guarantees of 9 1/2% Senior
Subordinated Notes due 2007,
Series B........................ $125,000,000 (2) (2) None
==================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(2) No further fee is payable pursuant to Rule 457(n).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 3, 1997
PRELIMINARY PROSPECTUS
, 1997
SOVEREIGN SPECIALTY CHEMICALS, INC.
OFFER TO EXCHANGE ITS 9 1/2% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES B FOR ANY AND ALL OF ITS OUTSTANDING
9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
SOVEREIGN LOGO
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED.
Sovereign Specialty Chemicals, Inc., a Delaware corporation (the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and conditions set forth in
this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal
(the "Letter of Transmittal"), to exchange $1,000 principal amount of its 9 1/2%
Senior Subordinated Notes due 2007, Series B (the "Exchange Notes"), registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
a Registration Statement of which this prospectus is a part, for each $1,000
principal amount of its outstanding 9 1/2% Senior Subordinated Notes due 2007
(the "Old Notes"), of which $125,000,000 principal amount is outstanding. The
form and terms of the Exchange Notes are the same as the form and terms of the
Old Notes except that (i) the Exchange Notes will bear a Series B designation,
(ii) the Exchange Notes will have been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof and (iii)
holders of the Exchange Notes will not be entitled to certain rights of holders
of Old Notes under the Registration Rights Agreement (as defined). The Old Notes
and the Exchange Notes are sometimes referred to herein collectively as the
"Notes." The Exchange Notes will evidence the same debt as the Old Notes (which
they replace) and will be issued under and be entitled to the benefits of the
Indenture dated as of August 1, 1997 (the "Indenture") by and among the Company,
the Guarantors (as defined) and The Bank of New York, as trustee, governing the
Notes. See "The Exchange Offer" and "Description of the Exchange Notes."
The Company will accept for exchange any and all Old Notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time on , 1997,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
See "The Exchange Offer."
The Old Notes were sold by the Company on August 5, 1997 to Chase Securities
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial
Purchasers") in a transaction not registered under the Securities Act in
reliance upon an exemption under the Securities Act (the "Initial Offering").
The Initial Purchasers subsequently placed the Old Notes with qualified
institutional buyers in reliance upon Rule 144A under the Securities Act.
Accordingly, the Old Notes may not be reoffered, resold or otherwise transferred
in the United States unless registered under the Securities Act or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered hereunder in order to satisfy
the obligations of the Company and the Guarantors under the Registration Rights
Agreement entered into by the Company, the Guarantors and the Initial Purchasers
in connection with the Initial Offering (the "Registration Rights Agreement").
See "The Exchange Offer."
Interest on the Notes will be payable semi-annually on February 1 and August 1
of each year, commencing on February 1, 1998. The Notes will mature on August 1,
2007. Except as described below, the Company may not redeem the Notes prior to
August 1, 2002. On or after such date, the Company may redeem the Notes, in
whole or in part, at any time at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, if any, to the date of redemption. In
addition, at any time and from time to time on or prior to August 1, 2000, the
Company may, subject to certain requirements, redeem in the aggregate up to
$40.0 million aggregate principal amount of the Notes with the net cash proceeds
of one or more Public Equity Offerings (as defined) by the Company after which
there is a Public Market (as defined), at a redemption price equal to 109.5% of
the principal amount thereof, plus accrued and unpaid interest thereon, if any,
to the date of redemption; provided, however, that at least $85.0 million
aggregate principal amount of the Notes must remain outstanding immediately
after each such redemption. The Notes will not be subject to any sinking fund
requirement. Upon the occurrence of a Change of Control (as defined), the
Company will be required to make an offer to purchase the Notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase. See "Description of the Notes."
The Notes will be general unsecured senior subordinated obligations of the
Company and will be subordinated to all existing and future Senior Indebtedness
(as defined) of the Company. The Notes will rank pari passu with any future
senior subordinated indebtedness of the Company and will rank senior to all
Subordinated Indebtedness (as defined) of the Company. The Notes will be
guaranteed (the "Guaranties"), jointly and severally, on a senior subordinated
basis, by each of the Company's direct and indirect subsidiaries (other than
Foreign Subsidiaries (as defined)) on the issue date of the Notes (the "Issue
Date") and by each direct and indirect subsidiary of the Company (excluding
Foreign Subsidiaries and Unrestricted Subsidiaries (as defined)) formed or
acquired thereafter (collectively, the "Guarantors"). As of the Issue Date, the
Guarantors under the Indenture were Pierce & Stevens Corp., SIA Adhesives, Inc.,
OSI Sealants, Inc. (formerly known as Laporte Construction Chemicals North
America, Inc.), Mercer Products Company, Inc. and Tanner Chemicals, Inc.
(formerly known as Evode-Tanner Industries, Inc.). The Guarantees will be
general unsecured senior subordinated obligations of the Guarantors and will be
subordinated in right of payment to all existing and future Guarantor Senior
Indebtedness (as defined) (including Indebtedness outstanding under the Amended
Credit Facility). The Guarantees will rank pari passu with any and all future
senior subordinated Indebtedness of the Guarantors and will rank senior to all
other subordinated Indebtedness of the Guarantors. The Indenture permits the
Company and its Subsidiaries to incur additional indebtedness, including Senior
Indebtedness, subject to certain limitations. See "Description of the Notes." As
of June 30, 1997, on a pro forma basis after giving effect to the Transactions
(as defined), the Company and the Guarantors would have had outstanding in the
aggregate $158.8 million of indebtedness, including $33.8 million of Senior
Indebtedness and Guarantor Senior Indebtedness (as defined). See "Description of
the Exchange Notes -- Ranking," "-- Subordination of the Exchange Notes" and
"Description of the Exchange Notes -- Guaranties."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 3
(cover continued)
Based upon an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any such holder that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes. See "The Exchange Offer -- Resale of the Exchange
Notes." Holders of Old Notes wishing to accept the Exchange Offer must represent
to the Company, as required by the Registration Rights Agreement, that such
conditions have been met. Each broker-dealer (a "Participating Broker-Dealer")
that receives Exchange Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter is
being used in connection with the Exchange Offer. Holders of Old Notes not
tendered and accepted in the Exchange Offer will continue to hold such Old Notes
and will be entitled to all the rights and benefits and will be subject to the
limitations applicable thereto under the Indenture and with respect to transfer
under the Securities Act. See "The Exchange Offer."
There has not previously been any public market for the Old Notes or the
Exchange Notes. The Company does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors -- Absence of a Public Market
Could Adversely Affect the Value of Exchange Notes." Moreover, to the extent
that Old Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Old Notes could be adversely
affected.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MAKE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE SUBSIDIARY GUARANTORS. NEITHER THE DELIVERY OF THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER, SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPEC-
i
<PAGE> 4
TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM.
EXCEPT AS DESCRIBED UNDER "BOOK-ENTRY; DELIVERY AND FORM," THE COMPANY EXPECTS
THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER WILL BE
REPRESENTED BY A GLOBAL NOTE (AS DEFINED), WHICH WILL BE DEPOSITED WITH, OR ON
BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC") AND REGISTERED IN ITS NAME OR IN
THE NAME OF CEDE & CO., ITS NOMINEE. BENEFICIAL INTERESTS IN THE GLOBAL NOTE
REPRESENTING THE EXCHANGE NOTES WILL BE SHOWN ON, AND TRANSFERS THEREOF WILL BE
EFFECTED THROUGH, RECORDS MAINTAINED BY DTC AND ITS PARTICIPANTS. AFTER THE
INITIAL ISSUANCE OF THE GLOBAL NOTE, NOTES IN CERTIFICATED FORM WILL BE ISSUED
IN EXCHANGE FOR THE GLOBAL NOTE ONLY UNDER LIMITED CIRCUMSTANCES AS SET FORTH IN
THE INDENTURE. SEE "BOOK-ENTRY; DELIVERY AND FORM."
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE
CONTENTS OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR
SHOULD CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES. NEITHER THE
COMPANY NOR ANY OF THE GUARANTORS IS MAKING ANY REPRESENTATION TO ANY
PROSPECTIVE INVESTOR IN THE EXCHANGE NOTES REGARDING THE LEGALITY OF AN
INVESTMENT THEREIN BY SUCH PERSON UNDER APPROPRIATE LEGAL INVESTMENT OR SIMILAR
LAWS.
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WAS OBTAINED THROUGH COMPANY
RESEARCH, SURVEYS OR STUDIES PURCHASED BY THE COMPANY AND CONDUCTED BY THIRD
PARTIES AND FROM INDUSTRY OR GENERAL PUBLICATIONS. THE COMPANY HAS NOT
INDEPENDENTLY VERIFIED MARKET DATA PROVIDED BY THIRD PARTIES OR INDUSTRY OR
GENERAL PUBLICATIONS. SIMILARLY, INTERNAL COMPANY SURVEYS, WHILE BELIEVED BY THE
COMPANY TO BE RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA
FINANCIAL STATEMENTS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL THESE FORWARD LOOKING
STATEMENTS, INCLUDING THOSE RELATING TO INDUSTRY GROWTH EXPECTATIONS, ARE BASED
ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY WHICH, ALTHOUGH
BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE
SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (I) INCREASED
COMPETITION; (II) INCREASED COSTS; (III) LOSS OR RETIREMENT OF KEY MEMBERS OF
MANAGEMENT; (IV) CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH
THE COMPANY MAY FROM TIME TO TIME COMPETE; AND (V) DEVELOPMENTS IN COMPETING
TECHNOLOGIES. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND
ITS MANAGEMENT. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE
FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK
FACTORS."
ii
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, covering the Exchange Notes being offered hereby. This
Prospectus does not contain all the information set forth in the Exchange Offer
Registration Statement. For further information with respect to the Company and
the Exchange Offer, reference is made to the Exchange Offer Registration
Statement. Statements made in this Prospectus to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Exchange Offer Registration Statement, reference is made to the exhibit
for a more complete description of the document or matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. In
addition, the Company files periodic reports and other information requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
the Commission, The Exchange Offer Registration Statement, including the
exhibits thereto, and periodic reports and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http:/www.sec.gov.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission all
quarterly and annual financial information that would be required to be filed
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act or
any successor provision thereto. In addition, for so long as any of the Notes
remain outstanding and prior to the occurrence of certain events, the Company
has agreed to make available to any record holder, in connection with any sale
thereof, the information required by Rule 144A(d)(4) under the Securities Act.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available without charge upon
request from Louis M. Pace, Director of Corporate Development of Sovereign
Specialty Chemicals, Inc., 225 West Washington Street, Chicago, Illinois, 60606.
In order to ensure timely delivery of the documents, any request should be made
by , 1997 (five business days prior to the Expiration Date).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus
and prior to the Expiration Date shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of the filing of such reports and
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in any other subsequently filed document which also is incorporated or
deemed to be incorporated by reference herein) modifies or supersedes such
previous statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Registration
Statement.
iii
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Data presented herein for the year ended December
31, 1996 on a pro forma basis give effect to the acquisitions of the Adhesives
Systems Division of B.F. Goodrich ("SIA Adhesives"), Pierce & Stevens Corp.
("Pierce & Stevens") and the Division (as defined) and each of the other
Transactions (as defined). Data presented herein for the six months ended June
30, 1997 on a pro forma basis give effect to the Acquisition of the Division and
each of the other Transactions. See "Unaudited Pro Forma Financial Statements."
Unless the context otherwise requires, all references herein to the "Company"
refer, prior to the consummation of the Transactions, to Sovereign Specialty
Chemicals, L.P., its consolidated subsidiaries and its predecessor and, after
consummation of the Transactions, to Sovereign Specialty Chemicals, Inc., its
consolidated subsidiaries and its predecessor, and all references herein to the
"Parent Partnership" refer to Sovereign Specialty Chemicals, L.P., the sole
stockholder of the Company. Concurrently with the consummation of the
Transactions, SIA Adhesives and Pierce & Stevens were contributed to the Company
by the Parent Partnership. The contribution was made between companies under
common control and, as such, was accounted for at book value similar to a
pooling of interests.
THE COMPANY
COMPANY OVERVIEW
The Company is a leading developer, producer and distributor of a wide
variety of adhesives, sealants and coatings utilized in numerous industrial and
commercial applications. The Company's broad line of over 1,300 products is sold
to more than 6,000 customers. The Company's products are frequently designed in
cooperation with its customers to meet unique specifications, resulting in a
significant number of primary supplier relationships. Many of the Company's
products provide critical performance attributes to its customers' products, but
represent only a small portion of total costs. The Company focuses on select
value-added niche markets in which it has strong market positions and advantages
in product development, manufacturing and distribution. The Company markets its
products to four primary business segments: Housing Repair, Remodeling and
Construction; Industrial; Graphic Arts; and Flexible Packaging. On a pro forma
basis for the year ended December 31, 1996 and the six months ended June 30,
1997, the Company had net sales of $199.2 million and $105.4 million,
respectively.
INDUSTRY OVERVIEW
Total sales of adhesives, sealants and coatings in the United States in
1996 were approximately $26.4 billion. Adhesives, sealants and coatings are
utilized in numerous applications across a wide range of industries for a broad
variety of end uses. The industry has experienced strong and stable growth over
the past decade, growing at an approximate 6.7% compound annual rate. The
industry is expected to experience similar growth trends in the future as a
result of the increased use of adhesives, sealants and coatings by end users to
simplify product design and manufacturing processes and to enhance the surface
appearance and/or performance characteristics of the products in which they are
used. For example, adhesives are increasingly replacing mechanical fasteners in
many manufacturing processes, and adhesives and sealants can reduce parts
requirements and provide superior protection against corrosion and vibration. In
addition, the industry is expected to benefit from the increased use of
adhesives, sealants and coatings in developing markets, particularly in the Far
East, Eastern Europe and Latin America, where penetration of such products is
lower than in more industrialized economies. The U.S. industry is highly
fragmented with over 500 competitors and is expected to consolidate as
competitors seek to enhance operating efficiencies in new product development,
sales and marketing, distribution, production and administrative overhead.
Larger competitors, such as the Company, benefit from a greater diversification
of end-use markets, customers, technologies and geography, which reduces the
impact of industry or regional cyclicality.
1
<PAGE> 7
COMPETITIVE STRENGTHS
The Company believes it benefits from the following competitive strengths,
which have enabled it to expand its penetration of existing customers and
markets, establish new customer relationships, enter new markets and develop
additional products and applications.
Leadership Positions in Selected Markets. The Company's customer-driven
product development, reputation for quality and high levels of customer service
have allowed it to achieve strong market positions and brand name recognition in
its markets. Management believes that over 50% of the Company's pro forma net
sales in 1996 were in niche markets in which the Company has either the number
one or two position. The Company's brand and trade names are particularly well
recognized in its target markets, and include Pierce & Stevens, OSI, Pro-Series,
Polyseamseal, Miracure, Plastilock, Latiseal, Hybond, Proxseal, Magic Seal and
Glaze'N Seal.
Strong Customer Relationships. The Company's leadership position within
its markets, reputation for high levels of quality and customer service, and
proven product development skills have allowed it to secure strong relationships
across its customer base. The Company's products are sold to and utilized by
some of the world's largest companies, including The Boeing Company, Airbus
Industrie, General Motors Corporation, Chrysler Corporation and Baxter
International, Inc. Many of the Company's Industrial, Graphic Arts and Flexible
Packaging products have been certified through intensive, customer-specific
technical approval processes which greatly enhance the Company's position with
such customers. The Company's relationships with retailers and professional
distributors of its Housing Repair, Remodeling and Construction products are
strengthened by the Company's broad product line, strong brands and reputation
for quality.
Technological Expertise. The Company is a technological leader in the
manufacture and development of specialty adhesives, sealants and coatings within
its market segments. The Company's technological expertise has allowed it to
introduce a broad variety of new products over the past three years, which
accounted for approximately $40.0 million of pro forma 1996 net sales. The
Company possesses numerous customized and proprietary formulations with unique
performance characteristics designed to address specific customer needs.
Examples of the Company's proprietary formulations include ultraviolet cured
coatings for graphic arts and adhesives used in aerospace, construction and
medical packaging. The Company continually leverages its technological expertise
to develop new products and additional applications for existing product
formulations. In addition, the Company has enhanced its technological expertise
both through cooperative research and development efforts and joint
technological alliances with suppliers and customers such as E.I. du Pont de
Nemours and Company, The Boeing Company, The Dow Chemical Company, Hoechst AG,
Phillip Morris Corporation and BASF Corporation.
Broad Product Offerings and Diverse Customer Base. The Company
manufactures over 1,300 products sold through multiple distribution channels to
over 6,000 customers in a wide variety of end-use markets. In 1996, no single
customer of the Company accounted for over 3% of the Company's pro forma net
sales, and the top ten customers accounted for less than 16% of the Company's
pro forma net sales. This diversity of customers, products and distribution
channels provides the Company with a broad base from which to grow sales and
expand customer relationships, and minimizes exposure to any particular
customer, economic cycle or geographic region.
Strong Management Team. The Company has assembled a strong and experienced
management team at both the corporate and operating levels. The Company's senior
and operating managers, led by Robert B. Covalt, average over 26 years of
experience in the specialty chemicals industry. The top managers own, or have
incentive awards to acquire, approximately 19% of the Parent Partnership's
equity. In addition, the Parent Partnership has reserved 4% of its equity on a
fully diluted basis for future incentive awards.
2
<PAGE> 8
BUSINESS STRATEGY
Continued Focus on Niche Products in Attractive Markets. The Company will
continue to develop product offerings for value-added end-use applications in
higher growth market segments, including those for: (i) structural adhesives;
(ii) fire-retardant adhesives and coatings; (iii) food and medical packaging
adhesives and coatings; and (iv) coatings which facilitate recycling and other
environmentally-friendly adhesives, sealants and coatings. Management believes
the Company's market leadership positions, technological expertise, and strong
customer relationships provide it with advantages in the development of new
products and the penetration of new markets.
Pursue Strategic Acquisitions. The Company has successfully grown through
acquisitions and intends to pursue additional strategic acquisitions that will
allow it to further improve its market position in targeted markets. Management
believes that the high degree of fragmentation in the adhesives, sealants and
coatings industry will continue to provide suitable acquisition candidates.
Potential acquisition candidates will be evaluated based upon the ability of the
Company to: (i) expand its product line; (ii) enhance its product development
capabilities; (iii) market products through new or expanded distribution
channels; and (iv) increase its international presence.
Increase International Presence. The Company believes it has significant
opportunities in international markets to increase sales to existing
multinational customers, enter developing markets and establish new customer
relationships. In October 1996, the Company appointed a Vice
President -- International with over 30 years of international sales and
marketing experience in the adhesives, sealants and coatings industry. The
Company intends to expand its global sales, particularly in Southeast Asia and
Latin America, by: (i) increasing sales and marketing activities in targeted
regions; (ii) entering into strategic alliances; and (iii) pursuing targeted
acquisitions. The Company has recently established a sales office in Singapore
focused on flexible packaging adhesives and has increased its sales and
marketing activities in Latin America through its existing operations in Mexico.
Achieve Significant Operating Efficiencies. The Company believes that it
can achieve operating efficiencies resulting in enhanced revenue opportunities,
cost savings and improved cash flow through: (i) cross-selling its expanded
product line across the broader distribution and customer network which it will
develop from the Acquisition; (ii) consolidating raw material purchases to
increase purchasing economies of scale; (iii) reducing duplicative selling,
general and administrative expenses; (iv) consolidating various compensation,
benefit and insurance programs; (v) consolidating certain manufacturing and
distribution operations; and (vi) lowering working capital levels by optimizing
SKU counts and consolidating inventory management. The Company believes that
over approximately a twelve-month period, it may realize potential cost savings
from these activities of approximately $4.0 million, although no assurance can
be given that such savings can be achieved.
HISTORY
The Company was formed by Robert B. Covalt, First Chicago Equity
Corporation ("FCEC") and other investors to acquire and consolidate specialty
chemical businesses in the highly fragmented adhesives, sealants and coatings
industry. The Company has successfully grown its business through its strategic
acquisitions. In March 1996, the Company acquired SIA Adhesives, a manufacturer
of specialty adhesives used primarily in the automotive, aerospace and general
industrial markets, for $15.6 million. In August 1996, the Company acquired
Pierce & Stevens, a developer and manufacturer of specialty coatings and
adhesives for performance-oriented niche applications, for $44.8 million.
Pursuant to an agreement dated May 22, 1997 (the "Acquisition Agreement"),
the Company acquired on August 5, 1997 (the "Acquisition") the U.S. adhesives,
sealants and coatings division (the "Division") of Laporte PLC ("Laporte") for a
cash purchase price of $133.0 million. The companies acquired from Laporte
comprise OSI Sealants, Inc. ("OSI Sealants"), Mercer Products
3
<PAGE> 9
Company, Inc. ("Mercer") and Tanner Chemicals, Inc. ("Tanner"). OSI Sealants,
Mercer and Tanner manufacture, market and distribute adhesives and sealants
primarily utilized in housing repair, remodeling and construction and industrial
markets. The Acquisition has added significant depth to the Company's product
offerings, including the well-known OSI, Pro-Series and Polyseamseal brands. The
Acquisition has also significantly enhanced the Company's distribution network,
particularly in the professional builder and retail home center channels, and
has provided access to new customers and markets for its existing product line.
THE TRANSACTIONS
Concurrently with the consummation of the Initial Offering (as defined),
(i) the Company acquired the Division for a cash purchase price of $133.0
million, (ii) FCEC, management and other investors made, through the Parent
Partnership (the Company's sole stockholder), an equity contribution to the
Company of $33.8 million in cash (the "Equity Contribution"), (iii) the Company
and the Guarantors borrowed $30.0 million pursuant to a new senior secured
credit facility (the "Senior Credit Facility") providing for a term loan of
$30.0 million (the "Term Loan") and revolving loans of up to $30.0 million,
subject to a borrowing base and other conditions (the "Revolving Credit
Facility"), and (iv) the Company refinanced $46.2 million of indebtedness (the
"Refinancing").
The Initial Offering, the Acquisition, the Equity Contribution, the
Refinancing and the initial borrowings under the Senior Credit Facility are
referred to herein as the "Transactions." Consummation of the Initial Offering
was conditioned upon simultaneous consummation of each of the other
Transactions. See "Use of Proceeds" and "Description of Senior Credit Facility."
The following table summarizes the anticipated sources and uses of funds at
the closing of the Transactions as if the Transactions had closed on June 30,
1997:
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES:
Senior Credit Facility:
Revolving Credit Facility(1)....................................................... $ --
Term Loan.......................................................................... 30.0
Senior Subordinated Notes due 2007................................................... 125.0
Equity Contribution.................................................................. 33.8
-------
Total Sources............................................................... $ 188.8
==============
USES:
Acquisition cash purchase price(2)................................................... $ 133.0
Repayment of indebtedness............................................................ 46.2
Fees and expenses.................................................................... 8.0
Cash................................................................................. 1.6
-------
Total Uses.................................................................. $ 188.8
==============
</TABLE>
- ---------------
(1) The Revolving Credit Facility provides for borrowing of up to $30.0 million,
subject to borrowing base availability. On a pro forma basis as of June 30,
1997, the Company would have had available $30.0 million under the Revolving
Credit Facility.
(2) The Parent Partnership also issued a $3.0 million principal amount 8.0%
junior subordinated note to Laporte as additional consideration for the
Division.
------------------------
The Company's principal executive offices are located at 225 West
Washington Street, Suite 2200, Chicago, Illinois, 60606 and its telephone number
is (312) 419-7100. The principal executive offices of each Guarantor are c/o
Sovereign Specialty Chemicals, Inc. at the same address and telephone number.
4
<PAGE> 10
THE INITIAL OFFERING
Notes...................... The Old Notes were sold by the Company on August 5,
1997 (the "Initial Offering") to Chase Securities,
Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation (the "Initial Purchasers") pursuant to
a Purchase Agreement dated July 31, 1997 (the
"Purchase Agreement"). The Initial Purchasers
subsequently resold the Old Notes to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act.
Registration Rights
Agreement................ Pursuant to the Purchase Agreement, the Company,
the Guarantors and the Initial Purchasers entered
into a Registration Rights Agreement dated as of
August 5, 1997 (the "Registration Rights
Agreement"), which grants the holder of the Old
Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
and registration rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered......... $125,000,000 aggregate principal amount of 9 1/2%
Senior Subordinated Notes due 2007, Series B, of
the Company (the "Exchange Notes").
The Exchange Offer......... $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of Old
Notes. As of the date hereof, $125,000,000
aggregate principal amount of Old Notes are
outstanding. The Company will issue the Exchange
Notes to holders on or promptly after the
Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder
thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business and that
such holder does not intend to participate and has
no arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter. Each
Participating Broker-Dealer that receives Exchange
Notes for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
Prospectus,
5
<PAGE> 11
as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer
in connection with resales of Exchange Notes
received in exchange for Old Notes where such Old
Notes were acquired by such Participating Broker-
Dealer as a result of market-making activities or
other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration
Date, they will make this Prospectus available to
any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff
of the Commission enunciated in no-action letters
and, in the absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure to
comply with such requirements in such instance may
result in such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
Expiration Date............ 5:00 p.m., New York City time, on ,
1997 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time which the Exchange Offer is
extended.
Accrued Interest on the New
Notes and the Old
Notes.................... Each New Note will bear interest from its issuance
date. Holders of Old Notes that are accepted for
exchange will receive, in cash, accrued interest
thereon to, but not including the issuance date of
the Exchange Notes. Such interest will be paid with
the first interest payment on the Exchange Notes.
Interest on the Old Notes accepted for exchange
will cease to accrue upon issuance of the Exchange
Notes.
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Conditions."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof (or, in the case of a book-entry transfer,
transmit an Agent's Message (as defined) in lieu
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile (or Agent's Message), together with the
Old Notes and any other required documentation to
the Exchange Agent (as defined) at the address set
forth herein. By executing the Letter of
Transmittal (or transmitting an Agent's Message),
each holder will represent to the Company that,
among other things, the Exchange Notes acquired
pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person
receiving such Exchange Notes, whether or not such
person is the
6
<PAGE> 12
holder, that neither the holder nor any such other
person has any arrangement or understanding with
any person to participate in the distribution of
such Exchange Notes and that neither the holder nor
any such other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of the
Company. See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer" and "-- Procedures
for Tendering."
Untendered Old Notes....... Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have any
further exchange or registration rights and such
Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Old Notes could be
adversely affected.
Consequences of Failure to
Exchange................. The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States to
a foreign person pursuant to the requirements of
Rule 904 under the Securities Act, or (iv) pursuant
to an effective registration statement under the
Securities Act. See "The Exchange
Offer -- Consequences of Failure to Exchange."
Shelf Registration
Statement.................. If any holder of the Old Notes (other than any such
holder which is an "affiliate" of the Company or a
Guarantor within the meaning of Rule 405 under the
Securities Act) is not eligible under applicable
securities laws to participate in the Exchange
Offer, and such holder has satisfied certain
conditions relating to the provision of information
to the Company for use therein, the Company and the
Guarantors have agreed to register the Old Notes on
a shelf registration statement (the "Shelf
Registration Statement") and to use their best
efforts to cause it to be declared effective by the
Commission as promptly as practical on or after the
consummation of the Exchange Offer. The Company and
Guarantors have agreed to maintain the
effectiveness of the Shelf Registration Statement
for, under certain circumstances, a maximum of two
years, to cover resales of the Old Notes held by
any such holders.
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer
of registered ownership may take considerable time.
7
<PAGE> 13
Guaranteed Delivery
Procedures............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes (or
comply with the procedures for book-entry
transfer), the Letter of Transmittal or any other
documents required by the Letter of Transmittal to
the Exchange Agent (or transmit an Agent's Message
in lieu thereof) prior to the Expiration Date must
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m. New York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of Exchange
Notes.................... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer -- Terms of the Exchange
Offer."
Use of Proceeds............ There will be no cash proceeds to the Company for
the exchange pursuant to the Exchange Offer.
Exchange Agent............. The Bank of New York.
General.................... The form and terms of the Exchange Notes are the
same as the form and terms of the Old Notes (which
they replace) except that (i) the Exchange Notes
bear a Series B designation, (ii) the Exchange
Notes have been registered under the Securities Act
and, therefore, will not bear legends restricting
the transfer thereof, and (iii) the holders of
Exchange Notes will not be entitled to certain
rights under the Registration Rights Agreement,
including the provisions providing for an increase
in the interest rate on the Old Notes in certain
circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer." The Exchange Notes will evidence
the same debt as the Old Notes and will be entitled
to the benefits of the Indenture. See "Description
of the Exchange Notes." The Old Notes and the
Exchange Notes are referred to herein collectively
as the "Notes."
8
<PAGE> 14
THE OFFERING
Issuer..................... Sovereign Specialty Chemicals, Inc.
Securities Offered......... $125.0 million aggregate principal amount of 9 1/2%
Senior Subordinated Notes due 2007, Series B.
Maturity................... August 1, 2007.
Interest Payment Dates..... February 1 and August 1 of each year, commencing on
February 1, 1998.
Sinking Fund............... None.
Optional Redemption........ Except as described below, the Company may not
redeem the Exchange Notes prior to August 1, 2002.
On or after such date, the Company may redeem the
Exchange Notes, in whole or in part, at any time at
the redemption prices set forth herein, plus
accrued and unpaid interest thereon, if any, to the
date of redemption. In addition, at any time and
from time to time on or prior to August 1, 2000,
the Company may, subject to certain requirements,
redeem up to $40.0 million of the original
aggregate principal amount of the Exchange Notes
with the net cash proceeds of one or more Public
Equity Offerings (as defined) by the Company after
which there is a Public Market (as defined), at a
redemption price equal to 109.5% of the principal
amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption;
provided, however, that at least $85.0 million
aggregate principal amount of the Exchange Notes
must remain outstanding immediately after each such
redemption. See "Description of the Exchange
Notes -- Optional Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
purchase the Exchange Notes at a purchase price
equal to 101% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the
date of purchase. See "Description of the Exchange
Notes -- Optional Redemption" and "-- Offer to
Purchase upon Change of Control."
Subsidiary Guaranties...... The Exchange Notes will be guaranteed (the
"Guaranties"), jointly and severally on a senior
subordinated basis, by each of the Company's direct
and indirect Subsidiaries (as defined) other than
Foreign Subsidiaries (as defined) on the issue date
of the Exchange Notes and by each direct and
indirect Subsidiary of the Company (excluding
Foreign Subsidiaries and Unrestricted Subsidiaries)
formed or acquired thereafter. The Guaranties will
be general unsecured obligations of the Guarantors.
The Guarantors have guaranteed all obligations of
the Company under the Senior Credit Facility (as
defined), and each Guarantor has granted a security
interest in all or substantially all its assets to
secure the obligations under the Senior Credit
Facility. The obligations of each Guarantor under
its Guaranty will be subordinated in right of
payment to the prior payment in full of all
Guarantor Senior Indebtedness (as defined) of such
Guarantor to substantially the same extent as the
Exchange Notes are subordinated to all
9
<PAGE> 15
existing and future Senior Indebtedness of the
Company. See "Description of the Exchange
Notes -- Guaranties of the Notes."
Ranking.................... The Exchange Notes will be unsecured and will be
subordinated to all existing and future Senior
Indebtedness of the Company. The Exchange Notes
will rank pari passu with any future senior
subordinated indebtedness of the Company and will
rank senior to all Subordinated Indebtedness of the
Company. As of June 30, 1997, on a pro forma basis
after giving effect to the Transactions, the
Company would have had outstanding in the aggregate
$158.8 million of indebtedness, of which $33.8
million was Senior Indebtedness and/or Guarantor
Senior Indebtedness. See "Description of the
Exchange Notes -- Ranking" and "-- Subordination of
the Exchange Notes."
Restrictive Covenants...... The Indenture under which the Exchange Notes will
be issued (the "Indenture") limits: (i) the
incurrence of additional indebtedness by the
Company and its Restricted Subsidiaries (as
defined); (ii) the payment of dividends on, and the
redemption of, capital stock of the Company and its
Restricted Subsidiaries and the redemption of
certain subordinated obligations of the Company and
its Restricted Subsidiaries; (iii) investments;
(iv) sales of assets; (v) certain transactions with
affiliates; (vi) the sale or issuance of capital
stock of Restricted Subsidiaries; (vii) the
creation of liens; (viii) the lines of business in
which the Company and its Restricted Subsidiaries
may operate; and (ix) consolidations, mergers and
transfers of all or substantially all the Company's
assets. The Indenture also prohibits certain
restrictions on distributions from Restricted
Subsidiaries. However, all these limitations and
prohibitions are subject to a number of important
qualifications and exceptions. See "Description of
the Exchange Notes -- Certain Covenants."
For additional information regarding the Exchange
Notes, see "Description of the Exchange Notes."
Use of Proceeds............ The gross proceeds of $125.0 million from the
Initial Offering were used, together with the $33.8
million proceeds from the Equity Contribution and
the borrowings of $30.0 million under the Senior
Credit Facility, to pay the cash purchase price of
the Acquisition, to consummate the Refinancing and
to pay related fees and expenses. See "Use of
Proceeds."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered before tendering Old Notes in exchange for Exchange Notes. These risk
factors are generally applicable to the Old Notes as well as the Exchange Notes.
10
<PAGE> 16
SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents the summary combined historical data of the
Company, SIA Adhesives, Pierce & Stevens and the Division on an aggregate basis
for the periods indicated. The combined data (i) for the year ended December 31,
1996 is derived from the audited financial statements of each of the Company,
SIA Adhesives, Pierce & Stevens and the Division, (ii) for the year ended
December 31, 1995 is derived from the audited financial statements of each of
SIA Adhesives, Pierce & Stevens, and the Division, (iii) for the year ended
December 31, 1994 is derived from the audited financial statements of each of
SIA Adhesives and the Division and the unaudited financial statements of Pierce
& Stevens, which, in the opinion of management of the Company, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation, (iv) for the six months ended June 30, 1997 is derived from
the unaudited financial statements of the Company and the Division, which, in
the opinion of the management of the Company, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation and (v) for the six months ended June 30, 1996 is derived from the
unaudited financial statements of SIA Adhesives, Pierce & Stevens and the
Division, which, in the opinion of management of the Company, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation. The amounts presented do not include the effects of purchase
accounting adjustments for periods prior to acquisition by the Company. The
combined data has not been prepared in accordance with generally accepted
accounting principles ("GAAP"), which do not allow for the aggregation of
financial data for entities that are not under common ownership. The data set
forth below should not be construed to be indicative of the results that
actually would have occurred if these companies had been under common ownership
for the periods shown and do not project the Company's results of operations in
the future. This data should be read in conjunction with, and is qualified in
its entirety by reference to, the information set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, and the notes thereto, which appear
elsewhere in this Prospectus.
The pro forma statement of operations data for the year ended December 31,
1996 gives effect to the acquisitions of SIA Adhesives, Pierce & Stevens and the
Division as if each of the acquisitions were consummated on January 1, 1996. The
pro forma balance sheet data as of June 30, 1997 gives effect to the purchase of
the Division and related financing as if the Transactions were consummated on
that date. Neither the summary combined historical financial data nor the pro
forma summary financial data are necessarily indicative of either the future
results of operations or the results of operations that would have occurred if
those events had been consummated on the indicated dates. The following
information should be read in conjunction with the unaudited pro forma financial
statements and audited financial statements of the Company, SIA Adhesives,
Pierce & Stevens and the Division and, in each case, the related notes, included
elsewhere herein.
11
<PAGE> 17
SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
HISTORICAL COMBINED SIX
HISTORICAL COMBINED YEAR MONTHS
YEAR ENDED SIX MONTHS ENDED ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
-------------------------------- ------------------- ------------ ---------
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- ------- -------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $166,311 $171,364 $199,243 $98,454 $105,362 $199,243 $105,362
Cost of goods sold............. 119,418 127,797 142,703 69,671 73,089 142,614 73,044
-------- -------- -------- ------- -------- ------------ ---------
Gross profit................... 46,893 43,567 56,540 28,782 32,273 56,629 32,318
Selling, general and
administrative expenses...... 35,356 33,783 42,355 20,411 21,232 47,451 23,610
-------- -------- -------- ------- -------- ------------ ---------
Operating income............... 11,537 9,784 14,185 8,372 11,041 9,178 8,708
Interest expense............... 3,774 4,579 6,137 -- 3,846 15,761 7,966
-------- -------- -------- ------- -------- ------------ ---------
Income (loss) before income
taxes, discontinued
operations and extraordinary
item......................... 7,763 5,205 8,048 8,372 7,195 (6,583) 742
Income taxes................... 4,204 3,039 4,031 2,797 2,545 691 1,439
-------- -------- -------- ------- -------- ------------ ---------
Income (loss) before
discontinued operations and
extraordinary item........... 3,559 2,166 4,017 5,575 4,650 $ (7,274) $ (697)
========= ========= ========= ======== ========= ============= ==========
Discontinued operations(1)..... 228 3,025 -- 1,649 --
Extraordinary item(2).......... -- -- 281 3,926 --
-------- -------- -------- ------- --------
Net income (loss).............. $ 3,331 $ (859) $ 3,736 $ 3,926 $ 4,650
========= ========= ========= ======== =========
BALANCE SHEET DATA (END OF PERIOD):
Working capital................ $ 32,404
Total assets................... 244,879
Total indebtedness............. 158,763
Stockholder's equity........... 52,214
OTHER FINANCIAL DATA:
Capital expenditures........... $ 4,531 $ 6,317 $ 2,703 $ 1,604 $ 1,315 $ 2,703 $ 1,315
Ratio of earnings to fixed
charges(3)................... 0.6 1.1
</TABLE>
(1) Discontinued operations relates to the Tamms business of the Division which
was not acquired by the Company. See Note 5 to Combined Financial Statements
of the Division included elsewhere herein.
(2) Extraordinary item relates to the write-off of deferred financing costs
associated with the early extinguishment of debt.
(3) Ratio of earnings to fixed charges represents income before income taxes,
interest and other fixed charges divided by interest expense and other fixed
charges. Fixed charges consist of (i) interest, (ii) amortization of debt
issuance costs and (iii) the interest portion of rental expense.
12
<PAGE> 18
RISK FACTORS
Prospective purchasers of the Exchange Notes should consider carefully the
following factors, as well as the other information and data included in this
Prospectus before tendering Old Notes in exchange for Exchange Notes. The risk
factors set forth below are generally applicable to the Old Notes as well as the
Exchange Notes.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
As a result of the Transactions, the Company is highly leveraged, with
indebtedness that is substantial in relation to its stockholder's equity. After
giving pro forma effect to the Transactions, the Company's aggregate outstanding
indebtedness would have been $158.8 million as of June 30, 1997 and the
Company's stockholder's equity would have been $52.2 million as of the same
date. The Senior Credit Facility and the Indenture will permit the Company to
incur or guarantee certain additional indebtedness, subject to certain
limitations. See "Summary -- Summary Combined Historical and Pro Forma Financial
Data," "Unaudited Pro Forma Financial Statements," "Description of the Exchange
Notes" and "Description of Senior Credit Facility."
The Company's high degree of leverage could have important consequences to
holders of Exchange Notes, including, but not limited to, the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) the Company is substantially more leveraged than certain of its
competitors, which might place the Company at a competitive disadvantage; (iv)
the Company may be hindered in its ability to adjust rapidly to changing market
conditions; and (v) the Company's high degree of leverage could make it more
vulnerable in the event of a downturn in general economic conditions or its
business.
The Company's ability to repay or to refinance its obligations with respect
to its indebtedness will depend on its financial and operating performance,
which, in turn, is subject to prevailing economic and competitive conditions and
to certain financial, business and other factors, many of which are beyond the
Company's control. These factors could include operating difficulties, increased
operating costs, raw material or product prices, the response of competitors,
regulatory developments and delays in implementing strategic projects. The
Company's ability to meet its debt service and other obligations may depend in
significant part on the extent to which the Company can successfully implement
its business strategy. There can be no assurance that the Company will be able
to implement its strategy fully or that the anticipated results of its strategy
will be realized. See "Business -- Business Strategy."
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets or seek to obtain additional equity capital or
to restructure its debt. There can be no assurance that the Company's cash flow
and capital resources will be sufficient for payment of principal of and
interest on its indebtedness in the future, or that any such alternative
measures would be successful or would permit the Company to meet its scheduled
debt service obligations.
The Senior Credit Facility matures prior to the maturity of the Exchange
Notes. In the event that the Company is unable to refinance the Senior Credit
Facility at maturity or repay the facility with cash on hand, through asset
sales, equity sales or otherwise, its ability to repay the principal and
interest on the Notes could be adversely affected.
In addition, because the Company's obligations under the Senior Credit
Facility will bear interest at floating rates, an increase in interest rates
could adversely affect, among other things, the Company's ability to meet its
debt service obligations.
13
<PAGE> 19
SUBORDINATION OF NOTES AND GUARANTORS
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Exchange Notes will be subordinated to the
prior payment in full of all existing and future Senior Indebtedness (as
defined) of the Company, including all amounts owing or guaranteed under the
Senior Credit Facility. The Guaranties are similarly subordinated to Guarantor
Senior Indebtedness (as defined). Consequently, in the event of a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding with respect to
the Company or a Guarantor, assets of the Company or such Guarantor will be
available to pay obligations on the Exchange Notes or Guaranties only after all
Senior Indebtedness of the Company or Guarantor Senior Indebtedness, as
applicable, has been paid in full, and there can be no assurance that there will
be sufficient assets to pay amounts due on any or all of the Notes. In addition,
neither the Company nor any Guarantor may pay principal, premium, interest or
other amounts on account of the Exchange Notes or Guaranties in the event of a
payment default in respect of Designated Senior Indebtedness (as defined) unless
such amount has been paid in full or the default has been ceased or waived. In
addition, in respect of certain Designated Senior Indebtedness and unless
certain other conditions are satisfied, neither the Company nor any Guarantor
may make any payment on account of the Exchange Notes for a designated period of
time. See "Description of the Exchange Notes -- Subordination." At June 30,
1997, after giving pro forma effect to the Transactions, the Company would have
had $33.8 million of Senior Indebtedness and/or Guarantor Senior Indebtedness
outstanding. See "Description of the Exchange Notes -- Ranking."
In addition, since the Company's existing and future Foreign Subsidiaries
will not be required to guarantee the Company's obligations under the Exchange
Notes and the Indenture, the Exchange Notes will be effectively subordinated to
the claims of creditors of such Foreign Subsidiaries with respect to the assets
of such Foreign Subsidiaries.
RESTRICTIVE FINANCING COVENANTS
The Senior Credit Facility and the Indenture will contain a number of
covenants that will restrict the operations of the Company and its subsidiaries.
In addition, the Senior Credit Facility will require that the Company comply
with specified financial ratios and tests, including a minimum interest coverage
ratio, a maximum leverage ratio and a minimum net worth test. There can be no
assurance that the Company will be able to comply with such ratios and tests in
the future. The Company's ability to comply with such ratios and tests may be
affected by events beyond its control, including prevailing economic, financial
and industry conditions. The breach of any such covenants or restrictions could
result in a default under the Senior Credit Facility that would permit the
lenders thereto to declare all amounts outstanding thereunder to be immediately
due and payable, together with accrued and unpaid interest, and the commitments
of the lenders under the Revolving Credit Facility to make further extensions of
credit thereunder could be terminated. See "Description of the Exchange Notes"
and "Description of Senior Credit Facility."
CHANGE OF CONTROL
The occurrence of certain of the events that would constitute a Change of
Control (as defined) may result in a default, or otherwise require repayment of
indebtedness, under both the Notes and the Senior Credit Facility. In addition,
the Senior Credit Facility will prohibit the repayment of indebtedness on the
Notes by the Company in such an event, unless and until such time as the
indebtedness under the Senior Credit Facility is repaid in full. The Company's
failure to make such repayments in such instances would result in a default
under both the Exchange Notes and the Senior Credit Facility. Future
indebtedness of the Company may also contain restrictions or repayment
requirements with respect to certain events or transactions that could
constitute a Change of Control. In the event of a Change of Control, there can
be no assurance that the Company would have sufficient assets to satisfy all of
its obligations under the Exchange Notes or
14
<PAGE> 20
the Senior Credit Facility. See "Description of the Exchange Notes -- Offer to
Purchase Upon Change of Control."
RISKS RELATING TO THE COMPANY'S GROWTH STRATEGY
The Company's strategy includes making acquisitions, but there can be no
assurance that suitable acquisition candidates will continue to be available. In
addition, acquisitions that the Company may make, including the acquisition of
the Division, will involve risks, including the successful integration and
management of acquired technology, operations and personnel. The integration of
acquired businesses may also lead to the loss of key employees of the acquired
companies and diversion of management attention from ongoing business concerns.
There can be no assurance that any additional acquisitions will be made, that
the Company will be able to obtain additional financing needed to finance such
transactions and, if any acquisitions are so made, that they will be successful.
The Senior Credit Facility and the Indenture will limit the Company's ability to
make acquisitions and to incur indebtedness in connection with acquisitions. See
"Business -- Business Strategy."
The Company intends to increase its international sales through increased
sales and marketing activities in targeted regions, by entering into strategic
alliances and through acquisitions of foreign businesses, joint ventures and/or
other business combinations or arrangements. The Company's efforts to increase
international sales may be adversely affected by, among other things, changes in
foreign import restrictions and regulations, taxes, currency exchange rates,
currency and monetary transfer restrictions and regulations and economic and
political changes in the foreign nations in which the Company's products are
sold. There can be no assurance that one or more of these factors will not have
a material adverse effect on the Company's financial position or results of
operations in the future.
FLUCTUATIONS IN RAW MATERIALS COST AND SUPPLY
The Company uses a variety of specialty and commodity chemicals in its
manufacturing processes. These raw materials are generally available from
numerous independent suppliers. The Company typically purchases raw materials on
a spot basis. Certain of the Company's raw materials are derived from ethylene.
There have been historical periods of rapid and significant movements in the
price of ethylene and ethylene derivatives both upward and downward. The Company
has historically been successful in passing on price increases to its customers
within 90 to 120 days, but there can be no assurance that it will continue to be
able to do so in the future. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Combined Results of Operations"
and "Business -- Raw Materials."
TECHNOLOGICAL CHANGE
The market for the Company's products and services is characterized by
rapidly changing technology and continuing process development. The future
success of the Company's business will depend upon its ability to maintain and
enhance its technological capabilities, develop and market products and
applications that meet changing customer needs and successfully anticipate or
respond to technological changes on a cost-effective and timely basis. There can
be no assurance that the Company will effectively respond to the technological
changes in its market segments.
POTENTIAL RISK OF PRODUCT LIABILITY
Because many of the Company's products provide critical performance
attributes to its customers' products, the sale of such products entails risk of
product liability claims. A successful product liability claim (or series of
claims) against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
15
<PAGE> 21
CYCLICALITY
Demand for many of the Company's products is cyclical in nature and subject
to changes in general economic conditions. Sales to the building and
construction market are driven by trends in commercial and residential
construction, housing starts, and trends in residential repair and remodeling.
Sales to the automotive industry are also cyclical in nature.
COMPETITION
The Company competes with a wide variety of specialty chemical
manufacturers. Certain of the Company's principal competitors are less highly
leveraged than the Company and have greater financial resources than the
Company. Accordingly, such competitors may be better able to withstand
volatility within industries and throughout the economy as a whole while
retaining significantly greater operating and financial flexibility than the
Company. In addition, a number of the Company's niche product applications are
customized or sold into selected specialized markets. There can be no assurance
that these specialized markets will not attract additional competitors that
could have greater financial, technological, manufacturing and marketing
resources than the Company. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business is dependent upon the continued
services of its Chairman, President and Chief Executive Officer, Robert B.
Covalt, and other key officers and employees. The loss of Mr. Covalt or such
other key personnel due to death, disability or termination of employment could
have a material adverse effect on the Company's financial position and results
of operations.
CONTROLLING STOCKHOLDERS
All of the capital stock of the Company is owned by the Parent Partnership,
and FCEC, its affiliates and Mr. Covalt control approximately 63.6% of the
voting stock of the general partner of the Parent Partnership. As a result, they
are able to direct the election of the members of the Board of Directors of the
Company and therefore direct the management and policies of the Company. Their
interests may differ from the interests of holders of the Exchange Notes. See
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Transactions."
ENVIRONMENTAL MATTERS
The Company is subject to extensive laws and regulations pertaining to the
discharge of materials into the environment, the handling and disposal of solid
and hazardous wastes, and the remediation of contamination, and otherwise
relating to health, safety and protection of the environment ("Environmental
Laws"). As such, the Company's operations and the environmental condition of its
real property could give rise to liabilities under Environmental Laws, and there
can be no assurance that material costs will not be incurred in connection with
such liabilities. There are certain conditions at the Company's facilities which
will require environmental remediation. While the Company believes that any
costs relating to such remediation that are not covered by indemnification or
insurance will not be material, no assurance to such effect can be given.
Environmental Laws are constantly evolving and it is impossible to predict
accurately the effect they may have upon the capital expenditures, earnings or
competitive position of the Company in the future. Should Environmental Laws
become more stringent, the cost of compliance would increase. If the Company
cannot pass on future costs to its customers, such increases may have an adverse
effect on the Company's financial condition or results of operations. See
"Business -- Environmental Matters."
16
<PAGE> 22
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence of indebtedness by a Guarantor under its Guaranty may be
subject to review under federal bankruptcy law or relevant state fraudulent
conveyance laws if a bankruptcy case or lawsuit is commenced by or on behalf of
unpaid creditors of such Guarantor. Under these laws, if in a bankruptcy or
reorganization case or a lawsuit by or on behalf of unpaid creditors of a
Guarantor, a court were to find that, at the time such Guarantor incurred
indebtedness under its Guaranty, (i) such Guarantor incurred such indebtedness
with the intent of hindering, delaying or defrauding current or future creditors
or (ii) (a) such Guarantor received less than reasonably equivalent value or
fair consideration for incurring such indebtedness and (b) such Guarantor (1)
was insolvent or was rendered insolvent by reason of such incurrence, (2) was
engaged, or about to engage, in a business or transaction for which its assets
constituted unreasonably small capital, (3) intended to incur, or believed that
it would incur, debts beyond its ability to pay such debts as they matured (as
all of the foregoing terms are defined in or interpreted under the relevant
fraudulent transfer or conveyance statutes) or (4) was a defendant in an action
for money damages, or had a judgment for money damages docketed against it (if,
in either case, after final judgment the judgment is unsatisfied), then such
court could avoid or subordinate the amounts owing under such Guaranty to
presently existing and future indebtedness of such Guarantor and take other
actions detrimental to the holders of the Exchange Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, a Guarantor would be considered insolvent
if, at the time it incurred the indebtedness, either (i) the sum of its debts
(including contingent liabilities) is greater than its assets, at a fair
valuation, or (ii) the present fair saleable value of its assets is less than
the amount required to pay the probable liability on its total existing debts
and liabilities (including contingent liabilities) as they become absolute and
matured. There can be no assurance as to what standards a court would use to
determine whether a Guarantor was solvent at the relevant time, or whether,
whatever standard was used, a Guaranty would not be avoided or further
subordinated on the grounds set forth above. Counsel for the Company and counsel
for the Initial Purchasers will not express any opinion as to the applicability
of federal or state fraudulent transfer and conveyance laws.
The Company believes that at the time the indebtedness constituting the
Guaranties will be incurred, each Guarantor (i) will be (a) neither insolvent
nor rendered insolvent thereby, (b) in possession of sufficient capital to run
its businesses effectively and (c) incurring debts within its ability to pay as
the same mature or become due and (ii) will have sufficient assets to satisfy
any probable money judgment against it in any pending action. There can be no
assurance, however, that a court passing on such questions would reach the same
conclusions.
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF EXCHANGE NOTES
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. Prior to the Exchange Offer,
there has not been any public market for the Old Notes. The Old Notes have not
been registered under the Securities Act and will be subject to restrictions on
transferability to the extent that they are not exchanged for Exchange Notes by
holders who are entitled to participate in this Exchange Offer. The market for
Old Notes not tendered for exchange in the Exchange Offer is likely to be more
limited than the existing market for such notes. The holders of Old Notes (other
than any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who are not eligible to participate in the
Exchange Offer are entitled to certain registration rights, and the Company is
required to file a Shelf Registration Statement with respect to such Old Notes.
The Exchange Notes will constitute a new issue of securities with no established
trading market. The Company does not intend to list the Exchange Notes on any
national securities exchange or seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. The
Initial Purchaser has advised the Company that it currently intends to make a
market in the Exchange
17
<PAGE> 23
Notes, but it is not obligated to do so and may discontinue such market making
at any time. In addition, such market making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act and may be limited
during the Exchange Offer and the pendency of the Shelf Registration Statement.
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes or as to the liquidity of the trading market
for the Exchange Notes. If a trading market does not develop or is not
maintained, holders of the Exchange Notes may experience difficulty in reselling
the Exchange Notes or may be unable to sell them at all. If a market for the
Exchange Notes develops, any such market may be discontinued at any time.
If a public trading market develops for the Exchange Notes, future trading
prices of such securities will depend on many factors including, among other
things, prevailing interest rates, the Company's results of operations and
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from their
principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal (or
Agent's Message) and all other required documents. Therefore, holders of the Old
Notes desiring to tender such Old Notes in exchange for Exchange Notes should
allow sufficient time to ensure timely delivery. The Company is under no duty to
give notification of defects or irregularities with respect to the tenders of
Old Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, certain registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities, and if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan Distribution." To the extent
that Old Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Old Notes could be adversely
affected. See "The Exchange Offer."
18
<PAGE> 24
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the Exchange
Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, the Company will receive Old Notes in like
principal amount, the form and terms of which are the same as the forms and
terms of the Exchange Notes (which replace the Old Notes), except as otherwise
described herein. The Old Notes surrendered in exchange for Exchange Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase or decrease in the indebtedness
of the Company. As such, no effect has been given to the Exchange Offer in the
pro forma statements or capitalization tables.
The gross proceeds of $125.0 million from the sale of the Old Notes in the
Initial Offering were used, together with the $33.8 million proceeds from the
Equity Contribution and the borrowing of $30.0 million under the Senior Credit
Facility, to pay the cash purchase price of the Acquisition, to consummate the
Refinancing and to pay related fees and expenses. See "Summary -- The
Transactions" and "Description of Senior Credit Facility."
CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
the Company as of June 30, 1997 after giving effect to the Transactions,
assuming the Transactions were consummated on such date. The information in this
table should be read in conjunction with "Unaudited Pro Forma Financial
Statements," "Use of Proceeds" and "Description of Senior Credit Facility" and
the financial statements and accompanying notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA AS OF
JUNE 30, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Long-term debt (including current maturities):
Senior Credit Facility:
Revolving Credit Facility(1)....................................... $ --
Term Loan.......................................................... 30,000
Senior Subordinated Notes due 2007.................................... 125,000
Other(2).............................................................. 3,763
----------------------
Total long-term debt............................................... 158,763
Stockholder's equity.................................................. 52,214
----------------------
Total capitalization.................................................. $ 210,977
==================
</TABLE>
- ------------------------
(1) The Revolving Credit Facility provides for borrowing of up to $30.0 million,
subject to borrowing base availability. On a pro forma basis as of June 30,
1997, the Company would have had available $30.0 million under the Revolving
Credit Facility.
(2) Consists of capital lease obligations.
19
<PAGE> 25
SELECTED HISTORICAL FINANCIAL DATA
THE COMPANY
The selected information below presents the financial information of the
Company and its predecessor for the periods indicated. The data for the years
ended December 31, 1994 and 1995 and the three months ended March 31, 1996 are
derived from the audited financial statements of SIA Adhesives (the
"Predecessor"). The data for the period ended December 31, 1996 are derived from
the audited financial statements of the Parent Partnership. The data for the six
months ended June 30, 1997 are derived from the unaudited financial statements
of the Parent Partnership which, in the opinion of management of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation. The data for the years ended December 31,
1992 and 1993 are derived from the unaudited financial statements of the
Predecessor. The following information should only be read in conjunction with
the audited and unaudited consolidated financial statements of the Company, and
the notes thereto, "Unaudited Pro Forma Financial Statements," and "Management's
Discussion and Analysis of Results of Operations and Financial Condition," all
included elsewhere herein.
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR ------------------------
-----------------------------------------------------
THREE NINE SIX
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, JUNE 30,
---------------------------------------- --------- ------------ --------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- --------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $18,162 $18,823 $20,100 $21,129 $ 5,410 $ 37,792 $ 43,159
Cost of goods sold.......... 12,392 12,817 13,498 13,734 3,580 26,637 30,439
------- ------- ------- ------- ------- ------- -------
Gross profit................ 5,770 6,006 6,602 7,395 1,830 11,155 12,720
Selling, general and
administrative expense.... 6,286 6,702 6,362 5,633 1,603 9,613 9,047
------- ------- ------- ------- ------- ------- -------
Operating income (loss)..... (516) (696) 240 1,762 227 1,542 3,673
Interest expense............ -- -- -- -- -- 1,666 1,861
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes and extraordinary
item...................... (516) (696) 240 1,762 227 (124) 1,812
Income taxes(1)............. (206) (278) 96 705 91 (99) (75)
------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item........ (310) (418) 144 1,057 136 (25) 1,737
Extraordinary item(2)....... -- -- -- -- -- (281) --
------- ------- ------- ------- ------- ------- -------
Net income (loss)........... $ (310) $ (418) $ 144 $ 1,057 $ 136 $ (306) $ 1,737
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA
(END OF PERIOD):
Working capital............. $(8,828) $(7,214) $(5,988) $ 1,786 $(5,019) $ 11,936 $ 13,540
Total assets................ 8,800 10,024 10,281 9,394 9,612 69,960 70,918
Total indebtedness.......... -- -- -- -- -- 41,652 40,745
Stockholder's equity........ 970 696 144 7,013 136 17,444 19,006
OTHER FINANCIAL DATA:
Capital expenditures........ $ 422 $ 770 $ 655 $ 106 $ 131 $ 555 $ 1,127
Ratio of earnings (loss) to
fixed charges(3).......... (38.7) (52.5) 17.0 136.5 58.7 0.9 2.0
</TABLE>
See Notes to Selected Historical Financial Data
20
<PAGE> 26
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT
TO RULE 901(d) OF REGULATION S-T
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [ ]
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
SOVEREIGN SPECIALTY CHEMICALS, INC.
PIERCE & STEVENS CORP.
SIA ADHESIVES, INC.
OSI SEALANTS, INC.
MERCER PRODUCTS COMPANY, INC.
TANNER CHEMICALS, INC.
(Exact name of obligor as specified in its charter)
Delaware 36-4176637
New York 31-1557383
Delaware 16-0951610
Illinois 36-2361148
New Jersey 02-0352196
New Hampshire 22-3061500
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
225 West Washington Street
Chicago, Illinois 60606
(Address of principal executive offices) (Zip code)
----------------------
9 1/2% Senior Subordinated Notes due 2007, Series B
(Title of the indenture securities)
================================================================================
<PAGE> 27
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Name Address
- -----------------------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE
7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit
1 to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE> 28
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
-3-
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 31st day of October, 1997.
THE BANK OF NEW YORK
By: /S/MARY LAGUMINA
------------------------
Name: MARY LAGUMINA
Title: ASSISTANT VICE PRESIDENT
-4-
<PAGE> 30
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1997,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 7,769,502
Interest-bearing balances .......... 1,472,524
Securities:
Held-to-maturity securities ........ 1,080,234
Available-for-sale securities ...... 3,046,199
Federal funds sold and Securities pur-
chased under agreements to resell...... 3,193,800
Loans and lease financing
receivables:
Loans and leases, net of unearned
income ................. 35,352,045
LESS: Allowance for loan and
lease losses .............. 625,042
LESS: Allocated transfer risk
reserve........................ 429
Loans and leases, net of unearned
income, allowance, and reserve 34,726,574
Assets held in trading accounts ...... 1,611,096
Premises and fixed assets (including
capitalized leases) ................ 676,729
Other real estate owned .............. 22,460
Investments in unconsolidated
subsidiaries and associated
companies .......................... 209,959
Customers' liability to this bank on
acceptances outstanding ............ 1,357,731
Intangible assets .................... 720,883
Other assets ......................... 1,627,267
-----------
Total assets ......................... $57,514,958
===========
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES
Deposits:
In domestic offices ................ $26,875,596
Noninterest-bearing ...... 11,213,657
Interest-bearing ......... 15,661,939
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 16,334,270
Noninterest-bearing ......... 596,369
Interest-bearing ......... 15,737,901
Federal funds purchased and Securities
sold under agreements to repurchase. 1,583,157
Demand notes issued to the U.S.
Treasury ........................... 303,000
Trading liabilities .................. 1,308,173
Other borrowed money:
With remaining maturity of one year
or less .......................... 2,383,570
With remaining maturity of more than
one year through three years.......... 0
With remaining maturity of more than
three years ......................... 20,679
Bank's liability on acceptances exe-
cuted and outstanding .............. 1,377,244
Subordinated notes and debentures .... 1,018,940
Other liabilities .................... 1,732,792
-----------
Total liabilities .................... 52,937,421
-----------
EQUITY CAPITAL
Common stock ........................ 1,135,284
Surplus ............................. 731,319
Undivided profits and capital
reserves .......................... 2,721,258
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ 1,948
Cumulative foreign currency transla-
tion adjustments .................. ( 12,272)
------------
Total equity capital ................ 4,577,537
-----------
Total liabilities and equity
capital ........................... $57,514,958
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
<PAGE> 32
[ ]
Alan R. Griffith [ ]
J. Carter Bacot [ ]
Thomas A. Renyi [ ] Directors
[ ]
<PAGE> 33
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(1) Income taxes for the nine months ended December 31, 1996 and six months
ended June 30, 1997 relate to taxable income of Pierce & Stevens. Income of
SIA Adhesives, a limited liability company, and the Parent Partnership
(whose financial data is included for the Company) is taxed at the member or
partner, as the case may be, level and, as such, no income taxes are
reflected. After the Transactions, the Company and SIA Adhesives became
subchapter C corporations and became subject to corporate level income
taxes.
(2) Extraordinary item relates to the write-off of deferred financing costs
associated with the early extinguishment of debt.
(3) Ratio of earnings to fixed charges represents income before income taxes,
interest and other fixed charges divided by interest expense and other fixed
charges. Fixed charges consist of (i) interest, (ii) amortization of debt
issuance costs and (iii) the interest portion of rental expense.
2
<PAGE> 34
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements (the "Pro Forma
Financial Statements") are based on the historical financial statements of the
Company included elsewhere in this Offering Memorandum.
The unaudited pro forma balance sheet has been prepared to give effect to
the Acquisition of the Division as though it was consummated on June 30, 1997.
The unaudited pro forma statement of operations for the year ended December 31,
1996 gives effect to the acquisitions of SIA Adhesives, Pierce & Stevens and the
Division as though each of the acquisitions was consummated on January 1, 1996.
The unaudited pro forma statement of operations for the six months ended June
30, 1997 gives effect to the Acquisition of the Division as though it was
consummated on January 1, 1997. The pro forma adjustments are based upon
available information and certain assumptions that the Company believes are
reasonable. The acquisitions of SIA Adhesives and Pierce & Stevens have been,
and the acquisition of the Division will be, accounted for using the purchase
method of accounting. Allocations of the purchase price of the SIA Adhesives and
Pierce & Stevens acquisitions were based upon independent appraisals. The
allocation of the purchase price of the Division has been determined based upon
preliminary independent appraisals and other estimates of fair value and are
subject to change.
The Pro Forma Financial Statements do not purport to be indicative of the
results that would have been obtained had such transactions described above
occurred as of the assumed dates. In addition, the Pro Forma Financial
Statements do not purport to project the Company's results of operations for any
future date or period.
The Pro Forma Financial Statements do not include all adjustments to
operations for operating efficiencies that were identified by management in
connection with the acquisition of the Division. See "Business -- Business
Strategy."
The Unaudited Pro Forma Financial Statements should be read in conjunction
with the financial statements of the Company, SIA Adhesives, Pierce & Stevens
and the Division, and the notes thereto, included elsewhere herein.
22
<PAGE> 35
SOVEREIGN SPECIALTY CHEMICALS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED PRO FORMA
HISTORICAL(1) ADJUSTMENTS TOTAL
------------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 2,433 $ 1,600(2) $ 4,033
Accounts receivable, net....................... 30,213 -- 30,213
Inventories.................................... 20,873 -- 20,873
Other current assets........................... 5,132 -- 5,132
------------- ----------- --------
Total current assets........................ 58,651 1,600 60,251
Property, plant, and equipment, net.............. 46,052 6,892(2) 52,944
Goodwill, net.................................... 37,549 82,383(2) 119,932
Other assets..................................... 1,208 10,544(3) 11,752
------------- ----------- --------
Total assets................................... $ 143,460 $ 101,419 $244,879
========== ========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................... $ 19,336 $ -- $ 19,336
Accrued and other expenses..................... 6,343 -- 6,343
Current portion of long-term obligations....... 2,168 -- 2,168
------------- ----------- --------
Total current liabilities........................ 27,847 -- 27,847
Long-term debt obligations, less current
portion........................................ 81,553 75,042(4) 156,595
Other long-term liabilities...................... 5,732 2,491(5)(7) 8,223
Stockholder's equity:
Common stock................................... 17,575 34,309(5)(6) 51,884
Retained earnings.............................. 10,753 (10,423)(2)(3) 330
------------- ----------- --------
Total stockholder's equity.................. 28,328 23,886 52,214
------------- ----------- --------
Total liabilities and stockholder's
equity.................................... $ 143,460 $ 101,419 $244,879
========== ========== =========
</TABLE>
23
<PAGE> 36
SOVEREIGN SPECIALTY CHEMICALS, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(1) The combined historical data gives pro forma effect to the Acquisition
(exclusive of the adjustments set forth under "Pro Forma Adjustments") and
was derived from unaudited interim financial statements of the Company and
the Division included elsewhere herein.
<TABLE>
<CAPTION>
COMPANY THE COMBINED
HISTORICAL DIVISION HISTORICAL
---------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 1,028 $ 1,405 $ 2,433
Accounts receivable, net................................ 12,708 17,505 30,213
Inventories............................................. 10,010 10,863 20,873
Other current assets.................................... 2,277 2,855 5,132
---------- -------- --------
Total current assets............................... 26,023 32,628 58,651
Property, plant, and equipment, net....................... 26,915 19,137 46,052
Goodwill, net............................................. 16,772 20,777 37,549
Other assets.............................................. 1,208 -- 1,208
---------- -------- --------
Total assets............................................ $ 70,918 $ 72,542 $143,460
======== ======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable........................................ $ 6,762 $ 12,574 $ 19,336
Accrued and other expenses.............................. 3,624 2,719 6,343
Current portion of long-term obligations................ 2,097 71 2,168
---------- -------- --------
Total current liabilities............................ 12,483 15,364 27,847
Long-term debt obligations, less current portion.......... 38,648 42,998 81,553
Other long-term liabilities............................... 781 4,858 5,732
Stockholder's equity:
Common stock............................................ 17,575 -- 17,575
Retained earnings....................................... 1,431 9,322 10,753
---------- -------- --------
Total stockholder's equity........................... 19,006 9,322 28,328
---------- -------- --------
Total liabilities and stockholder's equity........... $ 70,918 $ 72,542 $143,460
======== ======== =========
</TABLE>
(2) The acquisition of the Division will be accounted for as a purchase in
accordance with Accounting Principles Board Option No. 16, "Business
Combinations." The purchase price is being allocated to tangible and
identifiable intangible assets and liabilities based upon preliminary
estimates of their fair values, with the excess of purchase price over fair
value allocated to goodwill. Fair value was determined based upon
preliminary independent appraisals and other estimates and is subject to
change. The allocation of the increase in basis is as follows:
<TABLE>
<S> <C>
Purchase price.................................................... $138,000
Book value of net assets acquired(i).............................. 48,725
--------
Increase in basis............................................... $ 89,275
=========
Allocation of increase in basis:
Increase in value of property, plant and equipment.............. $ 6,892
Goodwill........................................................ 82,383
--------
$ 89,725
=========
</TABLE>
(i) Comprised of total assets of $72.5 million less liabilities assumed of
$23.8 million as of June 30, 1997.
24
<PAGE> 37
(3) Adjustment reflects the capitalized debt issuance costs in connection with
the offering of the Notes and the Senior Credit Facility of $11.6 million,
net of $1.1 million of capitalized deferred financing costs written off upon
the Refinancing.
(4) Adjustment reflects the increase in long-term debt associated with (i) the
Notes of $125.0 million and (ii) the Senior Credit Facility of $30.0 million
as reduced for the repayment of existing indebtedness of (x) $40.6 million
pursuant to the refinancing and (y) the retention by Laporte of $39.4
million of indebtedness of the Division.
(5) Adjustment reflects minority interests of $0.5 million in SIA Adhesives and
Pierce & Stevens owned by management which will be contributed to the
Company in exchange for equity in the Parent Partnership in connection with
the Transactions.
(6) Adjustment reflects the Equity Contribution of $33.8 million.
(7) Adjustment reflects an additional liability of $3.0 million related to
potential environmental costs which will offset the 8.0% $3.0 million junior
subordinated note of the Parent Partnership issued to Laporte.
25
<PAGE> 38
SOVEREIGN SPECIALTY CHEMICALS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED PRO FORMA
HISTORICAL(1) ADJUSTMENTS TOTAL
------------- ----------- --------
<S> <C> <C> <C>
Net sales......................................... $ 199,243 $ -- $199,243
Cost of goods sold................................ 142,703 (89)(2) 142,614
------------- ----------- --------
Gross profit...................................... 56,540 89 56,629
Selling, general and administrative expense....... 42,355 5,096(3) 47,451
------------- ----------- --------
Operating income.................................. 14,185 (5,007) 9,178
Interest expense.................................. 6,137 9,624(4) 15,761
------------- ----------- --------
Income before income taxes........................ 8,048 (14,631) (6,583)
Income taxes...................................... 4,031 (3,340)(5) 691
------------- ----------- --------
Income (loss) from continuing operations.......... $ 4,017 $ (11,291) $ (7,274)
========== ========== =========
</TABLE>
26
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(1) The combined historical data gives pro forma effect to the acquisition of
SIA Adhesives, Pierce & Stevens and the Division (exclusive of the
adjustments set forth under "Pro Forma Adjustments") and was derived from
audited historical statements of operations of the Company, SIA Adhesives,
Pierce & Stevens and the Division, all included elsewhere herein.
<TABLE>
<CAPTION>
SIA PIERCE & COMBINED
THE COMPANY ADHESIVES STEVENS THE DIVISION HISTORICAL
----------- --------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales............................. $37,792 $ 5,410 $ 36,823 $119,218 $ 199,243
Cost of goods sold.................... 26,637 3,580 29,979 82,507 142,703
----------- --------- -------- ------------ ----------
Gross profit.......................... 11,155 1,830 6,844 36,711 56,540
Selling, general and administrative
expenses............................ 9,613 1,603 5,335 25,804 42,355
----------- --------- -------- ------------ ----------
Operating income...................... 1,542 227 1,509 10,907 14,185
Interest expense...................... 1,666 -- 9 4,462 6,137
----------- --------- -------- ------------ ----------
Income (loss) before income taxes..... (124) 227 1,500 6,445 8,048
Income taxes.......................... (99) 91 537 3,502 4,031
----------- --------- -------- ------------ ----------
Net income (loss) from continuing
operations.......................... $ (25) $ 136 $ 963 $ 2,943 $ 4,017
=========== ======== ======= ========== ========
</TABLE>
(2) Adjustment reflects the reduction in certain raw material costs as a result
of the consolidation of purchases under the more favorable of the existing
contracts of either the Company or the Division.
(3) Adjustments reflect the following:
<TABLE>
<S> <C>
Amortization of goodwill(i)....................................................... $6,236
Elimination of certain management positions(ii)................................... (600)
Savings associated with the change to certain employee benefits of the Division in
connection with the Acquisition(iii)............................................ (540)
------
$5,096
======
</TABLE>
(i) Adjustment reflects the incremental goodwill amortization associated
with the acquisitions of SIA Adhesives, Pierce & Stevens and the
Division as if such acquisitions had occurred on January 1, 1996. For
pro forma purposes, goodwill is being amortized over a period of 15
years.
(ii) Adjustment reflects the elimination of certain management positions of
the Division that are redundant with existing positions of the
Company.
(iii) Adjustment reflects savings related to the transfer of certain
employee benefits of the Division to Company plans.
(4) Interest expense has been adjusted to reflect the increase in interest
expense associated with the Notes and the Senior Credit Facility (net of the
elimination of historical interest in connection with the Refinancing) as if
the Transactions had been consummated as of the beginning of the period.
<TABLE>
<S> <C>
Senior Credit Facility:
Term Loan at 8.25%............................................................. $ 2,475
Senior Subordinated Notes due 2007 at 9.5%....................................... 11,875
Amortization of deferred financing costs, net (i)................................ 904
Elimination of historical interest............................................... (5,630)
-------
$ 9,624
=======
</TABLE>
(i) Adjustment reflects amortization of the capitalized debt issuance costs
of $970 incurred in connection with the financing of the Transaction.
For pro forma purposes, deferred financing costs are being amortized,
as interest expense, over a period of 10 years. The adjustment is
offset by $66 related to the amortization of deferred financing costs
written off in the Refinancing.
(5) Gives effect to decreased income taxes as a result of an income tax benefit
of $3,382 associated with the increase in interest expense and other pro
forma adjustments (net of nondeductible goodwill amortization) related to
the Transactions, partially offset by income tax expense of $42 resulting
from the Company becoming a C corporation in connection with the
Transactions, in each case at an effective tax rate of 40%.
27
<PAGE> 40
SOVEREIGN SPECIALTY CHEMICALS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED PRO FORMA
HISTORICAL(1) ADJUSTMENTS TOTAL
------------- ----------- --------
<S> <C> <C> <C>
Net sales......................................... $ 105,362 $ -- $105,362
Cost of goods sold................................ 73,089 (45)(2) 73,044
------------- ----------- --------
Gross profit...................................... 32,273 45 32,318
Selling, general and administrative expenses...... 21,289 2,321(3) 23,610
------------- ----------- --------
Operating income.................................. 10,984 (2,276) 8,708
Interest expense.................................. 3,789 4,177(4) 7,966
------------- ----------- --------
Income before income taxes........................ 7,195 (6,453) 742
Income taxes...................................... 2,545 (1,106) (5) 1,439
------------- ----------- --------
Net income (loss) from continuing operations...... $ 4,650 $ (5,347) $ (697)
========== ========== =========
</TABLE>
28
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENT OF OPERATIONS
(1) The combined historical data gives pro forma effect to the Acquisition
(exclusive of the adjustments set forth under "Pro Forma Adjustments") and
was derived from the unaudited interim financial statements of operations of
the Company and the Division, all included elsewhere herein.
<TABLE>
<CAPTION>
COMBINED
THE COMPANY THE DIVISION HISTORICAL
----------- ------------ --------
<S> <C> <C> <C>
Net sales................................................ $43,159 $ 62,203 $105,362
Cost of goods sold....................................... 30,439 42,650 73,089
----------- ------------ --------
Gross profit............................................. 12,720 19,553 32,273
Selling, general and administrative expenses............. 9,047 12,242 21,289
----------- ------------ --------
Operating income......................................... 3,673 7,311 10,984
Interest expense......................................... 1,861 1,928 3,789
----------- ------------ --------
Income before income taxes............................... 1,812 5,383 7,195
Income taxes............................................. 75 2,470 2,545
----------- ------------ --------
Net income from continuing operations.................... $ 1,737 $ 2,913 $ 4,650
=========== ========== ========
</TABLE>
(2) Adjustment reflects the reduction in certain raw material costs as a result
of the consolidation of purchases under the more favorable of the existing
contracts of either the Company or the Division.
(3) Adjustments reflect the following:
<TABLE>
<S> <C>
Amortization of goodwill(i)........................................................ $2,991
Elimination of certain management positions(ii).................................... (400)
Savings associated with the change to certain employee benefits of the Division in
connection with the Acquisition(iii)............................................. (270)
------
$2,321
======
</TABLE>
(i) Adjustment reflects the incremental goodwill amortization associated
with the acquisition of the Division as if the Acquisition had occurred
on January 1, 1997. For pro forma purposes, goodwill is being amortized
over a period of 15 years.
(ii) Adjustment reflects the elimination of certain management positions of
the Division that are redundant with existing positions of the
Company.
(iii) Adjustment reflects savings related to the transfer of certain
employee benefits of the Division to Company plans.
(4) Interest expense has been adjusted to reflect the increase in interest
expense associated with the Notes and the Senior Credit Facility (net of the
elimination of historical interest in connection with the Refinancing) as if
the Transactions had been consummated as of the beginning of the period.
<TABLE>
<S> <C>
Senior Credit Facility:
Term Loan at 8.25%.............................................................. $ 1,238
Senior Subordinated Notes due 2007 at 9.5%........................................ 5,938
Amortization of deferred financing costs, net(i).................................. 536
Elimination of historical interest................................................ (3,535)
-------
$ 4,177
=======
</TABLE>
(i) Adjustment reflects amortization of the capitalized debt issuance costs
of $580 incurred in connection with the financing of the Transaction.
For pro forma purposes, deferred financing costs are being amortized,
as interest expense, over a period of 10 years. The adjustment is
offset by $44 related to the amortization of deferred financing costs
written off in the Refinancing.
(5) Gives effect to decreased income taxes as a result of a tax benefit of
$1,385 associated with the increase in interest expense and other pro forma
adjustments (net of nondeductible goodwill amortization) related to the
Transactions, partially offset by an income tax expense of $279 resulting
from the Company becoming a C corporation in connection with the
Transactions, in each case at an effective tax rate of 40%.
29
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company was formed by Robert B. Covalt, FCEC and other investors to
acquire and consolidate specialty chemical businesses in the highly fragmented
adhesives, sealants and coatings industry. The Company began operations in March
1996 with the acquisition of SIA Adhesives, a manufacturer of specialty
adhesives used primarily in the automotive, aerospace and general industrial
markets. In August 1996, the Company acquired Pierce & Stevens, a developer and
manufacturer of specialty coatings and adhesives for performance-oriented niche
applications. On August 5, 1997, the Company acquired the Division from Laporte.
HISTORICAL RESULTS OF OPERATIONS
Historical Six Months Ended June 30, 1997 Compared to Six Months Ended June 30,
1996
Net Sales. Net sales for the six months were $43.2 million, an increase of
$32.1 million, or 290.6%, over the comparable period in 1996, primarily as a
result of the acquisition of Pierce & Stevens in August, 1996. Excluding the
acquisition, net sales increased $0.7 million as a result of increased sales of
aerospace adhesives resulting from strong levels of commercial aircraft
production. The increase in net sales was partially offset by reduced sales of
automotive pressure sensitive adhesives.
Cost of Goods Sold. Cost of goods sold for the six months was $30.4
million, an increase of $23.4 million, or 331.3%, over the comparable period in
1996. As a percentage of net sales, cost of goods sold increased to 70.5% for
the first six months of 1997 from 63.9% in the first six months of 1996 as a
result of the inclusion of the generally lower gross margin Pierce & Stevens
business in the first quarter of 1997, partially offset by increased sales of
higher margin aerospace adhesives.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first six months of 1997 were $9.0 million,
representing a $6.2 million, or 213.3%, increase over the comparable period in
1996. As a percentage of net sales, selling, general and administrative expenses
decreased to 21.0% in the first six months of 1997 from 26.1% in the first six
months of 1996 as a result of the inclusion of results of Pierce & Stevens,
which has generally lower selling, general and administrative expenses as a
percentage of sales.
Net Income. Net income for the first six months of 1997 was $1.7 million
representing a $1.2 million, or 199.0%, increase over the comparable period in
1996. This increase was the result of the factors discussed above.
Historical 1996 Compared to Historical 1995
Net Sales. Net sales for 1996 were $43.2 million, representing a $22.1
million, or 104.5%, increase over 1995. This increase was due to the acquisition
of Pierce & Stevens in August, 1996 which contributed $22.0 million in sales for
the period.
Cost of Goods Sold. Cost of goods sold for 1996 was $30.2 million,
representing a $16.5 million, or 120.0%, increase over 1995. This increase was
primarily due to the acquisition of Pierce & Stevens in August, 1996. As a
percentage of net sales, cost of goods sold increased to 69.9% in 1996 from
65.0% in 1995, primarily due to the addition of the generally lower gross margin
Pierce & Stevens products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996 were $11.2 million, representing a $5.6 million,
or 99.1%, increase over 1995. This increase was primarily attributable to the
acquisition of Pierce & Stevens in August, 1996. As a percentage of
30
<PAGE> 43
net sales, selling, general and administrative expenses decreased to 26.0% in
1996 from 26.7% in 1995 as a result of the lower level of selling, general and
administrative expenses as a percentage of net sales at Pierce & Stevens.
Net Income. Net income for 1996 was $(0.2) million, representing a $0.9
million decrease from 1995. As a percentage of net sales, net income decreased
to (0.3)% in 1996 from 5.0% in 1995. This decrease was the result of the factors
discussed above as well as increased interest expense of $1.7 million and an
extraordinary loss of $0.3 million due to the refinancing resulting from the
acquisition of Pierce & Stevens in August, 1996.
Historical 1995 Compared to Historical 1994
Net Sales. Net sales in 1995 were $21.1 million, representing an increase
of $1.0 million, or 5.1%, over 1994. This increase was attributable to sales of
a new aerospace adhesive, increased sales resulting from qualifications from
certain commercial aircraft manufacturers and sales of interior automotive
adhesives as a result of new marketing programs.
Cost of Goods Sold. Cost of goods sold in 1995 was $13.7 million,
representing an increase of $0.2 million, or 1.7%, over 1994. As a percentage of
net sales, cost of goods sold decreased to 65.0% in 1995 from 67.2% in 1994,
resulting from sales of higher gross margin aerospace adhesives, as well as the
elimination of four manufacturing positions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1995 were $5.6 million, representing a decrease of
$0.7 million, or 11.5%, from 1994. As a percentage of net sales, selling,
general and administrative expenses decreased to 26.7% in 1995 from 31.7% in
1994 as a result of a reorganization of selling, marketing, technical and
administration functions resulting in the elimination of twelve positions.
Net Income. Net income for 1995 was $1.1 million, representing a $0.9
million, or 634%, increase from 1994. As a percentage of net sales, net income
increased to 5.0% in 1995 from 0.7% in 1994. This was the result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Interest payments on the Notes and under the Senior Credit Facility and
amortization of the Term Loan represent significant obligations of the Company.
The Notes require semiannual interest payments, interest on loans under the
Senior Credit Facility is due quarterly and the Term Loan will require quarterly
amortization payments commencing in September 1998. The Company's remaining
liquidity demands relate to capital expenditures and working capital needs. For
the year ended December 31, 1996, the Company spent on a pro forma basis $2.7
million on capital projects. The Company anticipates capital expenditures
totaling $6.0 million in 1997, $2.3 million of which relates to environmental
expenditures for which the Company expects to be indemnified pursuant to
acquisition agreements. Of this amount, $1.1 million had been spent through June
30, 1997. Exclusive of the impact of any future acquisitions, the Company does
not expect its capital expenditure requirements to increase materially in the
foreseeable future.
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the Senior Credit Facility. The Revolving Credit Facility
will provide the Company with $30.0 million of borrowings, subject to
availability under the borrowing base. At June 30, 1997, on a pro forma basis
after giving effect to the Transactions, the Company would have been able to
borrow $30.0 million under the Revolving Credit Facility. See "Description of
Senior Credit Facility." The Company believes that, based on current and
anticipated financial performance, cash flow from operations and borrowings
under the Revolving Credit Facility will be adequate to meet anticipated
requirements for capital expenditures, working capital and scheduled interest
payments (including interest payments on the Notes and amounts outstanding under
the Senior Credit Facility). However, the Company's capital requirements may
change, particularly if the Company should
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<PAGE> 44
complete any additional material acquisitions. The ability of the Company to
satisfy its capital requirements will be dependent upon the future financial
performance of the Company, which in turn will be subject to general economic
conditions and to financial, business and other factors, including factors
beyond the Company's control.
The Company's future operating performance and ability to repay or
refinance the Notes will also be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control. See "Risk Factors -- Substantial Leverage and Debt Service
Obligations."
The Company is considering selling certain businesses which are not part of
its four main business segments. If such sales were to occur, the proceeds would
be used to repay debt or would be reinvested in core businesses.
INFLATION
The Company does not believe that inflation has had a material impact on
its financial position or results of operations.
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<PAGE> 45
BUSINESS
COMPANY OVERVIEW
The Company is a leading developer, producer and distributor of a wide
variety of adhesives, sealants and coatings utilized in numerous industrial and
commercial applications. The Company's broad line of over 1,300 products is sold
to more than 6,000 customers. The Company's products are frequently designed in
cooperation with its customers to meet unique specifications, resulting in a
significant number of primary supplier relationships. Many of the Company's
products provide critical performance attributes to its customers' products but
represent only a small portion of total costs. The Company focuses on select
value-added niche markets in which it has strong market positions and advantages
in product development, manufacturing and distribution. The Company markets its
products to four primary business segments: Housing Repair, Remodeling and
Construction; Industrial; Graphic Arts; and Flexible Packaging. On a pro forma
basis for the year ended December 31, 1996 and the six months ended June 30,
1997, the Company had net sales of $199.2 million and $105.4 million,
respectively.
COMPETITIVE STRENGTHS
The Company believes it benefits from the following competitive strengths,
which have enabled it to expand its penetration of existing customers and
markets, establish new customer relationships, enter new markets and develop
additional products and applications.
Leadership Positions in Selected Markets. The Company's customer-driven
product development, reputation for quality and high levels of customer service
have allowed it to achieve strong market positions and brand name recognition in
its markets. Management believes that over 50% of the Company's pro forma net
sales in 1996 were in niche markets in which the Company has either the number
one or two position. The Company's brand and trade names are particularly well
recognized in its target markets, and include Pierce & Stevens, OSI, Pro-Series,
Polyseamseal, Miracure, Plastilock, Latiseal, Hybond, Proxseal, Magic Seal and
Glaze'N Seal.
Strong Customer Relationships. The Company's leadership position within
its markets, reputation for high levels of quality and customer service, and
proven product development skills have allowed it to secure strong relationships
across its customer base. The Company's products are sold to and utilized by
some of the world's largest companies, including The Boeing Company, Airbus
Industrie, General Motors Corporation, Chrysler Corporation and Baxter
International, Inc. Many of the Company's Industrial, Graphic Arts and Flexible
Packaging products have been certified through intensive, customer-specific
technical approval processes which greatly enhance the Company's position with
such customers. The Company's relationships with retailers and professional
distributors of its Housing Repair, Remodeling and Construction products are
strengthened by the Company's broad product line, strong brands and reputation
for quality.
Technological Expertise. The Company is a technological leader in the
manufacture and development of specialty adhesives, sealants and coatings within
its market segments. The Company's technological expertise has allowed it to
introduce a broad variety of new products over the past three years, which
accounted for approximately $40.0 million of pro forma 1996 net sales. The
Company possesses numerous customized and proprietary formulations with unique
performance characteristics designed to address specific customer needs.
Examples of the Company's proprietary formulations include ultraviolet cured
coatings for graphic arts and adhesives used in aerospace, construction and
medical packaging. The Company continually leverages its technological expertise
to develop new products and additional applications for existing product
formulations. In addition, the Company has enhanced its technological expertise
both through cooperative research and development efforts and joint
technological alliances with suppliers and customers such as E. I. du Pont de
Nemours and Company, The Boeing Company, The Dow Chemical
33
<PAGE> 46
Company, Hoechst AG, General Motors Corporation, Baxter International, Inc.,
Phillip Morris Corporation and BASF Corporation.
Broad Product Offerings and Diverse Customer Base. The Company
manufactures over 1,300 products sold through multiple distribution channels to
over 6,000 customers in a wide variety of end-use markets. In 1996, no single
customer of the Company accounted for over 3% of the Company's pro forma net
sales, and the top ten customers accounted for less than 16% of the Company's
pro forma net sales. This diversity of customers, products and distribution
channels provides the Company with a broad base from which to grow sales and
expand customer relationships, and minimizes exposure to any particular
customer, economic cycle or geographic region.
Strong Management Team. The Company has assembled a strong and experienced
management team at both the corporate and operating levels. The Company's senior
and operating managers, led by Robert B. Covalt, average over 26 years of
experience in the specialty chemicals industry. Upon closing of the
Transactions, the top managers will own, or have incentive awards to acquire
approximately 19% of the Parent Partnership's equity. In addition, the Parent
Partnership has reserved 4% of its equity on a fully diluted basis for future
incentive awards.
BUSINESS STRATEGY
Continued Focus on Niche Products in Attractive Markets. The Company will
continue to develop product offerings for value-added end-use applications in
higher growth market segments, including those for: (i) structural adhesives;
(ii) fire-retardant adhesives and coatings; (iii) food and medical packaging
adhesives and coatings; and (iv) coatings which facilitate recycling and other
environmentally-friendly adhesives, sealants and coatings. Management believes
the Company's market leadership positions, technological expertise, and strong
customer relationships provide it with advantages in the development of new
products and the penetration of new markets.
Pursue Strategic Acquisitions. The Company has successfully grown through
acquisitions and intends to pursue additional strategic acquisitions that will
allow it to further improve its market positions in targeted markets. Management
believes that the high degree of fragmentation in the adhesives, sealants and
coatings industry will continue to provide suitable acquisition candidates.
Potential acquisition candidates will be evaluated based upon the ability of the
Company to: (i) expand its product line; (ii) enhance its product development
capabilities; (iii) market products through new or expanded distribution
channels; and (iv) increase its international presence.
Increase International Presence. The Company believes it has significant
opportunities in international markets to increase sales to existing
multinational customers, enter developing markets and establish new customer
relationships. In October 1996, the Company appointed a Vice
President -- International with over 30 years of international sales and
marketing experience in the adhesives, sealants and coatings industry. The
Company intends to expand its global sales, particularly in Southeast Asia and
Latin America, by: (i) increasing sales and marketing activities in targeted
regions; (ii) entering into strategic alliances; and (iii) pursuing targeted
acquisitions. The Company has recently established a sales office in Singapore
focused on flexible packaging adhesives and has increased its sales and
marketing activities in Latin America through its existing operations in Mexico.
Achieve Significant Operating Efficiencies. The Company believes that it
can achieve operating efficiencies resulting in enhanced revenue opportunities,
cost savings and improved cash flow through: (i) cross-selling its expanded
product line across the broader distribution and customer network which it will
develop from the Acquisition; (ii) consolidating raw material purchases to
increase purchasing economies of scale; (iii) reducing duplicative selling,
general and administrative expenses; (iv) consolidating various compensation,
benefit and insurance programs; (v) consolidating certain manufacturing and
distribution operations; and (vi) lowering working capital levels by optimizing
SKU counts and consolidating inventory management. The Company
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<PAGE> 47
believes that over approximately a twelve-month period, it may realize potential
cost savings from these activities of approximately $4.0 million, although no
assurance can be given that such savings can be achieved.
INDUSTRY
Total sales of adhesives, sealants and coatings in the United States were
approximately $26.4 billion in 1996. Adhesives, sealants and coatings are used
in a wide range of products with applications in numerous industries, including:
industrial, consumer, construction, automotive, aerospace and packaging. Typical
industrial applications include corrosion resistant industrial coatings, general
assembly adhesives, fire-retardant textile coatings, coatings for electronic
components and numerous other diverse applications. Consumer applications
include various consumer-applied adhesives such as white glues, caulks and
sealants, architectural coatings and miscellaneous do-it-yourself sealing
applications for bathtub and kitchen fixtures. Automotive market applications
include the use of primers and top coats, body sealants, structural adhesives
and interior and exterior trim adhesives. Typical construction applications
include contractor-applied architectural coatings, joint sealants and flooring
and roofing adhesives. Packaging industry applications include carton,
corrugated box and flexible consumer packaging adhesives, seam sealers and
container coatings. Aerospace applications include commercial, military and
general aviation coatings, composite bonding adhesives and structural epoxies.
The U.S. adhesives, sealants and coatings industry is highly fragmented
with over 500 competitors, the significant majority of which the Company
believes are small, regional competitors. While smaller companies have
successfully competed in niche markets, the industry is expected to consolidate
as competitors seek to enhance operating efficiencies in new product
development, sales and marketing, distribution, production and administrative
overhead. Larger specialty competitors also benefit through a greater
diversification of end-use markets, customers, technologies and geography,
reducing the impact of industry or regional cyclicality.
The U.S. adhesives, sealants and coatings industry grew from approximately
$13.8 billion in 1986 to approximately $26.4 billion in 1996, representing a
compound annual growth rate of 6.7%. Continued future growth is expected to
result from the following factors:
New Markets and More Stringent Demands of End Users. Adhesives and
sealants are increasingly being used in new applications, particularly in the
transportation and construction sectors, as end users desire simpler design and
manufacture, lower costs, improved bonding, lower weight, and reduced vibration
and corrosion. For example, in the bonding of automotive window glass to steel
body panels, high-performance adhesives provide structural reinforcement to the
adjacent steel panels, thus providing additional integrity to the car body. In
highway construction, new, long-lasting sealants are replacing traditional
bitumen and other materials that exhibit poor longevity.
New Materials. The growing use of nonferrous parts (e.g., aluminum and
plastics) in car bodies, appliances, buildings and other fabricated goods
requires the use of adhesives that are specially formulated to bond dissimilar
materials. On these substrates, traditional mechanical fasteners are frequently
not suitable.
Additional industry growth is expected to occur as a result of the
increased use of adhesives, sealants and coatings in international markets.
Total worldwide sales for adhesives, sealants and coatings were approximately
$75.2 billion in 1996. In 1996, the United States accounted for approximately
35% of worldwide sales, while Europe accounted for approximately 40% of
worldwide sales and Japan accounted for approximately 12% of worldwide sales.
Sales to the remainder of the world accounted for approximately 13% of total
industry sales. Developing markets are currently under-penetrated with respect
to the use of adhesives, sealants and coatings. Strong growth is expected in
these markets, particularly in the Far East, Eastern Europe and Latin America.
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<PAGE> 48
PRODUCTS AND MARKETS
The table below sets forth the Company's principal business segments, 1996
pro forma net sales and selected product applications:
<TABLE>
<CAPTION>
PRO FORMA
1996 NET
BUSINESS SEGMENT SALES SELECTED PRODUCT APPLICATIONS
- ---------------------------- ------------ ---------------------------------------------------
<S> <C> <C>
Housing Repair, Remodeling
and Construction.......... $74 million Aluminum and vinyl siding sealants Window and door
sealants Tub and tile sealants Drywall and
subflooring adhesives
Industrial.................. $68 million Power staple and nail gun cartridge adhesives Fire-
retardant textile adhesives and coatings Automotive
structural and trim adhesives Aerospace structural
adhesives Commercial insulation adhesives
Graphic Arts................ $17 million High gloss scratch and abrasion resistant coatings
used on paperback book covers, decorative
packaging, annual reports, catalog covers and
playing and trading cards
Flexible Packaging.......... $17 million Blister packaging adhesives and coatings Food and
product packaging adhesives and coatings Food
packaging laminating adhesives
</TABLE>
Housing Repair, Remodeling and Construction. The Company's Housing Repair,
Remodeling and Construction product offerings are primarily sealants and
adhesives used in exterior and interior applications. The Company's products in
this segment are marketed to defined niches in the do-it-yourself retail and
professional markets. Distribution channels include professional distributors,
traditional hardware stores and retail home center customers such as Loews
Corp., Builder's Square, Inc. and Home Depot, Inc. The Company offers a broad
range of well-established branded products including OSI and Polyseamseal for
retail do-it-yourself markets and Pro-Series for professional markets.
Industrial. The Company's Industrial product offerings consist primarily
of specialty adhesives and coatings for the automotive, aerospace, manufactured
housing and textile markets. Such products include: adhesives for power staple
and nail gun cartridges, adhesives for carpet backing manufacturers,
fire-retardant coatings for carpet and other textiles, automotive trim
adhesives, commercial structural adhesives and insulation adhesives. In
addition, the Company manufactures and markets Dualite, a lightweight inert
filler that can both reduce the weight and enhance the strength of products to
which it is added. The Company's Industrial customers include The Boeing
Company, Airbus Industrie, General Motors Corporation, Chrysler Corporation,
Senco Corporation, Stanley Works and Zenith Corporation.
Graphic Arts. The Company produces a variety of high quality, high gloss
scratch and abrasion resistant coatings used on paperback book covers,
decorative packaging, annual reports, catalog covers, playing and trading cards
and other miscellaneous items. The Company is the leading manufacturer of
coatings for paperback book covers. Graphic Arts customers include printers,
custom coaters and magazine manufacturers.
Flexible Packaging. The Company produces Flexible Packaging adhesives
including: (i) heat-activated lidding adhesives used to apply flexible paper or
foil lids to plastic tubs in the food industry, such as individually packaged
condiments, creamers and cream cheese tubs; (ii) foil or paper blister packaging
for products such as pharmaceuticals, batteries, toys, and tool accessories;
(iii) film-to-film adhesives used to bond different types of plastic film, such
as metalized and moisture barrier films used in snack food bags; and (iv)
medical packaging adhesives.
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<PAGE> 49
Other. The Company also produces vinyl and rubber products such as wall
base, stair treads and nosings, and boat docking bumpers.
SALES AND MARKETING
Industrial, Flexible Packaging and Graphic Arts. The Company operates an
extensive sales and marketing network for its Industrial, Flexible Packaging and
Graphic Arts customers. This network consists of a direct sales force of over 50
professionals, each of whom has over 15 years of industry experience, as well as
independent agents and distributors. The sales force works closely with
customers to satisfy existing product needs and to identify new applications and
product improvement opportunities. The Company's sales efforts are complemented
by its product development and technical support staff, who work together with
the sales force to develop new products based on customer needs. The Company
augments its direct sales and marketing coverage through a network of over 30
distributors and independent agents who specialize in particular markets. This
market specialization allows the Company's products to gain access to a broader
range of distribution channels and end users and further strengthens the
Company's brand names.
The Company's sales and marketing efforts and customer relationships are
enhanced by the numerous customer-specific technical approvals the Company has
secured. These approvals typically involve significant customer time and effort
and result in a strong competitive position for qualified products. Once
qualified, products are often referenced in customer specifications or qualified
product lists. These qualification processes also reinforce the partnership
between the Company and its customers and can lead to additional sales and
marketing opportunities.
Housing Repair, Remodeling and Construction. The Company sells products in
this segment through a network of distributors, as well as directly to large
national chains. This sales and marketing network allows the Company to reach a
variety of end users ranging from professional contractors to do-it-yourself
customers. The Company's brands are developed for specific end users:
Pro-Series, Magic Seal and Polyseamseal PRO for the professional contractor and
Polyseamseal, OSI, Bullet Bond, Nail Power and FI:X for retail distribution to
do-it-yourself end users. The Company differentiates itself through strong
technical service, specific product performance and color availability in the
professional market and consumer brand recognition, product performance, store
service and point of purchase packaging in the do-it-yourself market. The
Company services its customers in this segment through a network of six sales
managers, ten regional brand sales managers and 150 independent field sales
representatives.
RAW MATERIALS
The Company uses a variety of specialty and commodity chemicals in its
manufacturing processes. These raw materials are generally available from
numerous independent suppliers. The Company typically purchases raw materials on
a spot basis. Certain of the Company's raw materials are derived from ethylene
and its derivatives. There have been historical periods of rapid and significant
movements in the price of ethylene both upward and downward. The Company has
historically been successful in passing on price increases to its customers
within 90 to 120 days, but there can be no assurance that it will continue to be
able to do so in the future. See "Risk Factors -- Raw Materials."
TECHNOLOGY
The Company maintains a strong commitment to technology, focusing on
expanding applications for its existing products and developing new products and
processes, and employs over 100 chemists and chemical engineers. The Company's
research and development staff works together with the Company's sales force and
customers to identify specific customer needs and develop innovative, high
performance solutions which satisfy those needs. This method of product
development results in close ongoing working relationships between the Company
and its customers and allows the Company to better anticipate and service its
customers needs. The Company's research and development staff also seeks to
apply new products and applications resulting from this process to other end use
markets.
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<PAGE> 50
The Company's technological expertise has allowed it to develop proprietary
techniques and manufacturing expertise across a range of product applications,
including: (i) its patented proprietary process for manufacturing Dualite, a
filler which enables the customer to produce lighter and stronger products; (ii)
pre-formulated dispersions used as medical packaging adhesives, fiber setting
adhesives and food packaging coatings; (iii) advanced toughened epoxy technology
systems used as adhesives for metal-to-metal aircraft bonding; and (iv)
fire-resistant chemistry used in a number of industrial coatings and adhesives
for the textile, automotive and manufactured housing markets. The Company is
also engaged in technical alliances with both customers and suppliers to develop
new products, including alliances with E. I. du Pont de Nemours and Company, The
Boeing Company, The Dow Chemical Company, Hoechst AG, Phillip Morris
Corporation, Baxter International, Inc. and BASF Corporation, among others. The
Company's patents and custom formulations and qualifications, combined with its
strong technical service and partnership arrangements with many of its
customers, create substantial competitive advantages in many of its markets.
MANUFACTURING AND FACILITIES
The production of adhesives, sealants and coatings is a multi-stage process
which involves extensive formulation, mixing and in some cases, chemical
synthesis. Following one or more of these processes, the product is packaged in
totes, drums, pails, cartridges or other delivery forms for sale based upon the
customer's requirements. The Company's principal manufacturing processes are
blending, polymerization, extrusion and film coating. Blending consists of
dissolving or dispersing various compounds in organic solvents or water. In
polymerization, vinyl, acrylic and urethane polymers are synthesized in closed
reactor systems. Extrusion consists of feeding formulated materials through an
extruder to compound pressure sensitive and hot melt products. Film coating
consists of transferring blended formulations onto release paper or polyethylene
liners to produce thin films of pressure sensitive, hot melt and epoxy products.
Many of the Company's manufacturing processes can be performed at more than one
facility.
The Company operates the manufacturing plants and facilities described in
the table below. Management believes that the Company's plants and facilities
are maintained in good condition and are adequate for its present and estimated
future needs.
Listed below are the principal manufacturing facilities operated by the
Company:
<TABLE>
<CAPTION>
OWNED/ SQUARE
LOCATION LEASED(1) FOOTAGE BUSINESS SEGMENT
- ---------------------------- --------- ------- --------------------------------------
<S> <C> <C> <C>
Akron, Ohio................. Owned 214,300 Industrial
Buffalo, New York........... Owned 165,000 Industrial, Graphic Arts, Flexible
Packaging
Mentor, Ohio................ Owned 160,000 Home Repair, Remodeling and
Construction
Greenville, South
Carolina.................. Leased(2) 104,500 Industrial
Eustis, Florida............. Owned 96,500 Other
Carol Stream, Illinois...... Owned 81,800 Industrial, Graphic Arts, Flexible
Packaging
LaGrange, Georgia........... Owned 64,000 Home Repair, Remodeling and
Construction
Kimberton, Pennsylvania..... Owned 55,900 Industrial, Graphic Arts, Flexible
Packaging
Mexico City, Mexico......... Leased(3) 24,400 Industrial, Graphic Arts, Flexible
Packaging
</TABLE>
- ---------------
(1) All of the Company's owned facilities are subject to mortgages pursuant to
the Senior Credit Facility.
(2) Lease expires December 31, 2008.
(3) Lease expires December 31, 1999.
The Company's executive offices are located in Chicago, Illinois. The
Company also has sales offices in Fremont, California and Singapore.
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<PAGE> 51
COMPETITION
The adhesives, sealants and coatings industry is highly competitive. The
industry is highly fragmented, with over 500 manufacturers ranging from small
regional companies to large multinational producers. No one company holds a
dominant position on a national basis and very few compete across all levels of
the Company's product line. The Company's competitors include CIBA-GEIGY
Corporation, National Starch and Chemical Company, Cytec Industries Inc., Morton
and DAP, Inc. Competition is generally regional and is based on product quality,
technical service for specialized customer requirements, breadth of product
line, brand name recognition and price.
EMPLOYEES
As of September 30, 1997, the Company had employees, of whom were
members of unions under contracts which expire between April 30, 1998 and
February 28, 1999. The Company believes that its relations with its employees
are good.
ENVIRONMENTAL MATTERS
The Company is subject to extensive laws and regulations pertaining to the
discharge of materials into the environment, the handling and disposal of solid
and hazardous wastes, the remediation of contamination, and otherwise relating
to health, safety and protection of the environment ("Environmental Laws"). As
such, the Company's operations and the environmental condition of its real
property could give rise to liabilities under Environmental Laws, and there can
be no assurance that material costs will not be incurred in connection with such
liabilities. Environmental Laws are constantly evolving and it is impossible to
predict accurately the effect they may have upon the capital expenditures, cash
flow or competitive position of the Company in the future. Should Environmental
Laws become more stringent, the cost of compliance would increase. If the
Company cannot pass on future costs to its customers, such increases may have an
adverse effect on the Company's financial condition or results of operations.
In connection with its acquisitions, the Company has performed substantial
due diligence to assess the environmental liabilities associated with the
acquired businesses and the Division, and has negotiated contractual
indemnifications, which, supplemented by commercial insurance coverage designed
for each acquisition, is currently expected to adequately address a substantial
portion of known and foreseeable environmental liabilities. The Company does not
currently believe that environmental liabilities will have a material adverse
effect on the financial condition or results of operations of the Company. No
assurance can be given, however, that indemnitors or insurers will in all cases
meet their obligations or that the discovery of presently unidentified
environmental conditions, or other unanticipated events, will not give rise to
expenditures or liabilities that may have such an effect.
Following the Acquisition of the Division, the Company became responsible
to the State of South Carolina for completing the investigation and remediation
of certain subsurface contamination resulting from historic operations under
prior ownership at the Greenville, South Carolina facility, which activities are
currently projected to cost approximately $3.0 to $6.0 million. The Company is
indemnified by Laporte with respect to this matter (as well as certain other
known and unknown pre-closing environmental liabilities), subject to an overall
cap well in excess of the currently estimated cost of cleanup. Laporte has
agreed to conduct and finance the investigation and remediation of this matter.
Further, as part of the Acquisition purchase price, the Parent Partnership has
issued a $3.0 million junior subordinated note payable in five years to Laporte,
and such note may be reduced as a result of payments by the Company to cover
certain environmental liabilities associated with the Division. In addition, the
Company expects to receive the benefit of rent reductions negotiated by Laporte
with the owner and lessor of the facility worth approximately $1.5 million.
In connection with the 1996 acquisition of Pierce & Stevens, the Company's
environmental due diligence detected conditions of subsurface contamination
primarily associated with storage tank farms and at certain other areas of the
Pierce & Stevens facilities. The Company plans to address most areas
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<PAGE> 52
of contamination in connection with its plan to replace the tank farms in late
1997 and 1998. The Company currently estimates the total cost of remediation to
be $1.3 million, but this amount could be higher, depending upon the extent of
contamination. In connection with the acquisition, Sherwin-Williams Company
agreed to indemnify the Company with respect to this and other pre-closing
liabilities, subject to a $7.0 million overall cap, and, in addition to the
overall cap, has placed $2.0 million in escrow to secure payment for this and
certain other environmental matters.
As is the case with manufacturers in general, if a release of hazardous
materials occurs at real property owned or operated by the Company or its
predecessors or at any off-site disposal location utilized by the Company or its
predecessors, the Company may be held strictly, jointly and severally liable for
cleanup costs and natural resource damages under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("Superfund") and
similar Environmental Laws. Pierce & Stevens and the Division have been named
potentially responsible parties under Superfund and/or similar Environmental
Laws for cleanup of approximately fifteen multi-party waste disposal sites, the
liability for several of which have been resolved, subject to standard reopeners
found in Superfund settlements due to what the Company currently believes is the
relatively minor contribution of Pierce & Stevens' and the Division's waste to
such sites. The Company does not currently believe that its liability with
respect to such sites will have a material adverse effect on the financial
condition or results of operations of the Company.
The Company expects to incur capital expenditures for environmental
controls in the years ahead and currently estimates that such expenditures will
amount to $2.3 million and $7.2 million for 1997 and 1998, respectively. The
majority of these expenditures will pertain to removing and replacing
aboveground and underground storage tank systems at several facilities to comply
with upcoming deadlines contained in Environmental Laws. The Company expects
that it will be entitled to indemnification for approximately 90% of these
expenditures. See "Risk Factors -- Environmental Matters."
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on its financial condition or results of operations.
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<PAGE> 53
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to: (i)
each member of the Company's Board of Directors (the "Board"); (ii) each
executive officer of the Company; and (iii) certain key employees of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Robert B. Covalt........... 65 Chairman, President, Chief Executive Officer and Director
William T. Schram.......... 48 Vice President, Chief Financial Officer and Director
Martyn Howell-Jones........ 60 Vice President - International
Richard W. Johnston........ 50 Vice President - Technical
Stephen Zavodny............ 40 Director of Project Engineering
Louis M. Pace.............. 26 Director of Corporate Development
Charles A. Aldag, Jr....... 65 Director
Carol E. Bramson........... 33 Director
Lawrence E. Fox............ 55 Director
Eric C. Larson............. 42 Director
Karl D. Loos............... 46 Director
Neal G. Reddeman........... 74 Director
Reeve B. Waud.............. 33 Director
</TABLE>
The following table sets forth certain information concerning the
Guarantors' directors and officers. Officers of the Guarantors serve at the
discretion of the respective board of directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Robert B. Covalt........... 65 Chairman and Director of Pierce & Stevens, SIA Adhesives,
OSI Sealants, Mercer and Tanner
William T. Schram.......... 48 Vice President - Finance of Pierce & Stevens; Vice
President - Finance and Administration of OSI Sealants,
Tanner and Mercer; and Vice President and Assistant
Secretary of SIA Adhesives
John H. Edholm............. 50 President and Chief Executive Officer of Pierce & Stevens
Richard W. Johnston........ 50 Executive Vice President of Pierce & Stevens
Paul Gavlinski............. 50 Vice President - Operations of Pierce & Stevens
Gerard A. Loftus........... 43 President and Chief Executive Officer of SIA Adhesives
Peter Longo................ 38 President and Chief Executive Officer of OSI Sealants
Michael Prude.............. 46 President and Secretary of Tanner; Vice President and
Secretary of Mercer
</TABLE>
Robert B. Covalt has served as Chairman, President and Chief Executive
Officer and as a director of the Company since its inception in 1995. Mr. Covalt
is a director of each of the Guarantors. From 1979 to 1990, Mr. Covalt served as
President of the Specialty Chemicals Group of Morton. During this period, Mr.
Covalt grew Morton's specialty chemicals group from $175.0 million to $1.3
billion in sales and he completed thirteen acquisitions ranging in size from
$3.0 million to $170.0 million. From 1990 to 1993, Mr. Covalt was Morton's
Corporate Executive Vice President. Prior to that time, Mr. Covalt served in
various capacities in Morton's Chemical Division which he joined in 1957. Mr.
Covalt serves on the board of directors of CFC International, Inc., a specialty
chemical coating manufacturer. Mr. Covalt has a B.S. in Chemical Engineering and
an honorary doctorate from Purdue University, and an M.B.A. from the University
of Chicago.
William T. Schram has served as Vice President and Chief Financial Officer
and Secretary and as a director of the Company since March 1996. Mr. Schram is
also serves as Vice
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<PAGE> 54
President - Finance of Pierce & Stevens, Vice President - Finance and
Administration of OSI Sealants, Tanner and Mercer, and Vice President and
Assistant Secretary of SIA Adhesives. Mr. Schram served as Vice President of
Specialty Polymers at Morton from 1990 to 1995. From 1986 to 1990, Mr. Schram
served as Group Vice President of Finance and Administration for the Specialty
Chemicals Group at Morton. Prior to that time, Mr. Schram served in various
financial capacities at Morton which he joined in 1975. Mr. Schram holds a B.S.
from Southern Illinois University and an M.B.A. from the University of Chicago.
Mr. Schram is also a C.P.A.
Martyn Howell-Jones has served as Vice President -- International of the
Company since October 1996. Mr. Howell-Jones is responsible for the Company's
international sales and marketing efforts. Prior to joining the Company, Mr.
Howell-Jones was engaged as a consultant to National Starch and Chemical Company
from June 1994 to September 1996 where he assisted in the development of
National Starch and Chemical Company's international adhesives business. From
1966 to 1992, Mr. Howell-Jones was employed by Morton in its European specialty
chemicals business. Mr. Howell-Jones holds a B.S. degree from London University.
Richard W. Johnston has served as Vice President -- Technical of the
Company since March 1997 and as Executive Vice President of Pierce & Stevens
since 1995. From 1992 to 1995, Mr. Johnston served as Vice
President -- Technology of Pierce & Stevens. Prior to that time, Mr. Johnston
served as Vice President of Pierce & Stevens' Canadian operations from 1988 to
1992. Mr. Johnston joined Pierce & Stevens in 1966 and has served in several
technical capacities with expertise in coatings and adhesives technology. Mr.
Johnston holds a B.S., M.S. and M.E.S. in Chemistry from the University of
Waterloo, Canada.
Stephen Zavodny has served as Director of Project Engineering for the
Company since February 1997. Mr. Zavodny is in charge of all capital projects
and improvements for the Company's manufacturing operations. From 1996 to
January 1997, Mr. Zavodny served as a project manager and product line manager
for Raytheon. Prior to that time, Mr. Zavodny served as Director of Engineering
at Morton from 1991 to 1996. From 1981 to 1991, Mr. Zavodny served in various
engineering capacities with Morton. Mr. Zavodny holds a B.S. degree in Chemical
Engineering from the University of Illinois.
Louis M. Pace has served as the Company's Director of Corporate Development
and Assistant Secretary since August 1996. From 1995 to August 1996, Mr. Pace
was an associate with FCEC. Prior to that time, Mr. Pace was a member of First
Chicago Corporation's First Scholar management training program where he was
engaged in various financial capacities including emerging markets, interest
rate derivatives and analysis of equity capital investments. Mr. Pace holds a
B.A. in Economics from Harvard University and an M.B.A. from J.L. Kellogg
Graduate School of Management at Northwestern University.
John H. Edholm has served as President of Pierce & Stevens since March
1997. From 1995 to March 1997, Mr. Edholm served as Executive Vice President of
Pierce & Stevens with responsibility for all sales, finance and information
systems functions. Prior to that time, Mr. Edholm served Pierce & Stevens as
Vice President -- Sales from 1993 to 1995 and as Vice President -- Manufacturing
from 1986 to 1993. Mr. Edholm joined Pierce & Stevens in 1973 as a research
chemist and he has worked in a variety of capacities including manager of
quality assurance and manager of technical administration. Mr. Edholm holds a
B.A. in Chemistry and an M.B.A. from the University of New York at Buffalo.
Paul Gavlinski has served as Vice President -- Operations of Pierce &
Stevens since September 1996. From 1995 to July 1996, Mr. Gavlinski served as
President of Catalyst Development, a management consulting firm. Prior to that
time, Mr. Gavlinski was Vice President -- Manufacturing of Emulsion Systems
Inc., a polymer manufacturing company. From 1969 to 1992, Mr. Gavlinski was
employed by Morton in various chemical manufacturing capacities. Mr. Gavlinski
holds a B.S. in Chemical Engineering from the University of Illinois.
42
<PAGE> 55
Gerard A. Loftus has served as President of SIA Adhesives since April 1996.
From January 1995 to March 1996, Mr. Loftus served as General Manager of the
Adhesive Systems Division of The B.F. Goodrich Company, the predecessor of SIA
Adhesives ("ASD"). In 1994, Mr. Loftus served as the division business manager
of ASD with responsibility for all sales, marketing and technical activities.
From 1990 to 1994, Mr. Loftus was business manager of the aerospace products
group of ASD. Upon joining ASD in 1986, Mr. Loftus served in a variety of
capacities including materials manager and controller. Mr. Loftus, who is a
C.P.A., holds a B.B.A. in Accounting from Ohio University and a Masters of
Accountancy from Cleveland State University.
Peter Longo has been President and Chief Executive Officer of OSI Sealants
since 1991. From 1989 to 1991, Mr. Longo was Vice President of Operations of OSI
Sealants. Mr. Longo has been employed by OSI Sealants for more than 20 years and
has served in a variety of capacities including sales and marketing. Mr. Longo
attended Lakeland Community College.
Michael Prude has been President of Tanner and Vice President of Mercer
since 1997. From 1993 to 1997, Mr. Prude was President and Chief Operating
Officer of Evode-Tanner Industries Division of Laporte plc, the predecessor of
Tanner. From 1991 to 1993, Mr. Prude was President of Tamms
Industries -- Division of Laporte plc. Mr. Prude holds a B.S. degree in Chemical
Engineering from the University of Wales, United Kingdom. From 1990 to 1991, Mr.
Prude served as Vice President of Tamms Industries -- Division of Laporte plc.
From 1987 to 1990, Mr. Prude served as Works Manager of Interox. From 1987 to
1987, Mr. Prude served as Operations Director of Chemical Specialties, Inc., a
division of Laporte plc. From 1977 to 1984, Mr. Prude was employed by Interox
Chemicals, a company owned jointly by Laport plc and Solvay.
Charles A. Aldag, Jr. has been a director of the Company since August 1996.
Mr. Aldag is retired but serves as a special advisor to the Chemical
Manufacturer's Association where he has been active in developing environmental,
health and safety management practices and systems. Prior to his retirement, Mr.
Aldag served from 1987 to 1991 as Vice Chairman of Sherex Chemical Co., a
subsidiary of Schering AG of Germany, which was a producer of oleochemical
products and specialty surfactants. Mr. Aldag joined Ashland Chemical, Sherex
Chemical's predecessor, in 1968 and served in various capacities including
President and Chief Executive Officer of Sherex Chemical from 1979 to 1987. Mr.
Aldag holds a B.S. in Chemistry from Purdue University and an M.B.A. from the
University of Indiana.
Carol E. Bramson has been a director of the Company since March 1996 and is
Chairman of its Compensation Committee. Ms. Bramson is a director of each of the
Guarantors. Ms. Bramson has been a partner of FCEC since 1995. From 1992 to
1995, Ms. Bramson was an associate with FCEC. From 1989 to 1992, Ms. Bramson was
employed by Household International Inc. in its leveraged finance group. Prior
to that time, Ms. Bramson was engaged as an associate with Essex Venture
Partners, a Chicago-based venture capital firm. Ms. Bramson also serves on the
board of directors of Seco Products Corporation. Ms. Bramson holds a B.S. in
Finance from DePaul University and an M.B.A. from the University of Chicago.
Lawrence E. Fox has been a director of the Company since June 1997. Mr. Fox
has been a senior vice-president of FCEC since 1979 and currently heads the
equity unit of the Capital Investments Department. Mr. Fox has previously been
responsible for FCEC's leveraged debt funding and mezzanine investments. Mr. Fox
is a director of Lafayette Pharmaceuticals Inc. and Alpha Technologies Group,
Inc. Mr. Fox received his undergraduate degree from the University of Wisconsin
and an M.B.A. from the University of Chicago.
Eric C. Larson has been a director of the Company since March 1996 and
serves as Chairman of its Audit Committee. Mr. Larson is a director of each of
the Guarantors. Mr. Larson has been a partner of FCEC since 1991. Since joining
FCEC in 1984, Mr. Larson has held a variety of principal investment and advisory
responsibilities in structuring middle market leveraged buyouts and
recapitalization transactions in a broad array of industries. Mr. Larson serves
on the board of directors of M-Wave, Inc., a manufacturer of specialty
components for the wireless communications
43
<PAGE> 56
industry as well as several private companies. Mr. Larson holds a B.A. degree
from Harvard University, a Masters in Architecture from the University of
Michigan and an M.B.A. from the University of Chicago.
Karl D. Loos has been a director of the Company since August 1996. Mr. Loos
founded Garnett Consulting in 1996. From 1977 to 1996, Mr. Loos was employed at
Arthur D. Little & Co. in Boston, Massachusetts, most recently as Vice President
and Managing Director of Process Industries Consulting and Director of the
Strategic Planning practice. Mr. Loos received his undergraduate degree from
Dartmouth College and an M.B.A. from Harvard Business School.
Neal G. Reddeman has been a director of the Company since August 1996 and
has been engaged as a consultant to the Company. Mr. Reddeman who is retired,
has more than 40 years experience in the specialty packaging, coatings and
adhesives industry. From 1965 to 1991, Mr. Reddeman was employed in the
specialty chemicals group of Morton, most recently as Executive Vice President
of Adhesives and Coatings. Prior to joining Morton, Mr. Reddeman was Vice
President of Manufacturing at General Packaging Inc. in Rochester, New York and
was manager of product development at Milprint Inc. in Milwaukee, Wisconsin. Mr.
Reddeman holds a B.S. in Chemical Engineering from the University of Wisconsin.
Reeve B. Waud has been a director of the Company since March 1996. Mr. Waud
is a director of each of the Guarantors. Mr. Waud has served as a principal of
Waud Capital Partners, L.L.C., Waud Capital Partners -- I, L.P. and Waud Capital
Partners -- II, L.P., a Chicago-based group of equity investment firms, since
November 1993. From 1987 to 1993, Mr. Waud was an Associate with Golder, Thoma &
Cressey, a middle market venture capital group. Prior to that time, Mr. Waud was
an analyst with Salomon Brothers Inc in the corporate finance group. Mr. Waud
serves as Chairman of the board of directors of Christiana Industries, L.L.C.
and Whitehall Products, L.L.C. and serves on the board of directors of
Northwestern Memorial Management Corporation. Mr. Waud holds a B.A. from
Middlebury College and an M.B.A. from the J.L. Kellogg Graduate School of
Management at Northwestern University.
EXECUTIVE COMPENSATION
The compensation of executive officers of the Company is determined by the
Board. The following Summary Compensation Table includes individual compensation
information for the Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company in the year ended December
31, 1996 for services rendered in all capacities to the Company and its
subsidiaries during the year ended December 31, 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------- ALL OTHER
SALARY BONUS COMPENSATION(1)
-------- --------- ---------------
<S> <C> <C> <C>
Robert B. Covalt(2)................................ $146,033 $139,315 $ 2,417
Chairman, President and Chief Executive Officer
William T. Schram(2)............................... 88,533 44,877 2,750
Vice President, Chief Financial Officer and
Secretary
John H. Edholm(3).................................. 63,422 7,875 1,618
President of Pierce & Stevens
Gerard A. Loftus(2)................................ 81,450 5,000 1,438
President of SIA Adhesives
Richard W. Johnston(3)............................. 63,904 7,875 1,632
Vice President -- Technical
</TABLE>
- ---------------
(1) Represents matching contributions under 401(k) plans.
(2) Represents compensation from April 1, 1996 to December 31, 1996.
(3) Represents compensation from August 19, 1996 to December 31, 1996.
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<PAGE> 57
MANAGEMENT INCENTIVE PLANS AND EMPLOYMENT AGREEMENTS
The Company's Board of Directors believes that equity- and
performance-based plans and programs should constitute a major portion of
management's compensation so as to provide significant incentives to achieve
corporate goals. The Company, in conjunction with the Parent Partnership, has
instituted four plans and programs for this purpose.
Stock Incentive Pool. The Parent Partnership adopted its Stock Incentive
Pool in April 1996 in order to provide incentives to employees and directors
(including nonemployee directors), the Company and its subsidiaries, by granting
them ownership awards in the form of Parent Partnership units and common stock
of its general partner. The Stock Incentive Pool awards are allocated by the
Compensation Committee of the Board of Directors of the Company. An award
granted from the Stock Incentive Pool is subject to five year time and
performance vesting. Accelerated vesting may be granted in accordance with
defined qualifying events. To date, Stock Incentive Pool units and shares
representing approximately 11.8% of the indirect ownership of the Company's
equity have been awarded by the Compensation Committee of the Board to nine
select officers, directors and employees of the Company.
1997 Long-Term Incentive Plan. The Parent Partnership adopted its 1997
Long-Term Incentive Plan in May 1997 in order to provide long-term incentive
awards to all salaried employees (excluding executives who participate directly
in the Stock Incentive Pool). Participants are granted a "participation share"
in the incentive award pool which consists of a portion of equity reserved for
the program. At the time of a qualified transaction, determined and defined by
the Board of Directors, the value of the pool is allocated to participants based
upon their "participation share". Payment may be in the form of stock options,
stock, cash, or a combination of these elements, as determined by the Board of
Directors. "Participation shares" are not vested until earned and paid out. If a
participant leaves the Company before a qualified transaction has occurred,
their "participation share" is forfeited. If an individual joins the Company
during the plan cycle, they may be permitted to participate in the program, at
the discretion of the Chief Executive Officer and Board of Directors. The
Compensation Committee of the Board of Directors will administer the plan and
have the authority and responsibility to approve award levels and make any
changes in plan concept and design. As of May 31, 1997, the Long-Term Incentive
Plan was funded with an allocation of units and shares representing indirect
ownership of approximately 1.0% in the Company's equity.
1997 Management Incentive Plan. The Company adopted its 1997 Management
Incentive Plan in May 1997 in order to provide incentives to eleven selected
members of management and corporate staff judged to have the greatest impact on
the year's results. Each participant will be eligible for cash bonus awards
based on the Company's financial performance, measured in terms of 1997 revenues
and EBITDA, and on individual role-specific goals. Participants in this program
have been assigned a percentage of their base salary as their bonus target for
the 1997 fiscal year. Awards may be higher or lower than the target bonus as the
Company and/or individual performance is above or below the level expected to
achieve the target bonus. Total potential bonus as a percent of salary will be
in the range of 30%-120% of base salary dependent upon position. However, no
bonuses will be earned by the senior executives named in the Summary
Compensation Table unless a target cashflow threshold is attained and no bonus
will be awarded to any participating employee unless both the Company's revenues
and EBITDA reach a 90% attainment level.
1997 Incentive Bonus Program. The Company adopted its 1997 Incentive Bonus
Program in May 1997 in order to provide incentives to all salaried employees
(excluding any participant in the 1997 Management Bonus Program, sales incentive
eligible employees and union employees). Each participant will be eligible for
bonus awards based on the Company's financial performance, measured in terms of
revenues and EBITDA, and on individual role-specific goals. Participants in this
program have been assigned a percentage of their base salary as their bonus
target for 1997. Awards may be higher or lower than the target bonus as the
Company and/or individual perform-
45
<PAGE> 58
ance is above or below the level expected to achieve the target bonus. Total
potential bonus will be in the range of 7.5% to 34% of base salary dependent
upon position and salary band. Participants' eligibility for the financial
performance aspects of target bonus is contingent upon the Company's realization
of 90% of its target budget for the period. Upon achievement of 90% of both
target revenue and EBITDA, participants earn 50% of the target bonus
opportunity. For performance achievement between 90% and 100% of target for
revenue and EBITDA, the bonus awarded will increase from 50% to 100% of the
target award level. For performance achievement above 100% of target revenue and
EBITDA, the bonus award will increase subject to a formula dependent upon
position and salary band.
In addition to the cash bonus program described above, the Company has
established a multi-tiered recognition program which provides cash and non-cash
recognition awards to employees. Service awards are in place to recognize
employees for loyalty and sustained contribution as demonstrated by length of
service. Contribution awards are provided to recognize a broad range of
employees for individual and team contributions of clear value to the
organization.
The Company also has employment agreements with Mr. Covalt, Mr. Schram, Mr.
Edholm, Mr. Loftus and Mr. Johnston, which provide for such executives to serve
in their current capacities. The agreement with Mr. Covalt currently provides
for a salary of at least $250,000. The remainder of these agreements provide for
salaries of at least the following amounts: Mr. Schram, $100,000; Mr. Edholm,
$145,000; Mr. Loftus, $100,000; and Mr. Johnston, $145,000. The agreements with
Mr. Covalt, Mr. Schram and Mr. Loftus expire on March 31, 1999 and the
agreements with Mr. Edholm and Mr. Johnston expire on August 19, 1999. All of
these agreements also contain noncompetition provisions which extend up to two
years after the end of such executives' employment with the Company.
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<PAGE> 59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a wholly owned subsidiary of the Parent Partnership. The
following table sets forth certain information regarding the beneficial
ownership of the common stock of the general partner of the Parent Partnership,
by each person who beneficially owns more than five percent of such common stock
and by the directors and certain executive officers of the Company,
individually, and as a group.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF SHARES OF SHARES
--------- ----------
<S> <C> <C>
FIVE PERCENT SECURITY HOLDERS
First Chicago Equity Corporation(1)................................... 717.9 42.0%
Three First National Plaza, Mail Suite 1210, Chicago, Illinois 60670
Waud Capital Partners - I, L.P.(2).................................... 165.6 9.7%
560 Oakwood Avenue, Suite 203, Lake Forest, Illinois 60045
Waud Capital Partners - II, L.P.(2)................................... 103.1 6.0%
560 Oakwood Avenue, Suite 203, Lake Forest, Illinois 60645
Chase Venture Capital Associates, L.P................................. 134.6 7.9%
380 Madison Avenue, 12th Floor, New York, New York 10017
Bank of America Investments........................................... 108.3 6.3%
231 South LaSalle Street, Chicago, Illinois 60697
Cross Creek Partners(3)............................................... 126.7 7.4%
Three First National Plaza, Mail Suite 1210, Chicago, Illinois 60670
OFFICERS AND DIRECTORS
Robert B. Covalt...................................................... 242.9 14.2%
William T. Schram..................................................... 31.2 1.8%
Martyn Howell-Jones................................................... 8.8 *
John H. Edholm........................................................ 7.4 *
Gerard A. Loftus...................................................... 6.5 *
Richard W. Johnston................................................... 7.4 *
Charles A. Aldag...................................................... 3.4 *
Carol E. Bramson(1)(3)................................................ 844.6 49.4%
Lawrence E. Fox(1)(3)................................................. 844.6 49.4%
Eric C. Larson(1)(3).................................................. 844.6 49.4%
Karl D. Loos.......................................................... 3.4 *
Neal G. Reddeman...................................................... 3.4 *
Reeve B. Waud(2)...................................................... 269.1 15.8%
------- ------
All executive officers and directors as a group....................... 1,428.1 83.6%
</TABLE>
- ---------------
* Represents less than 1%.
(1) Carol E. Bramson, Lawrence E. Fox and Eric C. Larson are partners of First
Chicago Equity Corporation. Accordingly, Ms. Bramson, Mr. Fox and Mr. Larson
may be deemed to be the beneficial owner of these securities. Ms. Bramson,
Mr. Fox and Mr. Larson disclaim beneficial ownership of these securities.
(2) Reeve B. Waud is affiliated with Waud Capital Partners - I, L.P. and Waud
Capital Partners - II, L.P. Accordingly, Mr. Waud may be deemed to be the
beneficial owner of these securities. Mr. Waud disclaims beneficial
ownership of these securities.
(3) Carol E. Bramson, Lawrence E. Fox and Eric C. Larson are partners of Cross
Creek Partners. Accordingly, Ms. Bramson, Mr. Fox and Mr. Larson may be
deemed to be the beneficial owner of these securities. Ms. Bramson, Mr. Fox
and Mr. Larson disclaim beneficial ownership of these securities.
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<PAGE> 60
CERTAIN TRANSACTIONS
In connection with the acquisition of SIA Adhesives in March 1996, Mr.
Loftus invested $110,000 to purchase membership interests of SIA Adhesives, and
in connection with the acquisition of Pierce & Stevens in August 1996, Mr.
Edholm and Mr. Johnston invested $125,000 and $125,000, respectively, to
purchase common stock of Pierce & Stevens. Pursuant to the Transactions, Mr.
Loftus, Mr. Edholm and Mr. Johnston each received Class B Common Units and
Preferred Units of the Parent Partnership, and Common Stock and Preferred Stock
of the general partner of the Parent Partnership in exchange for their shares of
SIA Adhesives and Pierce & Stevens.
The Chase Manhattan Bank is the administrative agent under the Senior
Credit Facility. Chase Securities Inc. acted as arranger for the Senior Credit
Facility. The Chase Manhattan Bank and Chase Securities Inc. are affiliates of
Chase Venture Capital Associates, L.P.
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<PAGE> 61
DESCRIPTION OF SENIOR CREDIT FACILITY
On the closing date of the Transactions, the Company entered into the
Senior Credit Facility with the several lenders from time to time parties
thereto (collectively, the "Lenders"), and The Chase Manhattan Bank, as
administrative agent (the "Agent"). Chase Securities Inc. is acting as advisor
and arranger for the Senior Credit Facility. The following is a summary
description of the principal terms of the Senior Credit Facility. The
description set forth below does not purport to be complete and is qualified in
its entirety by reference to the agreements setting forth the principal terms
and conditions of the Senior Credit Facility, which are available upon request
from the Company.
Structure. The Senior Credit Facility consists of (a) a Term Loan in an
aggregate principal amount of $30.0 million and (b) a Revolving Credit Facility
providing for revolving loans to the Company and up to $10.0 million for letters
of credit in an aggregate principal amount at any time not to exceed the lesser
of (i) $30.0 million and (ii) the Company's borrowing base described below.
The entire amount of the Term Loan was borrowed under the Senior Credit
Facility on the closing date of the Transactions. No amounts under the Revolving
Credit Facility were borrowed at the closing date of the Transactions.
Thereafter, the Revolving Credit Facility may be utilized to fund the Company's
working capital requirements, including issuance of stand-by and trade letters
of credit, to fund acquisitions (subject to compliance with certain covenants)
and for other general corporate purposes.
The borrowing base under the Revolving Credit Facility is the sum of up to
85% of the Company's eligible domestic accounts receivable, up to 75% of
eligible foreign accounts receivable and up to 50% of the Company's eligible
inventory. Eligible accounts receivable include substantially all the Company's
accounts receivable after deducting accounts outstanding for more than 120 days
after the invoice date, certain foreign accounts, and accounts of certain other
obligors. Eligible inventory does not include obsolete inventory and certain
other items. At March 31, 1997, on a pro forma basis after giving effect to the
Transactions, the Company's borrowing base would have been approximately $30.0
million.
Availability. The availability of the Revolving Credit Facility is subject
to certain conditions. The Revolving Credit Facility and letters of credit will
be available at any time during the seven-year term of the Senior Credit
Facility subject to the fulfillment of customary conditions precedent including
the absence of a default under the Senior Credit Facility and compliance with
the borrowing base limitation described above.
Security; Guaranty. The Company's obligations under the Senior Credit
Facility are guaranteed by each existing and subsequently acquired or organized
subsidiary of the Company, subject to certain exceptions. The Senior Credit
Facility and the guarantees thereof are secured by a perfected first priority
security interest in all substantial tangible and intangible assets and proceeds
of the foregoing of the Company and the guarantors subject to certain permitted
liens.
Interest; Maturity. Borrowings under the Senior Credit Facility bear
interest, payable quarterly, at a rate per annum equal (at the Company's option)
to: (i) the Agent's Eurodollar rate plus an applicable margin or (ii) an
alternate base rate (equal to the highest of the Agent's prime rate, a
certificate of deposit rate plus 1%, or the Federal Funds effective rate plus
1/2 of 1%) plus an applicable margin. The initial applicable margin is 2.5% per
annum for Eurodollar rate loans and 1.25% per annum for alternate base rate
loans. The applicable margins may reduce depending upon the Company's leverage
ratio. The Term Loan amortizes quarterly commencing in September 1998 and will
mature on the seventh anniversary of the closing of the Transactions.
Fees. The Company is required to pay the Lenders, on a quarterly basis, a
commitment fee equal to 1/2 of 1% per annum (which may be reduced based on the
Company's leverage ratio) on the undrawn portion of the Revolving Credit
Facility. The Company is also obligated to pay: (i) a per annum letter of credit
fee equal to the applicable margin for Eurodollar rate loans on the aggregate
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<PAGE> 62
amount of outstanding letters of credit; (ii) a fronting bank fee for the letter
of credit issuing bank equal to 1/4 of 1% per annum; and (iii) agent,
arrangement and other similar fees.
Covenants. The Senior Credit Facility contains a number of covenants that,
among other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, prepay other indebtedness
(including the Notes) or amend certain debt instruments (including the
Indenture), pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company or its
subsidiaries, make capital expenditures or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities. In addition, the
Senior Credit Facility requires that the Company comply with specified ratios
and tests, including a minimum interest coverage ratio, a maximum leverage ratio
and a minimum net worth test.
Events of Default. The Senior Credit Facility contains customary events of
default, including non-payment of principal, interest or fees, material
inaccuracy of representations and warranties, violation of covenants,
cross-default and cross-acceleration to certain other indebtedness, certain
events of bankruptcy and insolvency, certain events under the Employee
Retirement Income Security Act of 1974, as amended, material judgments, actual
or asserted invalidity of any guarantee or security interest and a change of
control in certain circumstances as set forth therein.
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<PAGE> 63
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes offered hereby will be issued as a separate series under
the Indenture (the "Indenture") dated as of August 1, 1997 among the Company,
the Guarantors and The Bank of New York, as trustee (the "Trustee"). The form
and terms of the Exchange Notes are the same as the form and terms of the Old
Notes (which they replace) except that (i) the Exchange Notes bear a Series B
designation, (ii) the Exchange Notes have been registered under the Securities
Act and, therefore, will not bear legends restricting the transfer thereof, and
(iii) the holders of Exchange Notes will not be entitled to certain rights under
the Registration Rights Agreement, including the provisions providing for an
increase in the interest rate on the Old Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights will terminate when the
Exchange Offer is consummated. The Old Notes issued in the Initial Offering and
the Exchange Notes offered hereby are referred to collectively as the "Notes."
The following summary of certain provisions of the Indenture and the
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), and to all of the provisions of
the Indenture and the Registration Rights Agreement, including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the Trust Indenture Act, as in effect on the date of the Indenture.
The definitions of certain capitalized terms used in the following summary are
set forth below under "Certain Definitions." References in this "Description of
the Exchange Notes" section to "the Company" mean only Sovereign Specialty
Chemicals, Inc. and not any of its Subsidiaries.
GENERAL
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. The Company will
appoint the Trustee to serve as registrar and paying agent under the Indenture
at its offices at 101 Barclay Street, New York, NY 10286. No service charge will
be made for any registration of transfer or exchange of the Notes, except for
any tax or other governmental charge that may be imposed in connection
therewith. Any Old Notes that remain outstanding after completion of the
Exchange Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, will be treated as a single class of securities under the
Indenture.
RANKING
The Notes will rank junior to, and be subordinated in right of payment to,
all existing and future Senior Indebtedness of the Company, pari passu in right
of payment with all senior subordinated Indebtedness of the Company and senior
in right of payment to all Subordinated Indebtedness of the Company. At June 30,
1997, on a pro forma basis after giving effect to the Transactions, the Company
would have had $33.8 million of Senior Indebtedness and/or Guarantor Senior
Indebtedness outstanding. All debt incurred under the Senior Credit Facility
constitutes Senior Indebtedness of the Company, is guarantied by each of the
Guarantors on a senior basis and is secured by substantially all of the assets
of the Company and the Guarantors.
MATURITY, INTEREST AND PRINCIPAL OF THE NOTES
The Notes will be limited to $125.0 million aggregate principal amount and
will mature on August 1, 2007. Cash interest on the Notes accrues at a rate of
9 1/2% per annum and will be payable semi-annually in arrears on each February 1
and August 1, commencing February 1, 1998, to the holders of record of Notes at
the close of business on January 15 and July 15, respectively, immediately
preceding such interest payment date. Cash interest accrues from the most recent
interest payment date to which interest has been paid or, if no interest has
been paid, from August 5, 1997. Interest is computed on the basis of a 360-day
year of twelve 30-day months.
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<PAGE> 64
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after August 1, 2002, at the redemption prices
(expressed as a percentage of principal amount) set forth below, plus accrued
and unpaid interest thereon, if any, to the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the twelve-month
period beginning on August 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
-------------------------------------------------------- ----------
<S> <C>
2002.................................................... 104.750%
2003.................................................... 103.167%
2004.................................................... 101.584%
2005 and thereafter..................................... 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to August 1,
2000, the Company may redeem in the aggregate up to $40.0 million aggregate
principal amount of the Notes with the net cash proceeds of one or more Public
Equity Offerings by the Company after which there is a Public Market, at a
redemption price in cash equal to 109.50% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of redemption (subject
to the right of Holders of record on the relevant record date to receive
interest due on the relevant interest payment date); provided, however, that at
least $85.0 million aggregate principal amount of the Notes must remain
outstanding immediately after giving effect to each such redemption (excluding
any Notes held by the Company or any of its Affiliates). Notice of any such
redemption must be given within 60 days after the date of the closing of the
relevant Public Equity Offering of the Company.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time
pursuant to an optional redemption, selection of such Notes for redemption will
be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided, however, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part; provided, further, however, that if a partial redemption is
made with the net cash proceeds of a Public Equity Offering by the Company,
selection of the Notes or portions thereof for redemption shall be made by the
Trustee only on a pro rata basis or on as nearly a pro rata basis as is
practicable (subject to the procedures of The Depository Trust Company), unless
such method is otherwise prohibited. Notice of redemption shall be mailed by
first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption as long as the Company
has deposited with the paying agent for the Notes funds in satisfaction of the
applicable redemption price pursuant to the Indenture.
SUBORDINATION OF THE NOTES
The payment of the principal of, premium, if any, and interest on the Notes
is subordinated in right of payment, to the extent and in the manner provided in
the Indenture, to the prior payment in full in cash of all Senior Indebtedness.
Upon any payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities (excluding any
payment or distribution of
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<PAGE> 65
Permitted Junior Securities and excluding any payment from the trust described
under "Satisfaction and Discharge of Indenture; Defeasance" (a "Defeasance Trust
Payment")), upon any dissolution or winding-up or total liquidation or
reorganization of the Company, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all Senior
Indebtedness shall first be paid in full in cash before the Holders of the Notes
or the Trustee on behalf of such Holders shall be entitled to receive any
payment by the Company of the principal of, premium, if any, or interest on the
Notes, or any payment by the Company to acquire any of the Notes for cash,
property or securities, or any distribution by the Company with respect to the
Notes of any cash, property or securities (excluding any payment or distribution
of Permitted Junior Securities and excluding any Defeasance Trust Payment).
Before any payment may be made by, or on behalf of, the Company of the principal
of, premium, if any, or interest on the Notes upon any such dissolution or
winding-up or total liquidation or reorganization, any payment or distribution
of assets or securities of the Company of any kind or character, whether in
cash, property or securities (excluding any payment or distribution of Permitted
Junior Securities and excluding any Defeasance Trust Payment), to which the
Holders of the Notes or the Trustee on their behalf would be entitled, but for
the subordination provisions of the Indenture, shall be made by the Company or
by any receiver, trustee in bankruptcy, liquidation trustee, agent or other
Person making such payment or distribution, directly to the holders of the
Senior Indebtedness (pro rata to such holders on the basis of the respective
amounts of Senior Indebtedness held by such holders) or their representatives or
to the trustee or trustees or agent or agents under any agreement or indenture
pursuant to which any of such Senior Indebtedness may have been issued, as their
respective interests may appear, to the extent necessary to pay all such Senior
Indebtedness in full in cash after giving effect to any prior or concurrent
payment, distribution or provision therefor to or for the holders of such Senior
Indebtedness.
No direct or indirect payment (excluding any payment or distribution of
Permitted Junior Securities and excluding any Defeasance Trust Payment) by or on
behalf of the Company of principal of, premium, if any, or interest on the
Notes, whether pursuant to the terms of the Notes, upon acceleration, pursuant
to an Offer to Purchase or otherwise, will be made if, at the time of such
payment, there exists a default in the payment of all or any portion of the
obligations on any Designated Senior Indebtedness, whether at maturity, on
account of mandatory redemption or prepayment, acceleration or otherwise, and
such default shall not have been cured or waived or the benefits of this
sentence waived by or on behalf of the holders of such Designated Senior
Indebtedness. In addition, during the continuance of any non-payment event of
default with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may be immediately accelerated, and upon receipt by the Trustee
of written notice (a "Payment Blockage Notice") from the holder or holders of
such Designated Senior Indebtedness or the trustee or agent acting on behalf of
the holders of such Designated Senior Indebtedness, then, unless and until such
event of default has been cured or waived or has ceased to exist or such
Designated Senior Indebtedness has been discharged or repaid in full in cash or
the benefits of these provisions have been waived by the holders of such
Designated Senior Indebtedness, no direct or indirect payment (excluding any
payment or distribution of Permitted Junior Securities and excluding any
Defeasance Trust Payment) will be made by or on behalf of the Company of
principal of, premium, if any, or interest on the Notes, to such Holders, during
a period (a "Payment Blockage Period") commencing on the date of receipt of such
notice by the Trustee and ending 179 days thereafter. Notwithstanding anything
in the subordination provisions of the Indenture or the Notes to the contrary,
(x) in no event will a Payment Blockage Period extend beyond 179 days from the
date the Payment Blockage Notice in respect thereof was given, (y) there shall
be a period of at least 181 consecutive days in each 360-day period when no
Payment Blockage Period is in effect and (z) not more than one Payment Blockage
Period may be commenced with respect to the Notes during any period of 360
consecutive days. No event of default that existed or was continuing on the date
of commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period (to the extent the
holder of Designated Senior Indebtedness, or trustee
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<PAGE> 66
or agent, giving notice commencing such Payment blockage Period had knowledge of
such existing or continuing event of default) may be, or be made, the basis for
the commencement of any other Payment Blockage Period by the holder or holders
of such Designated Senior Indebtedness or the trustee or agent acting on behalf
of such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such event of default has been cured or waived for a
period of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
Notes by reason of the provisions of the Indenture described under this
"Subordination of the Notes" heading will not be construed as preventing the
occurrence of any Event of Default in respect of the Notes. See "Events of
Default" below.
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders of
the Notes will be paid to the holders of Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full in cash, and the Company may be
unable to meet fully its obligations with respect to the Notes.
At the time of the issuance of the Notes, the Senior Credit Facility and
approximately $3.6 million of capital lease obligations are expected to be the
only outstanding Senior Indebtedness or Guarantor Senior Indebtedness. Subject
to the restrictions set forth in the Indenture, in the future the Company may
issue additional Senior Indebtedness to refinance existing Indebtedness or for
other corporate purposes.
GUARANTIES OF THE NOTES
The Indenture provides that each of the Guarantors will unconditionally
guaranty on a joint and several basis (the "Guaranties") all of the Company's
obligations under the Notes, including its obligations to pay principal,
premium, if any, and interest with respect to the Notes. The Guarantors have
guaranteed all obligations of the Company under the Senior Credit Facility, and
each Guarantor has granted a security interest in all or substantially all of
its assets to secure the obligations under the Senior Credit Facility. The
obligations of each Guarantor are limited to the maximum amount which, after
giving effect to all other contingent and fixed liabilities of such Guarantor
and after giving effect to any collections from or payments made by or on behalf
of any other Guarantor in respect of the obligations of such other Guarantor
under its Guaranty or pursuant to its contribution obligations under the
Indenture, will result in the obligations of such Guarantor under its Guaranty
not constituting a fraudulent conveyance or fraudulent transfer under Federal or
state law. Each Guarantor that makes a payment or distribution under a Guaranty
is entitled to a contribution from each other Guarantor in a pro rata amount
based on the net assets of each Guarantor determined in accordance with GAAP.
Except as provided in "Certain Covenants" below, the Company is not restricted
from selling or otherwise disposing of any of the Equity Interests of the
Guarantors.
The Indenture provides that each of the Company's Subsidiaries (other than
Foreign Subsidiaries) on the Issue Date and each of the Company's Subsidiaries
(excluding Unrestricted Subsidiaries and Foreign Subsidiaries) formed or
acquired thereafter are required to be Guarantors. The Company shall cause each
Restricted Subsidiary issuing a Guaranty after the Issue Date to (i) execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such Restricted Subsidiary shall become a party
to the Indenture and thereby unconditionally guaranty all of the Company's
Obligations under the Notes and the Indenture on the terms set forth therein and
(ii) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such Restricted
Subsidiary and constitutes a legal, valid, binding and enforceable obligation of
such Restricted Subsidiary (which opinion may be subject to customary
assumptions and qualifications). Thereafter, such Restricted Subsidiary shall
(unless released in accordance with the terms of this Indenture) be a Guarantor
for all purposes of the Indenture. Separate financial statements of the
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<PAGE> 67
Guarantors and other disclosures are not included herein because management has
determined that they are not material to investors.
The Indenture provides that if the Notes thereunder are defeased in
accordance with the terms of the Indenture, or if, subject to the requirements
of the first paragraph under "Certain Covenants -- Merger, Sale of Assets,
Etc.," all or substantially all of the assets of any Guarantor or all of the
Equity Interests of any Guarantor are sold (including by issuance or otherwise)
by the Company in a transaction constituting an Asset Sale, and if (x) the Net
Cash Proceeds from such Asset Sale are used in accordance with the covenant
described under "Certain Covenants -- Disposition of Proceeds of Asset Sales" or
(y) the Company delivers to the Trustee an Officers' Certificate representing
that the Net Cash Proceeds from such Asset Sale shall be used in accordance with
the covenant described under "Certain Covenants -- Disposition of Proceeds of
Asset Sales" and within the time limits specified by such covenant, then such
Guarantor (in the event of a sale or other disposition of all of the Equity
Interests of such Guarantor) or the corporation acquiring such assets (in the
event of a sale or other disposition of all or substantially all of the assets
of such Guarantor) shall be released and discharged of its Guaranty obligations
in respect of the Indenture and the Notes.
The Guaranties are general unsecured obligations of the Guarantors. The
obligations of each Guarantor under its Guaranty are subordinated and junior in
right of payment to the prior payment in full of all existing and future
Guarantor Senior Indebtedness of such Guarantor to substantially the same extent
as the Notes are subordinated to all existing and future Senior Indebtedness of
the Company.
Any Guarantor that is designated an Unrestricted Subsidiary pursuant to and
in accordance with "Certain Covenants -- Designation of Unrestricted
Subsidiaries" below shall upon such Designation be released and discharged of
its Guaranty obligations in respect of the Indenture and the Notes and any
Unrestricted Subsidiary (other than a Foreign Subsidiary) whose Designation is
revoked pursuant to "Certain Covenants -- Designation of Unrestricted
Subsidiaries" below will be required to become a Guarantor in accordance with
the procedure described in the third preceding paragraph.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Following the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company shall notify the
Holders of the Notes of such occurrence in the manner prescribed by the
Indenture and shall, within 20 days after the Change of Control Date, make an
Offer to Purchase all Notes then outstanding, and shall purchase all Notes
validly tendered, at a purchase price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the Purchase Date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
If a Change of Control occurs which also constitutes an event of default
under the Senior Credit Facility, the lenders under the Senior Credit Facility
would be entitled to exercise the remedies available to a secured lender under
applicable law and pursuant to the terms of the Senior Credit Facility.
Accordingly, any claims of such lenders with respect to the assets of the
Company will be prior to any claim of the Holders of the Notes with respect to
such assets.
If an Offer to Purchase is made, there can be no assurance that the Company
will have available funds sufficient to pay for all of the Notes that might be
tendered by Holders of Notes seeking to accept the Offer to Purchase. If the
Company fails to repurchase all of the Notes tendered for purchase, such failure
will constitute an Event of Default under the Indenture. See "Events of Default"
below.
If the Company makes an Offer to Purchase, the Company will comply with all
applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under
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<PAGE> 68
the Exchange Act, and any other applicable Federal or state securities laws and
regulations and any applicable requirements of any securities exchange on which
the Notes are listed, and any violation of the provisions of the Indenture
relating to such Offer to Purchase occurring as a result of such compliance
shall not be deemed an Event of Default or an event that, with the passing of
time or giving of notice, or both, would constitute an Event of Default.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
CERTAIN COVENANTS
Limitation on Restricted Payments. The Company shall not, and shall not
cause or permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or any other distribution on any
Equity Interests of the Company or any Restricted Subsidiary or make any
payment or distribution to the direct or indirect holders (in their
capacities as such) of Equity Interests of the Company or any Restricted
Subsidiary (other than any dividends, distributions and payments made to
the Company or any Restricted Subsidiary and dividends or distributions
payable to any Person solely in Qualified Equity Interests of the Company
or in options, warrants or other rights to purchase Qualified Equity
Interests of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Restricted Subsidiary (other than
any such Equity Interests owned by the Company or any Restricted
Subsidiary);
(iii) purchase, redeem, defease or retire for value, or make any
principal payment on, prior to any scheduled maturity, scheduled repayment
or scheduled sinking fund payment, any Subordinated Indebtedness (other
than any Subordinated Indebtedness held by the Company or any Restricted
Subsidiary); or
(iv) make any Investment (other than Permitted Investments) in any
Person (other than in the Company), any Restricted Subsidiary or a Person
that becomes a Restricted Subsidiary, or is merged with or into or
consolidated with the Company or a Restricted Subsidiary (provided the
Company or a Restricted Subsidiary is the survivor), as a result of or in
connection with such Investment)
(any such payment or any other action (other than any exception thereto)
described in (i), (ii), (iii) or (iv) each, a "Restricted Payment"), unless
(a) no Default shall have occurred and be continuing at the time or
immediately after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the
Company would be able to Incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the Consolidated Coverage Ratio of the first
paragraph of "Limitation on Indebtedness" below; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date does not exceed an amount equal to the sum of (1) 50% of
cumulative Consolidated Net Income determined for the period (taken as one
period) from the beginning of the first fiscal quarter commencing after the
Issue Date and ending on the last day of the most recent fiscal quarter
immediately preceding the date of such Restricted Payment for which
consolidated financial information of the Company is available (or if such
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss), plus (2) the aggregate net cash proceeds received by the Company
either (x) as capital contributions to the Company after the Issue Date or
(y) from the issue and sale (other than to
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<PAGE> 69
a Restricted Subsidiary) of its Qualified Equity Interests after the Issue
Date (excluding the net proceeds from any issuance and sale of Qualified
Equity Interests financed, directly or indirectly, using funds borrowed
from the Company or any Restricted Subsidiary until and to the extent such
borrowing is repaid), plus (3) the principal amount (or accreted amount
(determined in accordance with GAAP), if less) of any Indebtedness of the
Company or any Restricted Subsidiary Incurred after the Issue Date which
has been converted into or exchanged for Qualified Equity Interests of the
Company, plus (4) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment made after the Issue Date, an
amount (to the extent not included in the computation of Consolidated Net
Income) equal to the lesser of: (x) the return of capital with respect to
such Investment and (y) the amount of such Investment which was treated as
a Restricted Payment, in either case, less the cost of the disposition of
such Investment and net of taxes, plus (5) so long as the Designation
thereof was treated as a Restricted Payment made after the Issue Date, with
respect to any Unrestricted Subsidiary that has been redesignated as a
Restricted Subsidiary after the Issue Date in accordance with "Designation
of Unrestricted Subsidiaries" below, the Company's proportionate interest
in an amount equal to the excess of (x) the total assets of such
Subsidiary, valued on an aggregate basis at Fair Market Value, over (y) the
total liabilities of such Subsidiary, determined in accordance with GAAP
(and provided that such amount shall not in any case exceed the Designation
Amount with respect to such Restricted Subsidiary upon its Designation),
plus (6) (to the extent not included in the computation of Consolidated Net
Income) the amount of cash dividends or cash distributions (other than to
pay taxes) received from any Unrestricted Subsidiary since the Issue Date,
minus (7) the greater of (x) $0 and (y) the Designation Amount (measured as
of the date of Designation) with respect to any Subsidiary of the Company
which has been designated as an Unrestricted Subsidiary after the Issue
Date in accordance with "Designation of Unrestricted Subsidiaries" below.
The foregoing provisions will not prevent (i) (x) the payment of any
dividend or distribution on, or redemption of, Equity Interests within 60 days
after the date of declaration of such dividend or distribution or the giving of
formal notice of such redemption, if at the date of such declaration or giving
of such formal notice such payment or redemption would comply with the
provisions of the Indenture or (y) the payment of any dividend or distribution
on a pro rata basis to holders of minority Equity Interests in a Restricted
Subsidiary out of the net income from the Issue Date of such Restricted
Subsidiary; (ii) the purchase, redemption, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the net cash
proceeds of (or the payment of a dividend or distribution to Holdings out of the
net cash proceeds of) the substantially concurrent issue and sale (other than to
a Restricted Subsidiary) of, Qualified Equity Interests of the Company;
provided, however, that any such net cash proceeds and the value of any
Qualified Equity Interests issued in exchange for such retired Equity Interests
are excluded from clause (c)(2) of the preceding paragraph (and were not
included therein at any time); (iii) the purchase, redemption, retirement,
defeasance or other acquisition of Subordinated Indebtedness, or any other
payment thereon, made in exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale (other than to a Restricted Subsidiary)
of (x) Qualified Equity Interests of the Company; provided, however, that any
such net cash proceeds and the value of any Qualified Equity Interests issued in
exchange for Subordinated Indebtedness are excluded from clauses (c)(2) and
(c)(3) of the preceding paragraph (and were not included therein at any time) or
(y) other Subordinated Indebtedness having no stated maturity for the payment of
principal thereof prior to the final stated maturity of the Notes; (iv) any
Investment to the extent that it is funded with the net cash proceeds of the
substantially concurrent issue and sale (other than to a Restricted Subsidiary)
of Qualified Equity Interests of the Company; provided, however, that any such
net cash proceeds are excluded from clause (c)(2) of the preceding paragraph
(and were not included therein at any time); (v) the purchase, redemption or
other acquisition, cancellation or retirement for value of Equity Interests, or
options, warrants, equity appreciation rights or other rights to purchase or
acquire Equity Interests, of the Company or any Restricted Subsidiary, or
similar securities, held by
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officers or employees or former officers or employees of the Company or any
Restricted Subsidiary (or their estates or beneficiaries under their estates),
upon death, disability, retirement or termination of employment, or dividends by
the Company to Holdings to effect the same in respect of its Equity Interests
held by officers or employees or former officers or employees of the Company or
any Restricted Subsidiary (or their estates or beneficiaries under their
estates), upon death, disability, retirement or termination of employment, not
to exceed $1.0 million per fiscal year; provided that if the full $1.0 million
is not utilized in any fiscal year, such unutilized portion may be so utilized
in any subsequent fiscal year; and provided, further, that in no fiscal year
shall such payments exceed $4.0 million; (vi) distributions to Holdings to fund
the payment of principal and interest on the Junior Subordinated Seller Note in
accordance with the terms thereof; (vii) Restricted Payments not to exceed $2.0
million in the aggregate since the Issue Date; or (viii) payments to Holdings to
pay general and administrative expenses of Holdings not to exceed $250,000 in
any fiscal year; or (ix) the payment of any dividend or distribution to Holdings
to fund the federal and state income tax liability of the partners of Holdings
for periods ending on or before the Issue Date in an aggregate amount not to
exceed $200,000; provided, however, that in the case of each of clauses (ii),
(iii), (iv), (v), (vii) and (viii) no Default shall have occurred and be
continuing or would arise therefrom.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (v), (vii) and (viii) of the
immediately preceding paragraph shall be included as Restricted Payments and
amounts expended pursuant to clauses (ii), (iii), (iv), (vi) and (ix) shall be
excluded. The amount of any non-cash Restricted Payment shall be deemed to be
equal to the Fair Market Value thereof at the date of the making of such
Restricted Payment.
Limitation on Indebtedness. The Company shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness) or issue any Disqualified Equity
Interests, except for Permitted Indebtedness; provided, however, that (i) the
Company and any Guarantor may Incur Indebtedness (other than Disqualified Equity
Interests), (ii) any Restricted Subsidiary may incur Acquired Indebtedness and
(iii) the Company may issue Disqualified Equity Interests if, in any such case,
at the time of and immediately after giving pro forma effect to such Incurrence
of Indebtedness or issuance of Disqualified Equity Interests and the application
of the proceeds therefrom, the Consolidated Coverage Ratio would be greater than
(a) 1.85 to 1.0, if such Incurrence occurs on or prior to December 31, 1999, or
(b) 2.0 to 1.0, if such Incurrence occurs after December 31, 1999.
The foregoing limitations will not apply to the Incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(a) Indebtedness under the Notes, the Guarantees and the Indenture;
(b) Existing Indebtedness;
(c) Indebtedness of the Company, the Guarantors and Foreign
Subsidiaries pursuant to the Senior Credit Facility in an aggregate
principal amount at any one time outstanding not to exceed the sum of (x)
the greater of (I) $30.0 million and (II) the sum of (A) 85% of the net
book value of the accounts receivable of the Company and the Restricted
Subsidiaries on a consolidated basis in accordance with GAAP and (B) 50% of
the net book value of the inventory of the Company and the Restricted
Subsidiaries on a consolidated basis in accordance with GAAP with respect
to revolving loans thereunder and (y) $30.0 million with respect to term
loans, additional revolving loans or other loans thereunder.
(d) Indebtedness of any Restricted Subsidiary owed to and held by the
Company or any Restricted Subsidiary and Indebtedness of the Company owed
to and held by any Restricted Subsidiary, which Indebtedness is unsecured
and subordinated in right of payment to the payment and performance of the
Company's obligations under any Senior Indebtedness, the Indenture and the
Notes; provided, however, that an Incurrence of Indebtedness that is not
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permitted by this clause (d) shall be deemed to have occurred upon (i) any
sale or other disposition of any Indebtedness of the Company or any
Restricted Subsidiary referred to in this clause (d) to a Person (other
than the Company or any Restricted Subsidiary), and (ii) the designation of
a Restricted Subsidiary which holds Indebtedness of the Company or any
other Restricted Subsidiary as an Unrestricted Subsidiary;
(e) the Guaranties and guaranties by any Guarantor of Indebtedness of
the Company; provided, however, that if such guaranty is of Subordinated
Indebtedness, then the Guaranty of such Guarantor shall be senior to such
Guarantor's guaranty of Subordinated Indebtedness;
(f) Hedging Obligations of the Company and the Restricted
Subsidiaries;
(g) Purchase Money Indebtedness and Capitalized Lease Obligations (and
refinancings thereof) of the Company and the Restricted Subsidiaries which
do not exceed $10.0 million in the aggregate at any one time outstanding;
(h) Indebtedness of the Company or a Restricted Subsidiary to the
extent representing a replacement, renewal, refinancing or extension
(collectively, a "refinancing") of outstanding Indebtedness Incurred in
compliance with the Consolidated Coverage Ratio of the first paragraph of
this covenant or clause (a) or (b) of this paragraph of this covenant;
provided, however, that (i) any such refinancing shall not exceed the sum
of the principal amount (or accreted amount (determined in accordance with
GAAP), if less) of the Indebtedness or Disqualified Equity Interests being
refinanced, plus the amount of accrued interest or dividends thereon, plus
the amount of any reasonably determined prepayment premium necessary to
accomplish such refinancing and such reasonable fees and expenses incurred
in connection therewith, (ii) Indebtedness representing a refinancing of
Indebtedness other than Senior Indebtedness shall have a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of the Indebtedness being refinanced; (iii) Indebtedness that is
pari passu with the Notes may only be refinanced with Indebtedness that is
made pari passu with or subordinate in right of payment to the Notes and
Subordinated Indebtedness may only be refinanced with Subordinated
Indebtedness or Disqualified Equity Interests and Disqualified Equity
Interests may only be refinanced with other Disqualified Equity Interests;
and (iv) refinancing Indebtedness incurred by a Restricted Subsidiary which
is not a Guarantor may only be used to refinance Indebtedness of a
Restricted Subsidiary which is not a Guarantor
(i) in addition to the items referred to in clauses (a) through (h)
above and clause (j) below, Indebtedness of the Company (including any
Indebtedness under the Senior Credit Facility that utilizes this
subparagraph (i)) having an aggregate principal amount not to exceed $10.0
million at any time outstanding; and
(j) Indebtedness of a Foreign Subsidiary, (i) for working capital
purposes in an aggregate principal amount at any one time outstanding not
to exceed the sum of (x) 85% of the net book value of the accounts
receivable of such Foreign Subsidiary in accordance with GAAP and (y) 50%
of the net book value of the inventory of such Foreign Subsidiary in
accordance with GAAP, (ii) representing guaranties of Indebtedness of
another Foreign Subsidiary incurred pursuant to subclause (i) of this
clause (j).
Limitation on Layering. The Company shall not, directly or indirectly,
Incur any Indebtedness that by its terms would expressly rank senior in right of
payment to the Notes and expressly rank subordinate in right of payment to any
other Indebtedness of the Company.
The Company shall not permit any Guarantor to, and no Guarantor shall,
directly or indirectly, Incur any Indebtedness that by its terms would expressly
rank senior in right of payment to the Guaranty of such Guarantor and expressly
rank subordinate in right of payment to any Guarantor Senior Indebtedness of
such Guarantor.
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Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions to the Company or any other Restricted Subsidiary on its Equity
Interests or with respect to any other interest or participation in, or measured
by, its profits, or pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (b) make loans or advances to, or guaranty any
Indebtedness or other obligations of, the Company or any other Restricted
Subsidiary or (c) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of (i) the Senior Credit Facility, or any other
agreement of the Company or the Restricted Subsidiaries outstanding on the Issue
Date, in each case as in effect on the Issue Date, and any amendments,
restatements, renewals, replacements or refinancings thereof; provided, however,
that any such amendment, restatement, renewal, replacement or refinancing is no
more restrictive in the aggregate with respect to such encumbrances or
restrictions than those contained in the agreement being amended, restated,
renewed, replaced or refinanced; (ii) applicable law; (iii) any instrument
governing Indebtedness or Equity Interests of (x) a Foreign Subsidiary or (y) an
Acquired Person acquired by the Company or any Restricted Subsidiary as in
effect at the time of such acquisition (except to the extent any such
Indebtedness or Equity Interests were Incurred by such Acquired Person in
connection with, as a result of or in contemplation of such acquisition);
provided, however, that such encumbrances and restrictions are not applicable to
any Restricted Subsidiary, or the properties or assets of any Restricted
Subsidiary, other than a Foreign Subsidiary or the Acquired Person, as the case
may be; (iv) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices; (v) Purchase
Money Indebtedness for property acquired in the ordinary course of business that
only imposes encumbrances and restrictions on the property so acquired; (vi) any
agreement for the sale or disposition of the Equity Interests or assets of any
Restricted Subsidiary; provided, however, that such encumbrances and
restrictions described in this clause (vi) are only applicable to such
Restricted Subsidiary or assets, as applicable, and any such sale or disposition
is made in compliance with "Disposition of Proceeds of Asset Sales" below to the
extent applicable thereto; (vii) refinancing Indebtedness permitted under clause
(h) of the second paragraph of "Limitation on Indebtedness" above; provided,
however, that such encumbrances and restrictions contained in the agreements
governing such Indebtedness are no more restrictive in the aggregate than those
contained in the agreements governing the Indebtedness being refinanced
immediately prior to such refinancing; (viii) the Indenture; or (ix) contained
in any other indenture governing debt securities that are no more restrictive
than those contained in the Indenture.
Designation of Unrestricted Subsidiaries. The Company may designate after
the Issue Date any Subsidiary of the Company as an "Unrestricted Subsidiary"
under the Indenture (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation;
(ii) at the time of and after giving effect to such Designation, the
Company could Incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the Consolidated Coverage Ratio of the first paragraph
of "Limitation on Indebtedness" above; and
(iii) the Company would be permitted to make an Investment (other than
a Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of
"Limitation on Restricted Payments" above in an amount (the "Designation
Amount") equal to the Fair Market Value of the Company's aggregate
Investment in such Subsidiary on such date.
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Neither the Company nor any Restricted Subsidiary shall at any time (x)
provide credit support for, subject any of its property or assets (other than
the Equity Interests of any Unrestricted Subsidiary) to the satisfaction of, or
guaranty, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (z) be directly or indirectly liable for any Indebtedness which
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a default
with respect to any Indebtedness of any Unrestricted Subsidiary, except for any
non-recourse guaranty given solely to support the pledge by the Company or any
Restricted Subsidiary of the capital stock of any Unrestricted Subsidiary. All
Subsidiaries of Unrestricted Subsidiaries shall be automatically deemed to be
Unrestricted Subsidiaries.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation;
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at
such time, have been permitted to be Incurred for all purposes of the
Indenture; and
(iii) any transaction (or series of related transactions) between such
Subsidiary and any of its Affiliates that occurred while such Subsidiary
was an Unrestricted Subsidiary would be permitted by "Transactions with
Affiliates" below as if such transaction (or series of related
transactions) had occurred at the time of such Revocation.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
Limitation on Liens. The Company shall not, and shall not cause or permit
any Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist
any Liens of any kind against or upon any of their respective properties or
assets now owned or hereafter acquired, or any proceeds therefrom or any income
or profits therefrom, to secure any Indebtedness unless contemporaneously
therewith effective provision is made, in the case of the Company, to secure the
Notes and all other amounts due under the Indenture, and in the case of a
Restricted Subsidiary which is a Guarantor, to secure such Restricted
Subsidiary's Guaranty of the Notes and all other amounts due under the
Indenture, equally and ratably with such Indebtedness (or, in the event that
such Indebtedness is subordinated in right of payment to the Notes or such
Guarantor's Guaranty, prior to such Indebtedness) with a Lien on the same
properties and assets securing such Indebtedness for so long as such
Indebtedness is secured by such Lien, except for (i) Liens securing any Senior
Indebtedness or any Guarantor Senior Indebtedness and (ii) Permitted Liens.
Disposition of Proceeds of Asset Sales. The Company shall not, and shall
not cause or permit any Restricted Subsidiary to, directly or indirectly, make
any Asset Sale, unless (i) the Company or such Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets sold or otherwise disposed of and
(ii) at least 80% of such consideration consists of (A) cash or Cash
Equivalents, (B) properties and capital assets to be used in a Related Business,
(C) Equity Interests in any Person which thereby becomes a Wholly Owned
Restricted Subsidiary whose assets consist primarily of properties and capital
assets used in a Related Business or (D) "earn out" or similar rights providing
for a cash payment contingent upon operating results or the financial condition
of the business and/or Person subject to such Asset Sale. The amount of any (i)
Indebtedness (other than any Subordinated Indebtedness) of the Company or any
Restricted Subsidiary that is actually assumed by the transferee in such Asset
Sale and from which the Company and the Restricted Subsidiaries are fully
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released shall be deemed to be cash for purposes of determining the percentage
of cash consideration received by the Company or the Restricted Subsidiaries and
(ii) notes or other similar obligations received by the Company or the
Restricted Subsidiaries from such transferee that are immediately converted,
sold or exchanged (or are converted, sold or exchanged within thirty days of the
related Asset Sale) by the Company or the Restricted Subsidiaries into cash
shall be deemed to be cash, in an amount equal to the net cash proceeds realized
upon such conversion, sale or exchange for purposes of determining the
percentage of cash consideration received by the Company or the Restricted
Subsidiaries.
The Company or such Restricted Subsidiary, as the case may be, may (i)
apply the Net Cash Proceeds of any Asset Sale within 270 days of receipt thereof
to repay Senior Indebtedness, (ii) commit in writing to acquire, construct or
improve properties and capital assets to be used in a Related Business and so
apply such Net Cash Proceeds within 270 days after the receipt thereof or (iii)
apply the Net Cash Proceeds of any Asset Sale within 270 days of receipt thereof
or repay Pari Passu Debt not exceeding the Pari Passu Debt Pro Rata Share;
provided that the Company or such Restricted Subsidiary may use up to $10.0
million of aggregate Net Cash Proceeds from Asset Sales for any purpose not
prohibited by the Indenture.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are
not applied within 270 days of such Asset Sale as described in clause (i), (ii)
or (iii) or the proviso of the immediately preceding paragraph (such Net Cash
Proceeds, the "Unutilized Net Cash Proceeds"), the Company shall, within 20 days
after such 270th day, make an Offer to Purchase all outstanding Notes up to a
maximum principal amount (expressed as a multiple of $1,000) of Notes equal to
such Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100% of
the principal amount thereof, plus accrued and unpaid interest thereon, if any,
to the Purchase Date; provided, however, that the Offer to Purchase may be
deferred until there are aggregate Unutilized Net Cash Proceeds equal to or in
excess of $10.0 million, at which time the entire amount of such Unutilized Net
Cash Proceeds, and not just the amount in excess of $10.0 million, shall be
applied as required pursuant to this paragraph.
With respect to any Offer to Purchase effected pursuant to this covenant,
among the Notes, to the extent the aggregate principal amount of Notes tendered
pursuant to such Offer to Purchase exceeds the Unutilized Net Cash Proceeds to
be applied to the repurchase thereof, such Notes shall be purchased pro rata
based on the aggregate principal amount of such Notes tendered by each Holder.
To the extent the Unutilized Net Cash Proceeds exceed the aggregate amount of
Notes tendered by the Holders of the Notes pursuant to such Offer to Purchase,
the Company may retain and utilize any portion of the Unutilized Net Cash
Proceeds not applied to repurchase the Notes for any purpose consistent with the
other terms of the Indenture.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act, and any violation of the provisions of the Indenture relating
to such Offer to Purchase occurring as a result of such compliance shall not be
deemed an Event of Default or an event that with the passing of time or giving
of notice, or both, would constitute an Event of Default.
Each Holder shall be entitled to tender all or any portion of the Notes
owned by such Holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal amount and subject to any proration among tendering
Holders as described above.
Merger, Sale of Assets, etc. The Company shall not consolidate with or
merge with or into (whether or not the Company is the Surviving Person) any
other entity and the Company shall not and shall not cause or permit any
Restricted Subsidiary to, sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Company's and the Restricted
Subsidiaries' properties and assets (determined on a consolidated basis for the
Company and the Restricted
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Subsidiaries) to any entity in a single transaction or series of related
transactions, unless: (i) either (x) the Company shall be the Surviving Person
or (y) the Surviving Person (if other than the Company) shall be a corporation
organized and validly existing under the laws of the United States of America or
any State thereof or the District of Columbia, and shall, in any such case,
expressly assume by a supplemental indenture, the due and punctual payment of
the principal of, premium, if any, and interest on all the Notes and the
performance and observance of every covenant of the Indenture and the
Registration Rights Agreement to be performed or observed on the part of the
Company; (ii) immediately thereafter, no Default or Event of Default shall have
occurred and be continuing; (iii) immediately after giving effect to any such
transaction including the Incurrence by the Company or any Restricted
Subsidiary, directly or indirectly, of additional Indebtedness (and treating any
Indebtedness not previously an obligation of the Company or any Restricted
Subsidiary in connection with or as a result of such transaction as having been
Incurred at the time of such transaction), the Surviving Person could Incur, on
a pro forma basis after giving effect to such transaction as if it had occurred
at the beginning of the four quarter period immediately preceding such
transaction for which consolidated financial statements of the Company are
available, at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the Consolidated Coverage Ratio of the first paragraph of
"Limitation on Indebtedness" above; (iv) immediately after giving effect to such
transaction, the Surviving Person will have a Consolidated Net Worth in an
amount which is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; and (v) the Company will have delivered
to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture.
Notwithstanding the foregoing clause (iii) of the immediately preceding
paragraph, any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries the Equity Interests of which constitute all or substantially all
the properties and assets of the Company shall be deemed to be the transfer of
all or substantially all the properties and assets of the Company.
No Guarantor (other than a Guarantor whose Guaranty is to be released in
accordance with the terms of its Guaranty and the Indenture as provided in the
third paragraph under "Guaranties of the Notes" above) shall consolidate with or
merge with or into another Person, whether or not such Person is affiliated with
such Guarantor and whether or not such Guarantor is the Surviving Person, unless
(i) the Surviving Person (if other than such Guarantor) is a corporation
organized and validly existing under the laws of the United States, any State
thereof or the District of Columbia; (ii) the Surviving Person (if other than
such Guarantor) expressly assumes by a supplemental indenture all the
obligations of such Guarantor under its Guaranty of the Notes and the
performance and observance of every covenant of the Indenture and the
Registration Rights Agreement to be performed or observed by such Guarantor;
(iii) at the time of and immediately after such Disposition, no Default or Event
of Default shall have occurred and be continuing; (iv) immediately after giving
effect to such transaction, the Company will have Consolidated Net Worth in an
amount which is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; and (v) the Company will have delivered
to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture; provided, however, that clauses (iv) of this
paragraph shall not be a condition to a merger or consolidation of a Guarantor
if such merger or consolidation only involves the Company and/or one or more
other Guarantors.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraphs in
which the Company or a Guarantor, as the case may be, is not the Surviving
Person and the Surviving Person is to assume all the
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Obligations of the Company under the Notes, the Indenture and the Registration
Rights Agreement or of such Guarantor under its Guaranty, the Indenture and the
Registration Rights Agreement, as the case may be, pursuant to a supplemental
indenture, such Surviving Person shall succeed to, and be substituted for, and
may exercise every right and power of, the Company or such Guarantor, as the
case may be, and the Company shall be discharged from its Obligations under the
Indenture and the Notes or such Guarantor shall be discharged from its
Obligations under the Indenture and its Guaranty.
Transactions with Affiliates. The Company shall not, and shall not cause
or permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into any transaction (or series of related transactions) with
or for the benefit of any of their respective Affiliates or any officer,
director or employee of the Company or any Restricted Subsidiary (each an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
which are no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than would be available in a comparable transaction with an
unaffiliated third party and (ii) if such Affiliate Transaction or series of
related Affiliate Transactions (other than any such Affiliate Transactions
between the Company or a Restricted Subsidiary and an Unrestricted Subsidiary or
an Accounts Receivable Subsidiary in the ordinary course of business) involves
aggregate payments or other consideration having a Fair Market Value in excess
of $1.0 million, such Affiliate Transaction is in writing and a majority of the
disinterested members of the Board of Directors of the Company shall have
approved such Affiliate Transaction and determined that such Affiliate
Transaction complies with the foregoing provisions. In addition, any Affiliate
Transaction (other than an Affiliate Transaction between the Company or a
Restricted Subsidiary and an Unrestricted Subsidiary or an Accounts Receivable
Subsidiary in the ordinary course of business) involving aggregate payments or
other consideration having a Fair Market Value in excess of $5.0 million will
also require a written opinion from an Independent Financial Advisor (filed with
the Trustee) stating that the terms of such Affiliate Transaction are fair, from
a financial point of view, to the Company or the Restricted Subsidiary involved
in such Affiliate Transaction, as the case may be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and any Restricted
Subsidiary or between or among Restricted Subsidiaries; (ii) customary
directors' fees, indemnification and similar arrangements, consulting fees,
employee salaries, bonuses or employment agreements, compensation or employee
benefit arrangements and incentive arrangements with any officer, director or
employee of the Company or any Restricted Subsidiary entered into in the
ordinary course of business (including customary benefits thereunder) and
payments under any indemnification arrangements permitted by applicable law;
(iii) any transactions undertaken pursuant to any contractual obligations in
existence on the Issue Date (as in effect on the Issue Date); (iv) the issue and
sale by the Company to its stockholders of Qualified Equity Interests; (v) any
Restricted Payments made in compliance with "Limitation on Restricted Payments"
above; (vi) loans and advances to officers, directors and employees of the
Company or any Restricted Subsidiary for travel, entertainment, moving and other
relocation expenses, in each case made in the ordinary course of business; (vii)
the Incurrence of intercompany Indebtedness permitted pursuant to clause (d) of
the second paragraph of "Limitation on Indebtedness" above; and (viii) the
pledge of Equity Interests of Unrestricted Subsidiaries to support the
Indebtedness thereof.
Limitation on the Sale or Issuance of Preferred Equity Interests of
Restricted Subsidiaries. The Company shall not sell any Preferred Equity
Interest of a Restricted Subsidiary, and shall not cause or permit any
Restricted Subsidiary to issue any of its Preferred Equity Interests or sell any
Preferred Equity Interests of another Restricted Subsidiary (other than to the
Company or a Wholly Owned Restricted Subsidiary).
Limitation on Lines of Business. The Company shall not, and shall not
cause or permit any Restricted Subsidiary, directly or indirectly to, engage in
any business outside the specialty chemical business other than a Related
Business.
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Provision of Financial Information. Whether or not the Company is subject
to Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the SEC (if permitted by SEC practice and
applicable law and regulations) the annual reports, quarterly reports and other
documents which the Company would have been required to file with the SEC
pursuant to such Section 13(a) or 15(d) (each, an "Exchange Act Report") or any
successor provision thereto if the Company were so subject, such documents to be
filed with the SEC on or prior to the respective dates (the "Required Filing
Dates") by which the Company would have been required so to file such documents
if the Company were so subject; provided that the Required Filing Date for the
quarterly report with respect to the fiscal quarter ended June 30, 1997 shall be
the 45th day after the Issue Date and such report shall contain pro forma
financial statements as of and for the six-month period ended June 30, 1997
prepared on a basis substantially similar to the pro forma financial statements
included in this Offering Memorandum. If, at any time prior to the consummation
of the Exchange Offer when the Company is not subject to such Section 13(a) or
15(d), the information which would be required in an Exchange Act Document is
included in a public filing of the Company under the Securities Act at the
applicable Required Filing Date, such public filing shall fulfill the filing
requirement with the SEC with respect to the applicable Exchange Act Document.
The Company shall also in any event (a) within 15 days of each Required Filing
Date (whether or not permitted or required to be filed with the SEC) (i)
transmit (or cause to be transmitted) by mail to all Holders, as their names and
addresses appear in the Note register, without cost to such Holders, and (ii)
file with the Trustee, copies of the annual reports, quarterly reports and other
documents which the Company is required to file with the SEC pursuant to the
preceding sentence, or, if such filing is not so permitted (or, prior to the
consummation of the Exchange Offer, when the Company is not subject to Section
13(d) or 15(d) of the Exchange Act), information and data of a similar nature,
and (b) if, notwithstanding the preceding sentence, filing such documents by the
Company with the SEC is not permitted by SEC practice or applicable law or
regulations, promptly upon written request supply copies of such documents to
any Holder. In addition, for so long as any Notes remain outstanding, the
Company will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act, and, to any beneficial holder of
Notes, if not obtainable from the SEC, information of the type that would be
filed with the SEC pursuant to the foregoing provisions, upon the request of any
such holder.
Payments for Consent. Neither the Company nor any of its Subsidiaries may,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder of a Note for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Notes, the Indenture or the Registration Rights Agreement unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
EVENTS OF DEFAULT
The occurrence of any of the following is defined as an "Event of Default"
under the Indenture: (a) failure to pay principal of (or premium, if any, on)
any Note when due (whether or not prohibited by the provisions of the Indenture
described under "Subordination of the Notes" above); (b) failure to pay any
interest on any Note when due, continued for 30 days or more (whether or not
prohibited by the provisions of the Indenture described under "Subordination of
the Notes" above); (c) default in the payment of principal of or interest on any
Note required to be purchased pursuant to any Offer to Purchase required by the
Indenture when due and payable or failure to pay on the Purchase Date the
Purchase Price for any Note validly tendered pursuant to any Offer to Purchase
(whether or not prohibited by the provisions of the Indenture described under
"Subordination of the Notes" above); (d) failure to perform or comply with any
of the provisions described under "Certain Covenants -- Merger, Sale of Assets,
etc." above; (e) failure to perform any other covenant, warranty or agreement of
the Company under the Indenture or in the Notes or of the
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Guarantors under the Indenture or in the Guaranties continued for 30 days or
more after written notice to the Company by the Trustee or Holders of at least
25% in aggregate principal amount of the outstanding Notes; (f) default or
defaults under the terms of one or more instruments evidencing or securing
Indebtedness of the Company or any of its Significant Restricted Subsidiaries
having an outstanding principal amount of $5.0 million or more individually or
in the aggregate that have resulted in the acceleration of the payment of such
Indebtedness or failure by the Company or any of its Significant Restricted
Subsidiaries to pay principal when due at the stated maturity of any such
Indebtedness; (g) the rendering of a final judgment or judgments (not subject to
appeal) against the Company or any of its Significant Restricted Subsidiaries in
an amount of $5.0 million or more (net of any amounts covered by reputable and
creditworthy insurance companies) which remain undischarged or unstayed for a
period of 60 days after the date on which the right to appeal has expired; (h)
certain events of bankruptcy, insolvency or reorganization affecting the Company
or any of its Significant Restricted Subsidiaries; or (i) other than as provided
in or pursuant to any Guaranty or the Indenture, any Guaranty ceases to be in
full force and effect or is declared null and void and unenforceable or found to
be invalid or any Guarantor denies its liability under its Guaranty (other than
by reason of a release of such Guarantor from its Guaranty in accordance with
the terms of the Indenture and such Guaranty). Subject to the provisions of the
Indenture relating to the duties of the Trustee, in case an Event of Default
shall occur and be continuing, the Trustee is under no obligation to exercise
any of its rights or powers under the Indenture at the request or direction of
any of the Holders of Notes, unless such Holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for the indemnification
of the Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Notes have the right to 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 such Trustee.
If an Event of Default with respect to the Notes (other than an Event of
Default with respect to the Company described in clause (h) of the preceding
paragraph) occurs and is continuing, the Trustee or the Holders of at least 25%
in aggregate principal amount of the outstanding Notes, by notice in writing to
the Company, may declare the unpaid principal of (and premium, if any) and
accrued interest to the date of acceleration on all the outstanding Notes to be
due and payable immediately and, upon any such declaration, such principal
amount (and premium, if any) and accrued interest, notwithstanding anything
contained in the Indenture or the Notes to the contrary will become immediately
due and payable; provided, however, that so long as the Senior Credit Facility
shall be in full force and effect, if an Event of Default shall have occurred
and be continuing (other than an Event of Default with respect to the Company
described in clause (h) of the preceding paragraph), the Notes shall not become
due and payable until the earlier to occur of (x) five Business Days following
delivery of written notice of such acceleration of the Notes to the agent under
the Senior Credit Facility and (y) the acceleration (ipso facto or otherwise) of
any Indebtedness under the Senior Credit Facility. If an Event or Default
specified in clause (h) of the preceding paragraph with respect to the Company
occurs under the Indenture, the Notes will ipso facto become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder of the Notes.
Any such declaration with respect to the Notes may be annulled by the
Holders of a majority in aggregate principal amount of the outstanding Notes
upon the conditions provided in the Indenture. For information as to waiver of
defaults, see "Modification and Waiver" below.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes
outstanding, give the Holders of the Notes thereof notice of all uncured
Defaults or Events of Default thereunder known to it; provided, however, that,
except in the case of a Default or an Event of Default in payment with respect
to the Notes or a Default or Event of Default in complying with "Certain
Covenants -- Merger, Sale of Assets, etc." above, the Trustee shall be protected
in withholding such notice if and so long as a committee of its trust officers
in good faith determines that the withholding of such notice is in the interest
of the Holders of the Notes.
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No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default thereunder and unless the Holders of at least 25% of the aggregate
principal amount of the outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as the
Trustee, and the Trustee shall have not have received from the Holders of a
majority in aggregate principal amount of such outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a Holder of such a Note for enforcement of payment of the
principal of and premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
The Company is required to furnish to the Trustee annually a statement as
to the performance by it of certain of its obligations under the Indenture and
as to any default in such performance.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any of its Affiliates, as such, shall have any liability for any obligations
of the Company or any of its Affiliates 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 Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may terminate its and the Guarantors' substantive obligations
in respect of the Notes by delivering all outstanding Notes to the Trustee for
cancellation and paying all sums payable by it on account of principal of,
premium, if any, and interest on all Notes or otherwise. In addition to the
foregoing, the Company may, provided that no Default or Event of Default has
occurred and is continuing or would arise therefrom (or, with respect to a
Default or Event of Default specified in clause (h) of "Events of Default"
above, occurs at any time on or prior to the 91st calendar day after the date of
such deposit (it being understood that this condition shall not be deemed
satisfied until after such 91st day)) under the Indenture and provided that no
default under any Senior Indebtedness would result therefrom, terminate its and
the Guarantors' substantive obligations in respect of the Notes (except for its
obligations to pay the principal of (and premium, if any, on) and the interest
on the Notes and the Guarantors' Guaranty thereof) by (i) depositing with the
Trustee, under the terms of an irrevocable trust agreement, money or United
States Government Obligations sufficient (without reinvestment) to pay all
remaining Indebtedness on such Notes; (ii) delivering to the Trustee either an
Opinion of Counsel or a ruling directed to the Trustee from the Internal Revenue
Service to the effect that the Holders of the Notes will not recognize income,
gain or loss for Federal income tax purposes as a result of such deposit and
termination of obligations; (iii) delivering to the Trustee an Opinion of
Counsel to the effect that the Company's exercise of its option under this
paragraph will not result in any of the Company, the Trustee or the trust
created by the Company's deposit of funds pursuant to this provision becoming or
being deemed to be an "investment company" under the Investment Company Act of
1940, as amended (the "Investment Act"); and (iv) complying with certain other
requirements set forth in the Indenture. In addition, the Company may, provided
that no Default or Event of Default has occurred and is continuing or would
arise therefrom (or, with respect to a Default or Event of Default specified in
clause (h) of "Events of Default" above, occurs at any time on or prior to the
91st calendar day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 91st day)) under the
Indenture and provided that no default under any Senior Indebtedness would
result therefrom, terminate all of its and the Guarantors' substantive
obligations in respect of the Notes (including its obligations to pay the
principal of (and premium, if any, on) and interest on the Notes and the
Guarantors' Guaranty thereof) by (i) depositing with the Trustee, under the
terms of an irrevocable trust agreement, money or United States Government
Obligations sufficient (without
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reinvestment) to pay all remaining Indebtedness on the Notes; (ii) delivering to
the Trustee either a ruling directed to the Trustee from the Internal Revenue
Service to the effect that the Holders of the Notes will not recognize income,
gain or loss for Federal income tax purposes as a result of such deposit and
termination of obligations or an Opinion of Counsel addressed to the Trustee
based upon such a ruling or based on a change in the applicable Federal tax law
since the date of the Indenture, to such effect; (iii) delivering to the Trustee
an Opinion of Counsel to the effect that the Company's exercise of its option
under this paragraph will not result in any of the Company, the Trustee or the
trust created by the Company's deposit of funds pursuant to this provision
becoming or being deemed to be an "investment company" under the Investment Act;
and (iv) complying with certain other requirements set forth in the Indenture.
The Company may make an irrevocable deposit pursuant to this provision only
if at such time it is not prohibited from doing so under the subordination
provisions of the Indenture or certain covenants in the Senior Indebtedness and
the Company has delivered to the Trustee and any Paying Agent an Officers'
Certificate to that effect.
GOVERNING LAW
The Indenture, the Notes and the Guaranties are governed by the laws of the
State of New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company,
the Guarantors, and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the outstanding Notes (including consents obtained
in connection with a tender offer or exchange offer for the Notes); provided,
however, that no such modification or amendment to the Indenture may, without
the consent of the Holder of each Note affected thereby, (a) change the maturity
of the principal of or any installment of interest on any such Note or alter the
optional redemption or repurchase provisions of any such Note or the Indenture
in a manner adverse to the Holders of the Notes; (b) reduce the principal amount
of (or the premium) of any such Note; (c) reduce the rate of or extend the time
for payment of interest on any such Note; (d) change the place or currency of
payment of principal of (or premium) or interest on any such Note; (e) modify
any provisions of the Indenture relating to the waiver of past defaults (other
than to add sections of the Indenture or the Notes subject thereto) or the right
of the Holders of Notes to institute suit for the enforcement of any payment on
or with respect to any such Note or any Guaranty in respect thereof or the
modification and amendment provisions of the Indenture and the Notes (other than
to add sections of the Indenture or the Notes which may not be amended,
supplemented or waived without the consent of each Holder therein affected); (f)
reduce the percentage of the principal amount of outstanding Notes necessary for
amendment to or waiver of compliance with any provision of the Indenture or the
Notes or for waiver of any Default in respect thereof; (g) waive a default in
the payment of principal of, interest on, or redemption payment with respect to,
the Notes (except a rescission of acceleration of the Notes by the Holders
thereof as provided in the Indenture and a waiver of the payment default that
resulted from such acceleration); (h) modify the ranking or priority of any Note
or the Guaranty in respect thereof of any Guarantor or modify the definition of
Senior Indebtedness or Guarantor Senior Indebtedness or amend or modify the
subordination provisions of the Indenture, in any case in any manner adverse to
the Holders of the Notes; (i) modify the provisions of any covenant (or the
related definitions) in the Indenture requiring the Company to make an Offer to
Purchase following an event or circumstance which may give rise to the
requirement to make an Offer to Purchase in a manner materially adverse to the
Holders of Notes affected thereby otherwise than in accordance with the
Indenture; or (j) release any Guarantor from any of its obligations under its
Guaranty or the Indenture otherwise than in accordance with the Indenture.
The Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
and the Guarantors with certain
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restrictive provisions of the Indenture. Subject to certain rights of the
Trustee, as provided in the Indenture, the Holders of a majority in aggregate
principal amount of the Notes, on behalf of all Holders, may waive any past
default under the Indenture (including any such waiver obtained in connection
with a tender offer or exchange offer for the Notes), except a default in the
payment of principal, premium or interest or a default arising from failure to
purchase any Notes tendered pursuant to an Offer to Purchase, or a default in
respect of a provision that under the Indenture cannot be modified or amended
without the consent of the Holder of each Note that is affected.
THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the Indenture. During the existence
of a Default, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, any Guarantor or any other obligor upon the
Notes, to obtain payment of claims in certain cases or to realize on certain
property received by it in respect of any such claim as security or otherwise.
The Trustee is permitted to engage in other transactions with the Company or an
Affiliate of the Company; provided, however, that if it acquires any conflicting
interest (as defined in the Indenture or in the Trust Indenture Act), it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accounts Receivable Subsidiary" means any Subsidiary of the Company that
is, directly or indirectly, wholly owned by the Company (other than director
qualifying shares) and organized solely for the purpose of and engaged in (i)
purchasing, financing and collecting accounts receivable obligations of
customers of the Company or its Subsidiaries, (ii) the sale or financing of such
accounts receivable or interest therein and (iii) other activities incident
thereto.
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an Acquisition from such Person or (b) existing at the time such
Person becomes a Restricted Subsidiary or is merged or consolidated with or into
the Company or any Restricted Subsidiary.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Equity
Interests of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Restricted Subsidiary
or shall be consolidated with or merged into the Company or any Restricted
Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary
of the assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of the
ordinary course of business.
"Additional Interest" has the meaning provided in Section 4(a) of the
Registration Rights Agreement.
"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 purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
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by" and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that (i) beneficial ownership of 15.0% or more of the then outstanding Equity
Interests of a Person shall be deemed to be control for purposes of compliance
with the covenant described under "Certain Covenants -- Transactions with
Affiliates"; and (ii) no individual, other than a director of the Company or an
officer of the Company with a policy making function, shall be deemed an
Affiliate of the Company or any of its Subsidiaries, solely by reason of such
individual's employment, position or responsibilities by or with respect to the
Company or any of its Subsidiaries.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Company or a Wholly Owned Restricted Subsidiary, in one
transaction or a series of related transactions, of (i) any Equity Interest of
any Restricted Subsidiary; (ii) any material license, franchise or other
authorization of the Company or any Restricted Subsidiary; (iii) any assets of
the Company or any Restricted Subsidiary which constitute substantially all of
an operating unit or line of business of the Company or any Restricted
Subsidiary; or (iv) any other property or asset of the Company or any Restricted
Subsidiary outside of the ordinary course of business (including the receipt of
proceeds paid on account of the loss of or damage to any property or asset and
awards of compensation for any asset taken by condemnation, eminent domain or
similar proceedings). For the purposes of this definition, the term "Asset Sale"
shall not include (a) any transaction consummated in compliance with "Certain
Covenants -- Merger, Sale of Assets, etc." above and the creation of any Lien
not prohibited by "Certain Covenants -- Limitation on Liens" above; provided,
however, that any transaction consummated in compliance with "Certain
Covenants -- Merger, Sale of Assets, etc." above involving a sale, conveyance,
assignment, transfer, lease or other disposal of less than all of the properties
or assets of the Company shall be deemed to be an Asset Sale with respect to the
properties or assets of the Company and the Restricted Subsidiaries that are not
so sold, conveyed, assigned, transferred, leased or otherwise disposed of in
such transaction; (b) sales of property or equipment that has become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Company or any Restricted Subsidiary; (c) any transaction
consummated in compliance with "Certain Covenants -- Limitation on Restricted
Payments" above; (d) sales of accounts receivable for cash at fair market value;
and (e) any sale, conveyance or transfer of accounts receivable in the ordinary
course of business to an Accounts Receivable Subsidiary or to third parties that
are not Affiliates of the Company or any Subsidiary of the Company.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Cash Equivalents" means: (a) U.S. dollars and any other currency that is
convertible into U.S. dollars without legal restrictions and which is utilized
by the Company or any of the Restricted Subsidiaries in the ordinary course of
its business; (b) securities issued or directly and fully guarantied or insured
by the U.S. government or any agency or instrumentality thereof having
maturities of not more than six months from the date of acquisition; (c)
certificates of deposit and time deposits with maturities of six months or less
from the date of acquisition, bankers' acceptances with maturities not exceeding
six months and overnight bank deposits, in each case with any commercial bank
having capital and surplus in excess of $500.0 million (or the foreign currency
equivalent thereof); (d) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clauses (b) and
(c) above entered into with any financial institution meeting the qualifications
specified in clause (c) above; and (e) commercial
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paper rated P-1, A-1 or the equivalent thereof by Moody's Investors Service,
Inc. or Standard & Poor's Corporation, respectively, and in each case maturing
within six months after the date of acquisition.
"Change of Control" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company): (i) any
Person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other
than one or more Permitted Holders, is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person
shall be deemed to have "beneficial ownership" of all shares that any such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time, upon the happening of an event or otherwise),
directly or indirectly, of more than 35% of the total voting power of the then
outstanding Voting Equity Interests of the Company or, so long as Holdings owns
a majority of the Voting Equity Interests of the Company, Holdings (or, for so
long as Holdings is a partnership, its general partner); provided, however, that
the Permitted Holders beneficially own (as defined above), directly or
indirectly, in the aggregate a lesser percentage of the total voting power of
the then outstanding Voting Equity Interests of the Company, Holdings or such
general partner, as the case may be, than such other Person and do not have the
right or ability by voting power, contract or otherwise to elect or designate
for election a majority of the Board of Directors of the Company; (ii) the
Company consolidates with, or merges with or into, another Person (other than a
Guarantor which is a Wholly Owned Restricted Subsidiary) or the Company or the
Restricted Subsidiaries sell, assign, convey, transfer, lease or otherwise
dispose of all or substantially all of the assets of the Company and the
Restricted Subsidiaries (determined on a consolidated basis) to any Person
(other than the Company or a Guarantor which is a Wholly Owned Restricted
Subsidiary), other than any such transaction where immediately after such
transaction the Person or Persons that "beneficially owned" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have "beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time) immediately prior to such transaction, directly or indirectly, the then
outstanding Voting Equity Interests of the Company "beneficially own" (as so
determined), directly or indirectly, a majority of the total voting power of the
then outstanding Voting Equity Interests of the surviving or transferee Person;
or (iii) following the first public offering of Voting Equity Interests of the
Company, during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office.
"Change of Control Date" has the meaning set forth under "Offer to Purchase
upon Change of Control" above.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four quarter
period of the most recent four consecutive fiscal quarters ending prior to the
date of such determination (the "Four Quarter Period") to (ii) Consolidated
Interest Expense for such Four Quarter Period; provided, however, that (1) if
the Company or any Restricted Subsidiary has incurred any Indebtedness since the
beginning of such Four Quarter Period that remains outstanding on such date of
determination or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Incurrence of Indebtedness, Consolidated
EBITDA and Consolidated Interest Expense for such Four Quarter Period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such Four Quarter Period
and the discharge of
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any other Indebtedness repaid, repurchased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such Four Quarter Period, (2) if since the beginning of such Four Quarter
Period the Company or any Restricted Subsidiary shall have made any Asset Sale,
the Consolidated EBITDA for such Four Quarter Period shall be reduced by an
amount equal to the Consolidated EBITDA (if positive) directly attributable to
the assets that are the subject of such Asset Sale for such Four Quarter Period
or increased by an amount equal to the Consolidated EBITDA (if negative)
directly attributable thereto for such Four Quarter Period and Consolidated
Interest Expense for such Four Quarter Period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased or
otherwise discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Sale for such Four Quarter Period
(or, if the Equity Interests of any Restricted Subsidiary are sold, the
Consolidated Interest Expense for such Four Quarter Period directly attributable
to the Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such Four Quarter
Period the Company or any Restricted Subsidiary (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary (or any Person that becomes
a Restricted Subsidiary) or an acquisition of assets, including any acquisition
of assets occurring in connection with a transaction causing a calculation to be
made hereunder, which constitutes all or substantially all of an operating unit
of a business, Consolidated EBITDA and Consolidated Interest Expense for such
Four Quarter Period shall be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such Four Quarter Period and (4) if
since the beginning of such Four Quarter Period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such Four Quarter Period) shall
have made any Asset Sale or any Investment or acquisition of assets that would
have required an adjustment pursuant to clause (2) or (3) above if made by the
Company or a Restricted Subsidiary during such Four Quarter Period, Consolidated
EBITDA and Consolidated Interest Expense for such Four Quarter Period shall be
calculated after giving pro forma effect thereto as if such Asset Sale,
Investment or acquisition of assets occurred on, with respect to any Investment
or acquisition, the first day of such Four Quarter Period and, with respect to
any Asset Sale, the day prior to the first day of such Four Quarter Period. For
purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings and any cost savings
relating thereto and the amount of Consolidated Interest Expense associated with
any Indebtedness Incurred in connection therewith, the pro forma calculations
shall be determined in good faith by a responsible financial or accounting
officer of the Company. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest expense on such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any
agreement under which Hedging Obligations relating to interest are outstanding
applicable to such Indebtedness if such agreement under which such Hedging
Obligations are outstanding has a remaining term as at the date of determination
in excess of 12 months).
"Consolidated EBITDA" means, for any period, the Consolidated Net Income
for such period, minus any non-cash item increasing Consolidated Net Income
during such period, plus the following to the extent deducted in calculating
such Consolidated Net Income: (i) Consolidated Income Tax Expense for such
period; (ii) Consolidated Interest Expense for such period; (iii) depreciation
expense for such period; (iv) amortization expense for such period; and (v) all
other non-cash items reducing Consolidated Net Income for such period (other
than any non-cash item requiring an accrual or a reserve for cash disbursements
in any future period).
"Consolidated Income Tax Expense" means, with respect to the Company for
any period, the provision for Federal, state, local and foreign income taxes
payable by the Company and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP.
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"Consolidated Interest Expense" means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the Company
and the Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, including, without limitation, (a) any
amortization of debt discount, (b) the net cost under Hedging Obligations
relating to interest (including any amortization of discounts), (c) the interest
portion of any deferred payment obligation, (d) all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing and (e) all capitalized interest and all accrued interest,
(ii) the interest component of Capital Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and the Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with GAAP
and (iii) dividends and distributions in respect of Disqualified Equity
Interests of the Company during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of the Company and the Restricted Subsidiaries; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income (loss) of any Person if such person is not a Restricted Subsidiary,
except that (A) subject to the limitations contained in clause (iv) below, the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Company's equity in a
net loss of any such Person (other than an Unrestricted Subsidiary) for such
period shall be included in determining such Consolidated Net Income; (ii) any
net income (loss) of any person acquired by the Company or a Restricted
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition; (iii) any net income (loss) of any Restricted
Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company except that (A)
subject to the limitations contained in (iv) below, the Company's equity in the
net income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash that could
have been distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend (subject, in the case of
a dividend that could have been made to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity in a net loss
of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain or loss realized upon
the sale or other disposition of any asset of the Company or the Restricted
Subsidiaries (including pursuant to any sale/leaseback transaction) that is not
sold or otherwise disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Equity Interests of any
Person; (v) any extraordinary gain or loss; and (vi) the cumulative effect of a
change in accounting principles.
"Consolidated Net Worth" of the Company means the stockholders' equity of
the Company and the Restricted Subsidiaries determined on a consolidated basis
in accordance with GAAP, less amounts attributed to Disqualified Equity
Interests.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (a) any Indebtedness outstanding
under the Senior Credit Facility and (b) any other Senior Indebtedness which, at
the time of determination, has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least $15.0
million, if the instrument governing such Senior Indebtedness expressly states
that such Indebtedness is "Designated Senior Indebtedness" for purposes of the
Indenture and a Board Resolution setting forth such designation by the Company
has been filed with the Trustee.
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"Designation" has the meaning set forth under "Certain
Covenants -- Designation of Unrestricted Subsidiaries" above.
"Designation Amount" has the meaning set forth under "Certain
Covenants -- Designation of Unrestricted Subsidiaries" above.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder thereof), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof, in
whole or in part, or exchangeable into Indebtedness on or prior to the maturity
date of the Notes.
"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, in
such Person, including any Preferred Equity Interests.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Existing Indebtedness" means any Indebtedness of the Company and its
Restricted Subsidiaries in existence on the Issue Date until such amounts are
repaid.
"Expiration Date" has the meaning set forth in the definition of "Offer to
Purchase" below.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction; provided, however, that the Fair Market
Value of any such asset or assets shall be determined conclusively by the Board
of Directors of the Company acting in good faith, and shall be evidenced by
resolutions of the Board of Directors of the Company delivered to the Trustee.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company that is
not organized under the laws of the United States of America or any state
thereof or the District of Columbia.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Coverage Ratio" above.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"Guarantor" means (i) each of the Subsidiaries of the Company (other than
Foreign Subsidiaries) as of the Issue Date and their respective successors, and
(ii) each other Restricted Subsidiary, formed, created or acquired before or
after the Issue Date, required to become a Guarantor after the Issue Date
pursuant to "Guaranties of the Notes" above.
"Guarantor Senior Indebtedness" means, with respect to any Guarantor, at
any date, (a) all Obligations of such Guarantor under the Senior Credit
Facility; (b) all Hedging Obligations of such Guarantor; (c) all Obligations of
such Guarantor under stand-by letters of credit; and (d) all other Indebtedness
of such Guarantor for borrowed money, including principal, premium, if any, and
interest (including Post-Petition Interest) on such Indebtedness unless the
instrument under which such Indebtedness of such Guarantor for money borrowed is
Incurred expressly provides that such
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Indebtedness for money borrowed is not senior or superior in right of payment to
such Guarantor's Guaranty of the Notes, and all renewals, extensions,
modifications, amendments or refinancings thereof. Notwithstanding the
foregoing, Guarantor Senior Indebtedness shall not include (a) to the extent
that it may constitute Indebtedness, any Obligation for Federal, state, local or
other taxes; (b) any Indebtedness among or between such Guarantor and any
Subsidiary of such Guarantor; (c) to the extent that it may constitute
Indebtedness, any Obligation in respect of any trade payable Incurred for the
purchase of goods or materials, or for services obtained, in the ordinary course
of business; (d) Indebtedness evidenced by such Guarantor's Guaranty of the
Notes; (e) Indebtedness of such Guarantor that is expressly subordinate or
junior in right of payment to any other Indebtedness of such Guarantor; (f) to
the extent that it may constitute Indebtedness, any obligation owing under
leases (other than Capitalized Lease Obligations) or management agreements; and
(g) any obligation that by operation of law is subordinate to any general
unsecured obligations of such Guarantor.
"guaranty" means, as applied to any obligation, (i) a guaranty (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit. A guaranty shall include, without
limitation, any agreement to maintain or preserve any other Person's financial
condition or to cause any other Person to achieve certain levels of operating
results.
"Guaranty" means the guaranty of the Notes by each Guarantor under the
Indenture.
"Hedging Obligations" means, with respect to any Person, the Obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates and (iii) foreign currency or chemical commodity hedge, exchange or
similar protection agreements (agreements referred to in this definition being
referred to herein as "Hedging Agreements").
"Holder" means the registered holder of any Note.
"Holdings" means Sovereign Specialty Chemicals, L.P., a Delaware limited
partnership, and its successors.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guaranty or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of any Acquired Person or any of its
Subsidiaries existing at the time such Acquired Person becomes a Restricted
Subsidiary (or is merged into or consolidated with the Company or any Restricted
Subsidiary), whether or not such Indebtedness was Incurred in connection with,
as a result of, or in contemplation of, such Acquired Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Company or
any Restricted Subsidiary), shall be deemed Incurred at the time any such
Acquired Person becomes a Restricted Subsidiary or merges into or consolidates
with the Company or any Restricted Subsidiary.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed; (b)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses; (c) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person; (d)
every obligation of such Person issued or assumed as the deferred purchase price
of property or services (but excluding (x) earnout or other similar obligations
until such time
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as the amount of such obligation is capable of being determined, (y) trade
accounts payable incurred in the ordinary course of business and payable in
accordance with industry practices, or (z) other accrued liabilities arising in
the ordinary course of business which are not overdue or which are being
contested in good faith); (e) every Capital Lease Obligation of such Person; (f)
every net obligation under Hedging Agreements of such Person; (g) every
obligation of the type referred to in clauses (a) through (f) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guarantied or is responsible or liable for, directly or indirectly,
as obligor, guarantor or otherwise; and (h) any and all deferrals, renewals,
extensions and refundings of, or amendments, modifications or supplements to,
any liability of the kind described in any of the preceding clauses (a) through
(g) above. Indebtedness (a) shall never be calculated taking into account any
cash and cash equivalents held by such Person; (b) shall not include obligations
of any Person (x) arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business, provided that such
obligations are extinguished within two Business Days of their incurrence, (y)
resulting from the endorsement of negotiable instruments for collection in the
ordinary course of business and consistent with past business practices and (z)
under stand-by letters of credit to the extent collateralized by cash or Cash
Equivalents; (c) which provides that an amount less than the principal amount
thereof shall be due upon any declaration of acceleration thereof shall be
deemed to be incurred or outstanding in an amount equal to the accreted value
thereof at the date of determination; (d) shall include the liquidation
preference and any mandatory redemption payment obligations in respect of any
Disqualified Equity Interests of the Company or any Restricted Subsidiary; and
(e) shall not include obligations under performance bonds, performance
guaranties, surety bonds and appeal bonds, letters of credit or similar
obligations, incurred in the ordinary course of business. For purposes of
determining compliance with any U.S. dollar-denominated restriction on the
Incurrence of Indebtedness denominated in a foreign currency, the U.S.
dollar-equivalent principal amount of such Indebtedness Incurred pursuant
thereto shall be calculated based on the relevant currency exchange rate in
effect on the date that such Indebtedness was Incurred if such Indebtedness is
Incurred to refinance other Indebtedness denominated in a foreign currency, and
such refinancing would cause the applicable U.S. dollar-denominated restriction
to be exceeded if calculated at the relevant currency exchange rate in effect on
the date of such refinancing, such U.S. dollar-denominated restriction shall be
deemed not to have been exceeded so long as the principal amount of such
refinancing Indebtedness does not exceed the principal amount of such
Indebtedness being refinanced. The principal amount of any Indebtedness Incurred
to refinance other Indebtedness, if Incurred in a different currency from the
Indebtedness being refinanced, shall be calculated based on the currency
exchange rate applicable to the currencies in which such respective Indebtedness
is denominated that is in effect on the date of such refinancing.
"Independent Financial Advisor" means a nationally recognized accounting,
appraisal, investment banking firm or consultant that is, in the judgment of the
Company's Board of Directors, qualified to perform the task for which it has
been engaged (i) which does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in the Company
and (ii) which, in the judgment of the Board of Directors of the Company, is
otherwise independent and qualified to perform the task for which it is to be
engaged.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"interest" means, with respect to the Notes, the sum of any cash interest
and any Additional Interest on the Notes.
"Investment" means, with respect to any Person, any direct or indirect
loan, advance, guaranty or other extension of credit or capital contribution to
(by means of transfers of cash or other property or assets to others or payments
for property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
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securities or evidences of Indebtedness issued by, any other Person. The amount
of any Investment shall be the original cost of such Investment, plus the cost
of all additions thereto, and minus the amount of any portion of such Investment
repaid to such Person in cash as a repayment of principal or a return of
capital, as the case may be, but without any other adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment. In determining the amount of any Investment involving a transfer of
any property or asset other than cash, such property shall be valued at its fair
market value at the time of such transfer, as determined in good faith by the
Board of Directors (or comparable body) of the Person making such transfer.
"Issue Date" means the original issue date of the Notes.
"Junior Subordinated Seller Note" means the $3.0 million aggregate
principal amount 8% Note due 2002 issued by Holdings to Laporte plc on the Issue
Date.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Maturity Date" means August 1, 2007.
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or
Cash Equivalents received by the Company or any Restricted Subsidiary in respect
of any Asset Sale, including all cash or Cash Equivalents received upon any
sale, liquidation or other exchange of proceeds of Asset Sales received in a
form other than cash or Cash Equivalents, net of (a) the direct costs relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof; (b) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements); (c) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale; (d) amounts deemed, in good faith, appropriate by the Board of
Directors of the Company to be provided as a reserve, in accordance with GAAP,
against any liabilities associated with such assets which are the subject of
such Asset Sale (provided that the amount of any such reserves shall be deemed
to constitute Net Cash Proceeds at the time such reserves shall have been
released or are not otherwise required to be retained as a reserve); and (e)
with respect to Asset Sales by Restricted Subsidiaries, the portion of such cash
payments attributable to Persons holding a minority interest in such Restricted
Subsidiary.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Offer" has the meaning set forth in the definition of "Offer to Purchase"
below.
"Offer to Purchase" means a written offer (the "Offer") sent by or on
behalf of the Company by first-class mail, postage prepaid, to each holder at
his address appearing in the register for the Notes on the date of the Offer
offering to purchase up to the principal amount of Notes specified in such Offer
at the purchase price specified in such Offer (as determined pursuant to the
Indenture). Unless otherwise required by applicable law, the Offer shall specify
an expiration date (the "Expiration Date") of the Offer to Purchase, which shall
be not less than 20 Business Days nor more than 60 days after the date of such
Offer, and a settlement date (the "Purchase Date") for purchase of Notes to
occur no later than five Business Days after the Expiration Date. The Company
shall notify the Trustee at least 15 Business Days (or such shorter period as is
acceptable to the Trustee) prior to the mailing of the Offer of the Company's
obligation to make an Offer to Purchase, and the Offer shall be mailed by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company. The Offer shall contain all the information required by
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<PAGE> 90
applicable law to be included therein. The Offer shall also contain information
concerning the business of the Company and its Subsidiaries which the Company in
good faith believes will enable such Holders to make an informed decision with
respect to the Offer to Purchase (which at a minimum will include (i) the most
recent annual and quarterly financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to in
clause (i) (including a description of the events requiring the Company to make
the Offer to Purchase), (iii) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring the
Company to make the Offer to Purchase and (iv) any other information required by
applicable law to be included therein). The Offer shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state: (1) the Section of the Indenture
pursuant to which the Offer to Purchase is being made; (2) the Expiration Date
and the Purchase Date; (3) the aggregate principal amount of the outstanding
Notes offered to be purchased by the Company pursuant to the Offer to Purchase
(including, if less than 100%, the manner by which such amount has been
determined pursuant to the Section of the Indenture requiring the Offer to
Purchase) (the "Purchase Amount"); (4) the purchase price to be paid by the
Company for each $1,000 aggregate principal amount of Notes accepted for payment
(as specified pursuant to the Indenture) (the "Purchase Price"); (5) that the
Holder may tender all or any portion of the Notes registered in the name of such
Holder and that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal amount; (6) the place or places where Notes are to
be surrendered for tender pursuant to the Offer to Purchase; (7) that interest
on any Note not tendered or tendered but not purchased by the Company pursuant
to the Offer to Purchase will continue to accrue; (8) that on the Purchase Date
the Purchase Price will become due and payable upon each Note being accepted for
payment pursuant to the Offer to Purchase and that interest thereon shall cease
to accrue on and after the Purchase Date; (9) that each Holder electing to
tender all or any portion of a Note pursuant to the Offer to Purchase will be
required to surrender such Note at the place or places specified in the Offer
prior to the close of business on the Expiration Date (such Note being, if the
Company or the Trustee so requires, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or his attorney duly authorized in
writing); (10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or its Paying Agent) receives, not later than the
close of business on the fifth Business Day next preceding the Expiration Date,
a telegram, telex, facsimile transmission or letter setting forth the name of
the Holder, the principal amount of the Note the Holder tendered, the
certificate number of the Note the Holder tendered and a statement that such
Holder is withdrawing all or a portion of his tender; (11) that (a) if Notes in
an aggregate principal amount less than or equal to the Purchase Amount are duly
tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall
purchase all such Notes and (b) if Notes in an aggregate principal amount in
excess of the Purchase Amount are tendered and not withdrawn pursuant to the
Offer to Purchase, the Company shall purchase Notes having an aggregate
principal amount equal to the Purchase Amount on a pro rata basis (with such
adjustments as may be deemed appropriate so that only Notes in denominations of
$1,000 principal amount or integral multiples thereof shall be purchased); and
(12) that in the case of any Holder whose Note is purchased only in part, the
Company shall execute and the Trustee shall authenticate and deliver to the
Holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such Holder, in an aggregate principal
amount equal to and in exchange for the unpurchased portion of the Note so
tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
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"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Pari Passu Debt" means Indebtedness of the Company or any Guarantor that
neither constitutes Senior Indebtedness or Guarantor Senior Indebtedness, as
applicable, or Subordinated Indebtedness.
"Pari Passu Debt Pro Rata Share" means the amount of the applicable Net
Cash Proceeds obtained by multiplying the amount of such Net Cash Proceeds by a
fraction, (i) the numerator of which is the aggregate accreted value and/or
principal amount, as the case may be, of all Pari Passu Debt outstanding at the
time of the applicable Asset Sale with respect to which the Company is required
to use Net Cash Proceeds to repay or make an offer to purchase or repay and (ii)
the denominator of which is the sum of (a) the aggregate principal amount of all
Notes outstanding at the time of the applicable Asset Sale and (b) the aggregate
principal amount or the aggregate accreted value, as the case may be, of all
Pari Passu Debt outstanding at the time of the applicable Offer to Purchase with
respect to which the Company is required to use the applicable Net Cash Proceeds
to offer to repay or make an offer to purchase or repay.
"Permitted Holder" means (a) First Chicago NBD Corp. and any Person
controlled by either First Chicago NBD Corp. or any of its or its Subsidiaries'
officers, (b) Robert B. Covalt, Carol E. Bramson and Lawrence E. Fox and (c) any
Person controlled by any Person identified in clause (b) of this definition.
"Permitted Indebtedness" has the meaning set forth in the second paragraph
of "Certain Covenants -- Limitation on Indebtedness" above.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) loans and
advances to employees made in the ordinary course of business not to exceed $1.0
million in the aggregate at any one time outstanding; (d) Hedging Obligations;
(e) bonds, notes, debentures or other securities received as a result of Asset
Sales permitted under "Certain Covenants -- Disposition of Proceeds of Asset
Sales" above not to exceed 20% of the total consideration for such Asset Sales
and any "earn out" or similar right permitted under "Certain
Covenants -- Disposition of Proceeds of Asset Sales"; (f) transactions with
officers, directors and employees of the Company or any Restricted Subsidiary
entered into in the ordinary course of business (including compensation or
employee benefit arrangements with any such director or employee) and consistent
with past business practices; (g) Investments existing as of the Issue Date and
any amendment, extension, renewal or modification thereof to the extent that any
such amendment, extension, renewal or modification does not require the Company
or any Restricted Subsidiary to make any additional cash or non-cash payments or
provide additional services in connection therewith; (h) any Investment to the
extent that the consideration therefor consists of Qualified Equity Interests of
the Company; (i) any Investment consisting of a guaranty by a Guarantor of
Senior Indebtedness or any guaranty permitted under clause (e) of the second
paragraph of "Limitation on Indebtedness" above; (j) Investments in Persons
primarily engaged in a Related Business in an aggregate amount not to exceed
$10.0 million; provided that the Company and/or the Restricted Subsidiaries own
at least one-third of the outstanding Voting Equity Interests of each such
Person; and (k) Investments in the form of the sale (on a "true sale"
non-recourse basis) or the servicing of receivables transferred from the Company
or any Restricted Subsidiary, or transfers of cash, to an Accounts Receivable
Subsidiary as a capital contribution or in exchange for Indebtedness of such
Accounts Receivable Subsidiary or cash, in each case in the ordinary course of
business.
"Permitted Junior Securities" means any securities of the Company or any
other Person that are (i) equity securities without special covenants or (ii)
subordinated in right of payment to all Senior Indebtedness that may at the time
be outstanding, to substantially the same extent as, or to a greater extent
than, the Notes are subordinated as provided in the Indenture, in any event
pursuant
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to a court order so providing and as to which (a) the rate of interest on such
securities shall not exceed the effective rate of interest on the Notes on the
date of the Indenture, (b) such securities shall not be entitled to the benefits
of covenants or defaults materially more beneficial to the holders of such
securities than those in effect with respect to the Notes on the date of the
Indenture and (c) such securities shall not provide for amortization (including
sinking fund and mandatory prepayment provisions) commencing prior to the date
six months following the final scheduled maturity date of the Senior
Indebtedness (as modified by the plan of reorganization of readjustment pursuant
to which such securities are issued).
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary; provided, however, that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
property or assets of the Company or any Restricted Subsidiary other than the
property or assets subject to the Liens prior to such merger or consolidation;
(b) Liens imposed by law such as carriers', warehousemen's and mechanics' Liens
and other similar Liens arising in the ordinary course of business which secure
payment of obligations not more than 60 days past due or which are being
contested in good faith and by appropriate proceedings; (c) Liens existing on
the Issue Date; (d) Liens securing only the Notes; (e) Liens in favor of the
Company or any Restricted Subsidiary; (f) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; provided, however, that any reserve or other appropriate
provision as shall be required in conformity with GAAP shall have been made
therefor; (g) easements, reservation of rights of way, restrictions and other
similar easements, licenses, restrictions on the use of properties, or minor
imperfections of title that in the aggregate are not material in amount and do
not in any case materially detract from the properties subject thereto or
interfere with the ordinary conduct of the business of the Company and the
Restricted Subsidiaries; (h) Liens resulting from the deposit of cash or notes
in connection with contracts, tenders or expropriation proceedings, or to secure
workers' compensation, surety or appeal bonds, costs of litigation when required
by law and public and statutory obligations or obligations under franchise
arrangements entered into in the ordinary course of business; (i) Liens securing
Indebtedness consisting of Capitalized Lease Obligations, Purchase Money
Indebtedness, mortgage financings, industrial revenue bonds or other monetary
obligations, in each case incurred solely for the purpose of financing all or
any part of the purchase price or cost of construction or installation of assets
used in the business of the Company or the Restricted Subsidiaries, or repairs,
additions or improvements to such assets, provided, however, that (I) such Liens
secure Indebtedness in an amount not in excess of the original purchase price or
the original cost of any such assets or repair, addition or improvement thereto
(plus an amount equal to the reasonable fees and expenses in connection with the
incurrence of such Indebtedness), (II) such Liens do not extend to any other
assets of the Company or the Restricted Subsidiaries (and, in the case of
repair, addition or improvements to any such assets, such Lien extends only to
the assets (and improvements thereto or thereon) repaired, added to or
improved), (III) the Incurrence of such Indebtedness is permitted by "Certain
Covenants -- Limitation on Indebtedness" above and (IV) such Liens attach within
90 days of such purchase, construction, installation, repair, addition or
improvement; (j) Liens to secure any refinancings, renewals, extensions,
modifications or replacements (collectively, "refinancing") (or successive
refinancings), in whole or in part, of any Indebtedness secured by Liens
referred to in the clauses above so long as such Lien does not extend to any
other property (other than improvements thereto); (k) Liens securing letters of
credit entered into in the ordinary course of business and consistent with past
business practice; and (l) Liens on and pledges of the Equity Interests of any
Unrestricted Subsidiary securing any Indebtedness of such Unrestricted
Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
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"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding against such Person in
accordance with and at the contract rate (including, without limitation, any
rate applicable upon default) specified in the agreement or instrument creating,
evidencing or governing such Indebtedness, whether or not, pursuant to
applicable law or otherwise, the claim for such interest is allowed as a claim
in such Insolvency or Liquidation Proceeding.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
"Public Equity Offering" means, with respect to the Company, an
underwritten primary public offering of Qualified Equity Interests of the
Company pursuant to an effective registration statement filed under the
Securities Act (excluding registration statements filed on Form S-8).
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding Qualified
Equity Interests of the Company has been distributed by means of an effective
registration statement under the Securities Act.
"Purchase Amount" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary Incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the Fair Market Value of such property or such purchase
price or cost, including any refinancing of such Indebtedness that does not
increase the aggregate principal amount (or accreted amount, if less) thereof as
of the date of refinancing.
"Purchase Price" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Redemption Date" has the meaning set forth in the third paragraph of
"Optional Redemption" above.
"Related Business" means (a) those businesses in which the Company or any
of the Restricted Subsidiaries is engaged on the date of the Indenture, or that
are reasonably related or incidental thereto and (b) any business (the "Other
Business") which forms a part of a business (the "Acquired Business") which is
acquired by the Company or any of the Restricted Subsidiaries if (i) the primary
intent of the Company or such Restricted Subsidiary was to acquire that portion
of the Acquired Business which meets the requirements of clause (a) of this
definition and (ii) the Company believed that it would not have been able to
acquire such portion of the Acquired Business if the Other Business was not also
acquired.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a resolution of the
Board of Directors of the Company delivered to the Trustee, as an Unrestricted
Subsidiary pursuant to "Certain Covenants -- Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"SEC" means the Securities and Exchange Commission.
"Senior Credit Facility" means the Amended and Restated Credit Agreement,
dated as of the Issue Date, between the Company, Holdings, the Subsidiaries of
the Company named therein from
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time to time, the lenders named therein, and The Chase Manhattan Bank, as
Administrative Agent, including any deferrals, renewals, extensions,
replacements, refinancings or refundings thereof, or amendments, modifications
or supplements thereto and any agreement providing therefor (including any
restatements thereof and any increases in the amount of commitments thereunder),
whether by or with the same or any other lender, creditor, group of lenders or
group of creditors, and including related notes, guaranty and note agreements
and other instruments and agreements executed in connection therewith.
"Senior Indebtedness" means, at any date, (a) all Obligations of the
Company under the Senior Credit Facility; (b) all Hedging Obligations of the
Company; (c) all Obligations of the Company under stand-by letters of credit;
and (d) all other Indebtedness of the Company for borrowed money, including
principal, premium, if any, and interest (including Post-Petition Interest) on
such Indebtedness, unless the instrument under which such Indebtedness of the
Company for money borrowed is Incurred expressly provides that such Indebtedness
for money borrowed is not senior or superior in right of payment to the Notes,
and all renewals, extensions, modifications, amendments or refinancings thereof.
Notwithstanding the foregoing, Senior Indebtedness shall not include (a) to the
extent that it may constitute Indebtedness, any Obligation for Federal, state,
local or other taxes; (b) any Indebtedness among or between the Company and any
Subsidiary of the Company, unless and for so long as such Indebtedness has been
pledged to secure Obligations under the Senior Credit Facility; (c) to the
extent that it may constitute Indebtedness, any Obligation in respect of any
trade payable Incurred for the purchase of goods or materials, or for services
obtained, in the ordinary course of business; (d) Indebtedness evidenced by the
Notes; (e) Indebtedness of the Company that is expressly subordinate or junior
in right of payment to any other Indebtedness of the Company; (f) to the extent
that it may constitute Indebtedness, any obligation owing under leases (other
than Capital Lease Obligations) or management agreements; and (g) any obligation
that by operation of law is subordinate to any general unsecured obligations of
the Company.
"Significant Restricted Subsidiary" means, at any date of determination,
(a) any Restricted Subsidiary that, together with its Subsidiaries that
constitute Restricted Subsidiaries (i) for the most recent fiscal year of the
Company accounted for more than 5.0% of the consolidated revenues of the Company
and the Restricted Subsidiaries or (ii) as of the end of such fiscal year, owned
more than 5.0% of the consolidated assets of the Company and the Restricted
Subsidiaries, all as set forth on the consolidated financial statements of the
Company and the Restricted Subsidiaries for such year prepared in conformity
with GAAP, and (b) any Restricted Subsidiary which, when aggregated with all
other Restricted Subsidiaries that are not otherwise Significant Restricted
Subsidiaries and as to which any event described in clause (f), (g) or (h) of
"Events of Default" above has occurred, would constitute a Significant
Restricted Subsidiary under clause (a) of this definition.
"Stated Maturity," when used with respect to any Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Subordinated Indebtedness" means, with respect to the Company or any
Guarantor, any Indebtedness of the Company or such Guarantor, as the case may
be, which is expressly subordinated in right of payment to the Notes or such
Guarantor's Guaranty, as the case may be.
"Subsidiary" means, with respect to any Person, (a) any corporation of
which the outstanding Voting Equity Interests having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of which
at least a majority of Voting Equity Interests are at the time, directly or
indirectly, owned by such first named Person.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
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"United States Government Obligations" means direct non-callable
obligations of the United States of America for the payment of which the full
faith and credit of the United States is pledged.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to "Certain Covenants -- Designation of Unrestricted Subsidiaries"
above. Any such designation may be revoked by a resolution of the Board of
Directors of the Company delivered to the Trustee, subject to the provisions of
such covenant.
"Unutilized Net Cash Proceeds" has the meaning set forth in the third
paragraph under "Certain Covenants -- Disposition of Proceeds of Asset Sales"
above.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of
the outstanding Voting Equity Interests (other than directors' qualifying
shares) of which are owned, directly or indirectly, by the Company.
BOOK-ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, the Notes initially will be
represented by one or more permanent global certificates in definitive, fully
registered form (the "Global Notes"). The Global Notes will be deposited on the
date of issuance with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of a nominee of DTC.
Notes originally purchased by or transferred to Holders who elect to take
physical delivery of their certificates instead of holding their interest
through a Global Note (collectively referred to herein as the "Non-Global
Purchasers") will be issued Notes in the form of certificated notes in
definitive, fully registered form (the "Certificated Notes"). Upon the transfer
of any Certificated Note initially issued to a Non-Global Purchaser, such
Certificated Note will, unless the transferee requests Certificated Notes or the
Global Notes have previously been exchanged in whole for Certificated Notes, be
exchanged for an interest in a Global Note. Upon the transfer of an interest in
a Global Note, such interest will, unless the transferee requests Certificated
Notes, be represented by an interest in the Global Note. For a description of
the restrictions on the transfer of Certificated Notes and any interest in a
Global Note, see "Transfer Restrictions" below.
The Global Notes. The Company expects that pursuant to procedures
established by DTC (a) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by the Global Notes to the
respective accounts of persons who have accounts with DTC and (b) ownership of
beneficial interests in the Global Notes will be shown on, and the transfer of
such ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of Participants (as defined herein)) and the
records of Participants (with respect to interests of persons other than
Participants). Such accounts initially will be designated by or on behalf of the
Initial Purchasers and ownership of beneficial interests in the Global Notes
will be limited to persons who have accounts with DTC ("Participants") or
persons who hold interests through Participants. Interests in a Global Note may
be held directly through DTC, by Participants, or indirectly through
organizations which are Participants.
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So long as DTC, or its nominee, is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Notes for all
purposes under the Indenture. No beneficial owner of an interest in a Global
Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture.
Payments of the principal of, premium, if any, and interest on the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by Participants to owners of beneficial interests in the Global Note
held through such Participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such Participants.
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearinghouse funds. If a
Holder requires physical delivery of a Certificated Note for any reason,
including to sell Notes to persons in states which require physical delivery of
the Notes, or to pledge such securities, such Holder must transfer its interest
in the Global Note in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes (including the presentation of Notes for exchange)
only at the direction of one or more Participants to whose account the DTC
interests in a Global Note are credited and only in respect of such portion of
the aggregate principal amount of Notes as to which such Participant or
Participants has or have given such direction. However, if there is an Event of
Default under the Indenture, DTC will exchange the Global Notes in whole for
Certificated Notes, which it will distribute to the Participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Notes among Participants, it is under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. Neither the Company nor the Trustee will have any responsibility
for the performance by DTC or the Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
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Certificated Notes. If DTC is at any time unwilling or unable to continue
as a depositary for the Global Note and a successor depositary is not appointed
by the Company within 90 days, Certificated Notes will be issued in exchange for
Global Notes.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on August 5, 1997 to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes to qualified institutional buyers in reliance
on Rule 144A under the Securities Act. As a condition to the Purchase Agreement,
the company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on the date of the Initial Offering (the "Issue
Date"). Certain terms of the Registration Rights Agreement are summarized as
follows:
The Company and the Guarantors have agreed to (i) file with the Commission
on or prior to 90 days after the Issue Date a registration statement on Form S-1
or Form S-4, if the use of such forms is then available (the "Exchange Offer
Registration Statement"), relating to a registered exchange offer (the "Exchange
Offer") for the Old Notes under the Securities Act and (ii) use their reasonable
best efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act within 270 days after the Issue Date. As soon
as practicable after the effectiveness of the Exchange Offer Registration
Statement, the Company will offer to the holders of the Transfer Restricted
Securities (as defined below) who are not prohibited by any law or policy of the
Commission from participating in the Exchange Offer the opportunity to exchange
their Transfer Restricted Securities for an issue of a second series of notes
(the "Exchange Notes"), identical in all material respects to the Notes (except
that the Exchange Notes will not contain terms with respect to transfer
restrictions) and that would be registered under the Securities Act. The Company
will keep the Exchange Offer open for not less than 20 business days (or longer,
if required by applicable law) after the date on which notice of the Exchange
Offer is mailed to the holders of the Notes. If (i) because of any change in law
or applicable interpretations thereof by the staff of the Commission, the
Company is not permitted to effect the Exchange Offer as contemplated hereby,
(ii) any Securities validly tendered pursuant to the Exchange Offer are not
exchanged for Exchange Securities within 300 days after the Issue Date, (iii)
any Initial Purchaser so requests with respect to Old Notes not eligible to be
exchanged for Exchange Notes in the Exchange Offer, (iv) any applicable law or
interpretations do not permit any holder of Notes to participate in the Exchange
Offer, (v) any holder of the Old Notes that participates in the Exchange Offer
does not receive freely transferable Exchange Notes in exchange for tendered Old
Notes (other than due solely to the status of a holder (other than an Initial
Purchaser) as an affiliate of any of the Issuers within the meaning of the
Securities Act, and other than any state securities law restrictions which,
individually or, in the aggregate, do not materially adversely affect the
ability of any such holder to resell the securities held by such holder), or
(vi) the Company so elects, the Company and the Guarantors will file with the
Commission a shelf registration statement (the "Shelf Registration Statement")
to cover resales of Transfer Restricted Securities by such holders who satisfy
certain conditions relating to, among other things, the provision of information
in connection with the Shelf Registration Statement provided that, upon a
receipt of a notice from the Company to the effect that, in the reasonable
judgment of the Company, the use of the Shelf Registration Statement would
materially interfere with a valid business purpose of the Company or the
Guarantors, the holders of the Notes shall cease distribution of the Notes under
such Shelf Registration Statement for a period of time not to exceed 60 days in
any one year. For purposes of the foregoing, "Transfer Restricted Securities"
means each Old Note until (i) the date on which such Old Note has been exchanged
for a freely transferable Exchange Note in the Exchange Offer, (ii) the date on
which such Old Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf
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Registration Statement or (iii) the date on which such Old Note is distributed
to the public pursuant to Rule 144 under the Securities Act or is saleable
pursuant to Rule 144(k) under the Securities Act.
The Company and the Guarantors will use their reasonable best efforts to
have the Exchange Offer Registration Statement or, if applicable, a Shelf
Registration Statement (each a "Registration Statement") declared effective by
the Commission as promptly as practicable after the filing thereof. Unless the
Exchange Offer would not be permitted by a policy of the Commission, the Company
will commence the Exchange Offer and will use its best efforts to consummate the
Exchange Offer as promptly as practicable, but in any event prior to 300 days
after the Issue Date. If applicable, the Company and the Guarantors will use
their best efforts to keep the Shelf Registration Statement effective for a
period of two years after the Issue Date, subject to certain exceptions. If (i)
the applicable Registration Statement is not filed with the Commission on or
prior to 90 days after the Issue Date, (ii) the Exchange Offer Registration
Statement or the Shelf Registration Statement, as the case may be, is not
declared effective within 270 days after the Issue Date, (iii) the Exchange
Offer is not consummated on or prior to 300 days after the Issue Date, or (iv)
the Shelf Registration Statement is filed and declared effective within 270 days
after the Issue Date but shall thereafter cease to be effective (at any time
that the Company is obligated to maintain the effectiveness thereof) without
being succeeded within 60 days by an additional Registration Statement filed and
declared effective (each such event referred to in clauses (i) through (iv), a
"Registration Default"), the Company will be obligated to pay liquidated damages
to each holder of Transfer Restricted Securities, during the period of one or
more such Registration Defaults, in an amount equal to $0.192 per week per
$1,000 principal amount of the Old Notes constituting Transfer Restricted
Securities held by such holder until the applicable Registration Statement is
filed or declared effective, the Exchange Offer is consummated or the Shelf
Registration Statement is declared effective or again becomes effective, as the
case may be. All accrued liquidated damages shall be paid to holders in the same
manner as interest payments on the Notes on semiannual payment dates which
correspond to interest payment dates for the Notes. Following the cure of all
Registration Defaults, the accrual of liquidated damages will cease.
The Registration Rights Agreement also provides that the Company (i) shall
make available for a period of 180 days after the consummation of the Exchange
Offer a prospectus meeting the requirements of the Securities Act to any
broker-dealer for use in connection with any resale of any such Exchange Notes
and (ii) shall pay all expenses incident to the Exchange Offer (including the
expenses of one counsel to the holders of the Notes) and will indemnify certain
holders of the Notes (including any broker-dealer) against certain liabilities,
including liabilities under the Securities Act. A broker-dealer that delivers
such a prospectus to purchasers in connection with such resales will be subject
to certain of the civil liability provisions under the Securities Act, and will
be bound by the provisions of the Registration Rights Agreement (including
certain indemnification rights and obligations).
Each holder of Notes who wishes to exchange such Old Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it will
be acquired in the ordinary course of its business, (ii) it has no arrangement
or understanding with any person to participate in the distribution of the
Exchange Notes and (iii) it is not an "affiliate," as defined in Rule 405 under
the Securities Act, of the Company or if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
If a holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If a holder is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Notes that were acquired as a result of
market making activities or other trading activities (an "Exchange Dealer"), it
will be required to acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
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Holders of the Old Notes will be required to make certain representations
to the Company (as described above) in order to participate in the Exchange
Offer and will be required to deliver information to be used in connection with
the Shelf Registration Statement in order to have their Old Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
liquidated damages set forth in the preceding paragraphs. A holder who sells Old
Notes pursuant to the Shelf Registration Statement generally will be required to
be named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
For so long as the Old Notes are outstanding, the Company and the
Guarantors will continue to provide to holders of the Old Notes and to
prospective purchasers of the Old Notes the information required by paragraph
(d)(4) of Rule 144A under the Securities Act. The Company will provide a copy of
the Registration Rights Agreement to prospective purchasers of Old Notes
identified to the Company by an Initial Purchaser upon request.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes could be adversely affected.
The foregoing description of the Registration Rights Agreement is a summary
only, does not purport to be complete and is qualified in its entirety by
reference to all provisions of the Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes except that (i) the Exchange Notes bear a Series B designation
and a different CUSIP Number from the Old Notes, (ii) the Exchange Notes have
been registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (iii) the holders of the Exchange Notes
will not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Old Notes in certain circumstances relating to the timing of the Exchange Offer,
all of which rights will terminate when the Exchange Offer is terminated. The
Exchange Notes will evidence the same debt as the Old Notes and will be entitled
to the benefit of the Indenture.
As of the date of this Prospectus, $125,000,000 aggregate principal amount
of Old Notes were outstanding. The Company has fixed the close of business on
, 1997 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will
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act as agent for the tendering holders for the purpose of receiving the Exchange
Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any sum unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer and any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed is promptly as practicable by oral or
written notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Old Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the Exchange
Notes. Such interest will be paid with the first interest payment on the
Exchange Notes on , 1998. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semiannually on each February 1
and August 1, commencing on , 1998.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
for a holder to validly tender Old Notes pursuant to the Exchange Offer, a
property completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantee, or (in the case of a book-entry
transfer) an Agent's Message in lieu of the Letter of Transmittal, and any other
required documents must be received by the Exchange Agent at the address set
forth under "Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date. In addition, prior to 5:00 p.m., New York City time, on the
Expiration Date, either (a) certificates for tendered Old Notes must be received
by the Exchange Agent at such address or (b) such Old Notes must be transferred
pursuant to the procedures for book-entry transfer described below (and a
confirmation of such tender received by the Exchange Agent, including an Agent's
Message if the tendering holder has not delivered a Letter of Transmittal). The
term "Agent's Message" means a message, transmitted by the book-entry transfer
facility, The Depository Trust Company (the "Book-Entry
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Transfer Facility"), to and received by the Exchange Agent and forming a part of
a book-entry confirmation, which states that the Book-Entry Transfer Facility
has received an express acknowledgment from the tendering participant that such
participant has received and agrees to be bound by the Letter of Transmittal and
that the Company may enforce such Letter of Transmittal against such
participant.
By executing the Letter of Transmittal (or transmitting an Agent's Message
in lieu thereof) each holder will make to the Company the representations set
forth above in the third paragraph under the heading "-- Purpose and Effect of
the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTION FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must guaranteed by a recognized participant in the Securities
Transfer Agent Medallion Program, the York Stock Exchange Medallion Signature
Program or the Stock Exchange Medallion Program (each a "Medallion Signature
Guarantor"), unless the Old Notes tendered pursuant thereto are tendered (i) by
a registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of a member firm of a registered national securities
exchange, a member of the NASD or a commercial bank or trust company having an
office or correspondent in the United States (each of the foregoing being an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a property completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by a Medallion Signature Guarantor.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the Book-Entry Transfer Facility for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing such
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account with respect to the Old Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the Old
Notes may
89
<PAGE> 102
be effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee (or, in the
case of book-entry transfer, an Agent's Message in lieu thereof) and all other
required documents must in each case be transmitted to and received or confirmed
by the Exchange Agent at its address set forth below on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
he Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURE
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal (or, in the case of book-entry transfer, an Agent's Message) or any
other required documents to the Exchange Agent or (iii) who cannot complete the
procedures for book-entry transfer (including delivery of an Agents Message),
prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution (i) an Agent's Message with respect to guaranteed
delivery that is accepted by the Company, or (ii) a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder,
the certificate number(s) of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes (or a
confirmation of book-entry transfer of such Notes into the Exchange Agents
account at the Book-Entry Transfer Facility), and any other documents
requited by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal or
facsimile thereof (or, in the case of book-entry transfer, an Agents
Message), as well as the certificate(s) representing all tendered Old Notes
in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
90
<PAGE> 103
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited), (iii) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so Withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries;
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the sole
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are riot satisfied, the Company may (i) refuse to accept any Old Notes and
return all tendered Old Notes to the tendering holders, (ii) extend the Exchange
Offer and retain all Old Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of holders to withdraw such Old Notes
(see
91
<PAGE> 104
"-- Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange offer and accept all properly tendered Old Notes which
have not been withdrawn.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
THE BANK OF NEW YORK
<TABLE>
<S> <C>
BY MAIL: OVERNIGHT COURIER:
BY HAND: FACSIMILE TRANSMISSION:
</TABLE>
FOR INFORMATION TELEPHONE (CALL COLLECT):
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, less the original issue discount (net of
amortization) as reflected in the Company's accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be by the
Company. The expenses of the Exchange Offer will be expensed over the term of
the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so Long as the Old Notes are eligible for resale pursuant to Rule 144A, to
a person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction
92
<PAGE> 105
meeting the requirements of Rule 144A, in accordance with Rule 144 under the
Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder or other person who receives Exchange Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Old Notes in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activates, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
As contemplated by these no-action killers and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives an Exchange Note
for its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
93
<PAGE> 106
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based on the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "Service") will not take a
contrary view, and no ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conditions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders. Certain holders (including
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. The Company recommends that each holder consult such holders own tax
advisor as to the particular tax consequences of exchanging such holder's Old
Notes for Exchange Notes, including applicability and effect of any state, local
or foreign tax laws.
The Company believes that the exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for federal
income tax purposes because the Exchange Notes will not be considered to differ
materially in kind or extent from the Old Notes. Rather, the Exchange Notes
received by a holder will be treated as a continuation of the Old Notes in the
hands of such holder. As a result, there should be no federal income tax
consequences to holders exchanging Old Notes for Exchange Notes pursuant to the
Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
receive in exchange for Old Notes where such Old Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, they will make this
Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
, 1998 (90 days after the commencement of the Exchange Offer), all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such Exchange Notes. Any Participating Broker-Dealer that resells the
Exchange Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
94
<PAGE> 107
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
LEGAL MATTERS
Certain legal matters in connection with the offering and sale of the
Exchange Notes will be passed upon for the Company by Kirkland & Ellis, Chicago,
Illinois (a partnership which includes professional corporations).
EXPERTS
The consolidated financial statements and schedule of (i) the Company as of
December 31, 1996 and for the period from March 31, 1996 through December 31,
1996, (ii) SIA Adhesives as of December 31, 1995 and for the years ended
December 31, 1994 and 1995, and the three months ended March 31, 1996, and (iii)
Pierce & Stevens for the year ended December 31, 1995 and for the period from
January 1, 1996 through August 19, 1996 included in this Prospectus have been
audited by Ernst & Young LLP, independent auditors, as stated in their reports
appearing herein and incorporated herein by reference in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing. The combined financial statements of the Division as of December 31,
1995 and 1996, and for the three years in the period ended December 31, 1996,
have been audited by KPMG Audit Plc, chartered accountants and registered
auditor, London, England. Such combined financial statements have been included
and incorporated herein by reference in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
95
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
SOVEREIGN SPECIALTY CHEMICALS, L.P.
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheet as of December 31, 1996 and June 30, 1997 (unaudited)..... F-3
Consolidated Statement of Operations from March 31, 1996 through December 31, 1996... F-4
Statement of Partners' Interests from March 31, 1996 through December 31, 1996 and
for the six months ended June 30, 1997 (unaudited)................................. F-5
Consolidated Statement of Cash Flows from March 31, 1996 through
December 31, 1996 and for the six months ended June 30, 1997 (unaudited)........... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
ADHESIVES SYSTEMS DIVISION OF THE BFGOODRICH COMPANY
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-15
Balance Sheet as of December 31, 1995................................................ F-16
Statements of Divisional Operations and Division Equity for the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996........................ F-17
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the three
months ended March 31, 1996........................................................ F-18
Notes to Financial Statements........................................................ F-19
</TABLE>
PIERCE & STEVENS CORP.
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-23
Combined Statements of Income for the year ended December 31, 1995 and for the period
January 1, 1996 through August 19, 1996............................................ F-24
Combined Statements of Cash Flows for the year ended December 31, 1995 and for the
period January 1, 1996 through August 19, 1996..................................... F-25
Notes to Combined Financial Statements............................................... F-26
</TABLE>
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC., EVODE-TANNER INDUSTRIES,
INC.
AND MERCER PRODUCTS COMPANY, INC. (COLLECTIVELY, THE "DIVISION")
<TABLE>
<S> <C>
Combined Balance Sheet (unaudited) as of June 30, 1997............................... F-30
Combined Statements of Operations for the six months ended June 30, 1996 and 1997
(unaudited)........................................................................ F-31
Combined Statements of Cash Flows for the six months ended June 30, 1996 and 1997
(unaudited)........................................................................ F-32
Notes to Unaudited Combined Financial Statements..................................... F-33
Report of Independent Auditors....................................................... F-34
Combined Balance Sheets as of December 31, 1995 and 1996 and March 31, 1996 and
1997............................................................................... F-35
Combined Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 and 1997............................ F-36
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 and 1997............................ F-37
Notes to Combined Financial Statements............................................... F-38
</TABLE>
F-1
<PAGE> 109
REPORT OF INDEPENDENT AUDITORS
To the Partners of Sovereign Specialty Chemicals L.P.
We have audited the accompanying consolidated balance sheet of Sovereign
Specialty Chemicals, L.P. and Subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, partners' interests, and cash
flows for the period from March 31, 1996 (date of inception) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sovereign
Specialty Chemicals, L.P. and Subsidiaries at December 31, 1996, and the
consolidated results of their operations and their consolidated cash flows for
the period from March 31, 1996 (date of inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
March 7, 1997
F-2
<PAGE> 110
SOVEREIGN SPECIALTY CHEMICALS, L.P.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, ------------
1996
------------ (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 104 $ 1,028
Accounts receivable, less allowance of $324...................... 10,997 12,708
Loans receivable -- Related parties.............................. 396 311
Inventories...................................................... 9,895 10,010
Deferred income taxes............................................ 688 687
Other current assets............................................. 1,576 1,279
------------ ------------
Total current assets............................................... 23,656 26,023
Property, plant, and equipment:
Land............................................................. 2,930 2,930
Buildings........................................................ 8,020 8,073
Machinery and equipment.......................................... 16,820 17,079
Furniture and fixtures........................................... 193 962
------------ ------------
27,963 29,039
Less: Accumulated depreciation................................... 941 2,124
------------ ------------
27,022 26,915
Goodwill, net...................................................... 17,876 16,772
Deferred financing costs, net...................................... 1,169 1,101
Other assets....................................................... 237 107
------------ ------------
Total assets....................................................... $ 69,960 $ 70,918
=========== ==========
LIABILITIES AND PARTNERS' INTERESTS
Current liabilities:
Accounts payable................................................. $ 4,959 $ 6,762
Accrued expenses................................................. 4,629 3,624
Current portion of long-term debt................................ 2,000 2,000
Current portion of capital lease obligations..................... 132 97
------------ ------------
Total current liabilities.......................................... 11,720 12,483
Long-term debt, less current portion............................... 39,360 38,555
Capital lease obligations, less current portion.................... 160 93
Deferred income taxes.............................................. 72 72
Other long-term liabilities........................................ 713 200
Minority interests................................................. 491 509
Partners' interests:
General partner.................................................. 296 311
Limited partners................................................. 17,087 18,593
Cumulative translation adjustment.................................. 61 102
------------ ------------
Total partners' interests.......................................... 17,444 19,006
------------ ------------
Total liabilities and partners' interests.......................... $ 69,960 $ 70,918
=========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 111
SOVEREIGN SPECIALTY CHEMICALS, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31, 1996 PERIOD FROM
(DATE OF INCEPTION) APRIL 1, 1996 SIX MONTHS
THROUGH THROUGH ENDED JUNE
DECEMBER 31, 1996 JUNE 30, 1996 30, 1997
------------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales..................................... $37,792 $ 5,641 $43,159
Cost of goods sold............................ 26,637 3,374 30,439
------- ------- ------
Gross profit............................. 11,155 2,267 12,720
Selling, general, and administrative
expenses.................................... 9,613 1,389 9,047
------- ------- ------
Operating income......................... 1,542 878 3,673
Interest expense, net......................... 1,666 204 1,861
------- ------- ------
Income (loss) before income tax expense
(benefit) and extraordinary item....... (124) 674 1,812
Income tax expense (benefit).................. (99) 229 75
------- ------- ------
Income (loss) before extraordinary
item................................... (25) 445 1,737
Extraordinary loss on the extinguishment of
debt........................................ 281 -- --
------- ------- ------
Net income (loss)........................ $ (306) $ 445 $ 1,737
======= ======= ======
</TABLE>
See accompanying notes.
F-4
<PAGE> 112
SOVEREIGN SPECIALTY CHEMICALS, L.P.
STATEMENT OF PARTNERS' INTERESTS
(dollars in thousands)
<TABLE>
<CAPTION>
CURRENCY TOTAL
GENERAL LIMITED TRANSLATION PARTNERS'
PARTNER PARTNERS ADJUSTMENT INTEREST
-------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Initial capitalization of Company............... $ 56 $ 5,529 $ -- $ 5,585
Additional capital contributions................ 245 12,013 -- 12,258
Distributions to partners....................... (2) (152) -- (154)
Net loss for 1996............................... (3) (303) -- (306)
Translation adjustment.......................... -- -- 61 61
---- ------- --- -------
Balance at December 31, 1996.................... $296 $ 17,087 $ 61 $ 17,444
Distributions to partners (unaudited)........... (2) (214) -- (216)
Net income for the six months ended June 30, 17 1,720 -- 1,737
1997 (unaudited)..............................
Translation adjustment (unaudited).............. -- -- (41) (41)
---- ------- --- -------
Balance at June 30, 1997........................ $311 $ 18,593 $102 $ 19,006
==== ======= === =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 113
SOVEREIGN SPECIALTY CHEMICALS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
PERIOD FROM MARCH 31,
1996 PERIOD FROM
(DATE OF INCEPTION) APRIL 1, 1996
THROUGH DECEMBER 31, THROUGH SIX MONTHS ENDED
1996 JUNE 30, 1996 JUNE 30, 1997
------------------------ ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................. $ (306) $ 445 $1,737
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............. 1,600 257 1,847
Deferred income taxes..................... (133) -- --
Minority interests........................ 155 -- 18
Extraordinary loss on extinguishment of
debt.................................... 281 -- --
Changes in operating assets and
liabilities:
Accounts receivable..................... 1,197 (442) (1,711)
Inventories............................. 88 334 (115)
Prepaid expenses and other current
assets............................... (424) (420) 1,021
Accounts payable and accrued expenses... 2,326 2,056 285
---------- ------------- -------
Net cash provided by operating activities..... 4,784 2,230 3,082
INVESTING ACTIVITIES
Purchase of net assets of SEA (net of $404
purchased cash)............................. (15,819) (15,819) --
Purchase of common stock of P&S............... (46,899) -- --
Purchase of property, plant, and equipment.... (705) (26) (1,127)
Proceeds from sale of equipment............... 17 -- 51
Loan to related party......................... (110) (110) --
Proceeds from loans to related parties........ 72 20 --
---------- ------------- -------
Net cash used in investing activities......... (63,444) (15,935) (1,076)
FINANCING ACTIVITIES
Capital contributions......................... 17,835 5,585 --
Proceeds from revolving credit facility....... 3,228 -- 4,671
Payments on revolving credit facility......... (7,596) (976) (4,476)
Proceeds from long-term debt.................. 54,226 11,300 --
Payments on long-term debt.................... (8,699) (2,399) (1,000)
Payments on capital lease obligations......... (53) -- (102)
Distributions to partners..................... (154) (154) (216)
Distributions to minority members of SEA...... (4) (4) --
---------- ------------- -------
Net cash provided by (used in) financing
activities.................................. 58,783 13,352 (1,123)
Effect of exchange rate changes on cash....... (19) -- 41
---------- ------------- -------
Net increase (decrease) in cash and cash
equivalents................................. 104 (353) 924
Cash and cash equivalents at beginning of
period...................................... -- 404 104
---------- ------------- -------
Cash and cash equivalents at end of period.... $ 104 $ 51 $1,028
==================== =========== ==============
</TABLE>
See accompanying notes.
F-6
<PAGE> 114
SOVEREIGN SPECIALTY CHEMICALS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND THE PERIOD FROM APRIL 1, 1996
THROUGH JUNE 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Business
Sovereign Specialty Chemicals, L.P. (Sovereign or the Company) is a limited
partnership acting as a holding company. The partnership was formed on March 31,
1996 through an initial capitalization of $5,585. Sovereign Chemicals
Corporation (the General Partner) acts as the general partner with additional
investors as limited partners (the Limited Partners).
As described further in Note 2 "Business Combinations," on March 31, 1996,
Sovereign purchased certain assets and assumed certain commitments of a company
for $15,819 including transaction costs and net of purchased cash. The purchase
was made through Sovereign Engineered Adhesives, L.L.C. (SEA) a newly-formed
97%-owned limited liability corporation.
Also as described in Note 2 "Business Combinations," on August 19, 1996,
Sovereign purchased, through P&S Holdings, Inc. (P&S) a newly formed subsidiary,
100% of the outstanding stock of Pierce & Stevens Corp. for $46,899, including
transaction costs.
Interim Financial Information
The financial information at June 30, 1997 and for the six months ended
June 30, 1997, and the period from March 31, 1996 (date of inception) through
June 30, 1996 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) that the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. Operating results for the six months ended
June 30, 1997 are not necessarily indicative of the results that may be expected
for the entire year.
Principles of Consolidations
The consolidated financial statements include the accounts of Sovereign and
its majority-owned subsidiaries, SEA and P&S. All significant intercompany
accounts and transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
by the last in, first out (LIFO) method for SEA and by the first in, first out
(FIFO) for P&S.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided principally by use of the straight-line
method over the respective estimated useful lives of the assets for financial
reporting purposes, as follows: 3 to 10 years for machinery and equipment; seven
years for furniture and fixtures, and 39 years for buildings and improvements.
Accelerated depreciation methods are principally used for income tax purposes.
F-7
<PAGE> 115
SOVEREIGN SPECIALTY CHEMICALS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of
net assets acquired and is being amortized using the straight-line method over a
period of 15 years. Accumulated amortization of goodwill as of December 31, 1996
was approximately $590.
Organizational Costs
Organization costs relate to the start-up of SEA and are being amortized on
a straight-line basis over five years. Accumulated amortization of
organizational costs as of December 31, 1996 was approximately $2.
Deferred Financing Costs
The costs of obtaining financing are capitalized and are being amortized
using the straight-line method over the term of the related debt. Accumulated
amortization as of December 31, 1996 was approximately $47.
Income Taxes
The Company was formed as a limited partnership and thus the income of the
partnership is taxed at the partner level. Income relative to SEA, a limited
liability company, is taxed at the partner/member level.
Income related to P&S, a subchapter C corporation, is taxed at the
subsidiary level. P&S recognizes deferred income taxes for tax consequences of
temporary differences by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The effect of a change in tax
rates is recognized in the period that includes the enactment date. Deferred
income taxes have resulted from the difference in timing for financial reporting
and tax reporting of accounts receivable reserves, inventory reserves,
depreciation, various accrued liabilities, and a net operating loss
carryforward. Investment tax credits are accounted for on the flow-through
method.
Interest Rate Cap Agreements
The Company purchased interest rate cap agreements totaling $62 to reduce
the impact of increases in interest rates on its long-term debt. The cost of
these agreements is included in other assets and is being amortized to interest
expense ratably over the remaining three-year term of the caps. Payments
received as a result of the caps, if any, are accrued as a reduction of interest
expense.
Partners' Interests
The Company's partners' interests are comprised of preferred and common
shares. As of December 31, 1996, the balance of preferred and common shares were
$17,373 and $10, respectively. The Company's preferred shares earn interest as
determined by the partnership agreement (the guaranteed yield). At December 31,
1996, cumulative unpaid interest determined by the guaranteed yield amounted to
$840.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
F-8
<PAGE> 116
SOVEREIGN SPECIALTY CHEMICALS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue is recognized when products are shipped to the customer.
Research and Development
Research and development costs are charged to expense as incurred. Research
and development expense for the period ended December 31, 1996 was $658.
Translation of Foreign Currencies
The functional currency for P&S' foreign operations is the applicable local
currency. The translation from the applicable foreign currency to U.S. dollars
is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. Translation adjustments resulting from
such translation are included as a separate component of shareholders' equity.
Gains or losses resulting from foreign currency transactions are included in
income.
Fair Value of Financial Instruments
The carrying amounts reported in the Company's balance sheets for
variable-rate long-term debt, including current portion, approximate fair value,
as the underlying long-term debt instruments are comprised of notes that are
repriced on a short-term basis.
The Company estimates the fair value of fixed rate long-term debt
obligations including current portion, using the discounted cash flow method
with interest rates currently available for similar obligations. The carrying
amounts reported in the Company's balance sheets for these obligations
approximate fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts which are
from its domestic and international customers. To minimize this risk, ongoing
credit evaluations of customers' financial condition are performed, although
collateral is not required. In addition, the Company maintains an allowance for
potential credit losses.
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 amounts. Actual results could differ from
those estimates.
2. BUSINESS COMBINATIONS
On March 31, 1996, the Company purchased, through its newly formed,
majority-owned subsidiary, SEA, the net assets of a company (the Acquired
Company). The purchase was made in accordance with the Asset Purchase Agreement
(Agreement) between the Company, SEA and the Acquired Company. The Company
acquired certain assets and assumed certain commitments for $15,819, including
transaction related costs of $607 and net of purchased cash of $404. The
acquisition was accounted for as a purchase. The results of operations of the
acquired company are included in the Statement of Operations for the period from
March 31, 1996 (date of acquisition) through December 31, 1996. In connection
with the acquisition, the Company recognized (on the
F-9
<PAGE> 117
SOVEREIGN SPECIALTY CHEMICALS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
books of SEA) goodwill in the amount of $4,249 which is being amortized on a
straight-line basis over a 15-year period.
On August 19, 1996, the Company purchased, through its newly formed,
majority-owned subsidiary, P&S Holdings, Inc., 100% of the outstanding common
stock of Pierce & Stevens Corp. The cost of the acquisition was $46,899
including transaction costs and was accounted for as a purchase. The results of
the operations of the acquired company for the period from August 19, 1996 (date
of acquisition) through December 31, 1996 are included in the Statement of
Operations. In connection with the acquisition, the Company recognized (on the
books of Pierce & Stevens Corp.) goodwill in the amount of $14,036 which is
being amortized on a straight-line basis over a period of 15 years.
3. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Raw materials.................................................. $4,671
Work in process................................................ 140
Finished goods................................................. 5,158
------
9,969
Less: LIFO reserve............................................. 74
------
$9,895
======
</TABLE>
4. LONG-TERM DEBT
The components of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Revolving credit loan.......................................... $ 6,859
Term loan...................................................... 24,501
Senior subordinated notes...................................... 10,000
------
41,360
Less: Current maturities....................................... 2,000
------
$ 39,360
======
</TABLE>
The Company entered into a Credit Agreement on August 19, 1996, to provide
for a revolving credit facility, a long-term note, and two senior subordinated
notes. In connection with the Credit Agreement, SEA paid off its outstanding
debt obligations and recognized an extraordinary loss on the early
extinguishment of the debt in the amount of $281.
The Company has $15.0 million revolving credit facility (the Facility)
which expires in 2003. The Facility is shared among the Company, SEA and P&S.
The Company pays commitment fees of .5% on the unused balance, on a quarterly
basis. Amounts outstanding under the Facility bear interest at either the London
Interbank Offered Rate (LIBOR), plus 1.5% to 2.5% variable or the ABR rate plus
.25% to 1.25% variable. The ABR rate is defined in the Credit Agreement as the
highest of: (i) the Federal Funds Rate plus .5%; (ii) the prime rate; or (iii)
the base Certificate of Deposit rate plus 1%. Under the Facility, the Company
may borrow and repay from time to time, the lessor of: (i) $15,000; or (ii) the
Company's borrowing base. The Credit Agreement defines the Company's borrowing
base as the sum of 85% of eligible accounts receivable and 50% of eligible
inventory. The amount
F-10
<PAGE> 118
SOVEREIGN SPECIALTY CHEMICALS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company may borrow against the revolving credit facility is reduced by the
aggregate amount of any letters of credit issued for the account of the Company
and its subsidiaries. No letters of credit were outstanding at December 31,
1996. As of December 31, 1996, approximately $6,000 was available under the
Facility.
The Company has a term note payable at of December 31, 1996 in the amount
of $24,501. The variable interest rate on the long-term loan, which expires in
September 2003, is the same rate as the Facility described above, and was
approximately 8.1% at December 31, 1996. Quarterly installments under the note
range from $500 to $1,750. Interest is payable quarterly.
The Company has a $9 million and a $1 million senior subordinated note
bearing interest at 11 1/2%. The notes are due in a single payment on the
earlier of March 31, 2004 or 90 days after the final payment on the Credit
Agreement.
The weighted average interest rate on all debt obligations outstanding at
December 31, 1996 was 9.3%.
Debt obligations are secured by all assets of the Company, SEA, and P&S.
The credit facilities also contain various restrictive covenants at a
consolidated level related to leverage coverage, net worth, fixed charges, and
interest coverage. All such covenants were met at December 31, 1996.
Annual maturities of the Company's long-term debt is as follows at December
31, 1996:
<TABLE>
<S> <C>
1997.............................................................. $ 2,000
1998.............................................................. 2,125
1999.............................................................. 2,626
2000.............................................................. 3,000
2001.............................................................. 2,490
2002 and thereafter............................................... 29,119
</TABLE>
5. RETIREMENT PLANS
The Company provides a defined benefit pension plan covering certain
salaried employees of SEA employed on April 1, 1996 who were participants in the
Acquired Company's retirement plan. Employees vest in the plan over a five-year
period and the plan is frozen to new participants. Participants in the plan were
given credit for prior years of service.
The plan's net periodic pension cost for the period from April 1, 1996 to
December 31, 1996 was comprised solely of $37 in service cost.
The funded status of the plan, based on actuarial computations at October
1, 1996, is presented below. An assumed discount rate of 7.5% and a 4.5% rate of
increase in future compensation levels was used in determining the actuarial
present value of the projected benefit obligation.
<TABLE>
<S> <C>
Actuarial present value of accumulated benefit obligation:
Vested benefits....................................................... $13
Nonvested benefits.................................................... 15
---
Accumulated benefit obligation........................................ $28
===
Projected benefit obligation for services rendered to date............ $37
Plan assets at fair value............................................. --
---
Accrued pension liability............................................. $37
===
</TABLE>
F-11
<PAGE> 119
SOVEREIGN SPECIALTY CHEMICALS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a pension plan covering all P&S union employees. The
Company's funding policy has been to contribute annually at least the minimum
required by ERISA. The Plans provide monthly benefits under a flat benefit
formula.
Net periodic pension cost is as follows for the period ended December 31,
1996:
<TABLE>
<S> <C>
Service cost.......................................................... $ 5
Interest cost......................................................... 29
Actual return on plan assets.......................................... (19)
---
Net periodic pension cost............................................. $15
===
</TABLE>
The funded status of the plan, based on actuarial computations at June 30,
1996 and September 30, 1996 is presented below. Plan assets are stated at fair
value and composed of fixed rate securities and equity investments. The average
assumed discount rate is 7.5% and the average expected long-term rate of return
on plan assets is 8.5%.
Actuarial present value of accumulated benefit obligation:
<TABLE>
<S> <C>
Vested benefits........................................................... $ 1,567
Nonvested benefits........................................................ 8
-------
Accumulated benefit obligation............................................ $ 1,575
=======
Projected benefit obligation for services rendered to date................ $ 1,575
Plan assets at fair value................................................. (1,493)
-------
Accrued pension liability................................................. $ 82
=======
</TABLE>
The Company established a defined contribution plan on July 1, 1996
covering all SEA employees under Section 401(k) of the Internal Revenue Code.
Under terms of the plan, participants may elect to contribute up to 14% of their
defined compensation. In addition, the Company will contribute 50% of each of
the participant's contribution up to a maximum of 6% of defined compensation.
Employees not participating in the plan and employed on April 1, 1996, as well
as all employees hired after April 1, 1996 receive an additional 2%
discretionary contribution from the Company due to the fact they are not covered
under the Company's defined benefit plan. Total Company contributions to the
plan amounted to $88 for the period ended December 31, 1996.
The Company also has a defined contribution plan covering all P&S employees
under Section 401(k) of the Internal Revenue Code. Under terms of the plan,
participants may elect to contribute up to 7% of their defined compensation. In
addition, the Company will contribute 100% of each of the participant's
contribution up to a maximum of 2% of defined compensation. Total Company
contributions to the plan amounted to $51 for the period ended December 31,
1996.
The Company had a deferred profit sharing plan covering all P&S employees.
The contribution was subject to the discretion of the Board of Directors, but is
subject to a limitation of 5% of compensation of all eligible employees as
defined by the plan. Total Company contributions to the plan amounted to $154
for the period ended December 31, 1996. The plan was discontinued during 1996.
F-12
<PAGE> 120
SOVEREIGN SPECIALTY CHEMICALS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The provision for income taxes on P&S Holdings, Inc., a subchapter C
corporation, for the period ended December 31, 1996 consists of:
<TABLE>
<S> <C>
Current:
State................................................................ $ 11
Foreign.............................................................. 23
----
34
Deferred............................................................... (133)
----
$(99)
====
</TABLE>
Income tax expense for the period ended December 31, 1996 differs from the
amount computed by applying the statutory income tax rate as follows:
<TABLE>
<S> <C>
Income taxes at Federal statutory rate..................................... (34.0)%
Income not subject to Federal taxation*.................................... (48.9)
Permanent income tax disallowances......................................... 3.6
State taxes, net of federal benefit........................................ 1.4
Foreign withholding taxes.................................................. 4.6
Other...................................................................... 4.6
-----
Income taxes at the effective rate......................................... (68.7)%
=====
</TABLE>
- ------------------------
*Income from the Company and SEA are taxes at the partner/member level.
Deferred tax liabilities and assets are recorded in the Company's balance
sheet at December 31, 1996 as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Accelerated depreciation................................................ $(165)
Refundable investment tax credits....................................... (123)
-----
Gross deferred tax liabilities............................................ (288)
Deferred tax assets:
Federal net operating loss carryforwards................................ 413
Accrued liabilities..................................................... 336
Inventory............................................................... 88
Receivables............................................................. 67
-----
Gross deferred tax assets................................................. 904
-----
Net deferred tax asset.................................................... $ 616
=====
</TABLE>
As of December 31, 1996, the Company had a net operating loss carryforward
of approximately $1.2 million which expires in the year 2011.
F-13
<PAGE> 121
SOVEREIGN SPECIALTY CHEMICALS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL LEASES
Future minimum lease payments under capital leases at December 31, 1996,
together with the present value of the minimum lease payments are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 170
1998............................................................... 140
1999............................................................... 57
----
Total minimum payments............................................. 367
Amounts representing executory costs............................... 48
Amounts representing interest...................................... 27
----
Present value of minimum payments.................................. 292
Current portion.................................................... 132
----
Total long-term portion............................................ $ 160
====
</TABLE>
8. OPERATING LEASES
The Company is a leasee under noncancelable equipment and automobile lease
agreements. Rent expense was $39 for the period ended December 31, 1996. Future
minimum annual lease payments under operating leases with initial noncancelable
terms extending beyond one year are as follows:
<TABLE>
<S> <C>
1997....................................................... $ 59
1998....................................................... 34
1999....................................................... 14
2000....................................................... 12
2001....................................................... 6
----
$ 125
====
</TABLE>
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental cash flow data in addition to the
information provided in the Consolidated Statement of Cash Flows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31, 1996 PERIOD FROM
(DATE OF INCEPTION) APRIL 1, 1996
THROUGH THROUGH JUNE SIX MONTHS ENDED
DECEMBER 31, 1996 30, 1996 JUNE 30, 1997
------------------- ------------- ----------------
<S> <C> <C> <C>
Cash paid for:
Interest.............................. $ 1,291 $26 $1,821
Income taxes.......................... 20 -- 42
</TABLE>
Supplemental noncash information:
During 1996, the Company exchanged interests in its subsidiaries for notes
receivable in the amount of $348. In addition, interest income related to these
notes in the amount of $10 was capitalized.
F-14
<PAGE> 122
REPORT OF INDEPENDENT AUDITORS
The Holder of Equity Interest
Adhesives Systems Division of The BFGoodrich Company
We have audited the accompanying balance sheet of Adhesives Systems
Division (a division of The BFGoodrich Company) as of December 31, 1995 and the
related statements of divisional operations and division equity and cash flows
for the years ended December 31, 1994 and 1995, and the three months ended March
31, 1996. These financial statements are the responsibility of the Division'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 that 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 Adhesives Systems Division
(a division of The BFGoodrich Company) at December 31, 1995, and the results of
its divisional operations and its cash flows for the for the years ended
December 31, 1994 and 1995, and the three months ended March 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
June 19, 1997
F-15
<PAGE> 123
ADHESIVES SYSTEMS DIVISION
(A Division of The BFGoodrich Company)
BALANCE SHEET
DECEMBER 31, 1995
(dollars in thousands)
<TABLE>
<S> <C>
ASSETS:
Current assets:
Cash.............................................................................. $ 1
Accounts receivable, less allowance of $96........................................ 2,951
Inventories....................................................................... 1,004
Other current assets.............................................................. 211
------
Total current assets................................................................ 4,167
Property, plant, and equipment:
Land.............................................................................. 726
Buildings and improvements........................................................ 4,982
Machinery and equipment........................................................... 11,082
------
16,790
Less: Accumulated depreciation.................................................... 11,844
------
4,946
Goodwill, net....................................................................... 121
Noncompete agreement, net........................................................... 100
Other............................................................................... 60
------
Total assets........................................................................ $9,394
======
LIABILITIES AND DIVISION EQUITY:
Current liabilities:
Accounts payable.................................................................. $1,245
Accrued expenses.................................................................. 1,136
------
Total current liabilities........................................................... 2,381
Division equity..................................................................... 7,013
------
Total liabilities and division equity............................................... $9,394
======
</TABLE>
See accompanying notes.
F-16
<PAGE> 124
ADHESIVES SYSTEMS DIVISION
(A Division of The BFGoodrich Company)
STATEMENTS OF DIVISIONAL OPERATIONS AND DIVISION EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
THREE
YEAR ENDED DECEMBER MONTHS
31, ENDED
--------------------- MARCH 31,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Net sales................................................. $20,100 $21,129 $ 5,410
Cost of goods sold........................................ 13,498 13,734 3,580
------- ------- ------
Gross profit............................................ 6,602 7,395 1,830
Selling, general, and administrative expenses............. 6,362 5,633 1,603
------- ------- ------
Income before income taxes.............................. 240 1,762 227
Income tax expense........................................ 96 705 91
------- ------- ------
Net income.............................................. 144 1,057 136
Division equity -- Beginning of year...................... 5,812 5,956 7,013
------- ------- ------
Division equity -- End of year............................ $ 5,956 $ 7,013 $ 7,149
======= ======= ======
</TABLE>
See accompanying notes.
F-17
<PAGE> 125
ADHESIVES SYSTEMS DIVISION
(A Division of The BFGoodrich Company)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
THREE
YEAR ENDED DECEMBER MONTHS
31, ENDED
---------------------- MARCH 31,
1994 1995 1996
------ ------- ---------
<S> <C> <C> <C>
Operating activities:
Net income............................................. $ 144 $ 1,057 $ 136
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation........................................ 888 790 163
Amortization........................................ 111 111 28
Loss on sale/disposal of equipment.................. 22 117 --
Changes in operating assets and liabilities:
Accounts receivable............................... (134) (480) (265)
Inventories....................................... (300) 428 1
Prepaid expenses and other current assets......... (199) 24 (26)
Other assets...................................... (33) 3 12
Accounts payable and accrued expenses............. 294 (27) (115)
Accrued liabilities............................... 421 (584) 13
------ ------- -----
Net cash provided by (used in) operating activities...... 1,214 1,449 (53)
Investing activities:
Purchases of property, plant, and equipment............ (655) (106) (131)
Proceeds from the sale of equipment.................... 43 -- --
------ ------- -----
Net cash used in investing activities.................... (612) (106) (131)
Financing activities:
Net transfer (to) from The BFGoodrich Company.......... (602) (1,333) 184
------ ------- -----
Net cash provided by (used in) investing activities...... (602) (1,333) 184
------ ------- -----
Change in cash........................................... -- -- --
Cash at beginning of year................................ 1 1 1
------ ------- -----
Cash at end of year...................................... $ 1 $ 1 $ 1
====== ======= =====
</TABLE>
See accompanying notes.
F-18
<PAGE> 126
ADHESIVES SYSTEMS DIVISION
(A Division of The BFGoodrich Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
(dollars in thousands)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Adhesives Systems Division (the Division) was a division of The BFGoodrich
Company (Parent Company or BFG) and was engaged primarily in the development and
production of liquid and film adhesives used in the automotive, aerospace, and
industrial markets sold primarily in the United States.
These financial statements present the assets, liabilities, and results of
operations of the Division. Costs related to functions performed by BFG and
certain other costs which are attributable to the Division are allocated to the
Division by BFG. Refer to Note 6 for costs related to these functions performed
by BFG.
The Division was part of a consolidated group and as such has significant
transactions with related entities. The terms of these transactions were
determined between related parties and may, therefore, differ from terms which
would have occurred between wholly unrelated parties and may also differ from
the costs which would have been incurred had the Division operated as a
completely autonomous entity.
The assets, liabilities, income, and expenses shown on the Division's
financial statements are only part of those of a larger entity and are not
subject to the constraints of law and custom applicable entities.
2. ACCOUNTING POLICIES
Cash Management
The Division transfers its cash to BFG and BFG advances funds to the
Division to finance its operations and working capital requirements. The net
activity in the regard is reflected as a part of division equity.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
by the last in, first out (LIFO) method. The elements of cost are material,
labor, and factory overhead.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided principally by use of the straight-line
method and accelerated methods over the respective estimated useful lives of the
assets for financial reporting purposes, as follows: 3 to 10 years for machinery
and equipment, seven years for furniture and fixtures and 39 years for buildings
and improvements. Accelerated methods are used for tax reporting purposes.
Maintenance and repairs are charged against income as incurred and renewals and
betterments are capitalized.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of
net assets of an acquired business and is being amortized using the
straight-line method over a period of 15 years. Accumulated amortization of
goodwill was approximately $44 at December 31, 1995.
F-19
<PAGE> 127
ADHESIVES SYSTEMS DIVISION
(A Division of The BFGoodrich Company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Noncompete Agreement
In connection with a business acquisition, the Division entered into a
noncompete agreement with a former owner. The noncompete agreement is recorded
at cost and is being amortized on a straight-line basis over five years.
Accumulated amortization of the noncompete agreement was approximately $400 at
December 31, 1995.
Income Taxes
The Division is not a legal entity and, therefore, does not file income tax
returns. However, the Division's income was included in the federal and state
income tax returns of BFG. Federal and state income taxes for the years ended
December 31, 1994 and 1995 and for the three months ended March 31, 1996 are
recorded based upon an estimated effective rate of 40% of financial reporting.
Deferred income taxes, based upon the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, are not reflected in the
financial statements due to, in the opinion of management, the amounts not being
significant. Management believes that the effective tax rate of 40%
appropriately approximates the current and deferred tax position of the Division
on a stand-alone basis.
Revenue Recognition
Sales are recorded when products are shipped.
Concentration of Credit Risk
Financial instruments that potentially subject the Division to significant
concentrations of credit risk consisted principally of trade accounts which are
from its domestic and international customers. To minimize this risk, ongoing
credit evaluations of customers' financial condition are performed, although
collateral is not required. In addition, the Division maintains an allowance for
potential credit losses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Division to make
estimates and assumptions that affect the reported amounts. Actual results could
differ from those estimates.
Research and Development
Research and development costs are charged to expense as incurred. Research
and development expense for the period ended December 31, 1994 and 1995 and for
the three months ended March 31, 1996 was approximately $47, $64, and $18,
respectively.
Long-Lived Assets
On January 1, 1996, the Division 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 No. 121). SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment wherever events or changes in circumstances based on future expected
cash flows indicate that the carrying amount may not be reasonable. Adoption of
the Statement did not have a material effect on the financial statements as of
and for the three months ended
F-20
<PAGE> 128
ADHESIVES SYSTEMS DIVISION
(A Division of The BFGoodrich Company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1997. Management believes application of the Statement would not have
had a material effect on the results of operations for the years ended December
31, 1994 and 1995.
3. INVENTORIES
The components of inventories at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Raw materials............................................. $ 1,320
Work in process........................................... 207
Finished goods............................................ 900
-------
2,427
Less: LIFO reserve........................................ (1,423)
-------
Total..................................................... $ 1,004
=======
</TABLE>
4. ACCRUED EXPENSES
The components of accrued expenses at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Accrued compensation........................................ $ 190
Accrued vacation and holidays............................... 313
Accrued worker's compensation............................... 153
Accrued insurance........................................... 150
Accrued utilities........................................... 37
Accrued medical............................................. 100
Accrued other............................................... 193
------
$1,136
======
</TABLE>
5. CORPORATE ALLOCATION OF EXPENSES
Certain expenses related to employee benefits and administrative costs, tax
and legal services, among others, for the periods ended December 31, 1994 and
1995 and for the three months ended March 31, 1996, were paid by BFG on behalf
of the Division. These expenses were allocated to the Division by BFG based on
estimates of the Division's proportionate share of total common expenses. The
allocations were $974, $958, and $461 for the periods ended December 31, 1994
and 1995 and for the three months ended March 31, 1996, respectively. Management
believes that the allocation methods used on common expenses were reasonable,
produce materially accurate results, and are indicative of the expenses that
would have been incurred had the Division been operated as a stand-alone
business.
6. RELATED PARTY TRANSACTIONS
The Division has entered into various intercompany transactions with BFG
and related affiliates. Net sales to these affiliates were approximately $318,
$381, and $53 for the years ended December 31, 1994 and 1995 and for the three
months ended March 31, 1996, respectively.
F-21
<PAGE> 129
ADHESIVES SYSTEMS DIVISION
(A Division of The BFGoodrich Company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. EMPLOYEE BENEFITS
Medical Expenses
Medical coverage is provided by BFG to the Division's employees. Medical
expenses and claims experience of the Division and related affiliates are pooled
together and allocated to the Division based on estimates of the Division's
proportionate share of total medical expenses. For the years ended December 31,
1994 and 1995 and for the three months ended March 31, 1996, medical expenses
included in selling, general, and administrative expenses, were approximately
$556, $608, and $104, respectively.
Pension Plan
Substantially all salaried and hourly employees of the Division were
participants in BFG's defined benefit pension plan. BFG allocates pension costs
to the Division based on actuarial valuations. For the years ended December 31,
1994 and 1995 and for the three months ended March 31, 1996, pension plan
expenses included in cost of goods sold and selling, general, and administrative
expenses were approximately $473, $422, and $110, respectively.
Savings Plan
The Division participates in a BFG defined contribution savings plan which
covers most salaried and hourly employees of the Division. For the years ended
December 31, 1994 and 1995 and for the three months ended March 31, 1996,
Division contributions under the plan included in cost of goods sold and selling
general and administrative expenses were approximately $176, $183, and $45,
respectively.
Other Postretirement Benefit Plans
The Division's employees participated in a BFG defined benefit
postretirement plan that provides certain health care and life insurance
benefits to eligible employees. The health care plan is contributory, with
retiree contributions adjusted periodically, and contains other cost sharing
features, such as deductibles and coinsurance. The life insurance plan is
generally noncontributory. For the years ended December 31, 1994 and 1995 and
for the three months ended March 31, 1996, allocated net periodic postretirement
benefit expenses, included in corporate allocations in the statement of
operation were approximately $476, $543, and $184, respectively.
8. OPERATING LEASES
The Division leases certain equipment and automobiles under noncancelable
equipment and automobile lease agreements. Rent expense was $44, $38, and $11
for the years ended December 31, 1994 and 1995 and for the three months ended
March 31, 1996. Future minimum annual lease payments under operating leases with
initial noncancelable terms extending beyond one year are as follows:
<TABLE>
<S> <C>
1996......................................................... $ 39
1997......................................................... 30
1998......................................................... 27
1999......................................................... 14
2001......................................................... 1
----
$111
====
</TABLE>
F-22
<PAGE> 130
REPORT OF INDEPENDENT AUDITORS
The Shareholders
Pierce & Stevens Corp.
We have audited the accompanying combined statements of income and cash
flows for the year ended December 31, 1995 and the period January 1, 1996
through August 19, 1996 of the corporations listed in Note 1. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined statements of income
and cash flows 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 combined statements of income and
cash flows presentation. We believe that our audits of the combined statements
of income and cash flows provide a reasonable basis for our opinion.
In our opinion, the statements of income and cash flows referred to above
present fairly, in all material respects, the combined results of operations and
cash flows of the corporations listed in Note 1 for the year ended December 31,
1995 and the period January 1, 1996 through August 19, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
June 19, 1997
F-23
<PAGE> 131
PIERCE & STEVENS CORP.
COMBINED STATEMENTS OF INCOME
(dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH AUGUST 19, 1996
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996
YEAR ENDED THROUGH
DECEMBER 31, 1995 AUGUST 19, 1996
----------------- ----------------
<S> <C> <C>
Net sales........................................... $56,716 $ 36,823
Cost of goods sold.................................. 46,799 29,979
------- -------
Gross profit........................................ 9,917 6,844
Selling, general and administrative expenses........ 7,281 5,335
------- -------
Operating income.................................... 2,636 1,509
Interest expense.................................... (337) (9)
------- -------
Income before income taxes.......................... 2,299 1,500
Income tax expense.................................. 949 537
------- -------
Net income.......................................... $ 1,350 $ 963
======= =======
</TABLE>
See accompanying notes.
F-24
<PAGE> 132
PIERCE & STEVENS CORP.
COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH AUGUST 19, 1996
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996
YEAR ENDED THROUGH
DECEMBER 31, 1995 AUGUST 19, 1996
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,350 $ 963
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,461 1,165
Deferred income taxes..................................... 60 (112)
Changes in operating assets and liabilities:
Accounts receivable.................................... (2,060) (497)
Inventories............................................ 1,275 839
Prepaid expenses and other current assets.............. 236 334
Accounts payable and accrued expenses.................. (490) 291
------- -------
Net cash provided by operating activities................... 1,832 2,983
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (4,634) (822)
Proceeds from asset disposals............................... -- 82
------- -------
Net cash used in investing activities....................... (4,634) (740)
FINANCING ACTIVITIES
Net borrowings (repayments) under intercompany credit
facilities................................................ 995 (2,354)
------- -------
Net cash provided by (used in) financing activities......... 995 (2,354)
Effect of exchange rate changes on cash..................... 712 70
------- -------
Net decrease in cash........................................ (1,095) (41)
Cash (overdraft) at beginning of year....................... 754 (341)
------- -------
Overdraft at end of year.................................... $ (341) $ (382)
======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE> 133
PIERCE & STEVENS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS
(dollars in thousands)
AUGUST 19, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include the accounts of Pierce & Stevens
Corp. and Pratt & Lambert de Mexico S.A. de C.V. These entities were affiliated
through their common parent corporation. Both of these entities were acquired by
Sovereign Specialty Chemicals, L.P. on August 19, 1996. All significant
intercompany accounts and transactions have been eliminated.
Description of Business
Pierce & Stevens Corp. and Pratt and Lambert de Mexico S.A. de C.V.
(together the "Company") were wholly-owned subsidiaries of Pratt & Lambert
United, Inc. ("Pratt & Lambert"). The Company develops, manufactures, and sells
specialty adhesives and coatings for a wide variety of customer applications
worldwide. The Company grants credit to customers under normal business terms
and generally does not require collateral. The Company has operating divisions
in Buffalo, New York; Carol Stream, Illinois; Kimberton, Pennsylvania; and
Mexico City, Mexico.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined in accordance with the last-in, first-out (LIFO) method of inventory
valuation.
Property, Plant and Equipment
Depreciation is provided principally on the straight-line method over the
respective estimated useful lives of the assets ranging from 5 to 30 years.
Capital leases are amortized over the estimated useful life of the asset or
lease term, as appropriate, using the straight-line method. Depreciation expense
includes amortization of assets recorded under capital leases. For income tax
purposes, accelerated methods of depreciation are used.
Revenue Recognition
Revenue is recognized when products are shipped to the customer.
Translation of Foreign Currencies
The functional currency for the Company's foreign operations is the
applicable local currency. The translation from the applicable foreign currency
to U.S. dollars is performed for revenue and expense accounts using a weighted
average exchange rate during the period. Gains or losses resulting from foreign
currency transactions are included in income.
Income Taxes
The Company was included in the consolidated federal income tax return of
Pratt & Lambert. The income tax provision is in accordance with an informal tax
sharing agreement with Pratt & Lambert wherein income tax expense is calculated
as if the Company filed on a stand alone basis.
Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory rates applicable to future years to
differences between the financial
F-26
<PAGE> 134
PIERCE & STEVENS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect of a change in tax rates is recognized in the period that includes
the enactment date.
Research and Development
Research and development costs are charged to expense as incurred. Research
and development expense for the year ended December 31, 1995 and the period
January 1, 1996 through August 19, 1996 was $2,163 and $1,236, respectively.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Allocation of Expenses
The Company shares certain services with other related divisions of Pratt &
Lambert. These services are allocated to the Company primarily on the basis of
estimated usage of services. A summary of these service and amounts allocated to
the Company are described in Note 2.
2. RELATED PARTY TRANSACTIONS
Pratt & Lambert has provided the Company with various administrative and
financial services. These services included safety and environmental compliance
programs, employee benefits administration, computer systems and networking
services, accounting services, purchasing functions, personnel services, quality
management, and various other services. It is Pratt & Lambert's policy to
allocate the centrally incurred costs primarily on the basis of usage.
Management believes these allocations and charges have been made on a reasonable
basis; however, they are not necessarily indicative of the level of expenses
which might have been incurred had the Company been operating on a stand-alone
basis.
Charges allocated to the Company for the above-mentioned services amounted
to approximately $847 and $258 for the year ended December 31, 1995 and the
period January 1, 1996 to August 19, 1996, respectively.
Also, the Company was part of a centralized cash management system with
Pratt & Lambert, whereby all cash disbursements of the Company were funded by,
and all cash receipts were transferred to, Pratt & Lambert. During 1995, the
Company was charged interest on the net liability to Pratt & Lambert. There was
no interest charge in 1996.
3. RETIREMENT PLANS
The Company has a pension plan covering all union employees. The Company's
funding policy has been to contribute annually at least the minimum required by
ERISA. The Plan provides monthly benefits under a flat benefit formula.
F-27
<PAGE> 135
PIERCE & STEVENS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost is as follows:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996
YEAR ENDED THROUGH
DECEMBER 31, 1995 AUGUST 19, 1996
----------------- -----------------
<S> <C> <C>
Service cost...................................... $ 23 $ 19
Interest cost..................................... 89 77
Actual return on plan assets...................... (220) (129)
Amortization and deferral......................... 113 41
----- -----
Net periodic pension cost......................... $ 5 $ 8
===== =====
</TABLE>
The average assumed discount rate is 7.5% and the average expected
long-term rate of return on plan assets is 8.5%.
In addition, the Company had a deferred profit sharing plan covering all
employees. The contribution is subject to the discretion of the Board of
Directors and is limited to 5% of compensation of all eligible employees as
defined by the plan. Total Company contributions to the plan amounted to $300
for the year ended December 31, 1995 and $154 for the period January 1, 1996
through August 19, 1996, respectively.
All Company employees were covered by a defined contribution pension plan
sponsored by Pratt & Lambert. Pratt & Lambert contributed one half of one
percent of each individual participants' earnings in Company stock to the
employees 401(k) account. Total Company contributions to the plan amounted to
$39 for the year ended December 31, 1995. This plan was discontinued as of
December 31, 1995.
All Company employees were also covered by a capital accumulation plan
sponsored by Pratt & Lambert. Under terms of the plan, participants could have
elected to contribute up to 7% of their defined compensation. In addition, the
Company contributed 100% of each participant's contribution up to a maximum of
2% of defined compensation. Total Company contributions to the plan amounted to
$150 for the year ended December 31, 1995 and $89 for the period January 1, 1996
through August 19, 1996.
4. INCOME TAXES
The components of income before income taxes consist of:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996
YEAR ENDED THROUGH
DECEMBER 31, 1995 AUGUST 19, 1996
----------------- ---------------
<S> <C> <C>
Domestic................................... $ 2,773 $ 1,545
Foreign.................................... (474) (45)
------ ------
$ 2,299 $ 1,500
====== ======
</TABLE>
F-28
<PAGE> 136
PIERCE & STEVENS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996
YEAR ENDED THROUGH
DECEMBER 31, 1995 AUGUST 19, 1996
----------------- ---------------
<S> <C> <C>
Current
Federal.................................. $ 770 $ 562
State.................................... 119 87
---- ----
889 649
Deferred
Domestic................................. 158 (52)
Foreign.................................. (98) (60)
---- ----
60 (112)
---- ----
$ 949 $ 537
==== ====
</TABLE>
Income tax expense differs from the amount computed by applying the
statutory income tax rate as follows:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996
YEAR ENDED THROUGH
DECEMBER 31, 1995 AUGUST 19, 1996
----------------- ---------------
<S> <C> <C>
Income tax expense at 34% rate............. $ 782 $ 510
Foreign jurisdiction rate differential..... 56 (37)
State taxes, net........................... 79 57
Other permanent differences................ 32 7
---- ----
$ 949 $ 537
==== ====
</TABLE>
5. OTHER POSTRETIREMENT BENEFITS
The Company, through Pratt & Lambert, provided certain health care and life
insurance benefits for all retired employees who met eligibility requirements.
The cost of these benefits was allocated to the Company by Pratt & Lambert. The
net obligation for these benefits was maintained by Pratt & Lambert. Charges for
postretirement healthcare and life insurance plans allocated to the Company by
Pratt & Lambert were $97 and $61 for the year ended December 31, 1995 and the
period January 1, 1996 to August 19, 1996, respectively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental cash flow data in addition to the
information provided in the Combined Statements of Cash Flows:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996
YEAR ENDED THROUGH
DECEMBER 31, 1995 AUGUST 19, 1996
----------------- ---------------
<S> <C> <C>
Cash paid for:
Income taxes............................. $ 746 $ 335
</TABLE>
F-29
<PAGE> 137
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
COMBINED BALANCE SHEETS
JUNE 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
Assets
Current Assets:
Cash and cash equivalents....................................................... $ 1,405
Trade accounts receivable, less allowance....................................... 17,506
Inventories..................................................................... 10,863
Other current assets............................................................ 2,855
-------
Total current assets.............................................................. 32,628
Property, plant and equipment, net................................................ 19,137
Goodwill, net..................................................................... 20,777
-------
Total assets...................................................................... $72,542
=======
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable................................................................ $12,574
Accrued and other expenses...................................................... 2,719
Current portions of long-term obligations....................................... 71
-------
Total current liabilities......................................................... 15,364
Long-term obligations, less contract portion...................................... 42,998
Other long-term liabilities....................................................... 4,858
-------
Stockholder's equity:
Common stock.................................................................... --
Retained earnings............................................................... 9,322
-------
Total stockholder's equity........................................................ 9,322
-------
Total liabilities and stockholder's equity........................................ $72,542
=======
</TABLE>
F-30
<PAGE> 138
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Net sales.............................................................. $58,522 $62,203
Cost of goods sold..................................................... 40,522 42,650
------- -------
Gross profit........................................................... 18,000 19,553
Selling, general and administrative expenses........................... 12,610 12,242
------- -------
Operating income....................................................... 5,390 7,311
Interest expense....................................................... 2,617 1,928
------- -------
Income from continuing operations before income taxes.................. 2,773 5,383
Income taxes........................................................... 1,515 2,470
------- -------
Income before discontinued operations.................................. 1,258 2,913
Discontinued operations
Loss on disposal of Tamms division................................... -- 151
------- -------
Net income............................................................. $ 1,258 $ 2,762
======= =======
</TABLE>
F-31
<PAGE> 139
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 1,258 $ 2,762
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 2,160 2,145
Deferred taxes....................................................... 484 1,561
Loss on disposal on Tamms business................................... -- 151
Changes in operating assets and liabilities:
Receivables....................................................... (4,937) (3,391)
Inventories....................................................... (1,087) (300)
Other current assets.............................................. (156) (633)
Accounts Payable and accrued expenses............................. 4,479 (5,693)
Other liabilities................................................. (1,143) (214)
------- -------
Net cash provided by (used in) operating activities.................... 1,058 (3,612)
Cash flows from investing activities:
Purchase consideration -- acquisitions............................... (41) (831)
Purchase of property, plant and equipment............................ (693) (188)
Proceeds from fixed assets........................................... 221 51
Proceeds from Disposal of Tamms division, net of expenses............ -- 4,716
------- -------
Net cash provided by (used in) investing activities.................... (513) 3,748
Cash flows from financing activities:
Advances/(Payments) on long-term liabilities due to related
companies, net.................................................... (243) 1,132
Payments on capital lease obligation................................. (28) (36)
Dividends paid....................................................... -- (2,341)
------- -------
Net cash used in financing activities.................................. (271) (1,245)
------- -------
Net increase (decrease) in cash and cash equivalents................... 274 (1,109)
Cash and cash equivalents at beginning of year......................... 896 2,514
------- -------
Cash and cash equivalents at end of period............................. $ 1,170 $ 1,405
======= =======
</TABLE>
F-32
<PAGE> 140
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On May 22, 1997 Laporte plc entered into an agreement with Sovereign
Specialty Chemicals LP, for the sale of its Adhesive and Sealants business in
North America. This business is conducted by Laporte Construction Chemicals
North America, Inc., Evode-Tanner Industries, Inc. and Mercer Products Company,
Inc. (collectively, the "Companies"). Laporte Construction Chemicals North
America, Inc. is engaged in the manufacture, sale and distribution of solvent
and water-based caulk, sealants and adhesives. This company is based in Mentor,
Ohio where its principal manufacturing facilities are located. Evode-Tanner
Industries, Inc., with a plant in Greenville, South Carolina, is engaged in the
manufacture of adhesives and chemicals for the textiles industry. Mercer
Products Company, Inc., is engaged in the extrusion of rubber and vinyl products
for sale to wholesale distributors, mainly in the flooring industry from its
plant in Eustis, Florida.
Principles of Combination
The financial statements of the Companies, which are under common control
as they are wholly owned subsidiaries of Laporte plc, have been combined to
present the entities as a single business. All significant intercompany balances
and transactions have been eliminated in combination.
Interim Financial Information
The financial information at June 30, 1997 and for the six months ended
June 30, 1996 and 1997 is unaudited but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Operating results for the six months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year.
F-33
<PAGE> 141
INDEPENDENT AUDITORS' REPORT
Board of Directors
Laporte plc:
We have audited the accompanying combined balance sheets of Laporte
Construction Chemicals North America, Inc., Evode-Tanner Industries, Inc. and
Mercer Products Company, Inc. (indirect wholly-owned subsidiaries of Laporte
plc) as of December 31, 1996 and 1995, and the related combined statements of
operations and cash flows for each of the years in the three-year period ended
December 31, 1996. These combined financial statements are the responsibility of
Laporte plc's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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 that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Laporte Construction
Chemicals North America, Inc., Evode-Tanner Industries, Inc. and Mercer Products
Company, Inc. (indirect wholly-owned subsidiaries of Laporte plc) at December
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996 in conformity
with generally accepted accounting principles in the United States of America.
KPMG AUDIT PLC
London, England
16 June 1997
F-34
<PAGE> 142
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1996 1995
------ ------
$000 $000
<S> <C> <C>
Assets
Current Assets:
Cash..................................................................... 2,514 896
Trade accounts receivable, less allowance for doubtful accounts of $458
in 1996 and $422 in 1995.............................................. 13,747 13,961
Due from affiliated companies............................................ 448 669
Inventories (notes 3 and 11)............................................. 10,563 10,270
Net assets of discontinued operations (note 5)........................... 4,589 4,212
Prepaid expenses and other current assets (note 6)....................... 1,232 2,489
Deferred tax asset (note 9).............................................. 2,240 2,275
------ ------
Total current assets....................................................... 35,333 34,772
Long-term receivable -- affiliated companies............................... -- 1,829
Property, plant and equipment, net (notes 4 and 8)......................... 19,815 20,862
Goodwill less accumulated amortization of $20,906 in 1996
and $18,247 in 1995...................................................... 22,107 24,766
Deferred tax asset (note 9).............................................. -- 619
------ ------
Total assets............................................................... 77,255 82,848
====== ======
Liabilities and Stockholder's Equity
Current liabilities:
Current instalments of obligations under capital leases (note 8)......... 71 62
Accounts payable and accrued expenses.................................... 15,545 12,132
Deferred purchase consideration (note 2)................................. 1,995 1,477
Income taxes payable..................................................... 2,413 --
Due to affiliated companies.............................................. 919 1,425
------ ------
Total current liabilities.................................................. 20,943 15,096
Long-term payable -- parent and affiliated companies....................... 38,271 49,646
Obligation under capital lease, excluding current instalments (note 8)..... 3,631 3,702
Other liabilities (note 7)................................................. 5,509 7,687
------ ------
Total liabilities.......................................................... 68,354 76,131
Commitments and contingencies (notes 8, 12 and 13)
Stockholder's equity:
Common stock (note 10)................................................... -- --
Retained earnings........................................................ 8,901 6,717
------ ------
Total stockholder's equity................................................. 8,901 6,717
------ ------
Total liabilities and stockholder's equity................................. 77,255 82,848
====== ======
</TABLE>
See accompanying notes to combined financial statements
F-35
<PAGE> 143
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
$000 $000 $000
<S> <C> <C> <C>
Net sales................................................... 119,218 93,519 86,130
Cost of goods sold (note 11)................................ (82,507) (67,264) (59,853)
------- ------- -------
Gross profit................................................ 36,711 26,255 26,277
Selling, general and administrative expenses................ (21,776) (16,885) (14,001)
Management fees (note 11)................................... (1,369) (1,320) (1,216)
Amortization of goodwill.................................... (2,659) (2,664) (2,711)
------- ------- -------
Operating income............................................ 10,907 5,386 8,349
Interest expense (note 11).................................. (4,462) (4,242) (3,537)
------- ------- -------
Income from continuing operations before income taxes....... 6,445 1,144 4,812
------- ------- -------
Income taxes (note 9)..................................... (3,502) (1,385) (2,845)
------- ------- -------
Income/(loss) before discontinued operations................ 2,943 (241) 1,967
Discontinued operations (notes 5
and 9)
Loss from operations of Tamms division.................... -- (910) (228)
Loss on disposal of Tamms division........................ -- (2,115) --
------- ------- -------
Net income/(loss)........................................... 2,943 (3,266) 1,739
Retained earnings at beginning of year...................... 6,717 9,983 8,244
Dividends................................................... (759) -- --
------- ------- -------
Retained earnings at end of year............................ 8,901 6,717 9,983
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements
F-36
<PAGE> 144
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------- ------- ------
$000 $000 $000
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss)............................................... 2,943 (3,266) 1,739
Adjustments to reconcile net income/(loss) to net cash provided
by continuing operations:
Depreciation and amortization................................... 4,304 4,078 3,806
Deferred taxes.................................................. 964 (64) 813
Loss from operations of Tamms business.......................... -- 910 228
Loss on disposal on Tamms business.............................. -- 2,115 --
Changes in operating assets and liabilities:
Receivables................................................... 435 240 (2,319)
Inventories................................................... (293) 975 (752)
Prepaid expenses and other current assets..................... 1,029 (250) 169
Payables and accrued expenses................................. 2,907 (799) 207
Other liabilities............................................. (748) 189 (861)
Income taxes payable.......................................... 2,641 (507) 974
------- ------- ------
Net cash provided by continuing operations........................ 14,182 3,621 4,004
Net cash used in discontinued operations.......................... (377) (1,310) (194)
------- ------- ------
Net cash provided by operating activities......................... 13,805 2,311 3,810
------- ------- ------
Cash flows from investing activities:
Purchase consideration -- acquisitions.......................... (1,222) (15,714) (716)
Purchase of property, plant and equipment....................... (1,195) (1,577) (2,097)
Disposal of fixed assets........................................ 597 -- --
Disposal of Tamms division, net of expenses..................... -- -- --
------- ------- ------
Net cash used in investing activities............................. (1,820) (17,291) (2,813)
------- ------- ------
Cash flows from financing activities:
Advances/(Payments) on long-term liabilities due to related
companies..................................................... (9,546) 13,214 (521)
Payments on capital lease obligation............................ (62) (11) (10)
Dividends paid.................................................. (759) -- --
------- ------- ------
Net cash provided by/(used in) financing activities............... (10,367) 13,203 (531)
------- ------- ------
Net increase/(decrease) in cash................................... 1,618 (1,777) 466
Cash at beginning of year......................................... 896 2,673 2,207
------- ------- ------
Cash at end of year............................................... 2,514 896 2,673
======= ======= ======
</TABLE>
The companies paid $4,462, $4,242 and $3,537 for interest and Nil, $1,956
and $1,058 for income taxes during the years ended December 31, 1996, 1995 and
1994 respectively.
See accompanying notes to combined financial statements
F-37
<PAGE> 145
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On May 22, 1997 Laporte plc entered into an agreement with Sovereign
Specialty Chemicals L.P. for the sale of its Adhesive and Sealants business in
North America. This business is conducted by Laporte Construction Chemicals
North America, Inc., Evode-Tanner Industries, Inc. and Mercer Products Company,
Inc. (collectively, the "Companies"). Laporte Construction Chemicals North
America, Inc. is engaged in the manufacture, sale and distribution of solvent
and water-based caulk, sealants and adhesives. This company is based in Mentor,
Ohio where its principal manufacturing facilities are located. Evode-Tanner
Industries, Inc., with a plant in Greenville, South Carolina, is engaged in the
manufacture of adhesives and chemicals for the textiles industry. Mercer
Products Company, Inc. is engaged in the extrusion of rubber and vinyl products
for sale to wholesale distributors, mainly in the flooring industry from its
plant in Eustis, Florida.
(a) Principles of Combination
The financial statements of the Companies, which are under common
control as they are wholly owned subsidiaries of Laporte plc, have been
combined to present the entities as a single business. All significant
intercompany balances and transactions have been eliminated in combination.
The accounting basis of Laporte plc in the Companies has been
reflected in the accompanying combined financial statements. As such, the
goodwill resulting from the acquisition of the Companies, together with
related debt (shown as long-term payable -- parent and affiliated
Companies) incurred by Laporte plc has been "pushed-down" and is shown in
the accompanying combined financial statements. Interest expense associated
with the debt "pushed-down" has also been reflected in the accompanying
combined financial statements.
(b) Inventories
Inventories are stated at the lower of cost, using the first-in,
first-out method, or market.
(c) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Plant held under
capital lease is stated at the present value of minimum lease payments.
Depreciation on plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Plant held under
capital leases and leasehold improvements is amortized straight line over
the shorter of the lease term or estimated useful life of the asset. The
following table summarizes the estimated useful lives of the Companies'
property, plant and equipment:
<TABLE>
<CAPTION>
YEARS
--------------
<S> <C>
Building..................................... 40
Machinery and equipment...................... 15
Leasehold improvements....................... Term of lease
</TABLE>
(d) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis over
the expected periods to be benefited, which
F-38
<PAGE> 146
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
is 15 years. The Companies assess the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Companies' average cost of funds. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
(e) Income Taxes
The Companies do not file individual income tax returns, but rather
they are included within the consolidated Federal income tax return of
Laporte Inc. in the United States. For the purposes of these combined
financial statements income tax expense is calculated using the enacted
rates in the United States as if the Companies had been independent
entities.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance reduces
deferred tax assets when it is "more likely than not" that some portion or
all of the deferred tax assets will not be realized.
(f) Research and development
Research and development costs are expensed as incurred. Such costs
amounted to $1,468, $1,233 and $1,136 for the years ended December 31,
1996, 1995 and 1994, respectively.
(g) Advertising costs
Advertising costs are expensed as incurred. Advertising costs for the
years ended December 31, 1996, 1995 and 1994 amounted to $1,841, $1,131 and
$491, respectively.
(h) Commitments and Contingencies
Liabilities for loss contingencies, including environmental
remediation costs, arising from claims, assessments, litigation, fines and
penalties, and other sources are recorded when it is probable that a
liability has been incurred and the amount of the assessment and/or
remediation can be reasonably estimated. Recoveries from third parties
which are probable of realization are separately recorded, and are not
offset against the related environmental liability, in accordance with
Financial Accounting Standards Board Interpretation No. 39, Offsetting of
Amounts Related to Certain Contracts.
In October 1996, the American Institute of Certified Public
Accountants issued SOP 96-1, Environmental Remediation Liabilities. SOP
96-1 was adopted by the Companies on January 1, 1997 and requires, among
other things, environmental remediation liabilities to be accrued when the
criteria of SFAS No. 5, Accounting for Contingencies, have been met. The
SOP also provides guidance with respect to the measurement of the
remediation liabilities. Such account-
F-39
<PAGE> 147
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ing is consistent with the Companies' current method of accounting for
environmental remediation costs and, therefore, adoption of this new
Statement will not have a material impact on the Companies' financial
position, results of operations, or liquidity.
(i) Use of Estimates
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these combined financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(j) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Companies adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. Adoption of
this Statement did not have a material impact on the Companies' financial
position, results of operations, or liquidity.
(k) Fair Value of Financial Instruments
The carrying value of cash, trade accounts receivable, due from
affiliated companies, accounts payable and accrued expenses, due to
affiliated companies and other liabilities approximate to their fair value
because of the short-term maturity of these instruments.
It is not practical to determine the fair value of long-term
receivable and payable -- parent and affiliated companies because such
amounts, bearing interest in 1996, 1995 and 1994 of 9.4%, 8.3% and 7.3%,
respectively, have no stated maturity which makes it difficult to estimate
fair value with precision. The interest on the allocation of the debt
incurred by Laporte plc, when it originally acquired the Companies is dealt
with separately in note 11(c).
(2) ACQUISITION OF BUSINESS
On December 29, 1995, Laporte Construction Chemicals North America, Inc.
acquired the Darworth Company division of Ensign-Bickford Industries, Inc. for
$17,300 in cash. The Darworth division primarily manufactures, sells and
distributes latex (water) based caulk, sealants and adhesives. The acquisition
was recorded under the purchase method; and accordingly, the results of
operations of Darworth have been included in the accompanying combined
statements of operations since the date of acquisition. The purchase price was
allocated to the assets acquired and the liabilities assumed based on their
respective fair values. This resulted in goodwill of $7,779 which is being
amortized on straight-line basis over a period of 15 years.
The purchase agreement required that a deferred consideration be paid to
the former owners of the Darworth Company over a period of two years. At
December 31, 1996 and 1995 such deferred
F-40
<PAGE> 148
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
consideration amounted to $1,375 and $2,384 respectively. Other deferred
consideration relates to the acquisition of Magic Seal and Ohio Sealants, Inc.
(3) INVENTORIES
The components of inventories at December 31, 1996 and 1995, were as
follows:
<TABLE>
<CAPTION>
1995
1996 ------
------ $000
$000
<S> <C> <C>
Finished goods........................................... 6,396 6,597
Raw materials............................................ 4,167 3,673
------ ------
Total inventories........................................ 10,563 10,270
====== ======
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
At December 31, 1996 and 1995, property, plant and equipment was comprised
of the following items:
<TABLE>
<CAPTION>
1995
1996 -------
------- $000
$000
<S> <C> <C>
Land................................................... 756 648
Buildings.............................................. 12,181 12,462
Machinery and equipment................................ 18,932 19,161
Leasehold improvements................................. 309 309
-------- --------
32,178 32,580
Less accumulated depreciation and amortization......... (12,363) (11,718)
-------- --------
Property, plant and equipment, net..................... 19,815 20,862
======== ========
</TABLE>
(5) DISCONTINUED OPERATIONS
In December 1995, the Board of Directors of Laporte plc adopted a
restructuring program to rationalize divisions, reduce costs and refocus the
group. Among those businesses disposed of was the Tamms division of Laporte
Construction Chemicals North America, Inc. (LCCNA). The Tamms division, which
constituted a separate segment of the LCCNA business, was engaged in the
manufacture and sale of specialty concrete repair products, grouts and color
pigments. This division has been accounted for as a discontinued operation in
accordance with APB No. 30. As a result, a loss on disposal of $2,115 (net of
tax benefit of $1,320) has been recorded in the accompanying 1995 combined
statement of operations, consisting of a loss on disposal of the business of
$1,468 and a provision of $647 for anticipated operating losses until disposal.
The operating results of the Tamms business are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
1996 ------ ------
------ $000 $000
$000
<S> <C> <C> <C>
Sales.......................................... 16,994 17,165 19,849
====== ====== ======
Loss before income taxes....................... 269 1,467 370
Income taxes................................... (103) (557) (142)
------ ------ ------
Net loss....................................... 166 910 228
</TABLE>
F-41
<PAGE> 149
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The 1996 net loss of $166 was included in the provision for anticipated
operating losses at December 31, 1995.
The net assets of the Tamms business are summarized as follows:
<TABLE>
<CAPTION>
1995
1996 ------
------ $000
$000
<S> <C> <C>
Current assets........................................... 5,307 5,307
Plant and equipment, net................................. 3,152 2,939
Current liabilities...................................... (599) (599)
------ ------
Net assets of the Tamms business......................... 7,860 7,647
Net realizable value provision........................... (3,271) (3,435)
------ ------
Net assets of discontinued operations.................... 4,589 4,212
====== ======
</TABLE>
In March 1997, Laporte Construction Chemicals North America, Inc. sold its
Tamms division to Tamms Acquisition Corporation for $5,072 in cash before
expenses.
(6) PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 1996 and 1995 prepaid expenses and other current assets
were comprised of the following items:
<TABLE>
<CAPTION>
1995
1996 -----
----- $000
$000
<S> <C> <C>
Tax recoverable............................................. -- 228
Environmental remediation cost recovery (note 13)........... 584 883
Other....................................................... 648 1,378
----- -----
1,232 2,489
===== =====
</TABLE>
(7) OTHER LIABILITIES
At December 31, 1996 and 1995 other liabilities was comprised of the
following items:
<TABLE>
<CAPTION>
1995
1996 -----
----- $000
$000
<S> <C> <C>
Deferred taxes (note 9)..................................... 310 --
Wilkes-Barre lease obligation (note 8)...................... 1,650 1,830
Environmental remediation costs (note 13)................... 1,870 2,180
Deferred purchase consideration (note 2).................... 1,146 2,886
Other....................................................... 533 791
----- -----
5,509 7,687
===== =====
</TABLE>
(8) LEASES
Evode-Tanner Industries, Inc. is obligated under a capital lease that
expires in December 2008. The gross amount of buildings and related accumulated
amortization held under capital leases were $3,681 and $1,673, respectively, at
December 31, 1996 and $3,681 and $1,506, respectively, at December 31, 1995.
F-42
<PAGE> 150
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Companies have several non-cancellable operating leases, primarily for
buildings, automobiles and lift trucks, that expire at various dates through
2005. These leases generally contain renewal options for periods ranging from
three to five years and require the Companies to pay all executory costs such as
maintenance, taxes and insurance. Rental expense for operating leases excluding
the Wilkes-Barre lease for the years ended December 31, 1996, 1995 and 1994
amounted to $1,350, $976 and $1,241, respectively.
Future minimum lease payments under non-cancellable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1996 are:
<TABLE>
<CAPTION>
OPERATING
LEASES
YEAR ENDING DECEMBER 31 ---------
-------------------------------------------------------- CAPITAL $000
LEASES
-------
$000
<S> <C> <C>
1997.................................................... 569 1,833
1998.................................................... 569 1,711
1999.................................................... 620 1,603
2000.................................................... 620 1,367
2001.................................................... 620 1,034
Later years............................................. 4,643 1,953
------- -------
Total minimum lease payments............................ 7,641 9,501
=======
Less amount representing interest (at rates ranging from
12.36% to 15.96%)..................................... (3,939)
-------
Present value of net minimum capital lease payments..... 3,702
Less current instalments of obligations under capital
leases................................................ (71)
-------
Obligations under capital leases, excluding current
instalments........................................... 3,631
=======
</TABLE>
Operating lease payments include payments in respect of a leased facility
at Wilkes-Barre Township, Pennsylvania. This facility was established as a
manufacturing base for the Tamms division of Laporte Construction Chemicals
North America, Inc ("Tamms") in the early 1990's, but has subsequently been
decommissioned and is now only partly used for warehousing Tamms products. The
future minimum lease payments included for 1997, 1998, 1999, 2000, 2001 and
later years through 2005 are $550, $562 $575, $591, $604 and $1,954
respectively. As a result of the decommissioning, the difference between the
discounted future minimum lease rental payments and the discounted receipts from
a warehousing sub-let, has been recognized as a liability. At December 31, 1995
and 1996 the liability, which is included under the balance sheet caption "Other
liabilities", was $1,830 and $1,650, respectively. Prior to the completion of
the sale of the Companies to Sovereign Specialty Chemicals L.P., the
Wilkes-Barre lease liability will be assumed by an affiliated company.
F-43
<PAGE> 151
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INCOME TAXES
Total income taxes for the years ended December 31, 1996, 1995 and 1994
were allocated as follows:
<TABLE>
<CAPTION>
1995 1994
1996 -------- -----
------- $000 $000
$000
<S> <C> <C> <C>
Income from continuing operations............... 3,502 1,385 2,845
Discontinued operations......................... -- (1,877) (142)
----- ------ ------
Total........................................... 3,502 (492) 2,703
===== ====== ======
</TABLE>
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
DEFERRED TOTAL
CURRENT -------- -----
------- $000 $000
$000
<S> <C> <C> <C>
Year ended December 31, 1996:
U.S. Federal.................................... 2,582 548 3,130
State and local................................. 223 149 372
----- --- ------
Total........................................... 2,805 697 3,502
===== === ======
Year ended December 31, 1995:
U.S. Federal.................................... 529 596 1,125
State and local................................. 237 23 260
----- --- ------
Total........................................... 766 619 1,385
===== === ======
Year ended December 31, 1994:
U.S. Federal.................................... 1,908 548 2,456
State and local................................. 286 103 389
----- --- ------
Total........................................... 2,194 651 2,845
===== === ======
</TABLE>
Income tax expense attributable to income from continuing operations
differed from the amounts computed by applying the U.S. federal income tax rate
of 35 percent to pretax income from continuing operations as a result of the
following:
<TABLE>
<CAPTION>
1995 1994
1996 ----- -----
----- $000 $000
$000
<S> <C> <C> <C>
Computed "expected" tax expense................... 2,256 401 1,684
Increase in income taxes resulting from:
Goodwill and other expenses related to
acquisitions.................................... 752 805 848
State and local income taxes, net of federal
income tax benefit.............................. 241 168 253
Other............................................. 253 11 60
----- ----- -----
3,502 1,385 2,845
===== ===== =====
</TABLE>
F-44
<PAGE> 152
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below.
<TABLE>
<CAPTION>
1995
1996 ------
------ $000
$000
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts...................................... 250 261
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax Reform
Act of 1986............................................ 205 406
Intangibles, principally due to differences in
amortization........................................... 560 629
Deferred compensation,vacation and bonus accrual......... 545 570
Environmental accrual.................................... 380 328
Capital lease............................................ 639 600
State tax net operating loss carryforwards............... 153 217
Other accruals........................................... 450 198
Accrual for loss on discontinued operations.............. 1,211 1,320
Wilkes-Barre lease obligation............................ 631 700
------ ------
Total deferred tax assets................................ 5,024 5,229
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation........................................... (3,094) (2,335)
------ ------
Net deferred tax asset................................... 1,930 2,894
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not that the Companies will realize the benefits of these
deductible differences.
At December 31, 1996, the net deferred tax asset of $1,930 is included in
the balance sheet as a current asset of $2,240 and as a non-current liability
(within other liabilities) of $310. At December 31, 1995, the net deferred tax
asset of $2,894 is included in the balance sheet as a current asset of $2,275
and a non-current asset of $619.
F-45
<PAGE> 153
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMON STOCK
The common stock of the Companies at December 31, 1996 and 1995 is
summarized as follows:
<TABLE>
<CAPTION>
1995
1996 ----
---- $
$
<S> <C> <C>
Laporte Construction Chemicals North America, Inc............. -- --
No par value, 5,000,000 shares authorized, 505,980 shares
issued and outstanding
Evode-Tanner Industries, Inc. $1 par value, 300 shares
authorized,................................................. 270 270
270 shares issued and outstanding
Mercer Products Company, Inc.................................. 1 1
$0.1 par value, 1000 shares authorized, 10 shares issued and
outstanding
--- ---
Total common stock............................................ 271 271
=== ===
</TABLE>
(11) RELATED PARTY TRANSACTIONS
The Companies enter into transactions in the ordinary course of business
with the parent company and affiliates. The following table summarized the
Companies' most significant related party transactions:
<TABLE>
<CAPTION>
1995 1994
1996 ----- -----
----- $000 $000
$000
<S> <C> <C> <C>
Purchases of raw materials(a)..................... 6,285 9,014 9,075
Management fees (b)............................... 1,369 1,320 1,216
Interest (c)...................................... 3,874 3,740 2,372
</TABLE>
(a) Mercer Products Company, Inc., purchases raw materials from
AlphaGary Corporation, an affiliated company, for use in production. The
terms of the purchase are terms similar to the terms Mercer Products
Company, Inc. would have obtained from a third party.
(b) Laporte plc and Laporte Inc. provide services to the Companies,
including general management, treasury, tax, financial audit, financial
reporting, insurance and legal services. The Companies have been charged
for such services through corporate allocations. The amount of the charge
is dependent upon the total of anticipated allocable costs incurred, less
amounts charged as direct costs or expense rather than by allocation.
(c) These combined financial statements include an allocation of the
debt incurred by Laporte plc when it originally acquired the Companies.
Accordingly, interest expense at rates of 5.7%, 6.2% and 5.1% in 1996, 1995
and 1994, respectively, associated with such debt has been reflected in
these combined financial statements in addition to interest on funding
balances as shown in note 1 (k).
(12) EMPLOYEE BENEFIT PLANS
The Companies sponsor two defined contribution plans (an IRS qualified
401(k) plan and a money purchase pension plan). Participation in these plans is
available to all salaried and hourly employees of the Companies. Participating
employees contribute to the 401(k) plan based on a percentage of their
compensation and matched, based on a percentage of employee contributions,
F-46
<PAGE> 154
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
by the Companies. The Companies further contribute an amount based on a
percentage of employee's pay to the money purchase pension plan. The costs of
these plans amounted to $655 in 1996, $928 in 1995 and $578 in 1994.
The Companies have established a non-qualified deferred compensation plan
which permits key employees to defer a portion of their compensation, on a
pre-tax basis, until their retirement. The retirement benefit to be provided is
based on the amount of compensation deferred. Deferred compensation liability at
December 31, 1996 and 1995 amounted to $162 and $108, respectively. Deferred
compensation expense for the years ended December 31, 1996, 1995 and 1994
amounted to $43, $56 and $43, respectively.
(13) COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL REMEDIATION COSTS
In November of 1994, Evode-Tanner Industries, Inc. (ETI) entered into a
Consent Agreement with the state of South Carolina Bureau of Solid Waste and
Hazardous Waste Management requiring the completion of a Remedial Investigation
and Feasibility Study (RI/FS) at its manufacturing site. The existence of an old
waste burial site was discovered during an excavation project in 1991. ETI self
reported this situation and in its subsequent investigation learned that prior
owners had buried waste solvents in a pit on the property in the late 1970's and
early 1980's. ETI has engaged an environmental consultant to develop the site
environmental study (RI/FS Workplan), a remediation plan and remediation cost
estimates based upon that plan.
The total estimated remediation costs are approximately $2,900 (over 30
years), which principally relate to removal of soil and groundwater
contamination through vapour extraction and groundwater recovery and long term
monitoring following the remediation. The RI/FS Workplan is proceeding and is
scheduled for submittal to the state agency in September 1997. At the same time
ETI has installed and is presently operating an interim remediation system. To
date approximately $1,100 has been expended on this project.
In an agreement with the prior owners of the business and current landlord,
rent rebates are in place to cover 50% of the remediation cost up to a maximum
of $1,500. At December 31, 1996 and 1995 the amounts outstanding were $584 and
$883 respectively. ETI has accrued an additional $1,870 for the remaining
estimated liability, however, the payments are not considered to be fixed in
that they represent management's best estimates against current knowledge. The
cost estimate is based on utilizing technology that is presently in place and is
successfully removing the contaminants. Once the RI/FS is submitted, the state
agency will review the remediation plan for approval. The estimate of costs
could change as a result of 1) changes to the remediation plan required by the
state agency, 2) changes in technology available to treat the site, 3)
unforeseen circumstances existing at the site, and 4) differences due to
inflation. It is not possible to estimate the amounts which losses may exceed
accrued amounts at this time due to the above listed factors.
The US Environmental Protection Agency has identified the MIG/DeWane
Landfill site as a superfund site and issued a notice to Tamms identifying the
business as a "Potentially Responsible Party". Under the sale agreement for
Tamms, the Tamms Acquisition Corporation has agreed to a 50/50 share in the cost
of the Remedial Investigation and Feasibility Study and clean up to a maximum
cost of $250,000. On the sale of Laporte Chemicals Construction North America,
Inc. this contingency will revert to Laporte Inc.
F-47
<PAGE> 155
LAPORTE CONSTRUCTION CHEMICALS NORTH AMERICA, INC.,
EVODE-TANNER INDUSTRIES, INC. AND MERCER PRODUCTS COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LEGAL PROCEEDINGS
The Companies are involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Companies' combined financial position, results of operations or liquidity.
(14) BUSINESS AND CREDIT CONCENTRATIONS
The Companies are primarily producers of adhesives and sealants, which are
sold to a number of markets, including the construction, automotive and
industrial markets. The Companies sell domestically to customers in the
midwestern and eastern United States. A significant portion of the Companies'
sales are to customers in the construction industry, and as such the Companies
are affected by the well-being of that industry. The Companies do not require
collateral and all their accounts receivable are unsecured; and while they
believe their trade receivables will be collected, the Companies anticipate that
in the event of default they will follow normal collection procedures. Overall,
credit risk related to the Companies is limited due to a large number of
customers in differing industries and geographic areas.
No single customer accounted for more than five percent of the Companies'
sales in 1996, 1995 or 1994, and no accounts receivable from any customer
exceeded $1,058. The Companies estimate an allowance for doubtful accounts based
on the credit worthiness of its customers as well as general economic
conditions. Consequently, an adverse change in those factors could affect the
Companies' estimate of its bad debt.
The Companies rely on several vendors to supply raw materials needed for
its products. Although there are a limited number of manufacturers capable of
supplying these needs, the Companies believe that other suppliers could provide
for the companies needs in comparable terms. Abrupt changes in the supply flow
could, however cause a delay in manufacturing and possible inability to meet
sales commitments on schedule and a possible loss of sales, which would affect
operating results adversely.
(15) POST BALANCE STATEMENT
In March 1997 the Tamms division was sold to the Tamms Acquisition
Corporation as disclosed in note 5 to the combined financial statements.
On May 22, 1997 Laporte plc entered into an agreement with Sovereign
Specialty Chemicals L.P. for the sale of its Adhesives and Sealants business in
North America as disclosed in note 1 of the combined financial statements.
Dividends declared in 1997 amount to $2,340 being $1,225 in respect of
Mercer Products Company, Inc. and $1,115 in respect of Evode Tanner Industries,
Inc.
F-48
<PAGE> 156
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Summary.................................... 1
Risk Factors............................... 13
Use of Proceeds............................ 19
Capitalization............................. 19
Selected Historical Financial Data......... 20
Unaudited Pro Forma Financial Statements... 22
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................ 30
Business................................... 33
Management................................. 41
Security Ownership of Certain Beneficial
Owners and Management.................... 47
Certain Transactions....................... 48
Description of Senior Credit Facility...... 49
Description of the Exchange Notes.......... 51
The Exchange Offer......................... 85
Certain Federal Income Tax Consequences.... 94
Plan of Distribution....................... 94
Legal Matters.............................. 95
Experts.................................... 95
Index to Financial Statements.............. F-1
</TABLE>
PRELIMINARY PROSPECTUS
$125,000,000
SOVEREIGN SPECIALTY
CHEMICALS, INC.
OFFER TO EXCHANGE ITS 9 1/2% SENIOR
SUBORDINATED NOTES DUE 2007, SERIES B
FOR ANY AND ALL OUTSTANDING
9 1/2% SENIOR SUBORDINATED NOTES
DUE 2007
Sovereign Logo
,1998
<PAGE> 157
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company and SIA Adhesives are incorporated under the laws of the State
of Delaware. Section 145 of the General Corporation Law of the State of
Delaware, (the "Delaware Law") provides that a Delaware corporation may
indemnify any persons who were, are or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. A Delaware corporation may indemnify
any persons who are, were or are threatened to be made, a party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, provided that no indemnification is
permitted without judicial approval if the officer, director, employee or agent
is adjudged to be liable to the corporation. Where an officer, director,
employee or agent is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
The Delaware Law further authorizes a Delaware corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
The respective by-laws of the Company and SIA Adhesives provide that the
corporation shall indemnify, to the fullest extent permitted by the General
Corporation Law of the State of Delaware, any person who was or is a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he or she is or was a director or
officer of such corporation or other entity, or is or was serving at the request
of such corporation as a director, officer or member of another corporation,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding and that such indemnification shall continue as to an
indemnitee who has ceased to be a director or officer and shall inure to the
benefit of the indemnitee's heirs, executors and administrators. The by-laws of
the Company and SIA Adhesives further provide that any employee or agent of such
corporation, or any person serving at the request of such corporation an
employee or agent of another corporation, partnership, joint venture or other
enterprise shall be indemnified in the same manner as a director or officer of
such entity.
II-1
<PAGE> 158
The respective by-laws of the Company and SIA Adhesives provide that each
such corporation may purchase and maintain insurance on its own behalf and on
behalf of any person who is or was a director, officer, employee, fiduciary, or
agent of such corporation or was serving at the request of that corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, whether or not the
corporation would have the power to indemnify such person against such liability
under its by-laws.
Pierce & Stevens is incorporated under the laws of the State of New York.
Sections 722 and 723 of the Business Corporation Law of the State of New York
(the "New York Law") contain provisions permitting a New York corporation to
indemnify any person made a party to an action by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he,
his testator or intestate, is or was a director or officer of the corporation,
against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with the defense of such action, or in
connection with an appeal therein, except in relation to matters as to which
such director or officer is adjudged to have breached his duty to the
corporation under the New York Law.
A New York corporation may indemnify any person, made, or threatened to be
made, a party to an action or proceeding other than one by or in the right of
the corporation to procure a judgment in its favor, whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
The New York Law also authorizes a corporation to purchase and maintain
insurance to indemnify the corporation for any obligation which it incurs as a
result of the indemnification of directors and officers, to indemnify directors
and officers in instances in which they may be indemnified by the corporation,
and to indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of the New York
Law provided the contract of insurance covering such directors and officers
provides for a retention amount and for co-insurance.
The by-laws of Pierce & Stevens do not contain provisions regarding the
indemnification of directors and officers.
OSI Sealants is incorporated under the laws of the State of Illinois.
Section 8.75 of the Business Corporation Act of 1983 of the State of Illinois
(the "Illinois Law") contains provisions permitting an Illinois corporation to
indemnify any person who was or is a party, or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or who is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, if such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to
the best interests of the
II-2
<PAGE> 159
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause believe his or her conduct was unlawful.
An Illinois corporation may indemnify any person who was or is a party, or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, if such person
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to the best interests of the corporation, provided that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the corporation, unless, and
only to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability, but in
view of the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper.
The Illinois Law further authorizes an Illinois corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or who is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify such person against such liability
under the provisions of Section 8.75.
Mercer Products Company, Inc. is incorporated under the laws of the State
of New Jersey. Section 14A:3-5 of the New Jersey Business Corporation Act (the
"New Jersey Law") contains provisions permitting a New Jersey corporation to
indemnify a corporate agent against his expenses and layabouts in connection
with any proceeding involving the corporate agent by reason of his being or
having been such a corporate agent, other than a proceeding by or in the right
of the corporation, if (a) such corporate agent acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation; and (b) with respect to any criminal proceeding, such corporate
agent had not reasonable cause to believe his conduct was unlawful.
A New Jersey corporation may indemnify a corporate agent against his
expenses in connection with any proceeding by or in the right of the corporation
to procure a judgment in its favor which involves the corporate agent by reason
of his being or having been such corporate agent, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the corporation.
The New Jersey Law further authorizes a New Jersey corporation to purchase
and maintain insurance on behalf of any corporate agent against any expenses
incurred in any proceeding and any liabilities asserted against him in his
capacity as corporate agent, whether or not the corporation would have the power
to indemnify him against such liability under the provisions of the New Jersey
Law.
Tanner Chemicals, Inc. is incorporated under the laws of the State of New
Hampshire. Section 293-A:5 of the Business Corporation Act of the State of New
Hampshire (the "New Hampshire Law") contains provisions permitting a New
Hampshire corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
other than an action by or in the right of the corporation, by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or
II-3
<PAGE> 160
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
A New Hampshire corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the defense or settlement of the action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which the person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the corporation unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all circumstances of the case, the
person is fairly and reasonably entitled to indemnity for expenses which the
court shall deem proper.
The New Hampshire Law further authorizes a New Hampshire corporation to
purchase and maintain insurance on behalf of any person who is or a was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against this liability under the
provisions of the New Hampshire Law.
The respective by-laws of each of OSI Sealants, Mercer and Tanner provide
that the corporation shall indemnify any person who was or is a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he or she is or was a director or
officer of such corporation or other entity, or is or was serving at the request
of such corporation as a director, officer or member of another corporation so
long as such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of such corporation,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding and that such indemnification shall continue as to an
indemnitee who has ceased to be a director or officer and shall inure to the
benefit of the indemnitee's heirs, executors and administrators. The by-laws of
each of OSI Sealants, Mercer and Tanner further provide that any employee or
agent of such corporation, or any person serving at the request of such
corporation an employee or agent of another corporation, partnership, joint
venture or other enterprise shall be indemnified in the same manner as a
director or officer of such entity.
The respective by-laws of each of OSI Sealants, Mercer and Tanner provide
that each such corporation may purchase and maintain insurance on its own behalf
and on behalf of any person who is or was a director, officer, employee,
fiduciary, or agent of such corporation or was serving at the request of that
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity,
whether or not the corporation would have the power to indemnify such person
against such liability under its by-laws.
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<PAGE> 161
ITEM 21. EXHIBITS.
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of Sovereign Specialty Chemicals, Inc.*
3.2 By-Laws of Sovereign Specialty Chemicals, Inc.*
3.3 Certificate of Incorporation of Pierce & Stevens Corp.*
3.4 Bylaws of Pierce & Stevens Corp.*
3.5 Certificate of Incorporation of SIA Adhesives, Inc.*
3.6 By-laws of SIA Adhesives, Inc.*
3.7 Amended and Restated Articles of Incorporation of OSI Sealants, Inc.*
3.8 By-Laws of OSI Sealants, Inc., as amended.*
3.9 Certificate of Incorporation of Mercer Products Company, Inc.*
3.10 By-Laws of Mercer Products Company, Inc., as amended.*
3.11 Articles of Incorporation of Tanner Chemicals, Inc.*
3.12 By-Laws of Tanner Chemicals, Inc., as amended.*
4.1 Indenture dated August 1, 1997 among the Company, the Guarantors and The Bank of
New York as trustee.*
4.2 Forms of 9 1/2% Senior Subordinated Notes due 2007, Series A and Series B Notes
(contained in Exhibit 4.1 as Exhibit A and B thereto, respectively).*
4.3 Form of Guarantee*
4.4 Registration Rights Agreement dated August 5, 1997 among the Company, the
Guarantors, Chase Securities Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation.*
4.5 Amended and Restated Credit Agreement, dated August 5, 1997 between the Company,
the Guarantors and The Chase Manhattan Bank, as administrative agent.*
5.1 Opinion and consent of Kirkland & Ellis.*
10.1 Employment Agreement, dated March 31, 1996 among the Parent Partnership, Sovereign
Specialty Chemicals, Inc. and Robert B. Covalt.*
10.2 Executive Note, dated July 31, 1997, issued by Robert B. Covalt to the Parent
Partnership.*
10.3 Employment Agreement, dated March 31, 1996 among the Parent Partnership, Sovereign
Specialty Chemicals, Inc. and William T. Schram.*
10.4 Executive Note, dated July 31, 1997, issued by William T. Schram to the Parent
Partnership.*
10.5 Executive Note, dated July 31, 1997, issued by William T. Schram to the Parent
Partnership.*
10.6 Employment Agreement, dated August 19, 1996 between John H. Edholm and Pierce &
Stevens.*
10.7 Employment Agreement, dated March 31, 1996 between SIA Adhesives and Gerard A.
Loftus.*
10.8 Employment Agreement, dated August 19, 1996 between Richard W. Johnston and Pierce
& Stevens.*
10.9 Consulting Agreement, dated October 1, 1996 between the Parent Partnership and
Neal G. Reddeman.*
10.10 Letter Agreements, dated September 8, 1997, February 17, 1997 and October 25, 1996
between the Parent Partnership and Garnett Consulting.*
10.11 Assignment and Assumption Agreement dated July 31, 1997 among the Parent
Partnership, Sovereign Chemicals Corporation and the Company.*
10.12 1997 Management Incentive Plan.*
10.13 1997 Incentive Bonus Program.*
10.14 Asset Purchase Agreement dated March 31, 1996 among The B.F. Goodrich Company,
Sovereign Engineered Adhesives, L.L.C. and the Parent Partnership.*
10.15 Purchase Agreement, dated August 19, 1996 among The Sherwin-Williams Company,
Pierce & Stevens Canada, Inc., the Parent Partnership and P&S Holdings, Inc.*
</TABLE>
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<PAGE> 162
<TABLE>
<S> <C>
10.16 Stock Purchase Agreement dated May 22, 1997 between Laporte Inc. and the Parent
Partnership.*
10.17 Side Letter between Laporte Inc., the Parent Partnership and the Company.*
12.1 Statement of Computation of Ratios.*
21.1 Subsidiaries of the Company and the Guarantors.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of KPMG Audit PLC*
23.3 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee on Form T-1.
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange
II-6
<PAGE> 163
Act of 1934) that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
<PAGE> 164
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sovereign
Speciality Chemicals, Inc. has duly caused this Registration Statement on Form
S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Chicago, State of Illinois, on November 3, 1997.
SOVEREIGN SPECIALTY CHEMICALS, INC.
By: /s/ ROBERT B. COVALT
------------------------------------
Robert B. Covalt
Chairman, Chief Executive Officer
and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Covalt and William T. Schram, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
* * * *
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 and Power of Attorney have been signed on
November 3, 1997 by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ ROBERT B. COVALT Chairman of the Board, Chief Executive
- --------------------------------------------- Officer, President and Director (Principal
Robert B. Covalt Executive Officer)
/s/ WILLIAM T. SCHRAM Vice President, Chief Financial Officer and
- --------------------------------------------- Director (Principal Financial and Accounting
William T. Schram Officer)
/s/ NEIL G. REDDEMAN Director
- ---------------------------------------------
Neil G. Reddeman
/s/ CHARLES A. ALDAG Director
- ---------------------------------------------
Charles A. Aldag
/s/ CAROL E. BRAMSON Director
- ---------------------------------------------
Carol E. Bramson
</TABLE>
II-8
<PAGE> 165
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ LAWRENCE E. FOX Director
- ---------------------------------------------
Lawrence E. Fox
/s/ ERIC C. LARSON Director
- ---------------------------------------------
Eric C. Larson
/s/ KARL D. LOOS Director
- ---------------------------------------------
Karl D. Loos
/s/ REEVE B. WAUD Director
- ---------------------------------------------
Reeve B. Waud
</TABLE>
II-9
<PAGE> 166
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pierce &
Stevens Corp. has duly caused this Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Buffalo, State of New York, on November 3, 1997.
PIERCE & STEVENS CORP.
By: /s/ JOHN H. EDHOLM
------------------------------------
John H. Edholm
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Covalt and William T. Schram, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
* * * *
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 and Power of Attorney have been signed on
November 3, 1997 by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ JOHN H. EDHOLM President and Chief Executive Officer
- --------------------------------------------- (Principal Executive Officer)
John H. Edholm
/s/ WILLIAM T. SCHRAM Vice President -- Finance
- --------------------------------------------- (Principal Financial and Accounting Officer)
William T. Schram
/s/ ROBERT B. COVALT Director
- ---------------------------------------------
Robert B. Covalt
/s/ REEVE B. WAUD Director
- ---------------------------------------------
Reeve B. Waud
/s/ CAROL E. BRAMSON Director
- ---------------------------------------------
Carol E. Bramson
/s/ ERIC C. LARSON Director
- ---------------------------------------------
Eric C. Larson
</TABLE>
II-10
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, SIA Adhesives,
Inc. has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Akron,
State of Ohio, on November 3, 1997.
SIA ADHESIVES, INC.
By: /s/ GERARD A. LOFTUS
------------------------------------
Gerard A. Loftus
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Covalt and William T. Schram, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
* * * *
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 and Power of Attorney have been signed on
November 3, 1997 by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------ -------------------------------------------------
<C> <S>
/s/ GERARD A. LOFTUS President and Chief Executive Officer
- ------------------------------------------ (Principal Executive Officer)
Gerard A. Loftus
/s/ WILLIAM T. SCHRAM Vice President and Assistant Secretary
- ------------------------------------------ (Principal Financial and Accounting Officer)
William T. Schram
/s/ ROBERT B. COVALT Director
- ------------------------------------------
Robert B. Covalt
/s/ REEVE B. WAUD Director
- ------------------------------------------
Reeve B. Waud
/s/ CAROL E. BRAMSON Director
- ------------------------------------------
Carol E. Bramson
/s/ ERIC C. LARSON Director
- ------------------------------------------
Eric C. Larson
</TABLE>
II-11
<PAGE> 168
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, OSI Sealants,
Inc. North America, Inc. has duly caused this Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Mentor, State of Ohio, on November 3, 1997.
OSI SEALANTS, INC.
By: /s/ PETER LONGO
------------------------------------
Peter Longo
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Covalt and William T. Schram, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
* * * *
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 and Power of Attorney have been signed on
November 3, 1997 by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------ -------------------------------------------------
<C> <S>
/s/ PETER LONGO President and Chief Executive Officer
- ------------------------------------------ (Principal Executive Officer)
Peter Longo
/s/ WILLIAM T. SCHRAM Vice President -- Finance and Administration
- ------------------------------------------ (Principal Financial and Accounting Officer)
William T. Schram
/s/ ROBERT B. COVALT Director
- ------------------------------------------
Robert B. Covalt
/s/ REEVE B. WAUD Director
- ------------------------------------------
Reeve B. Waud
/s/ CAROL E. BRAMSON Director
- ------------------------------------------
Carol E. Bramson
/s/ ERIC C. LARSON Director
- ------------------------------------------
Eric C. Larson
</TABLE>
II-12
<PAGE> 169
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Mercer Products
Company, Inc. has duly caused this Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Umatilla, State of Florida, on November 3, 1997.
MERCER PRODUCTS COMPANY, INC.
By: /s/ MICHAEL PRUDE
------------------------------------
Michael Prude
Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Covalt and William T. Schram, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
* * * *
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 and Power of Attorney have been signed on
November 3, 1997 by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------ -------------------------------------------------
<C> <S>
/s/ MICHAEL PRUDE Vice President and Secretary
- ------------------------------------------ (Principal Executive Officer)
Michael Prude
/s/ WILLIAM T. SCHRAM Vice President -- Finance and Administration
- ------------------------------------------ (Principal Financial and Accounting Officer)
William T. Schram
/s/ ROBERT B. COVALT Director
- ------------------------------------------
Robert B. Covalt
/s/ REEVE B. WAND Director
- ------------------------------------------
Reeve B. Waud
/s/ CAROL E. BRAMSON Director
- ------------------------------------------
Carol E. Bramson
/s/ ERIC C. LARSON Director
- ------------------------------------------
Eric C. Larson
</TABLE>
II-13
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Tanner
Chemicals, Inc. has duly caused this Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Greenville, State of South Carolina, on November 3, 1997.
TANNER CHEMICALS, INC.
By: /s/ MICHAEL PRUDE
------------------------------------
Michael Prude
President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Covalt and William T. Schram, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
* * * *
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 and Power of Attorney have been signed on
November 3, 1997 by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------ -------------------------------------------------
<C> <S>
/s/ MICHAEL PRUDE President and Secretary
- ------------------------------------------ (Principal Executive Officer)
Michael Prude
/s/ WILLIAM T. SCHRAM Vice President Finance and Administration
- ------------------------------------------ (Principal Financial and Accounting Officer)
William T. Schram
/s/ ROBERT B. COVALT Director
- ------------------------------------------
Robert B. Covalt
/s/ REEVE B. WAUD Director
- ------------------------------------------
Reeve B. Waud
/s/ CAROL E. BRAMSON Director
- ------------------------------------------
Carol E. Bramson
/s/ ERIC C. LARSON Director
- ------------------------------------------
Eric C. Larson
</TABLE>
II-14
<PAGE> 171
The Company and SIA Adhesives are incorporated under the laws of the State
of Delaware. Section 145 of the General Corporation Law of the State of
Delaware, (the "Delaware Law") provides that a Delaware corporation may
indemnify any persons who were, are or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. A Delaware corporation may indemnify
any persons who are, were or are threatened to be made, a party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, provided that no indemnification is
permitted without judicial approval if the officer, director, employee or agent
is adjudged to be liable to the corporation. Where an officer, director,
employee or agent is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
The Delaware Law further authorizes a Delaware corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
The respective by-laws of the Company and SIA Adhesives provide that the
corporation shall indemnify, to the fullest extent permitted by the General
Corporation Law of the State of Delaware, any person who was or is a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he or she is or was a director or
officer of such corporation or other entity, or is or was serving at the request
of such corporation as a director, officer or member of another corporation,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding and that such indemnification shall continue as to an
indemnitee who has ceased to be a director or officer and shall inure to the
benefit of the indemnitee's heirs, executors and administrators. The by-laws of
the Company and SIA Adhesives further provide that any employee or agent of such
corporation, or any person serving at the request of such corporation an
employee or agent of another corporation, partnership, joint venture or other
enterprise shall be indemnified in the same manner as a director or officer of
such entity.
The respective by-laws of the Company and SIA Adhesives provide that each
such corporation may purchase and maintain insurance on its own behalf and on
behalf of any person who is or was a director, officer, employee, fiduciary, or
agent of such corporation or was serving at the request of that corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him
II-15
<PAGE> 172
or her in any such capacity, whether or not the corporation would have the power
to indemnify such person against such liability under its by-laws.
Pierce & Stevens is incorporated under the laws of the State of New York.
Sections 722 and 723 of the Business Corporation Law of the State of New York
(the "New York Law") contain provisions permitting a New York corporation to
indemnify any person made a party to an action by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he,
his testator or intestate, is or was a director or officer of the corporation,
against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with the defense of such action, or in
connection with an appeal therein, except in relation to matters as to which
such director or officer is adjudged to have breached his duty to the
corporation under the New York Law.
A New York corporation may indemnify any person, made, or threatened to be
made, a party to an action or proceeding other than one by or in the right of
the corporation to procure a judgment in its favor, whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
The New York Law also authorizes a corporation to purchase and maintain
insurance to indemnify the corporation for any obligation which it incurs as a
result of the indemnification of directors and officers, to indemnify directors
and officers in instances in which they may be indemnified by the corporation,
and to indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of the New York
Law provided the contract of insurance covering such directors and officers
provides for a retention amount and for co-insurance.
The by-laws of Pierce & Stevens do not contain provisions regarding the
indemnification of directors and officers.
OSI Sealants is incorporated under the laws of the State of Illinois.
Section 8.75 of the Business Corporation Act of 1983 of the State of Illinois
(the "Illinois Law") contains provisions permitting an Illinois corporation to
indemnify any person who was or is a party, or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or who is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, if such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause believe his or her conduct was unlawful.
An Illinois corporation may indemnify any person who was or is a party, or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person is or was a
II-16
<PAGE> 173
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit,
if such person acted in good faith and in a manner he or she reasonably believed
to be in, or not opposed to the best interests of the corporation, provided that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the corporation, unless, and
only to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability, but in
view of the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper.
The Illinois Law further authorizes an Illinois corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or who is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify such person against such liability
under the provisions of Section 8.75.
Mercer Products Company, Inc. is incorporated under the laws of the State
of New Jersey. Section 14A:3-5 of the New Jersey Business Corporation Act (the
"New Jersey Law") contains provisions permitting a New Jersey corporation to
indemnify a corporate agent against his expenses and layabouts in connection
with any proceeding involving the corporate agent by reason of his being or
having been such a corporate agent, other than a proceeding by or in the right
of the corporation, if (a) such corporate agent acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation; and (b) with respect to any criminal proceeding, such corporate
agent had not reasonable cause to believe his conduct was unlawful.
A New Jersey corporation may indemnify a corporate agent against his
expenses in connection with any proceeding by or in the right of the corporation
to procure a judgment in its favor which involves the corporate agent by reason
of his being or having been such corporate agent, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the corporation.
The New Jersey Law further authorizes a New Jersey corporation to purchase
and maintain insurance on behalf of any corporate agent against any expenses
incurred in any proceeding and any liabilities asserted against him in his
capacity as corporate agent, whether or not the corporation would have the power
to indemnify him against such liability under the provisions of the New Jersey
Law.
Tanner Chemicals, Inc. is incorporated under the laws of the State of New
Hampshire. Section 293-A:5 of the Business Corporation Act of the State of New
Hampshire (the "New Hampshire Law") contains provisions permitting a New
Hampshire corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
other than an action by or in the right of the corporation, by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with the action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
II-17
<PAGE> 174
A New Hampshire corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the defense or settlement of the action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which the person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the corporation unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all circumstances of the case, the
person is fairly and reasonably entitled to indemnity for expenses which the
court shall deem proper.
The New Hampshire Law further authorizes a New Hampshire corporation to
purchase and maintain insurance on behalf of any person who is or a was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against this liability under the
provisions of the New Hampshire Law.
The respective by-laws of each of OSI Sealants, Mercer and Tanner provide
that the corporation shall indemnify any person who was or is a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he or she is or was a director or
officer of such corporation or other entity, or is or was serving at the request
of such corporation as a director, officer or member of another corporation so
long as such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of such corporation,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding and that such indemnification shall continue as to an
indemnitee who has ceased to be a director or officer and shall inure to the
benefit of the indemnitee's heirs, executors and administrators. The by-laws of
each of OSI Sealants, Mercer and Tanner further provide that any employee or
agent of such corporation, or any person serving at the request of such
corporation an employee or agent of another corporation, partnership, joint
venture or other enterprise shall be indemnified in the same manner as a
director or officer of such entity.
The respective by-laws of each of OSI Sealants, Mercer and Tanner provide
that each such corporation may purchase and maintain insurance on its own behalf
and on behalf of any person who is or was a director, officer, employee,
fiduciary, or agent of such corporation or was serving at the request of that
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity,
whether or not the corporation would have the power to indemnify such person
against such liability under its by-laws.
II-18
<PAGE> 175
3.1 CERTIFICATE OF INCORPORATION OF SOVEREIGN SPECIALTY CHEMICALS, INC.
3.2 BY-LAWS OF SOVEREIGN SPECIALTY CHEMICALS, INC.
3.3 CERTIFICATE OF INCORPORATION OF PIERCE & STEVENS CORP.
3.4 BYLAWS OF PIERCE & STEVENS CORP.
3.5 CERTIFICATE OF INCORPORATION OF SIA ADHESIVES, INC.
3.6 BY-LAWS OF SIA ADHESIVES, INC.
3.7 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF OSI SEALANTS, INC.
3.8 BY-LAWS OF OSI SEALANTS, INC., AS AMENDED.
3.9 CERTIFICATE OF INCORPORATION OF MERCER PRODUTS COMPANY, INC.
3.10 BY-LAWS OF MERCER PRODUCTS COMPANY, INC., AS AMENDED.
3.11 ARTICLES OF INCORPORATION OF TANNER CHEMICALS, INC.
3.12 BY-LAWS OF TANNER CHEMICALS, INC., AS AMENDED.
4.1 INDENTURE DATED AUGUST 1, 1997 AMONG THE COMPANY, THE GUARANTORS AND THE
BANK OF NEW YORK AS TRUSTEE.
4.2 Forms of 9 1/2% Senior Subordinated Notes due 2007, Series A and Series
B Notes (contained in Exhibit 4.1 as Exhibit A and B thereto, respectively).
4.3 FORM OF GUARANTEE
4.4 Registration Rights Agreement dated August 5, 1997 among the Company,
the Guarantors, Chase Securities Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation.
4.5 Amended and Restated Credit Agreement, dated August 5, 1997 between the
Company, the Guarantors and The Chase Manhattan Bank, as administrative agent.
10.1 Employment Agreement, dated March 31, 1996 among the Parent
Partnership, Sovereign Specialty Chemicals, Inc. and Robert B. Covalt.
10.2 EXECUTIVE NOTE, DATED JULY 31, 1997, ISSUED BY ROBERT B. COVALT TO THE
PARENT PARTNERSHIP.
10.3 Employment Agreement, dated March 31, 1996 among the Parent
Partnership, Sovereign Specialty Chemicals, Inc. and William T. Schram.
10.4 EXECUTIVE NOTE, DATED JULY 31, 1997, ISSUED BY WILLIAM T. SCHRAM TO THE
PARENT PARTNERSHIP.
10.5 EXECUTIVE NOTE, DATED JULY 31, 1997, ISSUED BY WILLIAM T. SCHRAM TO THE
PARENT PARTNERSHIP.
10.6 EMPLOYMENT AGREEMENT, DATED AUGUST 19, 1996 BETWEEN JOHN H. EDHOLM AND
PIERCE & STEVENS.
10.7 EMPLOYMENT AGREEMENT, DATED MARCH 31, 1996 BETWEEN SIA ADHESIVES AND GERARD
A. LOFTUS
10.8 EMPLOYMENT AGREEMENT, DATED AUGUST 19, 1996 BETWEEN RICHARD W. JOHNSTON AND
PIERCE & STEVENS
10.9 CONSULTING AGEEMENT, DATED OCTOBER 1, 1996 BETWEEN THE PARENT PARTNERSHIP
AND NEAL G. REDDEMAN
10.10 Letter Agreements, dated September 8, 1997, February 17, 1997 and
October 25, 1996 between the Parent Partnership and Garnett Consulting.
10.11 Assignment and Assumption Agreement dated July 31, 1997 among the
Parent Partnership, Sovereign Chemicals Corporation and the Company
II-19
<PAGE> 176
10.12 1997 MANAGEMENT INCENTIVE PLAN.
10.13 1997 INCENTIVE BONUS PROGRAM.
10.14 Asset Purchase Agreement dated March 31, 1996 among The B.F. Goodrich
Company, Sovereign Engineered Adhesives, L.L.C. and the Parent Partnership.
10.15 Purchase Agreement, dated August 19, 1996 among The Sherwin-Williams
Company, Pierce & Stevens Canada, Inc., the Parent Partnership and P&S Holdings,
Inc.
10.16 STOCK PURCHASE AGREEMENT DATED MAY 22, 1997 BETWEEN LAPORTE INC. AND THE
PARENT PARTNERSHIP.
10.17 Side Letter, dated , 1997 between Laporte Inc., the Parent
Partnership and the Company.
II-20
<PAGE> 177
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation of Sovereign Specialty Chemicals,
Inc.*
3.2 By-Laws of Sovereign Specialty Chemicals, Inc.*
3.3 Certificate of Incorporation of Pierce & Stevens Corp.*
3.4 Bylaws of Pierce & Stevens Corp.*
3.5 Certificate of Incorporation of SIA Adhesives, Inc.*
3.6 By-laws of SIA Adhesives, Inc.*
3.7 Amended and Restated Articles of Incorporation of OSI Sealants,
Inc.*
3.8 By-Laws of OSI Sealants, Inc., as amended.*
3.9 Certificate of Incorporation of Mercer Products Company, Inc.*
3.10 By-Laws of Mercer Products Company, Inc., as amended.*
3.11 Articles of Incorporation of Tanner Chemicals, Inc.*
3.12 By-Laws of Tanner Chemicals, Inc., as amended.*
4.1 Indenture dated August 1, 1997 among the Company, the Guarantors
and The Bank of New York as trustee.*
4.2 Forms of 9 1/2% Senior Subordinated Notes due 2007, Series A and
Series B Notes (contained in Exhibit 4.1 as Exhibit A and B
thereto, respectively).*
4.3 Form of Guarantee*
4.4 Registration Rights Agreement dated August 5, 1997 among the
Company, the Guarantors, Chase Securities Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation.*
4.5 Amended and Restated Credit Agreement, dated August 5, 1997 between
the Company, the Guarantors and The Chase Manhattan Bank, as
administrative agent.*
5.1 Opinion and consent of Kirkland & Ellis.*
10.1 Employment Agreement, dated March 31, 1996 among the Parent
Partnership, Sovereign Specialty Chemicals, Inc. and Robert B.
Covalt.*
10.2 Executive Note, dated July 31, 1997, issued by Robert B. Covalt to
the Parent Partnership.*
10.3 Employment Agreement, dated March 31, 1996 among the Parent
Partnership, Sovereign Specialty Chemicals, Inc. and William T.
Schram.*
10.4 Executive Note, dated July 31, 1997, issued by William T. Schram to
the Parent Partnership.*
10.5 Executive Note, dated July 31, 1997, issued by William T. Schram to
the Parent Partnership.*
10.6 Employment Agreement, dated August 19, 1996 between John H. Edholm
and Pierce & Stevens.*
10.7 Employment Agreement, dated March 31, 1996 between SIA Adhesives
and Gerard A. Loftus.*
10.8 Employment Agreement, dated August 19, 1996 between Richard W.
Johnston and Pierce & Stevens.*
10.9 Consulting Agreement, dated October 1, 1996 between the Parent
Partnership and Neal G. Reddeman.*
10.10 Letter Agreements, dated September 8, 1997, February 17, 1997 and
October 25, 1996 between the Parent Partnership and Garnett
Consulting.*
</TABLE>
II-21
<PAGE> 178
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------- ------------
<S> <C> <C>
10.11 Assignment and Assumption Agreement dated July 31, 1997 among the
Parent Partnership, Sovereign Chemicals Corporation and the
Company.*
10.12 1997 Management Incentive Plan.*
10.13 1997 Incentive Bonus Program.*
10.14 Asset Purchase Agreement dated March 31, 1996 among The B.F.
Goodrich Company, Sovereign Engineered Adhesives, L.L.C. and the
Parent Partnership.*
10.15 Purchase Agreement, dated August 19, 1996 among The Sherwin-
Williams Company, Pierce & Stevens Canada, Inc., the Parent
Partnership and P&S Holdings, Inc.*
10.16 Stock Purchase Agreement dated May 22, 1997 between Laporte Inc.
and the Parent Partnership.*
10.17 Side Letter, dated , 1997 between Laporte Inc., the
Parent Partnership and the Company.*
12.1 Statement of Computation of Ratios.*
21.1 Subsidiaries of the Company and the Guarantors.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of KPMG Audit PLC*
23.3 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee on Form T-1.
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- ---------------
* To be filed by amendment.
II-22
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts," and as to
the use of our reports dated March 7, 1997 and June 19, 1997, in the
Registration Statement (Form S-4 No. 333-XXXX) of Sovereign Specialty
Chemicals, Inc. for the registration of the $125,000,000 of 9 1/2% Senior
Subordinated Notes due 2007.
ERNST & YOUNG LLP
Chicago, Illinois
November 3, 1997
<PAGE> 1
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT
TO RULE 901(d) OF REGULATION S-T
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [ ]
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
SOVEREIGN SPECIALTY CHEMICALS, INC.
PIERCE & STEVENS CORP.
SIA ADHESIVES, INC.
OSI SEALANTS, INC.
MERCER PRODUCTS COMPANY, INC.
TANNER CHEMICALS, INC.
(Exact name of obligor as specified in its charter)
Delaware 36-4176637
New York 31-1557383
Delaware 16-0951610
Illinois 36-2361148
New Jersey 02-0352196
New Hampshire 22-3061500
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
225 West Washington Street
Chicago, Illinois 60606
(Address of principal executive offices) (Zip code)
----------------------
9 1/2% Senior Subordinated Notes due 2007, Series B
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Name Address
- -----------------------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE
7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit
1 to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE> 3
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
-3-
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 31st day of October, 1997.
THE BANK OF NEW YORK
By: /S/MARY LAGUMINA
------------------------
Name: MARY LAGUMINA
Title: ASSISTANT VICE PRESIDENT
-4-
<PAGE> 5
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1997,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 7,769,502
Interest-bearing balances .......... 1,472,524
Securities:
Held-to-maturity securities ........ 1,080,234
Available-for-sale securities ...... 3,046,199
Federal funds sold and Securities pur-
chased under agreements to resell...... 3,193,800
Loans and lease financing
receivables:
Loans and leases, net of unearned
income ................. 35,352,045
LESS: Allowance for loan and
lease losses .............. 625,042
LESS: Allocated transfer risk
reserve........................ 429
Loans and leases, net of unearned
income, allowance, and reserve 34,726,574
Assets held in trading accounts ...... 1,611,096
Premises and fixed assets (including
capitalized leases) ................ 676,729
Other real estate owned .............. 22,460
Investments in unconsolidated
subsidiaries and associated
companies .......................... 209,959
Customers' liability to this bank on
acceptances outstanding ............ 1,357,731
Intangible assets .................... 720,883
Other assets ......................... 1,627,267
-----------
Total assets ......................... $57,514,958
===========
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES
Deposits:
In domestic offices ................ $26,875,596
Noninterest-bearing ...... 11,213,657
Interest-bearing ......... 15,661,939
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 16,334,270
Noninterest-bearing ......... 596,369
Interest-bearing ......... 15,737,901
Federal funds purchased and Securities
sold under agreements to repurchase. 1,583,157
Demand notes issued to the U.S.
Treasury ........................... 303,000
Trading liabilities .................. 1,308,173
Other borrowed money:
With remaining maturity of one year
or less .......................... 2,383,570
With remaining maturity of more than
one year through three years.......... 0
With remaining maturity of more than
three years ......................... 20,679
Bank's liability on acceptances exe-
cuted and outstanding .............. 1,377,244
Subordinated notes and debentures .... 1,018,940
Other liabilities .................... 1,732,792
-----------
Total liabilities .................... 52,937,421
-----------
EQUITY CAPITAL
Common stock ........................ 1,135,284
Surplus ............................. 731,319
Undivided profits and capital
reserves .......................... 2,721,258
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ 1,948
Cumulative foreign currency transla-
tion adjustments .................. ( 12,272)
------------
Total equity capital ................ 4,577,537
-----------
Total liabilities and equity
capital ........................... $57,514,958
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
<PAGE> 7
[ ]
Alan R. Griffith [ ]
J. Carter Bacot [ ]
Thomas A. Renyi [ ] Directors
[ ]
