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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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SOVEREIGN SPECIALTY CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 36-4176637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
225 WEST WASHINGTON STREET, CHICAGO, IL 60606
(Address of principal executive offices) (Zip Code)
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(Registrant's telephone number, including area code): (312) 419-7100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
All of the voting stock of the registrant is held by an affiliate of the
registrant.
On March 30, 1999, the registrant had 1,000 shares of common stock
outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference
into the part of the Form 10-K indicated:
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PART OF FORM 10-K INTO
DOCUMENT WHICH INCORPORATED
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None
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PART I
ITEM 1. BUSINESS
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 line of over 5,400 products is sold to
more than 6,300 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 the
following applications: Housing Repair, Remodeling and Construction; Industrial;
Overprint Coatings; and Flexible Packaging.
The Company was formed by Robert B. Covalt, First Chicago Equity
Corporation ("FCEC"), Waud Capital Partners and other investors to acquire and
consolidate specialty chemicals businesses in the highly fragmented adhesives,
sealants and coatings segment of the specialty chemicals industry. The Company
has successfully grown its business through its strategic acquisitions. In March
1996, the Company acquired SIA Adhesives, Inc. ("SIA"), 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 Corp. ("P&S"), a developer and manufacturer of specialty
coatings and adhesives for performance-oriented niche applications, for $44.8
million. In August 1997, the Company acquired (the "Acquisition") the U.S.
adhesives, sealants and coatings division (the "Acquired Companies") of Laporte
PLC ("Laporte") for a cash purchase price of $133.3 million. The companies
acquired from Laporte comprise OSI Sealants, Inc. ("OSI"), Mercer Products
Company, Inc. ("Mercer") and Tanner Chemicals, Inc. ("Tanner"). OSI, 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.
Unless the context otherwise requires, all references herein to the "Company"
refer, to Sovereign Specialty Chemicals, Inc., and its consolidated
subsidiaries, and all references to the "Parent Partnership" refer to Sovereign
Specialty Chemicals, L.P., the sole stockholder of the Sovereign Specialty
Chemicals, Inc.
The Company's principal executive offices are located at 225 West
Washington Street, Suite 2200, Chicago, IL 60606 and its telephone number is
(312) 419-7100.
DEVELOPMENTS
On April 21, 1998, the Company sold Mercer to Burke Industries, Inc. On
June 12, 1998, the Company acquired the net assets of the Coatings and Adhesives
Division of K.J. Quinn & Co., Inc. (C&A Division), a developer and manufacturer
of specialty polyurethane formulations for adhesives and coatings. On August 3,
1998, the Company acquired the PL Adhesives and Sealants Brand product line (PL)
from ChemRex Inc. in Shakopee, Minnesota. The Product Line consists of
solvent-based and polyurethane adhesives and sealants.
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 1998 and 1997 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
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include Pierce & Stevens, OSI, Pro-Series, PL, Polyseamseal, Miracure,
Plastilock, Latiseal, Hybond, Proxseal, Magic Seal and Glaze'N Seal.
Strong Customer Relationships. The Company's leadership position within the
markets it serves, 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, Overprint Coatings 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
the markets it serves. The Company's technological expertise has allowed it to
introduce a broad variety of new products over the past three years. 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 and
Company, The Boeing Company, The Dow Chemical 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 5,400 products sold through multiple distribution channels to over 6,300
customers for a wide variety of applications. 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, have extensive experience in
the specialty chemicals industry.
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 markets, 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 business segment 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.
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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. The Company's Vice President -- International has over 30 years
of international sales and marketing experience in the adhesives, sealants and
coatings segment. 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 a sales office in
Singapore and has recently established a sales office in the United Kingdom. The
Company 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 continue to achieve operating efficiencies resulting in enhanced revenue
opportunities, cost savings and improved cash flow through: (i) cross-selling
its applications across the broader distribution and customer network which it
has developed through its acquisitions; (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.
INDUSTRY
The Company operates in one segment and produces, manufactures and
distributes adhesives, sealants and coatings. Total sales for the the adhesives,
sealants and coatings segment of the specialty chemicals industry in the United
States were approximately $27.0 billion in 1998. Adhesives, sealants and
coatings are used in a wide range of products with applications in numerous
market categories, 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 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 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 segment 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 segment grew from approximately
$13.8 billion in 1986 to approximately $27.0 billion in 1998, representing a
compound annual growth rate of 5.8%. 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, a traditional sealant used between adjacent slabs of concrete and other
materials that exhibit poor longevity.
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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 segment 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 $69.6
billion in 1998. In 1996, the United States accounted for approximately 39% of
worldwide sales, while Europe accounted for approximately 28.5% of worldwide
sales and Japan accounted for approximately 8% of worldwide sales. Sales to the
remainder of the world accounted for approximately 24.5% of total segment 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.
APPLICATIONS
The table below sets forth the Company's selected applications to customers
in the following market categories:
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MARKET CATEGORY SELECTED APPLICATIONS
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Housing Repair, Remodeling and
Construction............................ Aluminum and vinyl siding sealants
Window and door sealants
Tub and tile sealants
Drywall and subflooring adhesives
Industrial................................ Power staple and nail gun cartridge adhesives
Fire-retardant textile adhesives and coatings
Automotive structural and trim adhesives
Aerospace structural adhesives
Commercial insulation adhesives
Overprint Coatings........................ 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........................ Blister packaging adhesives and coatings
Food and product packaging adhesives and coatings
Food packaging laminating adhesives
</TABLE>
Housing Repair, Remodeling and Construction. These applications are
primarily sealants and adhesives used in exterior and interior applications.
These products are marketed to defined niches in the do-it-yourself retail and
professional markets. The Company's customers for these applications include
Home Depot, Inc. and Lowe's Corp. The Company is a leader in aluminum and vinyl
siding sealants as well as kitchen and bath sealants, offering ease of use,
durability and color match capabilities. The Company offers a broad range of
well-established branded products including OSI PL and Polyseamseal for retail
do-it-yourself markets and Pro-Series for professional markets.
Industrial. These applications consist primarily of high-performance,
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, panel
lamenation adhesives for recreational vehicles, automotive trim adhesives,
commercial structural adhesives and insulation adhesives. The Company's
structural adhesives are often developed in conjunction with the technical staff
of its customers and are used in many demanding automotive applications
including brake bonding and body panel assembly. The Company's aerospace bonding
films are used to bond the composite tail structures in commercial aircraft and
meet rigid performance requirements. 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 Johns
Manville.
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Overprint Coatings. The Company produces a variety of high quality, high
gloss scratch and abrasion resistant coatings used on paperback book and
magazine covers, decorative packaging, annual reports, catalog covers, playing
and trading cards and other decorative packaging. The Company is the leading
manufacturer of coatings for paperback book covers. Overprint Coatings 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.
SALES AND MARKETING
The Company operates an extensive sales and marketing network for its
customers. This network consists of a direct sales force of over 100
professionals, as well as independent agents and distributors. This network
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 distributors and independent agents who specialize in particular
markets. This market specialization allows the Company's applications 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.
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 strategic raw
materials on a contract basis. Certain of the Company's raw materials are
derived from ethylene, propylene, and crude oil derivatives. There have been
historical periods of rapid and significant movements in the price of feedstocks
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.
TECHNOLOGY
The Company maintains a strong commitment to technology, with over 100
chemists and chemical engineers focused on the development of new products and
processes. The Company's R&D staff works hand in hand with its business teams
and customers to develop innovative, high performance solutions to satisfy
current and future needs. This methodology of involving the customer throughout
the product development process, ensures the creation of products that will add
value to their business.
Over recent years the Company has focused its R&D efforts on the
development of high performance, environmentally safe products. This effort has
lead to a broad range of unique technologies and applications, including, (i)
pre-formulated dispersions that function as medical packaging adhesives, fiber
setting binders, and food packaging coatings, (ii) advanced toughened epoxy
systems used to bond metal to composite in aircraft construction, (iii)
synthesized polyurethanes used to produce abrasion and scratch resistant
coatings
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for metal, glass and wood, (iv) fire resistant adhesives and coatings for
textile, automotive, and manufactured housing markets.
The Company's technical activities are further enhanced through strong
alliances with key industry suppliers and large multi-national customers. These
include E.I. DuPont and Company, The Boeing Company, The Dow Chemical Company,
Hoechst, A.G., Phillip Morris Corporation, Baxter International, and BASF
Corporation, among others.
The Company's patents and qualified formulations, in combination with its
customer integrated approach to product and application design, will continue to
create a sustainable, competitive advantage for many years to come.
COMPETITION
The adhesives, sealants and coatings segment of the specialty chemicals
industry is highly competitive. This segment 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 International, Inc. 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 December 31, 1998, the Company had 637 employees, of whom 79 were
members of unions under contracts which expire between 2001 and 2002. 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 acquired
businesses and has negotiated contractual indemnifications, which, supplemented
by commercial "pollution cleanup cap and pollution legal liability" 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.
As a result of the Acquisition, the Company is 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
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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 Company 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 Acquired Companies. In addition, the Company is
currently receiving the benefit of rent reductions negotiated by Laporte with
the owner and lessor of the facility worth approximately $1.5 million during the
period 1997 through 1999.
In connection with the 1996 acquisition of P&S, the Company's environmental
due diligence detected conditions of subsurface contamination primarily
associated with storage tank farms and at certain other areas of the P&S
facilities. The Company began addressing the areas of contamination in 1998.
This process will continue through 2000. 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. In
June 1998, Sherwin-Williams Company paid the Company $2.7 million as
indemnification relative to the tank farm replacement as well as a number of
other environmental issues. Upon receipt of the funds, the Company recorded an
environmental reserve in other long term liabilities and other current
liabilities.
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. P&S and the Acquired Companies 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 P&S' and the Acquired Companies 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. In addition, the agreements
with Sherwin Williams and LaPorte includes indemnification for these issues.
The Company expects to incur capital expenditures for environmental
controls in the years ahead and currently estimates that such expenditures will
amount to $3.3 million in 1999. Most of these expenditures will be recovered
through indemnifications provided by previous owners and pertain to removing and
replacing aboveground and underground storage tank systems at several
facilities.
BACKLOG
Most orders for the Company's products are received and shipped in the same
month. Total backlog orders at December 31, 1998 were approximately $2.2
million. All 1998 backlog orders were expected to be filled within the current
year. Backlog orders at December 31, 1997 were $4.6 millions and at December 31,
1996 were not significant.
ITEM 2. PROPERTIES
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
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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 APPLICATION SERVED
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<S> <C> <C> <C>
Akron, Ohio........................ Owned 214,300 Industrial
Buffalo, New York.................. Owned 165,000 Industrial, Overprint Coatings, Flexible
Packaging
Mentor, Ohio....................... Owned 160,000 Home Repair, Remodeling and Construction
Greenville, South Carolina......... Leased(2) 104,500 Industrial
Carol Stream, Illinois............. Owned 81,800 Industrial, Overprint Coatings, Flexible
Packaging
LaGrange, Georgia.................. Owned 64,000 Home Repair, Remodeling and Construction
Kimberton, Pennsylvania............ Owned 55,900 Industrial, Overprint Coatings, Flexible
Packaging
Mexico City, Mexico................ Leased(3) 24,400 Industrial, Overprint Coatings, Flexible
Packaging
Seabrook, New Hampshire............ Owned 21,800 Industrial, Flexible Packaging
</TABLE>
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(1) All of the Company's owned facilities are subject to mortgages pursuant to
the 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, Singapore and the United
Kingdom.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the Company's equity securities.
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ITEM 6. SELECTED FINANCIAL DATA
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 Sovereign Engineered Adhesives
L.L.C. (SEA) (subsequently, SIA) (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 years ended December 31, 1997 and 1998 are
derived from the audited financial statements of the Parent Partnership and the
Company. The following information should only be read in conjunction with the
audited consolidated financial statements of the Company, and the notes thereto,
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition," all included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------------------- -------------------------------------------
PERIOD PERIOD YEAR YEAR
YEAR ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------- --------- ------------ ------------- ------------
1994 1995 1996 1996 1997 1998
------- ------- --------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $20,100 $21,129 $ 5,410 $37,792 $134,771 $211,335
Cost of goods sold............................ 13,498 13,734 3,580 26,637 92,889 144,039
------- ------- ------- ------- -------- --------
Gross profit.................................. 6,602 7,395 1,830 11,155 41,882 67,296
Selling, general and administrative expense... 6,362 5,633 1,603 9,613 30,131 46,418
------- ------- ------- ------- -------- --------
Operating income.............................. 240 1,762 227 1,542 11,751 20,878
Interest expense.............................. -- -- -- 1,666 9,080 14,979
Loss on sale of business...................... -- -- -- -- -- 1,025
Other......................................... -- -- -- -- 163 (267)
------- ------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item.......................... 240 1,762 227 (124) 2,508 5,141
Income taxes(1)............................... 96 705 91 (99) 1,315 3,494
------- ------- ------- ------- -------- --------
Income (loss) before extraordinary item....... 144 1,057 136 (25) 1,193 1,647
Extraordinary losses, net(2).................. -- -- -- (281) (1,409) (176)
------- ------- ------- ------- -------- --------
Net income (loss)............................. $ 144 $ 1,057 $ 136 $ (306) $ (216) $ 1,471
======= ======= ======= ======= ======== ========
BALANCE SHEET DATA
(END OF PERIOD):
Working capital (deficit)..................... $(5,988) $ 1,786 $(5,019) $11,936 $ 29,618 $ 29,739
Total assets.................................. 10,281 9,394 9,612 69,960 242,759 225,804
Total indebtedness............................ -- -- -- 41,652 159,277 132,264
Stockholder's equity.......................... 144 7,013 136 17,444 52,053 54,194
OTHER FINANCIAL DATA:
Capital expenditures.......................... $ 655 $ 106 $ 131 $ 688 $ 1,834 $ 4,472
</TABLE>
See Notes to Selected Historical Financial Data
9
<PAGE> 11
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(1) Income of SEA Adhesives, a limited liability company, and the Parent
Partnership is taxed at the member or partner, as the case may be, level
and, as such, no income taxes are reflected prior to the Company's
reorganization on July 31, 1997. After the reorganization, the Company and
SIA are subchapter C corporations and, as such, are subject to income taxes.
As such, income taxes have been reflected for the year ended December 31,
1997 for taxable earnings subsequent to the reorganization.
(2) Extraordinary loss relates to the write-off of deferred financing costs
associated with the early extinguishment of debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company exists to acquire and consolidate adhesives, sealants and
coatings businesses in the highly fragmented adhesives, sealants and coatings
industry operating segment of the specialty chemical industry. The Company began
operations in March 1996 with the acquisition of SIA Adhesives (SIA), a
manufacturer of specialty adhesives used primarily in the automotive, aerospace
and general industrial markets categories. In August 1996, the Company acquired
Pierce & Stevens (P&S), a developer and manufacturer of specialty coatings and
adhesives for performance-oriented niche applications. In August 1997, the
Company acquired in a single transaction the net assets of Laporte Construction
Chemicals North America, Inc.(OSI), Evode-Tanner Industries, Inc. (Tanner), and
Mercer Products Company, Inc. (Mercer)(collectively, "the Acquired Companies").
These businesses manufacture, market and distribute adhesives and sealants
primarily utilized in housing repair, remodeling and construction and industrial
markets categories. On April 21, 1998, the Company sold Mercer to Burke
Industries, Inc. On June 12, 1998, the Company acquired the net assets of the
Coatings and Adhesives Division of K.J. Quinn & Co., Inc. (C&A Division), a
developer and manufacturer of specialty polyurethane formulations for adhesives
and coatings. Effective August 3, 1998 the Company acquired the PL Adhesives &
Sealants brand and product line (PL). The operating results of acquired
businesses have been included in the consolidated operating results of the
Company for all periods after their respective dates of acquisition.
The Operating results of the Company for 1996 include the results of the
Company for the period from March 31, 1996 (date of inception) to December 31,
1996 and the results of the Company's predecessor (the Adhesives Systems
Division of The BFGoodrich Company) for the period from January 1, 1996 to March
31, 1996. The results of acquired businesses have been included for all periods
subsequent to their respective dates of acquisition.
RESULTS OF OPERATIONS
1998 COMPARED TO HISTORICAL 1997
Net Sales. Net sales in 1998 were $211.3 million, an increase of $76.5
million, or 56.8%, over the comparable period in 1997, primarily due the
acquisition of the Acquired Companies in August, 1997, the C&A Division in June,
1998 and the PL brand in August, 1998, offset somewhat by the sale of Mercer in
April, 1998. Excluding acquisitions, net sales increased $5.6 million or 6.4%.
The sales increase was the result of increased sales for industrial and flexible
packaging applications partially offset by declines in overprint coatings sales.
Industrial sales increases were driven by increased share in recreation vehicle
adhesives applications and continued strong levels of commercial aircraft
production, offset by lower sales to automotive OEM's due to design-outs. Sales
for flexible packaging applications increased due to the combined effects of
market share gains in the United States and increased international sales.
Cost of Goods Sold. Cost of goods sold was $144.0 million for 1998, an
increase of $51.1 million, or 55.0%, over 1997. Gross margin improved to 31.8%
from 31.1% in 1997. Net of acquisitions, gross margin improved to 29.3% from
28.7% in 1997. The improved margin in 1998 was primarily the result of an
improvement in the product mix due to increased sales of construction adhesives
and raw material savings from consolidation of purchasing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1998 were $46.4 million, representing a $16.2
million, or 53.6%, increase from 1997. As a percentage of net sales, selling,
general and administrative expenses decreased slightly to 22.0% for 1998 from
22.4% in 1997. This decrease is due primarily to lower corporate overhead
charges as a percentage of rapidly expanding net sales and other efficiencies
offset partially by the full year impact of increased goodwill amortization
associated with
10
<PAGE> 12
the purchase of the Acquired Companies, non recurring management severance
expenses recorded in 1998 and the non cash compensation expense on management
incentive plans.
Interest Expense. Interest expense was $15.0 million in 1998 representing
a $5.9 million, or 64.8% increase over the comparable period in 1997. This
increase was the full year impact of increased debt incurred as a result of the
purchase of the Acquired Companies in August 1997 partially offset by impact of
repayment of $30.0 million Term Loan in April 1998.
Loss on Sale of Business. On April 21, 1998, the Company consummated the
sale of its Mercer Products Company, Inc. subsidiary to Burke Industries, Inc.
Net proceeds from the sale were approximately $35.3 million. The Company
recognized a book loss on the sale of approximately $1.0 million.
Income Taxes. Income tax expense increased by $2.2 million to $3.5 million
in 1998 over 1997 primarily due to the growth in pretax earnings resulting from
acquisitions and the fact that prior to its restructuring on July 31, 1997, the
consolidated entity was composed of various types of entities including a
limited partnership and a limited liability company. Income tax liabilities for
such entities generally "pass through" to their owners. After the restructuring,
the Company and its subsidiaries file a consolidated federal tax return. See
Footnote 3 in the Notes to the Consolidated Financial Statements for pro forma
income taxes, as if the companies had been subject to income taxes for the
period presented.
Income before extraordinary loss. Income before extraordinary loss for
1998 was $1.6 million representing a $.5 million increase from 1997. This
increase was primarily the result of the factors discussed above. Excluding the
loss on the sale of Mercer, net income before extraordinary loss for 1998 was
approximately $2.6 million.
Extraordinary Loss (net of tax benefit). The extraordinary loss of $176,
net of the income tax benefit of $118, on the extinguishment of the $30.0
million Senior Term Loan on April 21, 1998 relates to the write-off of deferred
financing costs related to the Term Loan.
Net Income. Net income was $1.5 million, representing a $1.7 million
increase over 1997. This increase was primarily the result of the factors
discussed above.
HISTORICAL 1997 COMPARED TO HISTORICAL 1996
Net Sales. Net sales for 1997 were $134.8 million, an increase of $91.6
million, or 212.0% over 1996. The increase is attributable primarily to the full
year impact of the acquisitions of SIA and P&S in 1996 and the purchase of the
Acquired Companies in 1997. Excluding the acquisitions, net sales increased 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 1997 was $92.9 million, an
increase of $62.7 million, or 207.4% over 1996. As a percentage of net sales,
cost of goods sold decreased from 69.9% in 1996 to 68.9% in 1997, thus resulting
in an improvement in gross profit margin from 30.1% in 1996 to 31.1% in 1997.
The improved margin in 1997 was a result of an improvement in product mix with
increased sales of construction adhesives (as a result of the purchase of the
Acquired Companies) and aerospace adhesives.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $30.1 million in 1997, an increase of $19.0
million, or 172.0% over 1996. Selling, general and administrative expenses
decreased to 22.3% of net sales for 1997 as compared to 25.6% for 1996. This was
a result of several factors, including (i) the purchase of the Acquired
Companies in August, 1997 which have generally lower selling expenses than SIA
and P&S due to increased average customer size, and the use of large
distributors rather than a direct sales force in the construction adhesives and
sealants markets, (ii) lower corporate overhead charges as a percentage of
rapidly expanding net sales, (iii) elimination of certain non-recurring expenses
in connection with the formation of the Company and the development of
compensation and benefit programs and policies, and (iv) reduced insurance
premiums related to combining policies of the acquired businesses.
Interest Expense. Interest expense was $9.1 million in 1997, an increase of
$7.4 million, or 445.0% over 1996. This related directly to the increased debt
incurred as a result of the acquisition of the P&S in August, 1996 and the
purchase of the Acquired Companies in August, 1997.
11
<PAGE> 13
Minority Interest Expense. Minority interest expense was $.1 million in
1997, a decrease of $.1 million, or 50.0% from 1996. This was due to the
purchase in July 1997 of the outstanding minority interests in SIA and P&S
through the issuance of additional equity in the Company.
Income Taxes. Prior to its restructuring in July 1997, the consolidated
entity was composed of various types of entities including a limited partnership
and a limited liability company. Income tax liabilities for such entities are
generally "passed through" to their owners. Subsequent to the restructuring, the
Company and its subsidiaries will file a consolidated tax return. The financial
statements for 1997 and 1996 include "pro forma" income taxes as if the
companies had been taxable entities for both periods.
Extraordinary Loss. The extraordinary loss, net income tax benefit, on the
extinguishment of debt was $1.4 million in 1997, an increase of $1.1 million, or
401.4% over 1996. These charges relate to the writeoff of deferred financing
costs and other fees related to the Transactions in August, 1997.
Net Income. As a result of the foregoing, the Company had a net loss of $.2
million in 1997 as compared to a net loss of $.3 million in 1996.
INFLATION
The Company does not believe that inflation has had a material impact on
net sales or income during any of the periods presented above. There can be no
assurance, however, that the Company's business will not be affected by
inflation in the future.
YEAR 2000 READINESS DISCLOSURE
Many computer systems and other equipment with embedded technology use only
two digits to define the applicable year and may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in failures or
miscalculations causing disruptions of normal business activities and operations
(the "Year 2000 issue").
The Company is actively addressing the Year 2000 issue. The compliance
program is led by information technology staff at each operating company, with
assistance from the finance and manufacturing staffs and outside technology
consultants where necessary. Progress is being monitored by each operating
company president and reported to Company management.
The Company's Year 2000 efforts focus on three areas: information
technology ("IT") related systems and processes, such as operating systems,
applications and programs; embedded logic ("non-IT") systems and processes, such
as manufacturing machinery, telecommunications equipment and security devices;
and compliance efforts of third parties (such as customers, suppliers and
service providers). Within each of the IT and non-IT areas, the project spans
four phases; assessment of programs and devices to identify those that are
affected by the Year 2000 issue; development of remediation strategies; testing
such strategies; and implementing the solutions. The third party aspect of the
project includes, among other things, obtaining Year 2000 readiness
certifications, obtaining Year 2000 disclosures contained in SEC filings, and
where applicable, testing interfaced systems as well as having discussions with
critical vendors in order to determine and mitigate the risk to the Company from
third parties' failures to satisfactorily address their Year 2000 issues.
The Company has completed an assessment of its critical IT systems and, as
a result, the operating companies have decided to modify, upgrade or replace
portions of their systems. The remediation efforts achieved significant progress
to date, and remain underway. The Company expects that the remediation, testing
and implementation of all critical IT systems will be completed by the third
quarter 1999. The Company is continuing the process of assessing and remediating
critical non-IT systems, as well, and expects that the assessment, remediation,
testing and implementation phases with respect to such systems will be completed
by the third quarter of calendar year 1999. The Company is currently confirming
the state of readiness of its primary vendors. Upon completion of this process,
management will develop and implement any necessary contingency plans.
12
<PAGE> 14
The Company believes that, with modification of existing computer systems,
updates by vendors and conversion to new software in the ordinary course of
business, the year 2000 issue will not have a material impact on the Company's
operations. The costs of modifications and conversions have not been and are not
expected to be material. Many of the required tasks to determine compliance of
its systems have been completed at March 30, 1999 and the Company estimates that
its effort will be complete by the third quarter of 1999 for both its financial
and operational systems. There can be no assurance, however, that as a result of
the failure of major customers or suppliers to properly address their year 2000
issues, or as a result of a delay or oversight in the Company's efforts, that
the year 2000 issue will not have a material impact on the business and
operations of the Company. Because of the difficulty of assessing the Year 2000
compliance of such third parties, the Company considers the potential
disruptions caused by such parties to present the most reasonably likely
worst-case scenarios. Adverse effects on the Company could include business
disruption, increased costs, loss of sales and other similar ramifications.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $13.6 million, which
represents a $7.2 million increase over 1997. Net income, depreciation,
amortization, deferred income taxes and the loss on the sale of Mercer resulted
in approximately $15.2 million of cash flow from operations. Net of 1998
acquisitions and disposition, accounts payable and other liabilities increased
$5.9 million in 1998. These increases to net cash were partially offset by
increases in accounts receivable and inventories of $7.4 million and $1.3
million, respectively. The increase in accounts receivable was due primarily to
increased sales volume primarily due to 1998 acquisitions.
Net cash provided by investing activities in 1998 was $15.7 million.
Capital additions to property, plant and equipment totaled $4.5 million in 1998.
The sale of Mercer in April, 1998, provided $35.3 million and the acquisitions
of the C&A Division in June, 1998 and the PL product line in August, 1998
resulted in the recognition of $15.1 million in additional net assets to the
Company.
The sale of Mercer in April 1998 demonstrates the Company's focus on
adhesives, sealants and coatings, as Mercer was not a strategic fit for the
Company. Mercer is a manufacturer of extruded vinyl flooring profiles and
related products for the commercial and residential construction and renovation
markets. Mercer was acquired in August 1997, as part of Sovereign's purchase of
the Acquired Companies.
On June 12, 1998, the Company acquired the net assets of the Coatings and
Adhesives Division of K.J. Quinn & Co., Inc. (C&A Division), a Seabrook, New
Hampshire developer and manufacturer of specialty polyurethane formulations for
adhesives and coatings. The Company paid cash and issued $2.8 million in notes
payable to the previous owners.
On August 3, 1998, the Company acquired the PL Adhesives and Sealants
product line (PL) from ChemRex Inc. in Shakopee, Minnesota. PL consists of
solvent-based and polyurethane adhesives and sealants. The Company borrowed $6.2
million under its Revolving Credit Facility to finance the acquisition which was
subsequently repaid in full prior to December 31, 1998. Most of the production
of the PL applications is being transferred to the Company's Mentor, Ohio
production facility in the first quarter of 1999.
Net cash used in financing activities was $29.9 million in 1998. The
Company used proceeds from the Mercer sale to repay its $30.0 million Term Loan
on April 21, 1998.
The Company's bank debt at June 30, 1998 consists of the $125.0 million
Notes and has $.9 million drawn under its Singapore-based sales office facility.
The Company has a $29.1 million available under its Revolving Credit Facility
and an additional $20 million revolving credit commitment which is supplemental
to the Revolving Credit Facility available for acquisition financing.
Interest payments on the Notes and under the Revolving Credit Facility
represent significant obligations of the Company. The Notes require semiannual
interest payments on February 1, and August 1. The Company's remaining liquidity
demands relate to capital expenditures and working capital needs. The Company
anticipates capital expenditures totaling $7.7 million in 1999, including
approximately $3.3 million of which relates to environmental expenditures for
which the Company has been or will be indemnified
13
<PAGE> 15
pursuant to acquisition agreements. 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 Revolving Credit Facility. The Revolving Credit
Facility provides the Company with $30.0 million of borrowings, subject to
availability under its borrowing base. At December 31, 1998, the Company would
have been able to borrow $29.1 million under the Revolving Credit Facility. The
repayment of the $30 million Term Loan in April 1998, triggered an additional
$20 million revolving credit commitment which is supplemental to the Revolving
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 Revolving
Credit Facility). However, the Company's capital requirements may change,
particularly if the Company should complete any 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.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Some of the information presented in, or connection with, this report may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve potential risks and
uncertainties. Our future results could differ materially from those discussed
here. Some of the factors that could cause or contribute to such differences
include:
Changes in economic and market conditions that impact the
demand for our products and services;
Risks inherent in international operations, including possible
economic, political or monetary instability;
Uncertainties relating to the Company's ability to consummate
its business strategy, including realizing synergies and cost
savings from the integration of its acquired businesses.
The impact of new technologies and the potential effect of
delays in the development or deployment of such technologies;
and,
The potential impact of issues related to Year 2000 software
compliance.
You should not place undue reliance on these forward-looking statements,
which are applicable only as of March 30, 1999. All written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the foregoing factors. We have no obligation to revise or
update these forward-looking statements to reflect events or circumstances that
arise after March 30, 1999 or to reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in hedging or other market structure derivative
trading activities. Additionally, the Company's debt obligations are primarily
fixed-rate in nature and, as such, are not sensitive to changes in interest
rates. The Company does not believe that its market risk financial instruments
on December 31, 1998 would have a material effect on future operations or cash
flow.
14
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are submitted as a
separate section of this report. For a list of financial statements and
schedules filed as part of this report, see the "Index to Financial Statements"
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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............... 67 Chairman, President, Chief Executive Officer and Director
John R. Mellett................ 49 Vice President, Chief Financial Officer, Treasurer,
Secretary and Director
Martyn Howell-Jones............ 61 Vice President -- International
Richard W. Johnston............ 51 Vice President -- Technology
Stephen Zavodny................ 41 Director of Engineering
Paul Gavlinski................. 51 Vice President, Manufacturing
Karen K. Seeberg............... 46 Vice President, Human Resources
Frederick Quinn................ 53 Vice President -- Business Development, President and
Chief Executive Officer of Pierce & Stevens
Louis M. Pace.................. 27 Vice President -- Mergers & Acquisitions
Gary Cassata................... 49 Director of Materials Management
Patrick W. Stanton............. 31 Principal Accounting Officer
Charles A. Aldag, Jr. ......... 66 Director
Carol E. Bramson............... 35 Director
Lawrence E. Fox................ 56 Director
Karl D. Loos................... 48 Director
Neal G. Reddeman............... 76 Director
Reeve B. Waud.................. 35 Director
</TABLE>
15
<PAGE> 17
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............... 67 Chairman and Director of Pierce & Stevens, SIA Adhesives,
OSI Sealants, Mercer and Tanner
John R. Mellett................ 49 Vice President, Finance, Chief Financial Officer,
Treasurer and Secretary of Pierce & Stevens, OSI Sealants,
Tanner, Mercer and SIA Adhesives
Frederick Quinn................ 53 President and Chief Executive Officer of Pierce & Stevens
Richard W. Johnston............ 51 Executive Vice President of Pierce & Stevens
Paul Gavlinski................. 51 Vice President -- Operations of Pierce & Stevens
Gerard A. Loftus............... 44 President and Chief Executive Officer of SIA Adhesives and
Tanner
Peter Longo.................... 39 President and Chief Executive Officer of OSI Sealants
Carol E. Bramson............... 35 Director of Pierce & Stevens, SIA Adhesives, OSI Sealants
and Tanner
Lawrence E. Fox................ 56 Director of Pierce & Stevens, SIA Adhesives, OSI Sealants
and Tanner
Reeve B. Waud.................. 35 Director of Pierce & Stevens, SIA Adhesives, OSI Sealants
and Tanner
</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
Corporation 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.
John R. Mellett has served as Vice President since March 1, 1999. Prior to
joining the Company, Mr. Mellett was Senior Vice President & Chief Financial
Officer of USI Bath and Plumbing Products and its Zurn Industries, Inc.
operations, a diversified supplier of bath, plumbing and HVAC products and
services from 1995 to 1999. From 1992 to 1995 Mr. Mellett served as Senior Vice
President & Chief Financial Officer of LeFebure Corporation, a supplier of
equipment and services to financial institutions. Mr. Mellett is a Certified
Public Accountant and holds a B.S. in Accounting from Miami University.
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 -- Technology 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 Engineering for the Company since
February 1997. Mr. Zavodny is in charge of all capital projects and improvements
for the Company's manufacturing
16
<PAGE> 18
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.
Paul Gavlinski has served as Vice President, Manufacturing of the Company
since February, 1998 and 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.
Karen K. Seeberg has been Vice President, Human Resources of the Company
since February, 1998. From January 1997 to February 1998, Ms. Seeberg was
Director, Human Resources for Pierce & Stevens. From September 1992 to January
1997, Ms. Seeberg was Human Resources Manager for the Information System
Division of Avery Dennison. From August 1982 to August 1992, Ms. Seeberg held
human resource management positions with Federated Department Stores, Iroquois
Industries, Inc. and British Petroleum. Ms. Seeberg holds a B.A. degree from
State University of New York.
Frederick A. Quinn has been President and Chief Executive Officer of Pierce
& Stevens since March, 1999 and has served as Vice-President Business
Development of the company since June 1998. Mr. Quinn is responsible for the
identification and development of new strategic business opportunities within
the company's business units. From September 1992 until June 1999, Mr. Quinn
served first as Executive Vice President and from 1993 as President, Chief
Operating Officer of K.J. Quinn & Co., Inc. From July 1988 until September 1992,
Mr. Quinn was the North American Business Manager for the Thermoplastic
Polyurethane Division of Morton International. From 1973 to July 1988, Mr. Quinn
held various sales and marketing positions within K.J. Quinn & Co., Inc. Mr.
Quinn holds a B.S. degree in International Relations and an MBA from the
University of Southern California.
Louis M. Pace has been Vice President -- Mergers & Acquisitions since
March, 1999 and has served as the Company's Director of Mergers & Acquisitions
since January, 1998. From August 1996 to December 1997, he served as the
Company's Director of Corporate Development and Assistant Secretary. 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.
Gary L. Cassata has served as Director, Materials Management of the Company
since June 1998. Mr. Cassata is responsible for all purchasing, transportation,
and distribution activities. From January 1995 to May 1998 Mr. Cassata served as
Manager, Purchasing and Supply Chain, and as Business Manager at Velsicol. From
1991 to December 1994 Mr. Cassata served as Purchasing Manager, Adhesives &
Specialty Polymers. From 1978 to 1990 Mr. Cassata held various purchasing and
supply positions with Morton's Chemical Division. From 1974 to 1978, Mr. Cassata
held various purchasing and distribution positions with Sargent Welch
Scientific. Mr. Cassata, who is a Certified Purchasing Manager, holds a B.S. in
Biology/ Chemistry from the University of Illinois Chicago.
Patrick W. Stanton has served as the Company's Principal Accounting Officer
since September, 1998. From April 1998 to August 1998, he served as the
Company's Manager of Financial Planning and Control. From 1990 to March 1998,
Mr. Stanton was with Arthur Andersen LLP. Mr. Stanton is a Certified Public
Accountant and holds a B.S. in Accounting from Marquette University.
Gerard A. Loftus has served as President of Tanner and SIA Adhesives since
February 1998 and 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
17
<PAGE> 19
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.
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.
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 the managing
partner of Waud Capital Partners, L.L.C., the general partner of each of Waud
Capital Partners -- I, L.P. and Waud Capital Partners -- II, L.P., a
Chicago-based group of equity investment funds, 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., Parish Publications,
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.
18
<PAGE> 20
from Middlebury College and an M.B.A. from the J.L. Kellogg Graduate School of
Management at Northwestern University.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation is determined by the compensation committee of the
Company's Board of Directors (the "Compensation Committee"). The Compensation
Committee is composed of Mr. Aldag, Ms. Bramson, Mr. Loos and Mr. Waud. Mr.
Aldag, Mr. Loos and Mr. Reddeman each receive $1,000 per meeting as compensation
for their services as directors. None of the other directors receive
compensation for their services as directors. The following Summary Compensation
Table includes individual compensation information for the Chief Executive
Officer and each of the four other most highly compensated executive officers of
the Company in the years ended December 31, 1998 and 1997 for services rendered
in all capacities to the Company and its subsidiaries during the year ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------ ALL OTHER
FISCAL COMPENSATION
YEAR SALARY($) BONUS($) ($)(1)
------ --------- -------- ------------
<S> <C> <C> <C> <C>
Robert B. Covalt.................................. 1998 $259,500 $154,470 $335,022
Chairman, President and Chief Executive Officer 1997 250,000 140,158 $ 17,512
Gerard A. Loftus.................................. 1998 139,167 41,863 $ 8,549
President of SIA Adhesives/Tanner Chemicals 1997 128,023 41,863 3,763
Peter Longo....................................... 1998 185,658 64,980 $ 3,333
President of OSI Sealants
Richard W. Johnston............................... 1998 150,000 24,161 $ 8,499
Vice President -- Technology 1997 146,667 24,961 7,156
</TABLE>
- -------------------------
(1) Represents matching contributions under 401(k) plans. Robert B. Covalt's
1998 compensation includes the difference between the fair market value of
purchased and fully vested units in the Parent Partnership and amount paid
($326,746). 1997 compensation includes $14,312 tax gross-up for shares of
the General Partner purchased in 1997.
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% of the indirect ownership of the Company's equity
have been awarded by the Compensation Committee of the Board to 12 select
officers, directors and employees of the Company.
Long-Term Incentive Plan. The Parent Partnership adopted its 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
19
<PAGE> 21
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 December 31, 1998, 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.
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 EBITDA 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.
Incentive Bonus Program. The Company adopted its Incentive Bonus Program
in May 1997 in order to provide incentives to all salaried employees (excluding
any participant in the 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. 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 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. 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 $262,500. The remainder of these agreements provide for salaries of at
least the following amounts: Mr. Loftus, $140,000, and Mr. Johnston, $150,000.
The agreements with Mr. Covalt and Mr. Loftus expire on March 31, 2000 and the
agreement with Mr. Johnston expires on August 19, 2000. All of these agreements
also contain noncompetition provisions which extend up to two years after the
end of such executives' employment with the Company.
20
<PAGE> 22
ITEM 12. 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)......................... 598.6 35.5%
Three First National Plaza, Mail Suite 1210, Chicago,
Illinois 60670
Waud Capital Partners - I, L.P.(2).......................... 148.6 8.8%
560 Oakwood Avenue, Suite 203, Lake Forest, Illinois 60045
Waud Capital Partners - II, L.P.(2)......................... 137.2 8.1%
560 Oakwood Avenue, Suite 203, Lake Forest, Illinois 60645
Chase Venture Capital Associates, L.P. ..................... 161.5 9.6%
380 Madison Avenue, 12th Floor, New York, New York 10017
Bank America Investment Corporation......................... 121.9 7.2%
231 South LaSalle Street, Chicago, Illinois 60697
Cross Creek Partners(3)..................................... 106.4 6.4%
Three First National Plaza, Mail Suite 1210, Chicago,
Illinois 60670
OFFICERS AND DIRECTORS
Robert B. Covalt............................................ 242.9 14.4%
Martyn Howell-Jones......................................... 8.8 *
Gerard A. Loftus............................................ 7.1 *
Richard W. Johnston......................................... 5.8 *
Louis M. Pace............................................... 2.6 *
Paul Gavlinski.............................................. 5.2 *
Stephen Zavodry............................................. 2.7 *
Peter Longo................................................. 4.9 *
Karen Seeberg............................................... 1.9 *
Frederick Quinn............................................. 2.8 *
Charles A. Aldag............................................ 3.4 *
Carol E. Bramson(1)(3)...................................... 705.0 41.9%
Lawrence F. Fox(1)(3)....................................... 705.0 41.9%
Karl D. Loos................................................ 3.4 *
Neal G. Reddeman............................................ 3.4 *
Reeve B. Waud(2)............................................ 312.0 18.4%
*All executive officers and directors as a group............ 1,320.4 81.8%
</TABLE>
- -------------------------
* Represents less than 1%.
(1) Carol E. Bramson and Lawrence E. Fox are officers of First Chicago Equity
Corporation. Accordingly, Ms. Bramson and Mr. Fox may be deemed to be the
beneficial owner of these securities. Ms. Bramson and Mr. Fox 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 and Lawrence E. Fox are partners of Cross Creek Partners.
Accordingly, Ms. Bramson, and Mr. Fox may be deemed to be the beneficial
owner of these securities. Ms. Bramson, and Mr. Fox disclaim beneficial
ownership of these securities.
21
<PAGE> 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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.
Johnston invested $125,000, to purchase common stock of Pierce & Stevens.
In connection with the formation of Sovereign Specialty Chemicals, Inc. on
July 31, 1997 and the reorganization of the Company, the Parent Partnership
exchanged partnership units, with a fair value of approximately $1.5 million,
for ownership interests in SIA and P&S held by management.
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.
In 1998, the Parent Partnership contributed approximately $2.8 notes
receivable from management. The notes receivable represent a portion of
management's purchase price of its equity in the Parent Partnership. These
contributed loans accrue interest at principally the prime rate.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Financial
Statements."
2. None.
3. The exhibits listed in the "Index to Exhibits."
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K, as
amended, dated May 5, 1998 under Item 2, Acquisition or Disposition of Assets,
to report our sale of Mercer Products Co., Inc.
(c) Exhibits. The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedule.
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 30, 1999.
SOVEREIGN SPECIALTY CHEMICALS, INC.
By: /s/ ROBERT B. COVALT
------------------------------------
Robert B. Covalt
Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 1999.
23
<PAGE> 25
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
* Chairman, Chief Executive Officer, President
- ----------------------------------------------------- and Director (Principal Executive Officer)
Robert B. Covalt
* Vice President, Chief Financial Officer,
- ----------------------------------------------------- Treasurer, Secretary and Director (Principal
John R. Mellett Financial Officer)
* Principal Accounting Officer
- -----------------------------------------------------
Patrick W. Stanton
* Director
- -----------------------------------------------------
Neil G. Reddeman
* Director
- -----------------------------------------------------
Charles A. Aldag
* Director
- -----------------------------------------------------
Carol E. Bramson
* Director
- -----------------------------------------------------
Lawrence E. Fox
* Director
- -----------------------------------------------------
Karl D. Loos
* Director
- -----------------------------------------------------
Reeve B. Waud
- ---------------
* The undersigned, by signing his name hereto, does sign and execute this report pursuant to the Power
of Attorney executed by the above named officers and directors of the registrant and filed with the
Securities and Exchange Commission on behalf of such officers and directors.
/s/ ROBERT B. COVALT
- -----------------------------------------------------
Robert B. Covalt
Attorney-in-Fact
</TABLE>
24
<PAGE> 26
ANNUAL REPORT ON FORM 10-K
ITEMS 8 AND 14(A)
INDEX TO FINANCIAL STATEMENTS
F-1
<PAGE> 27
SOVEREIGN SPECIALTY CHEMICALS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-3
Consolidated Financial Statements
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholder's Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-2
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sovereign Specialty Chemicals, Inc.
We have audited the accompanying consolidated balance sheets of Sovereign
Specialty Chemicals, Inc. and Subsidiaries (the Company) as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholder's
equity, and cash flows for the period from March 31, 1996 (date of inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998. Our audits
also included the financial statement schedule listed in the index at Item
14(d). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial position of Sovereign
Specialty Chemicals, Inc. and Subsidiaries at December 31, 1997 and 1998, 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, and
for the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
March 15, 1999
F-3
<PAGE> 29
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,863 $ 6,413
Accounts receivable, less allowance of $528 and $655...... 32,710 26,824
Inventories, net.......................................... 19,822 21,042
Deferred income taxes..................................... 1,560 944
Other current assets...................................... 3,799 4,539
-------- --------
Total current assets........................................ 63,754 59,762
Property, plant, and equipment, net......................... 49,497 48,308
Goodwill, net............................................... 101,205 123,177
Deferred financing costs, net............................... 9,913 11,137
Other assets................................................ 1,435 375
-------- --------
Total assets................................................ $225,804 $242,759
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 16,400 $ 13,008
Accrued expenses.......................................... 13,452 14,023
Other current liabilities................................. 2,200 --
Current portion of long-term debt......................... 1,802 2,993
Current portion of capital lease obligations.............. 161 120
-------- --------
Total current liabilities................................... 34,015 30,144
Long-term debt, less current portion........................ 126,900 152,600
Capital lease obligations, less current portion............. 3,401 3,564
Deferred income taxes....................................... 3,086 209
Other long-term liabilities................................. 4,208 4,189
Stockholder's equity:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding.................................... -- --
Additional paid-in capital.................................. 55,652 52,479
Retained earnings (accumulated deficit)..................... 949 (522)
Management notes receivable................................. (2,535) --
Cumulative translation adjustment........................... 128 96
-------- --------
Total stockholder's equity.................................. 54,194 52,053
-------- --------
Total liabilities and stockholder's equity.................. $225,804 $242,759
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 30
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31, 1996
YEAR ENDED YEAR ENDED (DATE OF
DECEMBER 31, DECEMBER 31, ACQUISITION) TO
1998 1997 DECEMBER 31, 1996
------------ ------------ -----------------
<S> <C> <C> <C>
Net sales.............................................. $211,335 $134,771 $ 37,792
Cost of goods sold..................................... 144,039 92,889 26,637
-------- -------- --------
Gross profit........................................... 67,296 41,882 11,155
Selling, general, and administrative expenses.......... 46,418 30,244 9,458
Minority interest...................................... -- 50 155
-------- -------- --------
Operating income....................................... 20,878 11,588 1,542
Interest expense....................................... 14,979 9,080 1,666
Interest income........................................ (267) -- --
Loss on sale of business............................... 1,025 -- --
-------- -------- --------
Income (loss) before income taxes and extraordinary
losses............................................... 5,141 2,508 (124)
Income taxes........................................... 3,494 1,315 (99)
-------- -------- --------
Income (loss) before extraordinary losses.............. 1,647 1,193 (25)
Extraordinary losses, net of tax benefits.............. 176 1,409 281
-------- -------- --------
Net income (loss)...................................... $ 1,471 $ (216) $ (306)
======== ======== ========
Pro forma (See Note 3, "Income Taxes"):
Net income (loss) before income taxes and extraordinary
losses, as stated.................................... $ 2,508 $ (124)
Income taxes:
As stated............................................ 1,315 (99)
Additional pro forma income taxes.................... 657 154
-------- --------
1,972 55
-------- --------
Net income (loss) before extraordinary losses.......... 536 (179)
Extraordinary losses................................... 1,409 169
-------- --------
Net loss............................................... $ (873) $ (348)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 31
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
ADDITIONAL EARNINGS MANAGEMENT OTHER
COMMON PAID-IN (ACCUMULATED NOTES COMPREHENSIVE
STOCK CAPITAL DEFICIT) RECEIVABLE INCOME TOTAL
------ ---------- ------------ ---------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996
(date of inception)......... $-- $ 5,585 $ -- $ -- $ -- $ 5,585
Comprehensive loss:
Net loss.................... -- -- (306) -- (306)
Translation adjustment...... -- -- -- 61 61
-------
Total comprehensive
loss................... (245)
Capital contributions......... -- 12,258 -- -- 12,258
Distributions................. -- (154) -- -- (154)
--- ------- ------ ------- ---- -------
Balance at December 31,
1996........................ -- 17,689 (306) -- 61 17,444
Comprehensive loss:
Net loss.................... -- -- (216) -- (216)
Translation adjustment...... -- -- -- 35 35
-------
Total comprehensive
loss................... (181)
Capital contributions......... -- 33,800 -- -- 33,800
Issuance of equity to purchase
minority interests.......... -- 990 -- -- 990
--- ------- ------ ------- ---- -------
Balance at December 31,
1997........................ -- 52,479 (522) -- 96 52,053
Comprehensive income:
Net income.................. -- -- 1,471 -- 1,471
Translation adjustment...... -- -- -- 32 32
-------
Total comprehensive
income................. 1,503
Contribution of management
notes receivable............ -- 2,765 -- (2,765) -- --
Payments received on
management notes
receivable.................. -- -- -- 230 -- 230
Compensation expense under
management incentive
plans....................... -- 408 -- -- 408
--- ------- ------ ------- ---- -------
Balance at December 31,
1998........................ $-- $55,652 $ 949 $(2,535) $128 $54,194
=== ======= ====== ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 32
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31, 1996
YEAR ENDED YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1998 1997 1996
------------ ------------ -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ 1,471 $ (216) $ (306)
Adjustments to reconcile net income (loss)to net
cash provided by operating activities:
Depreciation and amortization................. 9,477 6,049 1,600
Loss on sale of business...................... 1,025 -- --
Compensation expense under management
incentive plans............................. 408 -- --
Deferred income taxes......................... 2,025 238 (133)
Minority interests............................ -- 50 155
Amortization of deferred financing costs...... 1,213 651 47
Extraordinary losses.......................... 176 1,409 281
Changes in operating assets and liabilities
(net of acquisitions and disposition):
Accounts receivable......................... (7,371) 642 1,197
Inventories................................. (1,293) (114) 88
Prepaid expenses and other assets........... 567 (1,889) (462)
Accounts payable and other liabilities...... 5,920 (434) 3,495
-------- --------- --------
Net cash provided by operating activities.......... 13,618 6,386 5,962
INVESTING ACTIVITIES
Proceeds from sale of business..................... 35,308 -- --
Acquisition of businesses, net of acquired cash.... (15,089) (133,338) (62,718)
Purchase of property, plant, and equipment......... (4,472) (1,834) (688)
-------- --------- --------
Net cash provided by (used in) investing
activities....................................... 15,747 (135,172) (63,406)
FINANCING ACTIVITIES
Capital contributions.............................. -- 33,800 17,835
Payments on management notes receivable............ 230 -- --
Proceeds from revolving credit facilities.......... 6,524 593 3,228
Payments on revolving credit facilities............ (6,215) -- (7,596)
Proceeds from issuance of long term debt........... -- 155,000 54,226
Deferred financing costs........................... (282) (12,672) (1,216)
Payments on long-term debt......................... (30,081) (41,360) (8,699)
Payments on capital lease obligations.............. (122) (270) (53)
Distributions...................................... -- -- (158)
-------- --------- --------
Net cash (used in) provided by financing
activities....................................... (29,946) 135,091 57,567
Effect of exchange rate changes on cash............ 31 4 (19)
-------- --------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (550) 6,309 104
Cash and cash equivalents at beginning of year..... 6,413 104 --
-------- --------- --------
Cash and cash equivalents at end of year........... $ 5,863 $ 6,413 $ 104
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 33
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1. REORGANIZATION AND BASIS OF PRESENTATION
Effective July 31, 1997, Sovereign Specialty Chemicals, L.P. (the Parent
Partnership) reorganized its corporate structure. The Parent Partnership
purchased the outstanding minority interests in its majority-owned subsidiaries
through the exchange of partnership units for the outstanding membership
interests in Sovereign Engineered Adhesives, L.L.C. (SEA) and common stock in
P&S Holdings, Inc. which were not previously owned. The acquisition of minority
interests was accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations", and goodwill in the
amount of $990 was recognized. Concurrently, SEA was merged with and into SIA
Adhesives, Inc. (SIA), a newly formed C corporation and SEA was dissolved. Also,
P&S Holdings, Inc., was merged into its wholly owned subsidiary, Pierce &
Stevens Corp. (P&S). At the same time, Sovereign Specialty Chemicals, Inc.
(Sovereign) was formed as a wholly owned subsidiary of the Parent Partnership.
The initial capitalization of Sovereign was comprised of a $33.8 million
contribution from investors through the Parent Partnership. Additionally the
Parent Partnership contributed its wholly owned subsidiaries, SIA and P&S, to
Sovereign. The contribution of the Subsidiaries was accounted for at historical
book value (after accounting for the purchase of the minority interests) in a
manner similar to pooling of interests. Upon the consummation of the
transactions, SIA and P&S became wholly owned subsidiaries of Sovereign.
Unless otherwise noted, all references to "the Company" herein refer to
Sovereign and its wholly owned subsidiaries.
The financial statements as of December 31, 1996 and for the period from
March 31, 1996 (date of inception) through December 31, 1996 and as of and for
the year ended December 31, 1997 are presented on a basis "as if" the Company
existed prior to July 31, 1997 and included the operations of the subsidiaries
from their respective dates of acquisition.
2. NATURE OF BUSINESS
The Company develops, produces and distributes adhesives, sealants and
coatings utilized in numerous industrial and commercial applications. Commercial
applications of the Company's products include housing repair, remodeling and
construction, industrial, overprint coatings, and flexible packaging. Products
are sold and distributed primarily throughout the United States.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
transactions of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in first-out (FIFO) method.
F-8
<PAGE> 34
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
respective estimated useful lives of the assets for financial reporting
purposes, as follows: three to ten years for machinery and equipment; five to
seven years for furniture and fixtures, and 39 years for buildings and
improvements. Accelerated depreciation methods are used for income tax purposes.
Depreciation expense was $4,237, $2,979 and $1,010 for the periods ended
December 31, 1998, 1997 and 1996, respectively.
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
periods ranging from 15 to 25 years. Accumulated amortization of goodwill was
$8,672 and $3,660 as of December 31, 1998 and 1997, respectively.
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 ranging from
seven to ten years. Accumulated amortization was $1,911 million and $710 as of
December 31, 1998 and 1997, respectively.
LONG-LIVED ASSETS
The Company evaluates its long-lived assets (including related goodwill) on
an ongoing basis. Identifiable intangibles are reviewed for impairment wherever
events or changes in circumstances indicate that the carrying amount of the
related asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to future
undiscounted cash flows expected to be generated by the asset. If the asset is
determined to be impaired, the impairment recognized is measured by the amount
by which the carrying value of the asset exceeds its fair value.
INCOME TAXES
Deferred taxes have been recognized for the tax consequences of temporary
differences by applying the enacted statutory income tax rates applicable to
future years of differences between the financial statement carrying amounts and
the tax bases of the existing assets and liabilities. Deferred taxes have been
recognized due to differences in timing for financial reporting and tax
reporting of depreciation, net operating loss carryforwards, goodwill, inventory
reserves and capitalization, the allowance for doubtful accounts, and various
accruals.
Prior to its restructuring on July 31, 1997 (see also Note 1), the
consolidated entity was composed of various types of entities including a
limited partnership and a limited liability company. Income tax liabilities for
such entities are generally "passed through" to their owners. Subsequent to the
restructuring, the Company and its subsidiaries will file a consolidated federal
tax return. The financial statements of operations for the year ended December
31, 1997 and for the period ended December 31, 1996, include "pro forma" income
taxes as if the companies had been subject to income taxes for all periods
presented.
MANAGEMENT NOTES RECEIVABLE
Certain members of management of the Company have purchased units in the
Parent Partnership through the issuance of notes receivable. During 1998, these
notes receivable were contributed by the Parent
F-9
<PAGE> 35
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Partnership to the Company. The notes receivable are collateralized by the
Parent Partnership units and as such, have been reflected as a reduction of the
Company's stockholder's equity.
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 expenses were $4.2 million, $3.0 million and $0.7 million for
the periods ended December 31, 1998, 1997 and 1996, respectively.
TRANSLATION OF FOREIGN CURRENCIES
Except as noted below, the Company's foreign subsidiaries use the local
currency as their functional currency; accordingly, their financial statements
are translated using the current exchange rates as of the reporting dates for
the balance sheet and using a weighted-average exchange rate during the period
for statement of operations accounts. Adjustments resulting from such
translation are included in cumulative translation adjustment, a separate
component of stockholder's equity. Because Mexico is classified as a
hyperinflationary economy through December 31, 1998, P&S's Mexican subsidiary is
required to use the U.S. dollar as its functional currency. Accordingly, the
financial statements of the Mexican subsidiary have been remeasured from the
peso to the U.S. dollar. Gains and losses on such remeasurement have been
included in the statement of operations.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (Statement
131). Management and the Company's Chief Operating Decision Maker assess
performance and make decisions about resource allocation on a consolidated basis
as the Company is one operating segment. The Company operates in the adhesive
sealants and coatings segment of the specialty chemicals industry. Products are
sold and distributed primarily throughout the United States. No customer
accounted for more than 10.0% of the Company's accounts receivables or sales for
the years ended December 31, 1998 and 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade accounts receivable,
loans receivable, related party, accounts payable and accrued expenses, and
other current liabilities approximate to their fair value at December 31, 1998
and 1997, due to the short-term nature of these 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.
F-10
<PAGE> 36
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
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. The Company
estimates an allowance for doubtful accounts based on the creditworthiness of
its customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect the Company's estimate of its bad debt.
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 reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
4. BUSINESS COMBINATIONS AND SALE OF BUSINESS
Effective March 31, 1996, the Company purchased, through SEA, the Adhesives
Systems Division of The BFGoodrich Company (BFG). The purchase was made in
accordance with the Asset Purchase Agreement between the Company, SEA and BFG.
The Company acquired certain assets and assumed certain commitments for $15,819,
including transaction related costs of $607 and net of acquired cash of $404.
The acquisition was accounted for as a purchase and, as such, the results of
operations subsequent to March 31, 1996, have been included in the consolidated
statement of operations of the Company. In connection with the acquisition, the
Company recognized goodwill in the amount of approximately $4.2 million which is
being amortized over a period of 15 years.
Effective August 19, 1996, the company purchased, through P&S Holdings,
Inc., 100% of the outstanding common stock of P&S. The cost of the acquisition
was $46,899 including transaction costs of approximately $1.2 million. The
acquisition was accounted for as a purchase and, as such, the results of
operations subsequent to August 19, 1996, have been included in the consolidated
statement of operations of the Company. In connection with the acquisition, the
Company recognized goodwill in the amount of approximately $14.0 million which
is being amortized over a period of 15 years.
Effective August 5, 1997, the Company purchased from Laporte plc (Laporte),
the net assets of Laporte Construction Chemicals North America, Inc.;
Evode-Tanner Industries, Inc.; and Mercer Products Company, Inc. (the Acquired
Companies). The Acquired Companies were affiliated by common control as
wholly-owned subsidiaries of Laporte. The purchase price of the Acquired
Companies was approximately $133.3 million, including expenses relating to the
purchase of approximately $1.5 million, and net of acquired
F-11
<PAGE> 37
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS AND SALE OF BUSINESS (CONTINUED)
cash of $707. Allocation of the purchase price to the fair values of significant
assets and liabilities as of the date of purchase was as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $133,338
Assets acquired/liabilities assumed:
Accounts receivable....................................... 16,469
Inventories............................................... 11,033
Property, plant, and equipment............................ 22,431
Accounts payable.......................................... (11,717)
Accrued liabilities....................................... (9,954)
Capital lease obligations................................. (3,662)
Other, net................................................ 981
--------
25,581
--------
Goodwill.................................................... $107,757
========
</TABLE>
The acquisitions were accounted for as purchases and, as such, the results
of the operations of the Acquired Companies subsequent to August 5, 1997 (date
of acquisition), have been included in the consolidated statement of operations
of the Company. Goodwill recognized in the acquisitions is being amortized over
a period of 25 years. The Acquired Companies are wholly-owned subsidiaries of
Sovereign and operate as OSI Sealants, Inc. (OSI), Tanner Chemicals, Inc.
(Tanner), and Mercer Products Company, Inc. (Mercer).
The unaudited pro forma consolidated statement of operations as if all of
the above acquisitions had occurred as of January 1, 1997, would have been as
follows for the year ended December 31, 1997:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Net sales................................................... $208,345
Cost of goods sold.......................................... 142,615
--------
Gross profit................................................ 65,730
Selling general and administrative expenses................. 46,874
--------
Operating income............................................ 18,856
Interest expense............................................ 16,478
Income taxes................................................ 1,747
--------
Income (loss) before extraordinary losses................... $ 631
========
</TABLE>
Effective June 12, 1998, the Company acquired the net assets of the C&A
Division of KJ Quinn (C&A Division) a Seabrook, New Hampshire developer and
manufacturer of specialty polyurethane formulations for adhesives and coatings.
The transaction was accounted for as a purchase and as such, the results of the
operations subsequent to the date of acquisition have been included on the
consolidated statement of operations of the Company. The Company paid cash and
issued $2.8 million in notes payable to former owners. Goodwill of $1.2 million
was recognized in the acquisition and is being amortized over a period of 15
years.
Effective August 3, 1998, the Company acquired the PL Adhesives and
Sealants brand and product line ("PL") from ChemRex Inc. in Shakopee, Minnesota.
PL consists of solvent-based and polyurethane adhesives and sealants. The
transaction was accounted for as a purchase and as such the results of the
operations subsequent to the date of acquisition have been included in the
consolidated statement of
F-12
<PAGE> 38
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS AND SALE OF BUSINESS (CONTINUED)
operations of the Company. The purchase price was approximately $9.8 million.
Goodwill of $9.1 million was recognized in the acquisition and is being
amortized over a period of 15 years.
Effective April 21, 1998, the Company sold Mercer to Burke Industries, Inc.
Net proceeds from the sale were approximately $35.3 million. The book value of
the net assets sold, including goodwill of approximately $25.0 million, was
approximately $36.3 million and the Company recognized a book loss on the sale
of approximately $1.0 million.
5. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials............................................ $ 8,515 $11,594
Work in process.......................................... 326 150
Finished goods........................................... 10,981 9,298
------- -------
$19,822 $21,042
======= =======
</TABLE>
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1998 1997
---- ----
<S> <C> <C>
Land..................................................... $ 4,891 $ 4,099
Building and improvements................................ 19,677 18,915
Machinery and equipment.................................. 28,017 27,271
Furniture and fixtures................................... 936 962
Construction-in-progress................................. 3,742 982
------- -------
57,263 52,229
Less: Accumulated depreciation........................... 7,766 3,921
------- -------
$49,497 $48,308
======= =======
</TABLE>
7. OTHER CURRENT ASSETS
Other current assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
---- ----
<S> <C> <C>
Prepaid expense............................................ $1,653 $1,337
Acquisition purchase price adjustment receivable........... -- 1,300
Prepaid income taxes....................................... 518 --
Other...................................................... 1,628 1,902
------ ------
$3,799 $4,539
====== ======
</TABLE>
F-13
<PAGE> 39
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1998 1997
---- ----
<S> <C> <C>
Interest................................................... $ 5,121 $ 5,344
Compensations and benefits................................. 4,118 4,435
Rebates and warranty....................................... 1,173 1,307
Insurance.................................................. 242 526
Professional fees.......................................... 193 315
Taxes other than income.................................... 399 268
Other...................................................... 2,208 1,828
------- -------
$13,452 $14,023
======= =======
</TABLE>
9. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
---- ----
<S> <C> <C>
Senior subordinated notes................................ $125,000 $125,000
Term loan................................................ -- 30,000
Revolving credit facilities.............................. 902 593
Acquisition notes payable................................ 2,800 --
-------- --------
128,702 155,593
Less: Current maturities................................. 1,802 2,993
-------- --------
$126,900 $152,600
======== ========
</TABLE>
In connection with its acquisition of SEA on March 31, 1996, the Company
entered into a credit agreement (the Initial Credit Agreement) which provided a
revolving credit facility and a long-term note. On August 19, 1996, the Company
repaid its outstanding debt obligations under the Initial Credit Agreement and
recognized an extraordinary loss on the early extinguishment of debt in the
amount of $281.
On August 19, 1996, concurrent with the acquisition of P&S, the Company
entered into new credit agreements (the Credit Agreements) which provided for a
revolving credit facility, a long-term note, and a senior subordinated note. On
July 31, 1997, the Company repaid its outstanding debt obligations under the
Credit Agreements and recognized an extraordinary loss on the early
extinguishment of debt of $1,409, net of tax benefit of $948.
Senior Subordinated Notes
On July 31, 1997, the Company completed a private placement issuance of
$125.0 million in principal amount of 9.5% Senior Subordinated Notes due 2007
(the Notes) which was subsequently registered with the Securities and Exchange
Commission (SEC).
F-14
<PAGE> 40
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
Interest on the Notes is payable semi-annually in arrears each February 1
and August 1. On or after August 1, 2002, the Notes may be redeemed at the
option of the Company, in whole or in part, at specified redemption prices plus
accrued and unpaid interest:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2002........................................................ 105.0%
2003........................................................ 103.0%
2004........................................................ 102.0%
2005 and thereafter......................................... 100.0%
</TABLE>
In addition, at any time on or prior to August 1, 2000, the Company may,
subject to certain requirements, redeem up to $40.0 million aggregate principal
amount of the Notes with the net cash proceeds of one or more public equity
offerings, at a price equal to 110.0% of the principal amount to be redeemed
plus accrued and unpaid interest. In the event of a change in control, the
Company would be required to offer to repurchase the Notes at a price equal to
101.0% of the principal amount plus accrued and unpaid interest.
The Notes are general obligations of the Company, subordinated in right of
payment to all existing and future senior debt and are guaranteed by the
Company's wholly-owned subsidiaries -- SIA, P&S, OSI and Tanner (the Guarantor
Subsidiaries). The Company's wholly-owned foreign subsidiaries are not
guarantors of the Notes (the Non-Guarantor Subsidiaries). Each of the Guarantor
Subsidiaries' guarantees of the Notes are full, unconditional, and joint and
several. The Company may incur additional indebtedness, including borrowings
under its Facility (see below), subject to certain limitations. See also Note 16
for financial information as of December 31, 1998, of the Guarantor and the
Non-Guarantor Subsidiaries.
The indenture under which the Notes were issued contains certain covenants
that, among other things, limit the Company from incurring other indebtedness,
engaging in transactions with affiliates, incurring liens, making certain
restricted payments (including dividends), and making certain asset sales. All
such covenants were met at December 31, 1998.
Term Loan
The Company entered into an agreement providing for a $30.0 million term
loan (Term Loan) to fund the purchase of the Acquired Companies (see also Note
5). On April 21, 1998, the Company repaid its outstanding debt obligations under
the Term Loan and recognized an extraordinary loss on the early extinguishment
of debt of $176, net of tax benefit of $118.
Revolving Credit Facilities
The Company has a credit agreement which provides for two revolving credit
facilities (the Facilities) which provide for aggregate borrowings of $50.0
million. The Facilities are also available for letters of credit of up to $10.0
million. The Facilities mature on August 5, 2004. Funds borrowed may not exceed
85.0% and 75.0% of the Company's eligible domestic accounts receivable and
eligible foreign accounts receivable, respectively and 50.0% of the Company's
eligible inventories, as defined in the Credit Agreement. Amounts advanced are
also collateralized by the Company's existing and future subsidiaries other than
any subsidiary designated as an unrestricted subsidiary. At December 31, 1998,
the Company's Singapore-based sales office had borrowings of $.9 million against
its facility as described below. This borrowing is applied against the
Facilities in determining the Company's available borrowings at December 31,
1998. As a result, the Company has $49.1 million available on its Facilities.
At the Company's election, amounts outstanding under the Facilities will
bear interest at either the London Interbank Offered Rate (LIBOR), plus 1.5% to
2.5% or the Alternate Base Rate (ABR), plus a
F-15
<PAGE> 41
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
0.25% to 1.25%. The variable spread to LIBOR or ABR is determined by the
Company's leverage ratio as detailed in the Amended and Restated Credit
Agreement. The ABR rate is defined in the Amended and Restated Credit Agreement
as the highest of: (i) the federal funds rate plus 0.5%, (ii) the prime rate for
such day, or (iii) the certificate of deposit rate plus 1.0%. Interest is due
quarterly and the interest rate was approximately 8.25% at December 31, 1998.
The Company is required to pay, on a quarterly basis, a commitment fee
equal to 0.5% per annum. The Company is also obligated to pay: (i) a per annum
letter of credit fee equal to the applicable margin for LIBOR loans on the
aggregate amount of outstanding letters of credit; (ii) bank fees for letters of
credit issued of 0.25% per annum; and (iii) agent, arrangement, and other
similar fees.
The Facilities contain several covenants that, among other things, restrict
the ability of the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay or amend other indebtedness, pay dividends, or
make other changes in the business conducted by the Company or its subsidiaries.
In addition, the Facilities require 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. All such covenants were met at
December 31, 1998.
The Company's Singapore-based sales office has a facility providing for
borrowings up to SG $1.0 million and secured by a SG $1.0 million letter of
credit. Interest is payable at United States prime plus 1.0%. As of December 31,
1998, $.9 million was drawn on the facility.
Acquisition Notes Payable
In connection with its acquisition of the C&A Division in June 1998, the
Company issued notes payable to the former owners aggregating $2.8 million, of
which $1.8 million will be paid over the next two years, and a $1.0 million note
payable that has a maturity date of June 30, 2003 and accrues interest at a rate
of 8.5%. Interest is payable on June 30 of each year commencing in 1999.
Annual Maturities
Annual maturities of the Company's long-term debt are as follows at
December 31, 1998:
<TABLE>
<S> <C>
1999........................................................ $ 1,802
2000........................................................ 1,200
2001........................................................ 200
2002........................................................ 200
2003........................................................ 300
2004 and thereafter......................................... $125,000
--------
$128,702
========
</TABLE>
F-16
<PAGE> 42
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The components of the provision for income taxes (benefit), are as follows
for the years ended December 31, 1998 and 1997 and for the period from March 31,
1996 (date of inception) to December 31, 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current income taxes:
Federal............................................. $ 879 $ -- $ --
State............................................... 187 98 11
Foreign............................................. 207 31 23
------ ------ -----
1,273 129 34
Deferred income taxes (benefit)....................... 2,103 238 (133)
------ ------ -----
3,376 367 (99)
Extraordinary losses.................................. 118 948 --
------ ------ -----
Income taxes (benefit)................................ $3,494 $1,315 $ (99)
====== ====== =====
</TABLE>
The reconciliation of income tax expense computed at the U.S. federal
statutory tax rates to income tax expense (benefit), inclusive of tax benefits
on extraordinary items, is as follows for the years ended December 31, 1998,
1997 and for the period from March 31, 1996 (date of inception) to December 31,
1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes at federal statutory rate.................. $1,663 $ 47 $(43)
Income not subject to income taxes...................... -- (558) (61)
State taxes, net of federal benefit..................... 358 181 2
Foreign income taxes.................................... 207 31 23
Increase (decrease) in valuation allowance.............. (400) 400 --
Goodwill................................................ 720 281 --
Other................................................... 828 (15) (20)
------ ----- ----
Income taxes at the effective rate...................... $3,376 $ 367 $(99)
====== ===== ====
</TABLE>
Income not subject to income taxes represents income from the Parent
Partnership and SEA which, prior to the reorganization (see also Note 1), was
taxed at the partner/member level. Pro forma income taxes, as if the Company and
its subsidiaries were subject to income taxes for all periods presented, are
presented in the statement of operations. In 1998, the Company reversed the
valuation allowance it had established relative to the deferred tax asset
associated with its net operating loss carryforwards as it was able to utilize
those carryforwards in 1998.
F-17
<PAGE> 43
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.......................... $ 292 $ 130
Inventory obsolescence reserve........................... 218 343
Inventory capitalization................................. 197 123
Accrued liabilities...................................... 531 421
Deferred financing costs................................. 334 400
Other.................................................... 553 --
Net operating loss carryforwards......................... -- 1,779
------- -------
2,125 3,196
Less: Valuation allowance.................................. -- 400
------- -------
Deferred tax assets........................................ 2,125 2,796
Deferred tax liabilities:
Accelerated depreciation................................. (2,244) (1,827)
Amortization of goodwill................................. (1,051) (234)
Refundable investment tax credits........................ (126) --
------- -------
Deferred tax liabilities................................... (3,421) (2,061)
------- -------
Net deferred tax (liability) asset......................... $(1,296) $ 735
======= =======
</TABLE>
11. RETIREMENT PLANS
The Company sponsors a defined benefit pension plan covering certain
salaried employees of one subsidiary of the Company. 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 Company has a pension plan covering all union employees of a different
subsidiary. The Company's funding policy has been to contribute annually at
least the minimum required by ERISA. The Plan provides monthly benefits under a
benefit formula.
F-18
<PAGE> 44
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT PLANS (CONTINUED)
The following tables set forth the Company's two defined benefit plans:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in millions)
<S> <C> <C>
Change in projected benefit obligations
Projected benefit obligation at beginning of year......... $1,752 $1,612
Service cost.............................................. 95 104
Interest cost............................................. 128 117
Actuarial (gains) losses.................................. (258) 30
Benefits paid............................................. (105) (111)
------ ------
Projected benefit obligation at end of year............... $1,612 $1,752
------ ------
Change in plan assets
Fair value of plan assets at beginning of year............ $1,742 $1,493
Actual return on plan assets.............................. (83) 316
Company contributions..................................... 165 44
Benefits paid............................................. (105) (111)
------ ------
Fair value of plan assets at end of year.................. $1,719 $1,742
------ ------
Funded status
Funded status............................................. $ 107 $ 10
Unrecognized net actuarial (gains) loss................... (100) 140
------ ------
Prepaid (accrued) benefit cost............................ $ 7 $ 150
====== ======
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost...................................... $ 7 $ 150
Accrued benefit liability................................. --
------ ------
Net amount recognized..................................... $ 7 $ 150
====== ======
Weighted-average assumptions as of December 31
Discount rate............................................. 7.5% 7.5%
Expected return on plan assets............................ 10% 10%
Rate of compensation increase............................. 4.5% 4.5%
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost........................................... $ 95 $ 104 $ 42
Interest cost.......................................... 128 117 29
Expected return on plan assets......................... 83 (316) (19)
---- ----- ----
Benefit cost........................................... $306 $ (95) $ 52
==== ===== ====
</TABLE>
The Company sponsored several defined contribution plans (IRS qualified
401(k) plans). Participation in the plans is available to all salaried and
hourly employees of the company. Participating employees contribute to the
401(k) plans based on a percentage of their compensation which are matched,
based on a percentage of employee contributions by the Company. The Company
recorded expense of $1,020, $600 and $139 for the periods ended December 31,
1998, 1997 and 1996, respectively.
F-19
<PAGE> 45
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. MANAGEMENT INCENTIVE PLANS AND NOTES RECEIVABLE
The Company has implemented, through the Parent Partnership, certain
management incentive plans.
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. The participant is
awarded units in the Parent Partnership and common stock in its general partner.
The Company recognized compensation expense for the excess of the fair market
value of the units and common stock over the purchase price in the amount of
approximately $408 and $22 for the years ended December 31, 1998 and 1997.
As allowed under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company will continue to apply APB Opinion No. 25
and related interpretations in accounting for the awards under the Company's
Stock Incentive Pool. Accordingly, compensation expense has only been recognized
for awards with an exercise price below the market value at the date of grant.
Had compensation cost for the Company's Stock Incentive Pool been determined in
accordance with SFAS No. 123, it would have resulted in net income that
approximate the amounts reported.
The fair value of each award is estimated on the date of award using the
Minimum Value award-pricing model with risk free interest rates of 5.50% and
expected award lives of 5 years for 1998 and 1997. The Company has not paid and
does not anticipate paying dividends; therefore, the expected dividend yield is
assumed to be zero.
Because the Company's awards have characteristics significantly different
from those of traded stock options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its awards.
Long-Term Incentive Plan
The Parent Partnership adopted its Long-Term Incentive Plan in May 1997 in
order to provide long-term incentive awards to 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 as 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. Individuals joining the Company during the plan cycle 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. At
December 31, 1998 and 1997, no grants were awarded under the plan.
Management Notes Receivable
Certain members of management borrowed from the Parent Partnership a
portion of the purchase price for their units in the Parent Partnership. In
1998, the Parent Partnership contributed those notes receivable to
F-20
<PAGE> 46
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. MANAGEMENT INCENTIVE PLANS AND NOTES RECEIVABLE (CONTINUED)
the Company as an equity contribution. The amount contributed was approximately
$2.8 million. The notes receivable are collateralized by the Parent Partnership
units and as such, the balance has been reflected as a reduction of the
Company's Stockholder's equity. The loans are long term receivables from
management and accrue interest at principally the prime rate as determined by a
leading financial institution. Members of management with loans outstanding have
one-half of their bonus in each year applied to principal and interest on the
loans. The balance of the management loans at December 31, 1998 was
approximately $2.5 million.
13. CAPITAL LEASES
Property under capital leases included within property, plant, and
equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
---- ----
<S> <C> <C>
Buildings.................................................. $1,912 $1,912
Machinery and equipment.................................... 105 208
------ ------
2,017 2,120
Less: Accumulated depreciation............................. 324 215
------ ------
$1,693 $1,905
====== ======
</TABLE>
Future minimum lease payments under capital leases at December 31, 1998,
together with the present value of the minimum lease payments are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 637
2000........................................................ 620
2001........................................................ 620
2002........................................................ 676
2003........................................................ 676
2004 and thereafter......................................... 3,288
-------
Total minimum payments...................................... 6,517
Less: Amounts representing interest......................... (2,955)
-------
Present value of minimum payments........................... 3,562
Less: Current portion....................................... (161)
-------
Total long-term portion..................................... $ 3,401
=======
</TABLE>
14. ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local, and foreign
environmental 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 relation to health, safety, and
protection of the environment. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and for certain damages resulting from past spills,
disposals, or other releases of hazardous substances. In connection with the
acquisition of businesses, the Company has conducted substantial investigations
to assess potential environmental liabilities. The investigations, performed by
independent consultants of all facilities, found that certain facilities have
had or may have had releases of hazardous materials that may require
remediation. In addition, the facilities may be subject to potential liabilities
for contamination from off-site disposal of substances or wastes.
F-21
<PAGE> 47
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ENVIRONMENTAL MATTERS (CONTINUED)
Certain subsidiaries have been named as potentially responsible parties
under the Comprehensive Environment Response, Compensation, and Liability Act
(CERCLA) and/or similar environmental laws for cleanup of multiparty waste
disposal sites. The Company is entitled to indemnification by previous owners of
certain acquired businesses, and the Company 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. At December 31,
1998, the Company had established accrued liabilities relating to environmental
matters of approximately $5.3 million. The liabilities are included in the
balance sheet as "other long-term liabilities" and "other current liabilities"
and represent known environmental liabilities for which the Company have been
indemnified. Management estimates that it will incur approximately $2.2 million
of these indemnified liabilities in 1999. The Company does not currently believe
that potential additional expenses for environmental liabilities will have a
material adverse effect on the financial condition or results of operations of
the Company.
15. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental cash flow data in addition to the
information provided in the consolidated statements of cash flows for the years
ended December 31, 1998, 1997 and for the period from March 31, 1996 (date of
inception) to December 31, 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Interest........................................ $13,675 $3,536 $1,291
Income taxes.................................... $ 2,223 $ 302 $ 20
</TABLE>
In connection with its purchase of the C&A Division in June 1998, the
Company issued $2.8 in notes payable to former owners as part of the purchase
price. The Parent Partnership contributed $2.8 million in management notes
receivable in 1998.
F-22
<PAGE> 48
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. OTHER FINANCIAL INFORMATION
The Company is a holding company with no independent assets or operations.
Full separate financial statements of the Guarantor Subsidiaries have not been
presented as the guarantors are wholly-owned subsidiaries of the Company.
Management does not believe that inclusion of such financial statements would be
material to investors. The financial statement data as of December 31, 1998 and
1997, respectively of the Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries are below. The financial statement data of the Guarantor
Subsidiaries include SIA, P&S, OSI, and Tanner under the caption "the Company."
For purposes of this disclosure, the results of operations for Mercer for the
period ended April 21, 1998 (date of disposition) are separately reported.
The following sets forth the financial data at December 31, 1998 and for
the year then ended:
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR
THE COMPANY MERCER SUBSIDIARIES TOTAL
------------ -------- ------------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $196,989 $ 7,218 $ 7,128 $211,335
Cost of goods sold.............................. 133,997 4,700 5,342 144,039
-------- ------- ------- --------
Gross profit.................................... 62,992 2,518 1,786 67,296
Selling, general, and administrative expenses... 43,094 1,439 1,885 46,418
-------- ------- ------- --------
Operating income (loss)......................... 19,898 1,079 (99) 20,878
Interest expense, net........................... 13,718 840 154 14,712
Loss on sale of business........................ 1,025 -- -- 1,025
-------- ------- ------- --------
Income (loss) before income taxes and
extraordinary losses.......................... $ 5,155 $ 239 $ (253) $ 5,141
======== ======= ======= ========
BALANCE SHEET DATA:
Assets:
Current assets.................................. $ 60,379 $ 3,375 $ 63,754
Property, plant and equipment, net.............. 48,702 795 49,497
Goodwill, net................................... 101,205 -- 101,205
Deferred financing costs, net................... 9,913 -- 9,913
Other assets.................................... 1,253 182 1,435
-------- ------- --------
Total assets.................................... $221,452 $ 4,352 $225,804
======== ======= ========
Liabilities and stockholder's equity (deficit):
Current liabilities............................. $ 30,665 $ 3,350 $ 34,015
Long-term liabilities........................... 135,367 2,228 137,595
Total stockholder's equity (deficit)............ 55,420 (1,226) 54,194
-------- ------- --------
Total liabilities and stockholder's equity...... $221,452 $ 4,352 $225,804
======== ======= ========
</TABLE>
F-23
<PAGE> 49
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR
THE COMPANY MERCER SUBSIDIARIES TOTAL
------------ -------- ------------- --------
<S> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA
OPERATING ACTIVITIES
Net income (loss)............................... $ 1,486 $ 238 $ (253) $ 1,471
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 8,699 422 356 9,477
Deferred income taxes......................... 2,025 -- -- 2,025
Loss on sale of business...................... 1,025 -- -- 1,025
Compensation expense on management incentive
plan....................................... 408 -- -- 408
Amortization of deferred financing costs...... 1,129 84 -- 1,213
Extraordinary losses.......................... 176 -- -- 176
Changes in operating assets and liabilities
(net of effect of acquired companies)...... (747) (1,021) (409) (2,177)
-------- ------- ------- --------
Net cash provided by (used in) operating
activities.................................... 14,201 (277) (306) 13,618
INVESTING ACTIVITIES
Acquisition, disposition of businesses, net (net
of acquired cash)............................. 20,219 -- -- 20,219
Purchase of property, plant, and equipment...... (3,960) (188) (324) (4,472)
-------- ------- ------- --------
Net cash provided by (used in) investing
activities.................................... 16,259 (188) (324) 15,747
FINANCING ACTIVITIES
Capital contributions........................... 230 -- -- 230
Net proceeds from revolving credit facilities... 309 -- -- 309
Proceeds from issuance of long-term debt........ -- -- -- --
Deferred financing costs........................ (282) -- -- (282)
Payments on long-term debt...................... (30,081) -- -- (30,081)
Payments on capital lease obligations........... (122) -- -- (122)
-------- ------- ------- --------
Net cash (used in) financings activities........ (29,946) -- -- (29,946)
Effect of exchange rate changes on cash......... 31 -- -- 31
-------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................... 545 (465) (630) (550)
Cash and cash equivalents at beginning of
year.......................................... 5,722 501 190 6,413
-------- ------- ------- --------
Cash and cash equivalents at end of year........ $ 6,269 $ 36 $ (440) $ 5,863
======== ======= ======= ========
</TABLE>
F-24
<PAGE> 50
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following sets forth the financial data at December 31, 1997 and for
the year then ended:
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR
THE COMPANY MERCER SUBSIDIARIES TOTAL
------------ -------- ------------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 119,951 $ 9,945 $4,875 $ 134,771
Cost of goods sold............................. 82,608 6,921 3,360 92,889
--------- ------- ------ ---------
Gross profit................................... 37,343 3,024 1,515 41,882
Selling, general, and administrative
expenses..................................... 26,692 1,899 1,540 30,131
--------- ------- ------ ---------
Operating income (loss)........................ 10,651 1,125 (25) 11,751
Foreign exchange loss.......................... -- -- 163 163
Interest expense............................... 7,858 1,117 105 9,080
--------- ------- ------ ---------
Income (loss) before income taxes and
extraordinary losses......................... $ 2,793 $ 8 $ (293) $ 2,508
========= ======= ====== =========
BALANCE SHEET DATA:
Assets:
Current assets................................. $ 50,235 $ 6,761 $2,766 $ 59,762
Property, plant and equipment, net............. 42,772 4,952 584 48,308
Goodwill, net.................................. 98,368 24,809 -- 123,177
Deferred financing costs, net.................. 9,295 1,842 -- 11,137
Other assets................................... 261 -- 114 375
--------- ------- ------ ---------
Total assets................................... $ 200,931 $38,364 $3,464 $ 242,759
========= ======= ====== =========
Liabilities and stockholder's equity (deficit):
Current liabilities............................ $ 25,589 $ 2,082 $2,473 $ 30,144
Long-term liabilities.......................... 128,445 30,175 1,942 160,562
Total stockholder's equity (deficit)........... 46,897 6,107 (951) 52,053
--------- ------- ------ ---------
Total liabilities and stockholder's equity..... $ 200,931 $38,364 $3,464 $ 242,759
========= ======= ====== =========
</TABLE>
F-25
<PAGE> 51
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES
----------------------- NON-GUARANTOR
THE COMPANY MERCER SUBSIDIARIES TOTAL
------------ -------- ------------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA
OPERATING ACTIVITIES
Net income (loss).............................. $ 75 $ 2 $ (293) $ (216)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 5,323 699 27 6,049
Deferred income taxes........................ 72 166 -- 238
Minority interests........................... 50 -- -- 50
Amortization of deferred financing costs..... 651 -- -- 651
Extraordinary losses......................... 1,409 -- -- 1,409
Changes in operating assets and liabilities
(net of effect of acquired companies)..... (1,301) (391) (103) (1,795)
--------- ------- ------ ---------
Net cash provided by (used in) operating
activities................................... 6,279 476 (369) 6,386
INVESTING ACTIVITIES
Acquisition of businesses (net of acquired
cash)........................................ (133,338) -- -- (133,338)
Purchase of property, plant, and equipment..... (1,429) (37) (368) (1,834)
--------- ------- ------ ---------
Net cash used in investing activities.......... (134,767) (37) (368) (135,172)
FINANCING ACTIVITIES
Capital contributions.......................... 33,800 -- -- 33,800
Proceeds from revolving credit facility........ -- -- 593 593
Payments on revolving credit facility.......... -- -- -- --
Proceeds from issuance of long-term debt....... 155,000 -- -- 155,000
Deferred financing costs....................... (12,672) -- -- (12,672)
Payments on long-term debt..................... (41,360) -- -- (41,360)
Payments on capital lease obligations.......... (270) -- -- (270)
Distributions.................................. -- -- -- --
--------- ------- ------ ---------
Net cash provided by financings activities..... 134,498 -- 593 135,091
Effect of exchange rate changes on cash........ -- -- 4 4
--------- ------- ------ ---------
Net increase (decrease) in cash and cash
equivalents.................................. 6,010 439 (140) 6,309
Cash and cash equivalents at beginning of
year......................................... (288) 62 330 104
--------- ------- ------ ---------
Cash and cash equivalents at end of year....... $ 5,722 $ 501 $ 190 $ 6,413
========= ======= ====== =========
</TABLE>
F-26
<PAGE> 52
ANNUAL REPORT ON FORM 10-K
ITEMS 14(A) AND 14(C)
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
3.1 Certificate of Incorporation of the Company+
3.2 By-Laws of the Company+
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
(included in Exhibit 4.1)+
4.3 Form of Guarantee (included in Exhibit 4.1)+
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
among the Company, the Guarantors and the Chase Manhattan
Bank, as administrative agent+
4.5A Amendment No. 2 to Credit Agreement, dated August 5, 1997
among the Company, the Guarantors, Chase Securities, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation.
10.1 Employment Agreement, dated March 31, 1996 among the Parent
Partnership, Sovereign Specialty Chemicals, Inc. and Robert
B. Covalt+
10.2 Promissory Note, dated July 31, 1997, issued by Robert B.
Covalt to the Parent Partnership+
10.3A Resignation of Employment Agreement dated February 10, 1998
by and among the Parent Partnership, the Company and William
T. Schram
10.6A Resignation of Employment Agreement dated February 17, 1998,
by and among John Edholm, the Parent Partnership, Sovereign
Chemicals Corporation 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+
10.11A Executive Notes 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 Plan+
</TABLE>
E-1
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
10.14 Asset Purchase Agreement dated March 31, 1996 among The
BFGoodrich 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 Closing Agreement dated August 5, 1997 between Laporte Inc.,
the Parent Partnership and the Company+
10.18A Resignation of Employment Agreement, dated August 24, 1998,
by and among the Parent Partnership, the Company and Lowell
D. Johnson
10.20 Stock Purchase Agreement, dated March 5, 1998, by among
Burke Industries, Inc., Mercer and the Company+*
21.1 Subsidiaries of the Company and the Guarantors
24 Power of Attorney (Included on page 24 of Form 10-K)
27 Financial Data Schedule
</TABLE>
- -------------------------
+ Incorporated by reference to the Company's Registration Statement on Form S-4,
as amended (Registration No. 333-39373)
* The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule to such agreement upon the request of the Commission in
accordance with Item 601(b)(2) of Regulation S-K.
E-2
<PAGE> 54
SOVEREIGN SPECIALTY CHEMICALS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT -----------------------
BEGINNING CHARGED TO CHARGED TO
OF COSTS AND OTHER BALANCE AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
The Predecessor:
Three months ended March 31, 1996:
Reserve and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts....................... 96 34 -- 9(1) 121
Reserve for inventory
obsolescence................... 67 9 -- -- 76
The Company:
Nine months ended December 31, 1996:
Reserve and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts....................... 94(2) 156 258(2) 184(1) 324
Reserve for inventory
obsolescence................... 74(2) 11 237(2) 29(1) 293
Year ended December 31, 1997
Reserve and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts....................... 324 857 526(1) 655
Reserve for inventory
obsolescence................... 293 244 732(2) 110(1) 1,159
Year ended December 31, 1998
Reserve and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts....................... 655 376 -- 503(1) 528
Reserve for inventory
obsolescence................... 1,159 203 -- 624(1) 738
</TABLE>
- -------------------------
(1) Accounts written off, net of recoveries.
(2) Balances added through new acquisitions.
S-1
<PAGE> 1
EXHIBIT 4.5A
AMENDMENT NO. 2
AMENDMENT NO., 2 dated of July 31, 1998, between SOVEREIGN SPECIALTY
CHEMICALS, INC., a corporation duly organized and validly existing under the
laws of the State of Delaware; SIA ADHESIVES, INC., a corporation duly organized
and validly existing under the laws of the State of Delaware; PIERCE & STEVENS
CORP., a corporation duly organized and validly existing under the laws of the
State of New York; TANNER CHEMICALS, INC., a corporation duly organized and
validly existing under the laws of the State of New Hampshire; and OSI SEALANTS,
INC., a corporation duly organized and validly existing under the laws of the
State of Illinois (collectively, the "Borrowers"); each of the lenders that is a
signatory hereto (individually, a "Lender" and, collectively, the "Lenders");
and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative
agent for the Lenders (in such capacity, together with its successors in such
capacity, the "Administrative Agent").
The Borrowers, Mercer Products Company, Inc. ("Mercer"), the Lenders,
and the Administrative Agent are parties to an Amended and Restated Credit
Agreement dated as of August 5, 1997, as amended by Amendment No. 1 dated as of
December 10, 1997 (as heretofore modified and supplemented and in effect on the
date hereof, the "Credit Agreement"). Pursuant to the Waiver, Consent and
Release, dated as of March 31, 1998, among the Borrower, Mercer, the Lenders and
the Administrative Agent, inter alia, Mercer was released as a Borrower under
the Credit Agreement and all of the other Loan Documents. The Borrowers have
requested that the Lenders agree to amend the Credit Agreement as provided
herein and, accordingly, the Borrowers and the Lenders hereby agree as follows;
Section 1. Definitions. Except as otherwise defined in this
Amendment No. 2, terms defined in the Credit Agreement are used herein as
defined therein.
Section 2. Amendments. Subject to Section 4 hereof, but with effect
on and after the date hereof, the Credit Agreement shall be amended as follows:
2.01. The definition of "Mortgage" is hereby amended by inserting
"or Section 9.21" after "Section 7.01(i)".
2.02. Section 9.07(f) is hereby amended by deleting "$4,000,000"
and substituting "$8,000,000" therefor.
2.03. Section 9.07(i) is hereby amended by (i) inserting after
"hereunder," the following: "provided that such amounts to be paid shall be
specified to the Administrative Agent simultaneously with the financial
statements required to be delivered pursuant to Section 9.01(a) hereof, and
provided, further that" and (ii) deleting "provided that".
Amendment No. 2
---------------
<PAGE> 2
- 2 -
2.04. Section 9.08(l) is hereby amended by (i) deleting "$200,000"
and substituting "$300,000" therefor and (ii) deleting "$2,670,315" and
substituting "$3,500,000" therefor.
2.05. Section 9.10(a) is hereby deleted in its entirety and the
following substituted therefor:
"(a) Leverage Ratio. SSC will not permit the Leverage Ratio to
exceed the following respective ratios at any time during the following
respective periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
March 31, 1998 through March 31, 1999 5.75 to 1
April 1, 1999 through September 30, 1999 5.50 to 1
October 1, 1999 through June 30, 2000 5.25 to 1
July 1, 2000 through September 30, 2000 5.00 to 1
October 1, 2000 through March 31, 2001 4.50 to 1
April 1, 2001 through June 30, 2001 4.25 to 1
July 1, 2001 through September 30, 2001 4.00 to 1
October 1, 2001 and thereafter 3.50 to 1".
</TABLE>
2.06 Section 9.10(c) is hereby deleted in its entirety and the
following substituted therefor:
"(b) Interest Coverage Ratio. SSC will not permit the Interest
Coverage Ratio to be less than the following respective ratios as at the last
day of any fiscal quarter ending during the following respective periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
March 31, 1998 through September 30, 1999 1.75 to 1
October 1, 1999 through March 31, 2000 2.00 to 1
April 1, 2000 through March 31, 2001 2.25 to 1
April 1, 2001 through March 31, 2002 2.50 to 1
April 1, 2002 through March 31, 2003 2.75 to 1
April 1, 2003 and thereafter 3.00 to 1".
</TABLE>
Amendment No. 2
---------------
<PAGE> 3
- 3 -
2.07. Section 9.12 is hereby amended by deleting the list of fiscal
years and the aggregate amounts of Capital Expenditures specified therein and
substituting therefor the following:
<TABLE>
<CAPTION>
"Fiscal Year Amount
------------ ------
<S> <C>
1997 $5,500,000
1998 $5,500,000
1999 $5,750,000
2000 $5,750,000
2001 $6,000,000
2002 $6,250,000
2003 $6,500,000".
</TABLE>
2.08. A new Section 8.19 shall be added to the Credit Agreement as
follows:
"8.19 Year 2000. Any reprogramming required to permit the proper
functioning, in and following the year 2000, of (i) the Obligors' computer
systems and (ii) equipment containing embedded microchips (including
systems and equipment supplied by others or with which Obligors' systems
interface) and the testing of all such systems and equipment, as so
reprogrammed, will be materially completed by June 30, 1999. The cost to
the Obligors of such reprogramming and testing and of the reasonably
foreseeable consequences of year 2000 to the Obligors (including, without
limitation, reprogramming errors and the failure of others' systems or
equipment) will not result in a Default or a Material Adverse Effect.
Except for such of the reprogramming referred to in the preceding sentence
as may be necessary, the computer and management information systems of the
Obligors are and, with ordinary course upgrading and maintenance, will
continue to be, sufficient to permit the Obligors to conduct their
businesses without Material Adverse Effect."
Section 3. Representations and Warranties. The Borrowers jointly
and severally represent and warrant to the Lenders and the Administrative Agent
that (a) this Amendment No. 2 has been duly and validly authorized, executed and
delivered by each such Borrower and this Amendment No. 2, and the Credit
Agreement as amended hereby, constitute such Borrower's legal, valid and binding
obligation, enforceable against such Borrower in accordance with its terms and
(b) immediately after giving effect to this Amendment No. 2, no Default shall
have occurred and be continuing. It shall be an Event of Default for all
purposes of the Credit Agreement, as amended hereby, if any representation,
warranty or certification made by the Borrowers in this Amendment No. 2, or in
any certificate or other writing furnished to any Lender or the Administrative
Agent pursuant to this Amendment No. 2, shall prove to have been false or
misleading as of the time made or furnished in any material respect.
Amendment No. 2
---------------
<PAGE> 4
- 4 -
Section 4. Effectiveness. This Amendment No. 2 shall become
effective as of the date first above written subject to (i) the payment by SSC
to the Lenders by wire transfer of immediately available funds an amount equal
to 0.10% of the respective Commitments of the Lenders and (ii) the execution
hereof by the Borrowers, the Administrative Agent and the Lenders constituting
the Majority Lenders under the Credit Agreement.
Section 5. Miscellaneous. Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect. This Amendment
No. 2 may be executed in any number of counterparts, all of which taken together
shall constitute one and the same amendatory instrument and any of the parties
hereto may execute this Amendment No. 2 by signing any such counterpart. This
Amendment No. 2 shall be governed by and construed in accordance with the law of
the State of New York.
[Signature Page Follows.]
Amendment No. 2
---------------
<PAGE> 5
- 5 -
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
2 to be duly executed and delivered as of the day and year first above written.
SOVEREIGN SPECIALTY CHEMICALS, INC.
By: /s/ LOWELL D. JOHNSON
----------------------
Name: Lowell D. Johnson
Title: VP, CFO, Sec. Treas.
SIA ADHESIVES, INC.
By: /s/ LOWELL D. JOHNSON
----------------------
Name: Lowell D. Johnson
Title: VP, CFO, Sec. Treas.
PIERCE & STEVENS CORP.
By: /s/ LOWELL D. JOHNSON
----------------------
Name: Lowell D. Johnson
Title: VP, CFO, Sec. Treas.
TANNER CHEMICALS, INC.
By: /s/ LOWELL D. JOHNSON
----------------------
Name: Lowell D. Johnson
Title: VP, CFO, Sec. Treas.
OSI SEALANTS, INC.
By: /s/ LOWELL D. JOHNSON
----------------------
Name: Lowell D. Johnson
Title: VP, CFO, Sec. Treas.
Amendment No. 2
---------------
<PAGE> 6
- 6 -
THE CHASE MANHATTAN BANK
By: /s/ MARY ELISABETH SWERZ
-------------------------
Name: Mary Elisabeth Swerz
Title: Vice President
HARRIS TRUST AND SAVINGS BANK
By:
----------------------
Name:
Title:
LASALLE NATIONAL BANK
By:
----------------------
Name:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
----------------------
Name:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
----------------------
Name:
Title:
Amendment No. 2
---------------
<PAGE> 7
- 6 -
THE CHASE MANHATTAN BANK
By:
----------------------
Name:
Title:
HARRIS TRUST AND SAVINGS BANK
By: /s/ DANIEL K. SABOL
----------------------
Name: Daniel K. Sabol
Title: V.P.
LASALLE NATIONAL BANK
By:
----------------------
Name:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
----------------------
Name:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
----------------------
Name:
Title:
Amendment No. 2
---------------
<PAGE> 8
- 6 -
THE CHASE MANHATTAN BANK
By:
-------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS BANK
By:
----------------------
Name:
Title:
LASALLE NATIONAL BANK
By: /s/ YOUNG J. PARK
----------------------
Name: Young J. Park
Title: V.P.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
----------------------
Name:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
----------------------
Name:
Title:
Amendment No. 2
---------------
<PAGE> 9
- 6 -
THE CHASE MANHATTAN BANK
By:
-------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS BANK
By:
----------------------
Name:
Title:
LASALLE NATIONAL BANK
By:
----------------------
Name:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ ALEANA L. HILES
----------------------
Name: Aleana L. Hiles
Title: Senior Vice President
BHF-BANK AKTIENGESELLSCHAFT
By:
----------------------
Name:
Title:
Amendment No. 2
---------------
<PAGE> 10
- 6 -
THE CHASE MANHATTAN BANK
By:
-------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS BANK
By:
----------------------
Name:
Title:
LASALLE NATIONAL BANK
By:
----------------------
Name:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
----------------------
Name:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ THOMAS JCIFO By: /s/ NANCY HO
---------------------- ----------------------
Name: Thomas Jcifo Name: Nancy Ho
Title: AVP. Title: AVP.
Amendment No. 2
---------------
<PAGE> 11
- 7 -
CREDIT AGRICOLE INDOSUEZ
By: /s/ KATHERINE L. ABBOTT /s/ DEAN PAUSE
------------------------- --------------
Name: Katherine L. Abbott Dean Pause
Title: First Vice President Senior Vice President
BANKBOSTON, N.A.
By:
----------------------
Name:
Title:
NATIONAL CITY BANK
By:
----------------------
Name:
Title:
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By:
----------------------
Name:
Title:
Amendment No. 2
---------------
<PAGE> 12
- 7 -
CREDIT AGRICOLE INDOSUEZ
By:
-------------------------
Name:
Title:
BANKBOSTON, N.A.
By:
----------------------
Name:
Title:
NATIONAL CITY BANK
By: /s/ FRANK F. PAGURA
----------------------
Name: Frank F. Pagura
Title: Vice President
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By:
----------------------
Name:
Title:
Amendment No. 2
---------------
<PAGE> 13
- 7 -
CREDIT AGRICOLE INDOSUEZ
By:
-------------------------
Name:
Title:
BANKBOSTON, N.A.
By:
----------------------
Name:
Title:
NATIONAL CITY BANK
By:
----------------------
Name:
Title:
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By: /s/ JEFFREY W. MAILLET
---------------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President & Director
Amendment No. 2
---------------
<PAGE> 14
- 8 -
THE CHASE MANHATTAN BANK,
as Administrative Agent
By: /s/ MARY ELISABETH SWERZ
----------------------------
Name: Mary Elisabeth Swerz
Title: Vice President
Amendment No. 2
---------------
<PAGE> 1
EX-10.3A
RESIGNATION OF EMPLOYMENT AGREEMENT
This Resignation of Employment Agreement (this "AGREEMENT") is
entered into as of February 10, 1998, by and among William T. Schram (the
"EXECUTIVE"), Sovereign Specialty Chemicals, L.P., a Delaware limited
partnership ("SOVEREIGN"), Sovereign Chemicals Corporation, a Delaware
corporation ("SCC") and Sovereign Specialty Chemicals, Inc., a Delaware
corporation (the "COMPANY").
WITNESSETH:
WHEREAS, SCC, Sovereign and Executive are parties to an
Employment Agreement dated March 31, 1996 (the "EMPLOYMENT AGREEMENT") (which
Agreement has now been assigned to the Company);
WHEREAS, the Executive currently serves as Vice President-
Administration of the Company and SCC;
WHEREAS, Sovereign, SCC, the Company and the Executive desire
to enter into an agreement to provide for the terms and conditions by which the
Executive's employment with the Company and SCC will cease as of February 10,
1998 (the "RESIGNATION DATE").
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable consideration, the parties hereto agree as follows:
ARTICLE I
TERMS AND CONDITIONS OF RESIGNATION
1.1 RESIGNATION OF EXECUTIVE. Sovereign, SCC, the Company and the
Executive hereby agree that the employment of Executive as Vice
President-Administration of the Company and SCC shall cease as of the
Resignation Date. In addition, Executive hereby resigns as a director of
Sovereign Specialty Chemicals (s) PTE Ltd.
1.2 SEVERANCE PAY FOR EXECUTIVE. The parties hereto agree that
Executive's termination pursuant to this Agreement shall be deemed to be a
termination of Executive without cause pursuant to Section 4(b) of the
Employment Agreement. As a result, Executive shall be entitled to and Sovereign
and the Company shall pay severance pay ("SEVERANCE PAY") equal to Executive's
base salary for a period of one year. The Severance Pay shall be paid by
Sovereign or the Company to the Executive on a monthly basis beginning on the
first day of the first month following the Resignation Date by check mailed to
Executive's home address.
<PAGE> 2
1.3 BONUSES AND BENEFITS.
(a) Until February 28, 1999, Executive will be entitled to
continue to receive and Sovereign or the Company shall provide all health,
insurance and disability plans and programs, if any, required to be provided by
the Company to Executive under the Employment Agreement. If Executive so
desires, Executive will receive COBRA coverage after such time period at
Executive's expense.
(b) Executive will also be entitled to outplacement services
at the Company's expense from Manchester Associates for a period of one year (an
aggregate cost of $12,000).
1.4 CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by him during the course of his
employment with the Company concerning the business or affairs of the Company
and its affiliates are the property of the Company. Therefore, Executive agrees
that he will not disclose to any unauthorized person or use for his own benefit
any of such information, observations or data without the Company's prior
written consent, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public otherwise than as a
result of the Executive's acts or omissions. Executive agrees to deliver to the
Company upon resignation of his employment, or at any other time the Company may
request, all memoranda, notes, plans, records, reports and other documents (and
copies thereof) relating to the business of the Company and its affiliates which
he may then possess or have under his control and agrees not to remove any
assets or items from the business other than their personal effects.
1.5 STATUS OF AGREEMENTS. Except for the provisions of Sections 5,
6, and 7 of the Employment Agreement which shall remain in full force and
effect, the Employment Agreement is hereby terminated effective as of March 1,
1998.
1.6 MUTUAL RELEASE.
(a) Except as set forth in Section 1.8 (and the agreements
referenced therein) and the Redemption Agreement referenced in Section 2.2(c),
or except as otherwise set forth herein, Executive on the one hand and the
Company and Sovereign on the other hand, hereby remise, release and forever
discharge the other and their successors, assigns and affiliates from any and
all manner of action and actions, cause and causes of action, suits, debts,
dues, sums of money, accounts, reckoning, contracts, controversies, agreements,
liabilities, promises, damages, judgments, claims or demands of whatsoever kind
or nature, in law or in equity which either the Executive on the one hand and
the Company and Sovereign on the other hand, may have against the other from the
beginning of the world to the date hereof.
(b) These releases shall include, by way of example and not
limitation, all claims, actions, causes of action, liabilities, demands, rights,
damages, costs, attorneys' fees, expenses and controversies of every kind which
arise out of, relate, or are based on (i) Executive's employment with the
Company or the termination thereof, (ii) statements, acts or omissions by
Company and its agents (whether actual or apparent), employees and
representatives whether in their individual or
-2-
<PAGE> 3
representative capacities, (iii) express or implied agreements between the
parties, and (iv) the Civil Rights Acts of 1866, 1964, and 1991, the Employee's
Income Retirement Security Act of 1974, the Age Discrimination in Employment
Act, the Older Workers Benefit Protection Act, the Rehabilitation Act of 1973,
and all other state and federal statutes.
1.7 WARRANTIES.
(a) Warranties. Executive warrants and represents as follows:
(i) He has read this Agreement, and agrees to the
conditions and obligations set forth in it;
(ii) He has had a reasonable time to consider the terms of
this Agreement and after being advised by Company to seek legal
counsel;
(iii) He has had 21 days in which to consider the
Agreement, and, if he executes this Agreement less than 21 days
from receipt, it is with the understanding that he had the full 21
days available if he so desired;
(iv) He may revoke this Resignation Agreement for 7 days
following his execution, and this Agreement shall not become
enforceable and effective until 7 days after such execution;
(v) He has not assigned any of his rights or interests
under this Agreement, the Employment Agreement, or any other
agreement or arrangement between either of them and the Company or
Sovereign;
(vi) He voluntarily executes this Agreement after having
had full opportunity to consult with legal counsel and without
being pressured or influenced by any statement or representation
of any person acting on behalf of Company including the officers,
agents and attorneys for Company; and
(vii) He has full and complete legal capacity to enter
into this Agreement.
(b) WARRANTIES. Sovereign and the Company each warrants and
represents as follows:
(i) The execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate
action of Sovereign and the Company, and the Agreement has been
duly and validly executed and delivered by Sovereign and the
Company and it constitutes the valid and binding obligation of
Sovereign and the Company, enforceable in accordance with its
terms, and
-3-
<PAGE> 4
(ii) Neither Sovereign, SCC nor the Company has assigned
any of their rights or interests under this Agreement, the
Employment Agreement or any other agreement or arrangement between
either of them and the Executive.
1.8 CONTINUATION OF AGREEMENTS. This Agreement shall not affect
Executive's rights, duties and obligations under the Executive Securities
Agreement dated March 31, 1996 or any other agreement with respect to
Executive's ownership interests in the Partnership or SCC.
ARTICLE II
CONDITIONS TO CLOSING
2.1 EXECUTIVE'S CONDITIONS TO CLOSING. The obligation of the
Executive to consummate the transactions to be performed by him pursuant to this
Agreement is subject to satisfaction or waiver of the following conditions:
(a) the warranties set forth in Section 1.7(b) above shall be
true and correct in all material respects at and as of the Resignation Date.
2.2 SOVEREIGN'S, SCC'S AND THE COMPANY'S CONDITIONS TO CLOSING.
The obligations of the Sovereign, SSC and the Company to consummate the
transactions to be performed by them in connection with this Agreement is
subject to satisfaction or waiver of the following conditions:
(a) The warranties set forth in Section 1.7(a) above shall be
true and correct in all material respects at and as of the Resignation Date;
(b) No action, suit or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction wherein an unfavorable judgment,
order, decree, stipulation, injunction, or charge would (A) prevent consummation
of any of the transactions contemplated by this Agreement or (B) cause any of
the transactions contemplated by this Agreement to be rescinded following
consummation (and no such judgment, order, decree, stipulation, injunction, or
charge shall be in effect); and
(c) The Executive shall have delivered to the Company, SSC and
to Sovereign an executed Redemption Agreement, substantially in the form of
Exhibit A attached hereto, on or prior to the Resignation Date.
-4-
<PAGE> 5
ARTICLE III
GENERAL PROVISIONS
3.1 NOTICES. Any notice provided for in this Agreement must be in
writing and must be delivered to the recipient at the address below indicated:
To the Company:
c/o Sovereign Specialty Chemicals, Inc.
Suite 2200
West Washington Street
Chicago, Illinois 60606
Tel: (312) 419-7100
Fax: (312) 419-7145
Attn: Chief Executive Officer
With Copies to:
Hogan & Hartson, L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Tel: (202) 637-5771
Fax: (202) 637-5910
Attn: Christopher J. Hagan, Esq.
To the Executive:
William T. Schram
183 South Grace
Elmhurst, Illinois 60126
Tel: (630) 832-6327
Fax: (630) 832-0734
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given five (5) business
days after mailing by first class mail, certified return receipt requested, one
business day after delivery to a receipted courier for next business day
delivery, or upon transmission by telex or facsimile.
3.2 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or
-5-
<PAGE> 6
any other jurisdiction, but this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
3.3 COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
3.4 COUNTERPARTS; FACSIMILE TRANSMISSION. This Agreement may be
executed on separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement. This
Agreement may be executed and delivered by facsimile transmission.
3.5 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, SCC and
Sovereign and their respective successors and assigns, except that Executive may
not assign any of his rights or obligations under Article I.
3.6 CHOICE OF LAW. This Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of Illinois.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written.
EXECUTIVE:
/s/ William T. Schram
____________________________________________________
William T. Schram
SOVEREIGN SPECIALTY CHEMICALS, INC.:
By: /s/ Robert B. Covalt
____________________________________________________
Name: Robert B. Covalt
Title: President and Chief Executive Officer
SOVEREIGN CHEMICALS CORPORATION:
By: /s/ Robert B. Covalt
____________________________________________________
Name: Robert B. Covalt
Title: President and Chief Executive Officer
SOVEREIGN SPECIALTY CHEMICALS, L.P.:
By: Sovereign Chemicals Corporation, its
general partner
By: /s/ Robert B. Covalt
____________________________________________________
Name: Robert B. Covalt
Title: President and Chief Executive Officer
-7-
<PAGE> 1
EX-10.6A
RESIGNATION OF EMPLOYMENT AGREEMENT
This Resignation of Employment Agreement (this "AGREEMENT") is
entered into as of February 17, 1998, by and among John Edholm (the
"EXECUTIVE"), Sovereign Specialty Chemicals, L.P., a Delaware limited
partnership ("SOVEREIGN"), Sovereign Chemicals Corporation, a Delaware
corporation ("SCC") and Pierce & Stevens Corp., a New York corporation (the
"COMPANY").
WITNESSETH:
WHEREAS, the Company and Executive are parties to an
Employment Agreement dated August 19, 1996 (the "EMPLOYMENT AGREEMENT");
WHEREAS, the Executive currently serves as President of the
Company;
WHEREAS, Sovereign, SCC, the Company and the Executive desire
to enter into an agreement to provide for the terms and conditions by which the
Executive's employment with the Company will cease as of February 17, 1998 (the
"RESIGNATION DATE").
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable consideration, the parties hereto agree as follows:
ARTICLE I
TERMS AND CONDITIONS OF RESIGNATION
1.1 RESIGNATION OF EXECUTIVE. Sovereign, SCC, the Company and the
Executive hereby agree that the employment of Executive as President of the
Company shall cease as of the Resignation Date.
1.2 SEVERANCE PAY FOR EXECUTIVE. The parties hereto agree that
Executive's termination pursuant to this Agreement shall be deemed to be a
termination of Executive without cause pursuant to Section 4(b) of the
Employment Agreement. As a result, Executive shall be entitled to and the
Company shall pay severance pay ("SEVERANCE PAY") equal to $120,763. The
Severance Pay shall be paid by the Company to the Executive on March 2, 1998 by
check mailed to Executive's home address. The Executive will also be paid for
his unused vacation time.
1.3 BONUSES AND BENEFITS.
(a) Executive will be entitled to continue to receive and
Sovereign or the Company shall provide all health, insurance and disability
plans and programs, if any, required to be
<PAGE> 2
provided by the Company to Executive as set forth in the attached letter from
Karen Seeberg. If Executive so desires, Executive will receive COBRA coverage
after such time period at Executive's expense.
(b) Executive will also be entitled to outplacement services
at the Company's expense from Manchester Associates for a period of one year (an
aggregate cost of $12,000).
1.4 CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by him during the course of his
employment with the Company concerning the business or affairs of the Company
and its affiliates are the property of the Company. Therefore, Executive agrees
that he will not disclose to any unauthorized person or use for his own benefit
any of such information, observations or data without the Company's prior
written consent, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public otherwise than as a
result of the Executive's acts or omissions. Executive agrees to deliver to the
Company upon resignation of his employment, or at any other time the Company may
request, all memoranda, notes, plans, records, reports and other documents (and
copies thereof) relating to the business of the Company and its affiliates which
he may then possess or have under his control and agrees not to remove any
assets or items from the business other than their personal effects.
1.5 STATUS OF AGREEMENTS. Except for the provisions of Sections 5,
6, and 7 of the Employment Agreement which shall remain in full force and
effect, the Employment Agreement is hereby terminated effective as of February
17, 1998.
1.6 MUTUAL RELEASE.
(a) Except as set forth in Section 1.8 (and the agreements
referenced therein) and the Redemption Agreement referenced in Section 2.2(c),
or except as otherwise set forth herein, Executive on the one hand and the
Company and Sovereign on the other hand, hereby remise, release and forever
discharge the other and their successors, assigns and affiliates from any and
all manner of action and actions, cause and causes of action, suits, debts,
dues, sums of money, accounts, reckoning, contracts, controversies, agreements,
liabilities, promises, damages, judgments, claims or demands of whatsoever kind
or nature, in law or in equity which either the Executive on the one hand and
the Company and Sovereign on the other hand, may have against the other from the
beginning of the world to the date hereof.
(b) These releases shall include, by way of example and not
limitation, all claims, actions, causes of action, liabilities, demands, rights,
damages, costs, attorneys' fees, expenses and controversies of every kind which
arise out of, relate, or are based on (i) Executive's employment with the
Company or the termination thereof, (ii) statements, acts or omissions by
Company and its agents (whether actual or apparent), employees and
representatives whether in their individual or representative capacities, (iii)
express or implied agreements between the parties, and (iv) the Civil Rights
Acts of 1866, 1964, and 1991, the Employee's Income Retirement Security Act of
1974, the Age Discrimination in Employment Act, the Older Workers Benefit
Protection Act, the Rehabilitation Act of 1973, and all other state and federal
statutes.
-2-
<PAGE> 3
1.7 WARRANTIES.
(a) WARRANTIES. Executive warrants and represents as follows:
(i) He has read this Agreement, and agrees to the
conditions and obligations set forth in it;
(ii) He has had a reasonable time to consider the terms of
this Agreement and after being advised by Company to seek legal
counsel;
(iii) He has had 21 days in which to consider the
Agreement, and, if he executes this Agreement less than 21 days
from receipt, it is with the understanding that he had the full 21
days available if he so desired;
(iv) He may revoke this Resignation Agreement for 7 days
following his execution, and this Agreement shall not become
enforceable and effective until 7 days after such execution;
(v) He has not assigned any of his rights or interests
under this Agreement, the Employment Agreement, or any other
agreement or arrangement between him and the Company or Sovereign;
(vi) He voluntarily executes this Agreement after having
had full opportunity to consult with legal counsel and without
being pressured or influenced by any statement or representation
of any person acting on behalf of Company including the officers,
agents and attorneys for Company; and
(vii) He has full and complete legal capacity to enter
into this Agreement.
(b) WARRANTIES. Sovereign and the Company each warrants and
represents as follows:
(i) The execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate
action of Sovereign and the Company, and the Agreement has been
duly and validly executed and delivered by Sovereign and the
Company and it constitutes the valid and binding obligation of
Sovereign and the Company, enforceable in accordance with its
terms, and
(ii) Neither Sovereign, SCC nor the Company has assigned
any of their rights or interests under this Agreement, the
Employment Agreement or any other agreement or arrangement between
either of them and the Executive.
1.8 CONTINUATION OF AGREEMENTS. This Agreement shall not affect
Executive's rights, duties and obligations under the Executive Securities
Agreement dated August 19, 1996 or any other agreement with respect to
Executive's ownership interests in the Partnership or SCC.
-3-
<PAGE> 4
ARTICLE II
CONDITIONS TO CLOSING
2.1 EXECUTIVE'S CONDITIONS TO CLOSING. The obligation of the
Executive to consummate the transactions to be performed by him pursuant to this
Agreement is subject to satisfaction or waiver of the following conditions:
(a) the warranties set forth in Section 1.7(b) above shall be
true and correct in all material respects at and as of the Resignation Date.
2.2 SOVEREIGN'S, SCC'S AND THE COMPANY'S CONDITIONS TO CLOSING.
The obligations of the Sovereign, SSC and the Company to consummate the
transactions to be performed by them in connection with this Agreement is
subject to satisfaction or waiver of the following conditions:
(a) The warranties set forth in Section 1.7(a) above shall be
true and correct in all material respects at and as of the Resignation Date;
(b) No action, suit or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction wherein an unfavorable judgment,
order, decree, stipulation, injunction, or charge would (A) prevent consummation
of any of the transactions contemplated by this Agreement or (B) cause any of
the transactions contemplated by this Agreement to be rescinded following
consummation (and no such judgment, order, decree, stipulation, injunction, or
charge shall be in effect); and
(c) The Executive shall have delivered to the Company, SSC and
to Sovereign an executed Redemption Agreement, substantially in the form of
Exhibit B attached hereto.
ARTICLE III
GENERAL PROVISIONS
3.1 NOTICES. Any notice provided for in this Agreement must be in
writing and must be delivered to the recipient at the address below indicated:
To the Company:
c/o Sovereign Specialty Chemicals, Inc.
Suite 2200
-4-
<PAGE> 5
225 West Washington Street
Chicago, Illinois 60606
Tel: (312) 419-7100
Fax: (312) 419-7145
Attn: Chief Executive Officer
With Copies to:
Hogan & Hartson, L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Tel: (202) 637-5771
Fax: (202) 637-5910
Attn: Christopher J. Hagan, Esq.
To the Executive:
John Edholm
11 Heritage Court
Tonawanda, New York 14150
Tel: (716) 695-2755
Fax:
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given five (5) business
days after mailing by first class mail, certified return receipt requested, one
business day after delivery to a receipted courier for next business day
delivery, or upon transmission by telex or facsimile.
3.2 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
3.3 COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
3.4 COUNTERPARTS; FACSIMILE TRANSMISSION. This Agreement may be
executed on separate counterparts, each of which is deemed to be an original and
all of which taken together
-5-
<PAGE> 6
constitute one and the same agreement. This Agreement may be executed and
delivered by facsimile transmission.
3.5 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, SCC and
Sovereign and their respective successors and assigns, except that Executive may
not assign any of his rights or obligations under Article I.
3.6 CHOICE OF LAW. This Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of New York.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written.
EXECUTIVE:
/s/ John Edholm
_______________________
John Edholm
PIERCE & STEVENS CORP.:
By: /s/ Robert B. Covalt
____________________________________________________
Name: Robert B. Covalt
Title: Chairman
SOVEREIGN CHEMICALS CORPORATION:
By: /s/ Robert B. Covalt
____________________________________________________
Name: Robert B. Covalt
Title: President and Chief Executive Officer
SOVEREIGN SPECIALTY CHEMICALS, L.P.:
By: Sovereign Chemicals Corporation, its
general partner
By: /s/ Robert B. Covalt
____________________________________________________
Name: Robert B. Covalt
Title: President and Chief Executive Officer
-7-
<PAGE> 1
Exhibit 10.11A
EXECUTIVE NOTES ASSIGNMENT AND ASSUMPTION AGREEMENT
This EXECUTIVE NOTES ASSIGNMENT AND ASSUMPTION AGREEMENT (the
"Agreement" is made as of JULY 31, 1997, by and among Sovereign Specialty
Chemicals, L.P., a Delaware limited partnership (the "Partnership"), Sovereign
Specialty Chemicals Corporation (the "General Partner") and Sovereign Specialty
Chemicals, Inc., a Delaware corporation (the "Corporation").
WHEREAS, the Partnership and the General Partner wish to assign
certain assets and all of their rights, interest and obligations under certain
contracts to the Corporation;
WHEREAS, the Corporation wishes to assume the obligations of the
Partnership and the General Partner under such contracts.
NOW, THEREFORE, the parties hereto agree as follows:
1. Assignment. the Partnership and the General Partner hereby assign
to the Corporation the following assets and all of the Partnership's and the
General Partner's rights, interests and obligations under any of the following
contracts:
(a) the Executive Note issued on March 31, 1996 to the
Partnership by Gerald A. Loftus in the principal amount of $110,000;
(b) the Executive Note issued on August 16, 1996 to the
Partnership by John Edholm in the principal amount of $125,000;
(c) the Executive Note issued on August 16, 1996 to the
Partnership by Richard Johnston in the principal amount of $125,000;
(d) the Executive Note issued on June 1, 1997 to the Partnership
by Stephen Zavodny in the principal amount of $15,000;
(e) the Executive Note issued on June 1, 1997 to the Partnership
by Stephen Zavodny in the principal amount of $13,700;
(f) the Executive Note issued on October 7, 1996 to the
Partnership by Richard Bashford in the principal amount of $62,500;
(g) the Executive Note issued on October 15, 1996 to the
Partnership by Paul Gavlinski in the principal amount of $27,500;
(h) the Executive Note issued on July 31, 1997 to the Partnership
by Paul Gavlinski in the principal amount of $30,000;
<PAGE> 2
(i) the Executive Note issued on October 7, 1996 to the Partnership
by Louis Pace in the principal amount of $7,500;
(j) the Executive Note issued on January 5, 1998 to the Partnership
by Lowell D. Johnson in the principal amount of $50,000;
(k) the Executive Note issued on July 1, 1998 to the Partnership by
Karen Kempa Seeberg in the principal amount of $45,000;
(l) the Executive Note issued on September 29, 1998 to the
Partnership by Frederick Quinn in the principal amount of $148,500; and
(m) the Executive Note issued on March 10, 1998 to the Partnership
by Michael J. Prude in the principal amount of $255,000.
2. Assumption. The Corporation hereby assumes all obligations, including
but not limited to, obligations to make lease, salary or consulting fee
payments, of the General Partnership and the Partnership under all of the
agreements specified in paragraph 1.
3. Counterparts. This Agreement may be executed in one or more
counterparts (including by means of telecopied signature pages), each of which
shall be deemed an original, but all of which shall together constitute one and
the same agreement.
* * * * *
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Agreement as of July 31,
1997.
SOVEREIGN CHEMICALS CORPORATION
By: /s/ Robert B. Covalt
----------------------------
Its:
---------------------------
SOVEREIGN SPECIALTY CHEMICALS, L.P.
By: /s/ Robert B. Covalt
----------------------------
Its:
---------------------------
SOVEREIGN SPECIALITY CHEMICALS, INC.
By: /s/ Robert B. Covalt
----------------------------
Its: President & CEO
---------------------------
<PAGE> 1
EX-10.18A
RESIGNATION OF EMPLOYMENT AGREEMENT
This Resignation of Employment Agreement (this "AGREEMENT") is
entered into as of August 24, 1998, by and among Lowell D. Johnson (the
"EXECUTIVE"), Sovereign Specialty Chemicals, L.P., a Delaware limited
partnership ("SOVEREIGN"), Sovereign Chemicals Corporation, a Delaware
corporation ("SCC") and Sovereign Specialty Chemicals, Inc., a Delaware
corporation (the "COMPANY").
WITNESSETH:
WHEREAS, SCC, Sovereign and Executive are parties to an
Employment Agreement dated January 5, 1998 (the "EMPLOYMENT AGREEMENT") (which
Agreement has now been assigned to the Company);
WHEREAS, the Executive currently serves as Vice President and
Chief Financial Officer of the Company and SCC;
WHEREAS, Sovereign, SCC, the Company and the Executive desire
to enter into an agreement to provide for the terms and conditions by which the
Executive's employment with the Company and SCC will cease as of August 24, 1998
(the "RESIGNATION DATE").
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable consideration, the parties hereto agree as follows:
ARTICLE I
TERMS AND CONDITIONS OF RESIGNATION
1.1 RESIGNATION OF EXECUTIVE. Sovereign, SCC, the Company and the
Executive hereby agree that the employment of Executive as Vice President and
Chief Financial Officer of the Company and SCC shall cease as of the Resignation
Date. In addition, Executive hereby resigns as (i) a director of the Company and
SCC and (ii) an officer of Pierce & Stevens Corp., Tanner Chemicals, Inc., SIA
Adhesives, Inc. and OSI Sealants, Inc. effective as of Resignation Date.
1.2 SEVERANCE PAY FOR EXECUTIVE. The parties hereto agree that
Executive's termination pursuant to this Agreement shall be deemed to be a
termination of Executive without cause pursuant to Section 4(b) of the
Employment Agreement. As a result, Executive shall be entitled to and Sovereign
and the Company shall pay severance pay ("SEVERANCE PAY") equal to Executive's
Base Salary for a period of one year. The Severance Pay shall be paid by
Sovereign or the Company to the Executive on a monthly basis beginning on the
first day of the first month following the Resignation Date by check mailed to
Executive's home address.
<PAGE> 2
1.3 BONUSES AND BENEFITS.
(a) Until August 31, 1999, Executive will be entitled to
continue to receive and Sovereign or the Company shall provide all health,
insurance and disability plans and programs, if any, required to be provided by
the Company to Executive under the Employment Agreement. If Executive so
desires, Executive will receive COBRA coverage after such time period at
Executive's expense.
(b) [EXECUTIVE WILL ALSO BE ENTITLED TO OUTPLACEMENT SERVICES
AT THE COMPANY'S EXPENSE FROM MANCHESTER ASSOCIATES FOR A PERIOD OF ONE YEAR (AN
AGGREGATE COST OF $12,000).[IS THIS APPLICABLE??]
1.4 CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by him during the course of his
employment with the Company concerning the business or affairs of the Company
and its affiliates are the property of the Company. Therefore, Executive agrees
that he will not disclose to any unauthorized person or use for his own benefit
any of such information, observations or data without the Company's prior
written consent, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public otherwise than as a
result of the Executive's acts or omissions. Executive agrees to deliver to the
Company upon resignation of his employment, or at any other time the Company may
request, all memoranda, notes, plans, records, reports and other documents (and
copies thereof) relating to the business of the Company and its affiliates which
he may then possess or have under his control and agrees not to remove any
assets or items from the business other than their personal effects.
1.5 STATUS OF AGREEMENTS. Except for the provisions of Sections 5,
6, and 7 of the Employment Agreement which shall remain in full force and
effect, the Employment Agreement is hereby terminated effective as of August 24,
1998.
1.6 MUTUAL RELEASE.
(a) Except as set forth in Section 1.8 (and the agreements
referenced therein) and the Redemption Agreement referenced in Section 2.2(c),
or except as otherwise set forth herein, Executive on the one hand and the
Company and Sovereign on the other hand, hereby remise, release and forever
discharge the other and their successors, assigns and affiliates from any and
all manner of action and actions, cause and causes of action, suits, debts,
dues, sums of money, accounts, reckoning, contracts, controversies, agreements,
liabilities, promises, damages, judgments, claims or demands of whatsoever kind
or nature, in law or in equity which either the Executive on the one hand and
the Company and Sovereign on the other hand, may have against the other from the
beginning of the world to the date hereof.
(b) These releases shall include, by way of example and not
limitation, all claims, actions, causes of action, liabilities, demands, rights,
damages, costs, attorneys' fees, expenses and controversies of every kind which
arise out of, relate, or are based on (i) Executive's employment
-2-
<PAGE> 3
with the Company or the termination thereof, (ii) statements, acts or omissions
by Company and its agents (whether actual or apparent), employees and
representatives whether in their individual or representative capacities, (iii)
express or implied agreements between the parties, and (iv) the Civil Rights
Acts of 1866, 1964, and 1991, the Employee's Income Retirement Security Act of
1974, the Age Discrimination in Employment Act, the Older Workers Benefit
Protection Act, the Rehabilitation Act of 1973, and all other state and federal
statutes.
1.7 WARRANTIES.
(a) Warranties. Executive warrants and represents as follows:
(i) He has read this Agreement, and agrees to the
conditions and obligations set forth in it;
(ii) He has had a reasonable time to consider the terms of
this Agreement and after being advised by Company to seek legal
counsel;
(iii) He has had 21 days in which to consider the
Agreement, and, if he executes this Agreement less than 21 days
from receipt, it is with the understanding that he had the full 21
days available if he so desired;
(iv) He may revoke this Resignation Agreement for 7 days
following his execution, and this Agreement shall not become
enforceable and effective until 7 days after such execution;
(v) He has not assigned any of his rights or interests
under this Agreement, the Employment Agreement, or any other
agreement or arrangement between either of them and the Company or
Sovereign;
(vi) He voluntarily executes this Agreement after having
had full opportunity to consult with legal counsel and without
being pressured or influenced by any statement or representation
of any person acting on behalf of Company including the officers,
agents and attorneys for Company; and
(vii) He has full and complete legal capacity to enter
into this Agreement.
(b) WARRANTIES. Sovereign and the Company each warrants and
represents as follows:
(i) The execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate
action of Sovereign and the Company, and the Agreement has been
duly and validly executed and delivered by Sovereign and the
Company and it constitutes the valid and binding obligation of
Sovereign and the Company, enforceable in accordance with its
terms, and
-3-
<PAGE> 4
(ii) Neither Sovereign, SCC nor the Company has assigned
any of their rights or interests under this Agreement, the
Employment Agreement or any other agreement or arrangement between
either of them and the Executive.
1.8 CONTINUATION OF AGREEMENTS. This Agreement shall not affect
Executive's rights, duties and obligations under the Executive Securities
Agreement dated March 31, 1996 or any other agreement with respect to
Executive's ownership interests in the Partnership or SCC.
ARTICLE II
CONDITIONS TO CLOSING
2.1 EXECUTIVE'S CONDITIONS TO CLOSING. The obligation of the
Executive to consummate the transactions to be performed by him pursuant to this
Agreement is subject to satisfaction or waiver of the following conditions:
(a) the warranties set forth in Section 1.7(b) above shall be
true and correct in all material respects at and as of the Resignation Date.
2.2 SOVEREIGN'S, SCC'S AND THE COMPANY'S CONDITIONS TO CLOSING.
The obligations of the Sovereign, SCC and the Company to consummate the
transactions to be performed by them in connection with this Agreement is
subject to satisfaction or waiver of the following conditions:
(a) The warranties set forth in Section 1.7(a) above shall be
true and correct in all material respects at and as of the Resignation Date;
(b) No action, suit or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction wherein an unfavorable judgment,
order, decree, stipulation, injunction, or charge would (A) prevent consummation
of any of the transactions contemplated by this Agreement or (B) cause any of
the transactions contemplated by this Agreement to be rescinded following
consummation (and no such judgment, order, decree, stipulation, injunction, or
charge shall be in effect); and
(c) The Executive shall have delivered to the Company, SSC and
to Sovereign an executed Redemption Agreement, substantially in the form of
Exhibit A attached hereto, on or prior to the Resignation Date.
-4-
<PAGE> 5
ARTICLE III
GENERAL PROVISIONS
3.1 NOTICES. Any notice provided for in this Agreement must be in
writing and must be delivered to the recipient at the address below indicated:
To the Company:
c/o Sovereign Specialty Chemicals, Inc.
Suite 2200
West Washington Street
Chicago, Illinois 60606
Tel: (312) 419-7100
Fax: (312) 419-7145
Attn: Chief Executive Officer
With Copies to:
Hogan & Hartson, L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Tel: (202) 637-5771
Fax: (202) 637-5910
Attn: Christopher J. Hagan, Esq.
To the Executive:
Lowell D. Johnson
749 Lost Lakes Drive
Holland, Ohio 43528
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given five (5) business
days after mailing by first class mail, certified return receipt requested, one
business day after delivery to a receipted courier for next business day
delivery, or upon transmission by telex or facsimile.
3.2 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
-5-
<PAGE> 6
3.3 COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
3.4 COUNTERPARTS; FACSIMILE TRANSMISSION. This Agreement may be
executed on separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement. This
Agreement may be executed and delivered by facsimile transmission.
3.5 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, SCC and
Sovereign and their respective successors and assigns, except that Executive may
not assign any of his rights or obligations under Article I.
3.6 CHOICE OF LAW. This Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of Illinois.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written.
EXECUTIVE:
/s/ Lowell D. Johnson
-----------------------------------------------------
Lowell D. Johnson
SOVEREIGN SPECIALTY CHEMICALS, INC.:
By: /s/ Robert B. Covalt
-----------------------------------------------------
Name: Robert B. Covalt
Title: President and Chief Executive Officer
SOVEREIGN CHEMICALS CORPORATION:
By: /s/ Robert B. Covalt
-----------------------------------------------------
Name: Robert B. Covalt
Title: President and Chief Executive Officer
SOVEREIGN SPECIALTY CHEMICALS, L.P.:
By: Sovereign Chemicals Corporation, its
general partner
By: /s/ Robert B. Covalt
-----------------------------------------------------
Name: Robert B. Covalt
Title: President and Chief Executive Officer
-7-
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Company and the Guarantors
The Company
Pierce & Stevens Corp., a New York corporation
SIA Adhesives, Inc., a Delaware corporation
OSI Sealants, Inc., an Illinois corporation
Tanner Chemicals, Inc., a New Hampshire corporation
SSC International, Inc., a Barbados corporation
Sovereign Specialty Chemicals PTE Ltd, a Singapore Corporation
Sovereign Specialty Chemicals U.K. Ltd, a U.K. Corporation
Pierce & Stevens
None
SIA Adhesives
None
OSI Sealants
None
Tanner
None
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED SOVEREIGN
SPECIALTY CHEMICALS INC.'S DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,863
<SECURITIES> 0
<RECEIVABLES> 32,710
<ALLOWANCES> 0
<INVENTORY> 19,822
<CURRENT-ASSETS> 63,754
<PP&E> 57,263
<DEPRECIATION> (7,766)
<TOTAL-ASSETS> 225,804
<CURRENT-LIABILITIES> 34,015
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 54,194
<TOTAL-LIABILITY-AND-EQUITY> 225,804
<SALES> 211,335
<TOTAL-REVENUES> 211,335
<CGS> 144,039
<TOTAL-COSTS> 144,039
<OTHER-EXPENSES> 49,976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,979
<INCOME-PRETAX> 3,141
<INCOME-TAX> 3,494
<INCOME-CONTINUING> 1,647
<DISCONTINUED> 0
<EXTRAORDINARY> 176
<CHANGES> 0
<NET-INCOME> 1,471
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
