<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 2000
REGISTRATION NO. 333-36898
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SOVEREIGN SPECIALTY CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 2891 36-4176637
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
225 WEST WASHINGTON STREET
SUITE 2200
CHICAGO, ILLINOIS 60606
(312) 419-7100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
SEE TABLE OF ADDITIONAL REGISTRANTS
---------------------
JOHN R. MELLETT
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
SOVEREIGN SPECIALTY CHEMICALS, INC.
225 WEST WASHINGTON STREET, SUITE 2200
CHICAGO, ILLINOIS 60606
(312) 419-7100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copy to:
JOHN M. BIBONA, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004-1980
(212) 859-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
STATE OF I.R.S. EMPLOYER
NAME OF REGISTRANT PRINCIPAL EXECUTIVE OFFICE INCORPORATION IDENTIFICATION NO.
- ------------------ -------------------------- ------------- ------------------
<S> <C> <C> <C>
Pierce & Stevens Corp........ 710 Ohio Street New York 16-0951610
Buffalo, NY 14203
(716) 856-4941
SIA Adhesives, Inc. ......... 123 West Burtges Street Delaware 31-1557383
Akron, OH 44311
(330) 374-2900
OSI Sealants, Inc. .......... 7405 Production Drive Illinois 36-2361148
Mentor, OH 44060
(440) 255-8900
Tanner Chemicals, Inc. ...... 9 Furman Hall Court New Hampshire 02-0352196
Greenville, SC 29609
(864) 232-3893
</TABLE>
- ---------------
* The Standard Industrial Classification Code Number for each additional
registrant is 2891.
<PAGE> 3
PROSPECTUS
[SOVERIGN SPECIALTY CHEMICALS, INC. LOGO]
SOVEREIGN
SPECIALTY CHEMICALS, INC.
EXCHANGE OFFER FOR
$150,000,000
11 7/8% SENIOR SUBORDINATED NOTES DUE 2010
---------------------
We are offering to exchange 11 7/8% Senior Subordinated Notes due 2010,
Series B, for our currently outstanding 11 7/8% Senior Subordinated Notes due
2010, Series A. The exchange notes are the same as the outstanding notes, except
that the exchange notes have been registered under the federal securities laws
and will not bear any legend restricting their transfer. The exchange notes will
represent the same debt as the outstanding notes, and we will issue the exchange
notes under the same indenture. The principal features of the exchange offer are
as follows:
- Expires 5:00 p.m., New York City time on June 27, 2000, unless extended.
- We will exchange all outstanding notes that are validly tendered and not
validly withdrawn prior to the expiration date of the exchange offer.
- You may withdraw tendered outstanding notes at any time prior to the
expiration of the exchange offer.
- The form and terms of the exchange notes are substantially identical to
the form and terms of the outstanding notes, except for certain transfer
restrictions and certain rights under the registration rights agreement.
- The exchange of outstanding notes for exchange notes pursuant to the
exchange offer will be a tax-free event for United States federal tax
purposes.
- We will not receive any proceeds from the exchange offer.
- We do not intend to apply for listing of the exchange notes on any
securities exchange or automated quotation system.
Broker-dealers receiving exchange notes in exchange for outstanding notes
acquired for their own account through market-making or other trading activities
must deliver a prospectus in any resale of the exchange notes.
---------------------
INVESTING IN THE EXCHANGE NOTES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus is May 26, 2000.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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Summary..................................................... 1
Risk Factors................................................ 8
Use of Proceeds............................................. 16
Capitalization.............................................. 16
Selected Historical Financial Information................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 25
Management.................................................. 34
Security Ownership by Certain Beneficial Owners and
Management................................................ 43
Certain Relationships and Related Transactions.............. 44
Description of Our Credit Facility.......................... 46
Description of Exchange Notes............................... 49
The Exchange Offer.......................................... 92
Certain United States Federal Income Tax Consequences....... 102
Plan of Distribution........................................ 107
Legal Matters............................................... 108
Experts..................................................... 108
Where You Can Find More Information......................... 108
Index to Financial Statements............................... F-1
</TABLE>
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The federal securities laws allow us to incorporate by reference the
information we file with the Securities and Exchange Commission. This means that
we can disclose important information to you by referring you to those
documents. We incorporate by reference into this prospectus our annual report on
Form 10-K for the fiscal year ended December 31, 1999 and our quarterly report
on Form 10-Q for the quarter ended March 31, 2000. In addition, all reports and
documents we file with the Securities and Exchange Commission after the date of
this prospectus and until all of the outstanding notes are exchanged for
exchange notes are incorporated in this prospectus by reference and shall be a
part of this prospectus from the date of filing of those reports and documents.
These documents may contain important business and financial information about
us that is not included in or delivered with this prospectus. Any statement
contained in a report or document incorporated by reference in this prospectus
shall be deemed to be modified or superseded for purposes of this prospectus to
the extent that a statement contained in any subsequently filed report or
document that also is incorporated by reference in this prospectus modifies or
supersedes that statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
We will provide, upon written or oral request, without charge, to each
person to whom a prospectus is delivered, a copy of any or all of the
information that has been incorporated by reference in this prospectus but not
delivered with this prospectus. If you would like to obtain this information
from us, please direct your request, either in writing or by telephone, to
Sovereign Specialty Chemicals, Inc., 225 West Washington Street, Suite 2200,
Chicago, Illinois 60606, Attention: John R. Mellett, (312) 419-7100. TO OBTAIN
TIMELY DELIVERY, YOU MUST REQUEST THE INFORMATION NO LATER THAN JUNE 20, 2000,
WHICH IS FIVE BUSINESS DAYS BEFORE THE DATE BY WHICH YOU MUST MAKE YOUR
INVESTMENT DECISION.
---------------------
You should rely only on the information contained in, or incorporated by
reference into, this prospectus. We have not authorized any other person to
provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. You should assume that
(ii)
<PAGE> 5
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus or, with respect to information incorporated
by reference from reports or documents filed with the Securities and Exchange
Commission, as of the date such report or document was filed. Our business,
financial condition, results of operations and prospects may have changed since
that date.
This prospectus is based on information provided by us and other sources
that we believe are reliable. We cannot assure you that this information is
accurate or complete. This prospectus summarizes various documents and other
information and we refer you to them for a more complete understanding of what
we discuss in this prospectus. See "Where You Can Find More Information." In
making an investment decision, you must rely on your own examination of our
company and the terms of the offering and the exchange notes, including the
merits and risks involved.
We are not making any representation to any purchaser of the exchange notes
regarding the legality of an investment in the exchange notes by that purchaser
under any legal investment or similar laws or regulations. You should not
consider any information in this prospectus to be legal, business or tax advice.
You should consult your own attorney, business advisor and tax advisor for
legal, business and tax advice regarding an investment in the exchange notes.
---------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements including statements
relating to our strategy, expectations for the industry, capital requirements
and hedging activities. We have based these forward-looking statements on our
current expectations and projections about future events. These forward-looking
statements are subject to risks, uncertainties and assumptions about us,
including, among other things
- our anticipated growth and business strategies
- our expected internal growth
- our ability to integrate acquired businesses
- anticipated trends and conditions in the specialty chemicals industry
- our future capital needs
- our ability to develop new technologies
- our ability to control costs and maintain quality
- our ability to compete
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus may not occur.
(iii)
<PAGE> 6
SUMMARY
The following may not contain all of the information that is important to
you. You should read this entire document carefully, including the "Risk
Factors" and the financial statements and related notes, before making an
investment decision. Unless otherwise indicated, industry data contained in this
prospectus is as of December 31, 1998 and was derived from "The U.S. Adhesives
Industry 1996-2006," a report prepared by The ChemQuest Group, Inc., an
independent management consultancy specializing in the adhesives, sealants and
coatings and automotive industries, as well as publicly available sources, which
we have not independently verified but which we believe to be reliable.
THE COMPANY
We are a leading developer, producer and distributor of adhesives, sealants
and coatings for use in four primary markets: industrial; flexible packaging;
overprint coatings; and housing repair, remodeling and new construction. We
focus on select value-added market niches in which we have established
leadership positions and competitive advantages in product development,
manufacturing and distribution. We believe that approximately 45% of our 1999
net sales were from applications in which we have the number one or two position
in the United States. We frequently design our products in cooperation with our
customers to meet unique specifications and to provide critical performance
attributes to their products, resulting in a significant number of long-lived
primary supplier relationships. For the year ended December 31, 1999 and the
three months ended March 31, 2000, we had net sales of approximately $237.4
million, and $60.8 million.
We were formed to acquire and consolidate specialty chemicals businesses in
the U.S. adhesives, sealants and coatings segment. We have successfully expanded
our business through six strategic acquisitions which we have integrated into
our three business units: SIA Tanner, Pierce & Stevens and OSI Sealants. SIA
Tanner manufactures high-performance specialty adhesives and coatings for
automotive, aerospace, recreational vehicle, manufactured housing, air handling
and transportation textile applications. Pierce & Stevens manufactures coating
and adhesive products for overprint coating, flexible packaging and industrial
applications. OSI Sealants manufactures branded caulks, sealants and adhesives
for professional contractors and do-it-yourself applications. We plan to
continue our growth through a combination of new product development, continued
market penetration, strategic acquisitions and international expansion.
The U.S. adhesives, sealants and coatings segment of the specialty
chemicals industry is highly fragmented with over 500 companies, a significant
majority of which we believe are small and regional. Total sales for U.S.
adhesives, sealants and coatings grew from approximately $13.8 billion in 1986
to approximately $30.1 billion in 1998, representing a compound annual growth
rate of 6.7%. Adhesives are replacing mechanical fasteners in many manufacturing
processes, and adhesives and sealants can reduce weight and parts requirements
and provide superior performance characteristics such as protection against
corrosion and vibration. In addition, we expect international sales of
adhesives, sealants and coatings to grow due to increased use in developing
markets.
On December 30, 1999, SSCI Investors LLC, an entity owned by an investor
group led by AEA Investors Inc., acquired approximately 75% of our capital
stock, with the balance owned by other investors, including our current
management team. The aggregate purchase price for the transaction was $360.0
million, including the retained equity interest, assuming a balance sheet free
of cash and indebtedness. AEA Investors Inc. is an international private equity
firm supported by industrial families and chief executives of major corporations
from around the world.
Our principal place of business is located at 225 West Washington Street,
Suite 2200, Chicago, Illinois 60606, and our telephone number is (312) 419-7100.
For more information regarding our company, see "Business."
1
<PAGE> 7
THE OFFERING
On March 29, 2000, we completed the offering of $150.0 million aggregate
principal amount of 11 7/8% Senior Subordinated Notes due 2010 exempt from
registration under the Securities Act of 1933, as amended. We used the net
proceeds of the offering to repay approximately $141.0 million of outstanding
indebtedness under our credit facility and for general corporate purposes.
Outstanding notes.......... We sold the outstanding notes to J.P. Morgan
Securities Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Chase Securities Inc., the
initial purchasers, on March 29, 2000. The initial
purchasers subsequently resold the outstanding
notes to qualified institutional buyers pursuant to
Rule 144A under the Securities Act and to non-U.S.
persons outside the United States in reliance on
Regulation S under the Securities Act.
Registration rights
agreement.................. In connection with the sale of the outstanding
notes, we and the guarantor subsidiaries entered
into a registration rights agreement with the
initial purchasers. Under the terms of that
agreement we agreed to
- file a registration statement for the exchange
offer and the exchange notes by May 28, 2000
- use our reasonable best efforts to cause that
registration statement to become effective under
the Securities Act by September 25, 2000
- complete the exchange offer by October 25, 2000
If we do not meet one of these requirements, we
must pay additional interest on the outstanding
notes until we meet the requirement. We have also
agreed to keep the registration statement for the
exchange offer effective for at least 30 days (or
longer, if required by applicable law) after the
date for which notices of the exchange offer is
mailed to holders of notes. The exchange offer is
being made pursuant to the registration rights
agreement and is intended to satisfy the rights
granted under the registration rights agreement,
which rights terminate upon completion of the
exchange offer.
THE EXCHANGE OFFER
The following is a brief summary of terms of the exchange offer. For a more
complete description of the exchange offer, see "The Exchange Offer" in this
prospectus.
Securities offered......... $150,000,000 aggregate principal amount of 11 7/8%
Senior Subordinated Notes due 2010, Series B.
Exchange offer............. We are offering to exchange $1,000 principal amount
of our 11 7/8% Senior Subordinated Notes due 2010,
Series B, which have been registered under the
Securities Act for each $1,000 principal amount of
our currently outstanding 11 7/8% Senior
Subordinated Notes due 2010, Series A. We will
accept any and all outstanding notes validly
tendered and not withdrawn prior to 5:00 p.m., New
York City time, on June 27, 2000. Holders may
tender some or all of their notes pursuant to the
exchange offer. However, notes may be tendered only
in integral multiples of $1,000. The form and terms
of the exchange notes are the same as the form and
terms of the outstanding notes except that
- the exchange notes have been registered under the
federal securities laws and will not bear any
legend restricting their transfer
2
<PAGE> 8
- the exchange notes bear a Series B designation
and a different CUSIP number than the outstanding
notes
- the holders of the exchange notes will not be
entitled to certain rights under the registration
rights agreement, including the provisions for an
increase in the interest rate on the outstanding
notes in some circumstances relating to the
timing of the exchange offer
See "The Exchange Offer."
Transferability of exchange
notes.................. We believe that you will be able to freely transfer
the exchange notes without registration or any
prospectus delivery requirement so long as you may
accurately make the representations listed under
"The Exchange Offer -- Transferability of the
Exchange Notes." If you are a broker-dealer that
acquired outstanding notes as a result of market-
making or other trading activities, you must
deliver a prospectus in connection with any resale
of the exchange notes. See "Plan of Distribution."
Expiration date............ The exchange offer will expire at 5:00 p.m., New
York City time, on June 27, 2000, unless we choose
to extend the exchange offer.
Conditions to the
exchange offer........... Notwithstanding any other term of the exchange
offer, we shall not be required to accept for
exchange, or exchange any exchange notes for, any
outstanding notes, and may terminate or amend the
exchange offer as provided in this prospectus
before the acceptance of the outstanding notes, if
- any action or proceeding is instituted or
threatened in any court or by or before any
governmental agency with respect to the exchange
offer that, in our sole judgment, might
materially impair our ability to proceed with the
exchange offer or materially impair the
contemplated benefits of the exchange offer to us
or any material adverse development has occurred
in any existing action or proceeding with respect
to us or any of our subsidiaries
- any law, statute, rule, regulation or
interpretation by the staff of the Securities and
Exchange Commission is proposed, adopted or
enacted, that, in our sole judgment, might impair
our ability to proceed with the exchange offer or
impair the contemplated benefits of the exchange
offer to us, or
- any governmental approval has not been obtained,
that we believe, in our sole discretion, is
necessary for the completion of the exchange
offer as outlined in this prospectus
See "The Exchange Offer -- Conditions to the
Exchange Offer."
Procedures for tendering
outstanding notes...... If you wish to accept the exchange offer, you must
complete, sign and date the letter of transmittal,
or a facsimile of the letter of transmittal, in
accordance with the instructions contained in this
prospectus and in the letter of transmittal. You
should then mail or otherwise deliver the letter of
transmittal, or facsimile, together with the
outstanding notes to be exchanged and any other
required documentation, to the
3
<PAGE> 9
exchange agent at the address set forth in this
prospectus and in the letter of transmittal.
By executing the letter of transmittal, you will
represent to us that, among other things
- you, or the person or entity receiving the
related exchange notes, are acquiring the
exchange notes in the ordinary course of business
- neither you nor any person or entity receiving
the related exchange notes is engaging in or
intends to engage in a distribution of the
exchange notes within the meaning of the federal
securities laws
- neither you nor any person or entity receiving
the related exchange notes has an arrangement or
understanding with any person or entity to
participate in any distribution of the exchange
notes
- neither you nor any person or entity receiving
the related exchange notes is an "affiliate" of
Sovereign or the guarantors, as that term is
defined under Rule 405 of the Securities Act, and
- you are not acting on behalf of any person or
entity who could not truthfully make these
statements
See "The Exchange Offer -- Procedures for Tendering
Outstanding Notes" and "Plan of Distribution."
Effect of not tendering.... Any outstanding notes that are not tendered or that
are tendered but not accepted will remain subject
to the restrictions on transfer. Since the
outstanding notes have not been registered under
the federal securities laws, they bear a legend
restricting their transfer absent registration or
the availability of a specific exemption from
registration. Upon the completion of the exchange
offer, we will have no further obligations, except
under limited circumstances, to provide for
registration of the outstanding notes under the
federal securities laws. See "The Exchange
Offer -- Effect of Not Tendering."
Interest on the exchange
notes and the outstanding
notes.................... The exchange notes will bear interest from the most
recent interest payment date to which interest has
been paid on the notes or, if no interest has been
paid, from March 29, 2000. Interest on the
outstanding notes accepted for exchange will cease
to accrue upon the issuance of the notes.
Withdrawal rights.......... Tenders of outstanding notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on
the expiration date.
Federal tax consequences... There will be no federal income tax consequences to
you if you exchange your outstanding notes for
exchange notes in the exchange offer.
Exchange agent............. The Bank of New York, the trustee under the
indenture, is serving as exchange agent in
connection with the exchange offer.
4
<PAGE> 10
TERMS OF THE EXCHANGE NOTES
The following is a brief summary of the terms of the exchange notes. The
financial terms and covenants of the exchange notes are the same as the terms of
the outstanding notes. We sometimes refer to the outstanding notes and the
exchange notes together as the "notes." For a more complete description of the
terms of the exchange notes, see "Description of Exchange Notes" in this
prospectus.
Issuer..................... Sovereign Specialty Chemicals, Inc.
Securities offered......... $150,000,000 aggregate principal amount of 11 7/8%
Senior Subordinated Notes due 2010, Series B.
Maturity date.............. March 15, 2010.
Interest payment dates..... March 15 and September 15 of each year, commencing
September 15, 2000.
Subsidiary guarantees...... Each of our domestic subsidiaries will jointly and
severally guarantee the exchange notes on a senior
subordinated basis. Future direct and indirect
domestic subsidiaries, excluding specified
unrestricted subsidiaries, will also be required to
guarantee the exchange notes.
- the guarantees will be general unsecured
obligations of the guarantors and will be
subordinate in right of payment to all existing
and future guarantor senior debt, which includes
the guarantees of the credit facility
- the guarantees will be equal in right of payment
to all of the guarantors' future senior
subordinated debt
- the guarantees will be senior in right of payment
to all of the guarantors' existing and future
subordinated debt
See "Description of Exchange Notes -- Guaranties of
the Notes."
Ranking.................. The exchange notes will be unsecured and
- subordinate in right of payment to all of our
existing and future senior debt
- equal in right of payment to all of our future
senior subordinated debt
- senior in right of payment to all our existing
and future subordinated debt
As of May 15, 2000, our total combined outstanding
senior debt was approximately $15.5 million. As of
May 15, 2000, our available borrowing capacity
under our credit facility was $113.9 million. See
"Description of Exchange Notes -- Ranking" and
"Description of Our Credit Facility."
Optional redemption........ Except as described below, we may not redeem the
exchange notes prior to March 15, 2005. On or after
that date, we may redeem some or all of the
exchange notes, at any time at the redemption
prices set forth in this prospectus, plus accrued
and unpaid interest, if any, on the exchange notes,
to the date of redemption.
Equity offering optional
redemption............... Before March 15, 2003 we may, subject to specific
requirements, redeem up to 35% of the notes issued
under the indenture relating to
5
<PAGE> 11
the notes with the net proceeds of specified equity
offerings at the redemption price described in this
prospectus if at least 65% of the notes issued
under the indenture relating to the notes remain
outstanding after that redemption. See "Description
of Exchange Notes -- Optional Redemption."
Change of control.......... Upon the occurrence of specified events, we will be
required to make an offer to repurchase each
holder's exchange notes at a price equal to 101% of
principal amount, plus accrued and unpaid interest,
if any, to the date of repurchase. See "Description
of Exchange Notes -- Offer to Purchase upon Change
of Control."
Covenants.................. The indenture relating to the notes contains
covenants that, among other things, limit our
ability and the ability of our subsidiaries to
- incur additional indebtedness
- incur liens on property or assets
- make acquisitions
- merge or consolidate with third parties
- make restricted payments and investments
- pay dividends and make distributions
- repurchase or redeem capital stock
- dispose of assets
- guarantee obligations
- engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate
activities
These covenants are subject to a number of
important exceptions and qualifications. See
"Description of Exchange Notes -- Certain
Covenants."
Absence of a public market
for the exchange notes... The exchange notes are new securities, for which
there is currently no established trading market,
and none may develop. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the exchange notes. The initial
purchasers of the outstanding notes have advised us
that they intend to make a market in the exchange
notes. However, they are not obligated to do so,
and may discontinue any market making with respect
to the exchange notes at any time without notice.
We do not intend to apply for listing of the
exchange notes on any securities exchange or to
arrange for any quotation system to quote them.
RISK FACTORS
You should consider carefully all of the information contained in or
incorporated into this prospectus and, in particular, should evaluate the
specific factors under "Risk Factors" beginning on page 8 before investing in
the exchange notes.
6
<PAGE> 12
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents our summary historical financial data at the
dates and for the periods indicated. The historical data for the nine months
ended December 31, 1996 are derived from the audited statements of our former
parent, Sovereign Specialty Chemicals, L.P., and the data for the years ended
1997, 1998 and 1999 are derived from our audited financial statements. The data
for the three months ended March 31, 1999 and 2000 are derived from our
unaudited financial statements. The information set forth below should be read
in conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this
prospectus. The transactions resulting in the acquisition by SSCI Investors LLC
of its approximately 75% ownership stake in our company were accounted for as a
recapitalization.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996(1) 1997 1998 1999 1999 2000
----------------- ------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $37,792 $134,771 $211,335 $237,408 $ 55,766 $ 60,812
Cost of goods sold............... 26,637 92,889 144,039 162,550 37,880 41,302
------- -------- -------- -------- -------- --------
Gross profit..................... 11,155 41,882 67,296 74,858 17,886 19,510
Selling, general and
administrative expenses........ 9,613 30,272 46,010 47,486 11,848 13,176
Stock compensation expense....... -- 22 408 864 90 --
Special charges(2)............... -- -- -- 14,153 -- --
------- -------- -------- -------- -------- --------
Operating income................. 1,542 11,588 20,878 12,355 5,948 6,334
Interest expense, net............ 1,666 9,080 14,712 15,076 3,462 4,176
Loss on sale of business......... -- -- 1,025 -- -- --
------- -------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item......... (124) 2,508 5,141 (2,721) 2,486 2,158
Income taxes(3).................. (99) 1,315 3,494 4,218 1,106 1,221
------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item............. (25) 1,193 1,647 (6,939) 1,380 937
Extraordinary losses, net(4)..... 281 1,409 176 1,055 -- (4,828)
------- -------- -------- -------- -------- --------
Net income (loss)................ $ (306) $ (216) $ 1,471 $ (7,994) $ 1,380 $ (3,891)
======= ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and amortization.... $ 1,600 $ 6,049 $ 9,477 $ 10,965 2,451 3,076
Capital expenditures............. 688 1,834 4,472 6,280 2,180 780
Ratio of earnings to fixed
charges(5)..................... --(6) 1.3x 1.3x --(6) 1.7x 1.5x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, THREE MONTHS THREE MONTHS
---------------------------------------- ENDED ENDED
1996 1997 1998 1999 MARCH 31, 1999 MARCH 31, 2000
------- -------- -------- -------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash..................................... $ 104 $ 6,413 $ 5,863 $ 17,005 $ 6,053 $ 9,483
Working capital.......................... 11,936 29,618 29,739 17,311 31,091 40,034
Total assets............................. 69,960 242,759 225,804 257,839 234,547 254,765
Total indebtedness....................... 41,652 159,277 132,264 158,582 140,160 169,450
Stockholders' equity..................... 17,444 52,053 54,194 56,616 55,580 52,615
</TABLE>
- ---------------
(1) Period from March 31, 1996, date of inception, through December 31, 1996.
(2) Special charges relating to the acquisition by SSCI Investors LLC on
December 30, 1999 include $11.3 million in non-cash stock compensation
expense related to accelerated vesting of incentive equity awards previously
issued to certain members of management, $1.5 million in compensation
expenses related to a disbursement made to employees under the Long-Term
Incentive Plan of our former parent partnership, $0.8 million in cash
bonuses related to the transaction and $0.6 million in transaction fees.
(3) Prior to our restructuring on July 31, 1997, we were composed of entities,
including a limited partnership and a limited liability company, for which
income taxes are "passed through" to their owners and, as a result, no
income taxes are reflected prior to July 31, 1997. Effective July 31, 1997,
our predecessor was merged with and into SIA Adhesives, Inc., a subchapter C
corporation, and its business became subject to income taxes. As a result,
income taxes have been reflected for the year ended December 31, 1997 for
taxable earnings subsequent to the merger.
(4) Extraordinary loss relates to the write-off of deferred financing costs
associated with the early extinguishment of debt.
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes and fixed charges. Fixed charges
consist of interest, amortization of deferred debt issuance costs and the
portion of occupancy expense deemed representative of interest.
(6) Earnings were inadequate to cover fixed charges for the nine months ended
December 31, 1996, and the year ended December 31, 1999 by $0.1 million and
$2.7 million, respectively.
7
<PAGE> 13
RISK FACTORS
You should consider carefully the following risks and all of the
information set forth in this prospectus before participating in the exchange
offer. Investment in the exchange notes, like an investment in the outstanding
notes, entails the risks described below.
OUR INDEBTEDNESS COULD RESTRICT OUR OPERATIONS, MAKE US MORE VULNERABLE TO
ADVERSE ECONOMIC CONDITIONS AND MAKE IT MORE DIFFICULT FOR US TO MAKE PAYMENTS
ON THE EXCHANGE NOTES AND OUR OTHER INDEBTEDNESS.
We now have and will continue to have a significant amount of indebtedness.
As of May 15, 2000, our total debt was $165.3 million. As of May 15, 2000, our
available borrowing capacity under our credit facility was $113.9 million.
Our current and future indebtedness could have important consequences to
you. For example, it could
- impair our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate or other purposes
- limit our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
make principal and interest payments on our indebtedness
- put us at a competitive disadvantage to less leveraged competitors
- hinder our ability to adjust rapidly to changing market conditions
- increase our vulnerability in the event of a business or general economic
downturn
- make it more difficult for us to satisfy our obligations with respect to
the notes
- increase our vulnerability to interest rate increases to the extent our
variable-rate debt is not effectively hedged
- limit, along with the financial and other restrictive covenants in our
indebtedness, our ability to make investments or take other actions or
borrow additional funds
Our ability to repay or refinance our indebtedness will depend on our
financial and operating performance, which, in turn, is subject to prevailing
economic and competitive conditions and to financial, business and other
factors, many of which are beyond our control. These factors could include
operating difficulties, increased operating costs or raw material or product
prices, the response of competitors, regulatory developments and delays in
implementing strategic projects. Our ability to meet our debt service and other
obligations may depend in significant part on the extent to which we can
successfully implement our business strategy. We may not be able to implement
our business strategy or the anticipated results of our strategy may not be
realized.
We may be able to incur substantial additional indebtedness in the future.
The terms of the indenture do not prohibit us or our subsidiaries from incurring
indebtedness, although the indenture does contain limitations on additional
indebtedness. Based on our current level of operations, we believe that our cash
flow from operations and our available financing will be adequate to meet our
anticipated requirements for operating our business and servicing our debt. If,
in the future, we cannot generate enough cash from operations to make scheduled
payments on our indebtedness, we may be required to reduce or delay capital
expenditures, refinance our indebtedness, obtain additional financing or sell
assets. Our business may not be able to generate cash flow, and we may not be
able to obtain funding sufficient or utilize other means to satisfy our debt
service requirements.
THE EXCHANGE NOTES WILL BE JUNIOR TO OUR SENIOR DEBT AND THE GUARANTEES WILL BE
JUNIOR TO GUARANTOR SENIOR DEBT, AND THESE OBLIGATIONS WILL BE EFFECTIVELY
JUNIOR TO THE LIABILITIES OF OUR NONGUARANTOR SUBSIDIARIES WHICH MAY BE
SIGNIFICANT.
8
<PAGE> 14
The exchange notes will be unsecured senior subordinated obligations and
will be junior to all our existing and future senior indebtedness, including our
credit facility. Each of our currently existing domestic subsidiaries will
guarantee the exchange notes. These guarantees will be unsecured senior
subordinated obligations and will be junior to all existing and future senior
debt of the guarantors. The exchange notes will be effectively junior to all
existing and future debt and other liabilities of our subsidiaries that are not
guarantors, which include our foreign subsidiaries. As of May 15, 2000, we had
outstanding $15.3 million of senior debt and the guarantors had outstanding $4.2
million of senior debt (other than their guarantees of our debt). At March 31,
2000 the nonguarantor subsidiaries had outstanding $3.4 million of total debt to
third parties including trade payables.
We also may incur significant additional senior indebtedness under the
terms of our credit facility. For example, as of May 15, 2000, we had $113.9
million available under our credit facility which, if borrowed, would be senior
indebtedness. If we become bankrupt, liquidate or dissolve, our assets would be
available to pay obligations on the exchange notes only after our senior
indebtedness has been paid. Similarly, if one of our guarantor subsidiaries
becomes bankrupt, liquidates or dissolves, that subsidiary's assets would be
available to pay obligations on its guarantee only after payments have been made
on its senior indebtedness.
In addition, our credit facility provides our existing and future foreign
nonguarantor subsidiaries with borrowing capacity of up to $60 million. The
credit facility and the indenture with respect to the exchange notes also permit
these subsidiaries to incur additional indebtedness outside of the credit
facility. See "Description of Our Credit Facility." Our credit facility and the
indenture also provide for our ability to make loans to and investments in these
subsidiaries. The exchange notes will effectively rank junior to all
liabilities, including trade indebtedness, of these foreign nonguarantor
subsidiaries. If one of our nonguarantor subsidiaries becomes bankrupt,
liquidates or dissolves, that nonguarantor subsidiary's assets would be
available to us, and ultimately the holders of the exchange notes, only after
payments have been made on all of its liabilities. As of March 31, 2000, our
foreign nonguarantor subsidiaries represented 2.8% of our assets and 3.8% of our
net sales.
If we fail to pay any of our senior indebtedness, we may make payments on
the exchange notes only if either we first pay our senior debt or the holders of
our senior indebtedness waive the payment default. Moreover, if any non-payment
default exists under our senior indebtedness, we may not make any cash payments
on the exchange notes for a period of up to 179 days in any 360-day period,
unless we cure the non-payment default, the holders of the senior indebtedness
waive the default or rescind acceleration of the indebtedness or we repay the
indebtedness in full. In the event of a non-payment default we may not have
sufficient assets to pay amounts due on the exchange notes. In addition, various
events of default under our credit facility would prohibit us from making any
payments on the exchange notes.
THE EXCHANGE NOTES WILL NOT BE SECURED BY ANY OF OUR ASSETS. HOWEVER, OUR CREDIT
FACILITY IS SECURED BY SUBSTANTIALLY ALL OF OUR ASSETS.
In addition to being subordinated to all our senior indebtedness, the
exchange notes will not be secured by any of our assets. However, the credit
facility is secured by substantially all of our assets and the assets of our
domestic subsidiaries. Additionally, the terms of the indenture and our credit
facility permit us to incur additional secured debt. If we become insolvent or
are liquidated, or if payment under any of the instruments governing our secured
debt is accelerated, the lenders under these instruments will be entitled to
exercise the remedies available to a secured lender under applicable law and
pursuant to instruments governing such debt. Accordingly, the lenders will have
a prior claim on our assets. In that event, because the exchange notes will not
be secured by any of our assets, it is possible that there will be no assets
remaining from which claims of the holders of the exchange notes can be
satisfied or, if any assets remain, the remaining assets might be insufficient
to satisfy those claims in full.
9
<PAGE> 15
THE OPERATING AND FINANCIAL RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENTS,
INCLUDING OUR CREDIT FACILITY AND THE INDENTURE RELATING TO THE EXCHANGE NOTES,
COULD NEGATIVELY AFFECT OUR ABILITY TO FINANCE OPERATIONS AND CAPITAL NEEDS OR
TO ENGAGE IN OTHER BUSINESS ACTIVITIES.
Our existing debt agreements contain covenants that restrict our ability
and our subsidiaries' ability to
- incur additional indebtedness
- incur liens on property or assets
- make acquisitions
- merge or consolidate with third parties
- make restricted payments and investments
- pay dividends and make distributions
- repurchase or redeem capital stock
- dispose of assets
- guarantee obligations
- enter into sale and leaseback transactions
- engage in certain transactions with subsidiaries and affiliates and
otherwise restrict corporate activities
In addition, our credit facility contains financial covenants, including
- a total debt to EBITDA ratio
- a senior debt to EBITDA ratio
- a fixed charge coverage ratio
- an interest expense coverage ratio
Our ability to meet these covenants and requirements in the future may be
affected by events beyond our control, including prevailing economic, financial
and industry conditions. Our breach or failure to comply with any of these
covenants could result in a default under our credit facility or the indenture.
If we default under our credit facility, the lenders could cease to make further
extensions of credit, cause all of our outstanding debt obligations under our
credit facility to become due and payable, require us to apply all of our
available cash to repay the indebtedness under our credit facility or prevent us
from making debt service payments on any other indebtedness we owe. If a default
under the indenture occurs, the holders of the notes could elect to declare the
notes due and payable. If the indebtedness under our credit facility or the
notes is accelerated, we may not have sufficient assets to repay amounts due
under these existing debt agreements or on other debt securities then
outstanding. We also may amend the provisions and limitations of our credit
facility from time to time without the consent of the holders of exchange notes.
THE SUCCESS OF OUR ACQUISITION STRATEGY COULD BE ADVERSELY AFFECTED BY THE
UNAVAILABILITY OF SUITABLE ACQUISITION CANDIDATES OR OUR INABILITY TO FINANCE
FUTURE ACQUISITIONS OR SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES.
Our business strategy includes making acquisitions, but we can give you no
assurance that suitable acquisition candidates will continue to be available or
that we will be able to negotiate acceptable prices and terms. We expect to
finance acquisitions primarily through the issuance of additional debt. However,
we may not be able to obtain additional financing for future acquisitions. Also,
our credit facility limits our ability to make acquisitions and to incur
indebtedness. In addition, growth by acquisition involves risks such as
10
<PAGE> 16
- difficulties in integrating the operations and personnel of acquired
companies
- the potential loss of key employees and customers of acquired companies
- diversion of our management's attention from ongoing business concerns
If the execution of our acquisition strategy is unsuccessful, our ability
to compete successfully with larger companies, or companies that are able to
complete successful acquisitions in our industry, will be reduced.
WE MAY BE UNABLE TO IMPLEMENT SUCCESSFULLY OUR EXPANSION INTO FOREIGN MARKETS.
Our business strategy includes increasing our international sales through
increased sales and marketing activities in targeted regions, by entering into
strategic alliances and through acquisitions of foreign businesses, joint
ventures and/or other business combinations or arrangements. Our efforts to
increase international sales may be adversely affected by, among other things
- changes in foreign import restrictions and regulations
- taxes
- currency exchange rates
- currency and monetary transfer restrictions and regulations
- changes in U.S. law affecting foreign trade
- economic and political changes in the foreign nations in which our
products are sold
One or more of these factors could have a material adverse effect on our
business, financial condition or results of operations in the future.
THE ADHESIVES, SEALANTS AND COATINGS SEGMENT OF THE SPECIALTY CHEMICALS INDUSTRY
IS HIGHLY COMPETITIVE.
We compete with a wide variety of specialty chemical manufacturers. Some of
our competitors are larger, have greater financial resources and are less
leveraged than we are. As a result, these competitors may be better able to
withstand a change in market conditions within the specialty chemical industry
and throughout the economy as a whole. These competitors may also be able to
maintain significantly greater operating and financial flexibility than we can.
Additionally, a number of our niche product applications are customized or sold
for highly specialized uses. Competitors that have greater financial,
technological, manufacturing and marketing resources than we do and that do not
today market similar applications for these uses could choose to do so in the
future. Increased competition could have a material adverse effect on our
business, financial condition or results of operations.
WE DEPEND SIGNIFICANTLY ON OUR SENIOR MANAGEMENT TEAM.
Our success depends in large part on the services of our senior management
team including our Chairman, President and Chief Executive Officer, Robert B.
Covalt. The loss of any of our key executives could materially adversely affect
our company and seriously impair our ability to implement our business strategy.
The employment agreements of most of our key executives expire on December 31,
2002 or December 31, 2003. With the exception of Robert B. Covalt, we do not
maintain key person life insurance policies on any of our executive officers.
Our ability to manage our anticipated growth will also depend on our ability to
identify, hire and retain qualified management personnel. If we are unsuccessful
in attracting and retaining qualified personnel, it could have a material
adverse affect on our business, financial condition or results of operations.
11
<PAGE> 17
WE MAY BE UNABLE TO RESPOND EFFECTIVELY TO TECHNOLOGICAL CHANGES IN OUR
INDUSTRY.
Our future business success will depend upon our ability to maintain and
enhance our technological capabilities, develop and market products and
applications that meet changing customer needs and successfully anticipate or
respond to technological changes on a cost-effective and timely basis. If we
cannot keep pace with the technological advances in the specialty chemicals
industry, it could have a material adverse effect on our business, financial
condition or results of operations.
WE RELY ON SUPPLIES OF A VARIETY OF SPECIALTY AND COMMODITY CHEMICALS IN OUR
MANUFACTURING PROCESS.
We use a variety of specialty and commodity chemicals in our manufacturing
processes. These raw materials are generally available from numerous independent
suppliers. We typically purchase raw materials on a contract basis. Some of the
raw materials that we use are derived from propylene, crude oil derivatives and
ethylene. There have been historical periods of rapid and significant movements
in the prices of propylene, crude oil derivatives and ethylene both upward and
downward. We generally pass changes in the prices of raw materials to our
customers over a period of time. We cannot always do so, however, and any
limitation on our ability to pass through any such price increases could have a
material adverse effect on our business, financial condition or results of
operations.
RISKS ASSOCIATED WITH THE OPERATION OF OUR MANUFACTURING FACILITIES MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our revenues are dependent on the continued operation of our various
manufacturing facilities. The operation of chemical manufacturing plants
involves many risks including
- the breakdown, failure or substandard performance of equipment
- inclement weather and natural disasters
- the need to comply with directives of, and maintain all necessary permits
from, government agencies
- raw material supply disruptions
- labor force shortages, work stoppages or other labor difficulties
- transportation interruptions
The occurrences of material operational problems, including but not limited
to the above events, may have a material adverse effect on the productivity and
profitability of a particular manufacturing facility, or with respect to various
facilities of our company as a whole, during the period of the operational
difficulties.
Our operations are also subject to various hazards incident to the
production of industrial chemicals including the use, handling, processing,
storage and transportation of hazardous materials. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, environmental damage and suspension of operations. Claims arising
from any future catastrophic occurrence at one of our locations may result in us
being named as a defendant in lawsuits asserting potentially large claims. In
addition, individuals could seek damages for alleged personal injury or property
damage resulting from exposure to chemicals at our facilities. Although we
maintain insurance policies that could provide some coverage for these claims,
that coverage does not include all of these risks and is subject to limitations
and, accordingly, may be inadequate.
POTENTIAL ENVIRONMENTAL LIABILITIES MAY ARISE IN THE FUTURE AND ADVERSELY IMPACT
OUR FINANCIAL POSITION.
We are subject to extensive laws and regulations pertaining to air
emissions, wastewater discharges, the handling and disposal of solid and
hazardous wastes, the remediation of contamination, and otherwise relating to
health, safety and protection of the environment. Additionally, the operation of
chemical manufacturing plants involves the risk of chemical spills and other
discharges or releases of hazardous
12
<PAGE> 18
substances, including gases. Should this risk materialize, it may cause personal
injury and loss of life, severe damage to or destruction of property and
equipment, and environmental damage, which could lead to claims under the
environmental laws.
There are conditions at our facilities that require environmental
remediation. While we believe that any costs relating to this remediation that
are not covered by indemnification or insurance will not be material, they could
be. Environmental laws are constantly evolving and it is impossible to predict
accurately the effect they may have upon our capital expenditures, earnings or
competitive position in the future. Should environmental laws become more
stringent, the cost of compliance would increase. If we cannot pass along future
costs to our customers, any increases may have a material adverse effect on our
business, financial condition or results of operations.
DEMAND FOR SOME OF OUR PRODUCTS IS CYCLICAL IN NATURE AND SUBJECT TO CHANGES IN
GENERAL ECONOMIC CONDITIONS.
A significant portion of our products are used in industries that
experience cyclicality and are subject to changes in general economic
conditions. Sales to the building and construction market are driven by trends
in commercial and residential construction, housing starts and trends in
residential repair and remodeling. Sales to the transportation industry are also
cyclical in nature. Downturns in the building and construction market or the
transportation industry could have a material adverse effect on our business,
financial condition or results of operations.
PRODUCT LIABILITY CLAIMS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Because many of our products provide critical performance attributes to our
customers' products, the sale of these products entails risk of product
liability claims. A successful product liability claim, or series of claims,
against us in excess of our insurance coverage could have a material adverse
effect on our business, financial condition or results of operations.
WE ARE CONTROLLED BY ONE PRINCIPAL SHAREHOLDER.
The interests of our controlling shareholder may be in conflict with your
interests as a holder of notes. We are 75% owned by SSCI Investors LLC. As a
result, SSCI Investors LLC will be able to direct the election of the members of
our board of directors and therefore direct our management and policies.
Circumstances may occur in which the interests of SSCI Investors LLC, as an
equity holder, could be in conflict with the interests of the holders of notes.
For example, SSCI Investors LLC may have an interest in pursuing acquisitions,
divestitures or other transactions that, in their judgment, could enhance their
equity investment, even though those transactions might involve disproportionate
risks to the holders of the notes.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES OF THE EXCHANGE NOTES.
Federal and state statutes allow courts, under specific circumstances, to
void guarantees, subordinate claims under the guarantees to the guarantor's
other debt or take other action detrimental to holders of the guarantees of
exchange notes. Under the federal bankruptcy law and comparable provisions of
state fraudulent transfer laws, the guarantees made by our subsidiaries could be
voided or subordinated to other debts if, among other things
- any subsidiary guarantor issued the guarantee to delay, hinder or defraud
present or future creditors
- any subsidiary guarantor received less than reasonably equivalent value
or fair consideration for issuing such subsidiary guarantee and, at the
time it issued its subsidiary guarantee, any subsidiary guarantor
- was insolvent or rendered insolvent by reason of such incurrence
13
<PAGE> 19
- was engaged in a business or transaction for which such guarantor's
remaining unencumbered assets constituted unreasonably small capital
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature
- was a defendant in an action for money damages, or had a judgment for
money damages docketed against it if, in either case, after final
judgment, the judgment is unsatisfied
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a subsidiary guarantor
would be considered insolvent if, at the time it incurred the indebtedness,
- the sum of its debts is greater than the fair value of all of its assets
- the present fair saleable value of its assets was less than the amount
that would be required in order to pay its probable liability on its
existing debts and liabilities, including contingent liabilities, as they
become absolute and mature, or
- it could not pay or is generally not paying its debts as they become due
WE MAY NOT BE ABLE TO REPURCHASE THE EXCHANGE NOTES UPON A CHANGE OF CONTROL.
Upon a change of control event, each holder of the notes will have the
right to require us to repurchase their notes at 101% of their principal amount,
plus accrued and unpaid interest to the date of repurchase. Our ability to
repurchase the exchange notes upon a change of control event is limited by the
terms of our debt agreements, including our credit facility. Upon a change of
control event, we may be required to repay immediately the outstanding
principal, and any accrued interest or any other amounts, owed by us under our
credit facility. We may not be able to repay these amounts or obtain the
necessary consents under our credit facility to repurchase the exchange notes.
The source of funds for any purchase of exchange notes would be our available
cash or cash generated from other sources. However, we may not have enough
available funds or be able to generate the necessary funds upon a change of
control to make any required repurchases of tendered notes. This may result in
our having to refinance our outstanding indebtedness, which we may not be able
to do on favorable terms or at all.
YOU MAY BE UNABLE TO SELL YOUR EXCHANGE NOTES IF A TRADING MARKET FOR THE
EXCHANGE NOTES DOES NOT DEVELOP.
The exchange notes will be new securities for which there is currently no
established trading market, and none may develop. The initial purchasers of the
outstanding notes have indicated to us that they intend to make a market in the
exchange notes, as permitted by applicable laws and regulations. However, the
initial purchasers are under no obligation to do so. At their discretion, the
initial purchasers could discontinue their market-making efforts at any time
without notice. Accordingly, we cannot assure you that an active trading market
for the exchange notes will develop or, if a market develops, as to the
liquidity of the market. We do not intend to apply for listing of the exchange
notes on any securities exchange or for quotation on any automated dealer
quotation system.
The liquidity of any market for the exchange notes will depend on the
number of holders of the exchange notes, the interest of securities dealers in
making a market in the exchange notes and other factors. Accordingly, we cannot
assure you as to the development or liquidity of any market for the exchange
notes. If an active trading market does not develop, the market price and
liquidity of the exchange notes may be adversely affected. If the exchange notes
are traded, they may trade at a discount from their initial offering price
depending upon prevailing interest rates, the market for similar securities,
general economic conditions, our performance and business prospects and certain
other factors.
14
<PAGE> 20
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OUTSTANDING
NOTES
In the event the exchange offer is completed, we will not be required to
register any outstanding notes not tendered and accepted in the exchange offer.
In that event, holders of outstanding notes seeking liquidity in their
investment would have to rely on exemptions to the registration requirements
under the securities laws, including the Securities Act, since the outstanding
notes will continue to be subject to restrictions on transfer. Consequently,
holders of outstanding notes who do not participate in the exchange offer could
experience significant diminution in the value of their outstanding notes,
compared to the value of the exchange notes. Following the exchange offer, none
of the exchange notes will be entitled to the contingent increase in interest
rate provided for (in the event of a failure to complete the exchange offer in
accordance with the terms of the registration rights agreement) pursuant to the
registration rights agreement.
15
<PAGE> 21
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the exchange notes in
the exchange offer. We will receive in exchange outstanding notes in like
principal amount. We will retire or cancel all of the outstanding notes tendered
in the exchange offer.
We used the net cash proceeds from the issuance of the outstanding notes to
repay approximately $141.0 million of outstanding indebtedness under our credit
facility. Of the $156.1 million principal amount then outstanding under our
credit facility (which as of March 23, 2000, had a weighted average interest
rate of 8.7%) prior to that issuance, approximately $127.4 million was incurred
to finance the repurchase of $125.0 million principal amount of our 9 1/2% notes
on March 6, 2000 pursuant to a change of control offer.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
UNAUDITED
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 9,483
========
Total debt, including current maturities:
New credit facility(1).................................... 15,098
Notes(2).................................................. 148,932
Other debt, including capital leases...................... 5,420
--------
Total debt............................................. 169,450
--------
Total stockholders' equity(3)..................... 52,615
--------
Total debt and stockholders' equity............... $222,065
========
</TABLE>
- ---------------
(1) The net proceeds from the issuance of the outstanding notes were used to
repay all amounts outstanding under our Term A Loan Facility and our Term B
Loan Facility and approximately $6.0 million outstanding under our Revolving
Credit Facility. Upon these repayments, the Term B Loan Facility was
terminated and we had $75.0 million of borrowing availability under the Term
A Loan Facility and $35.5 million of borrowing availability under our $50.0
million Revolving Credit Facility.
(2) Reflects unamortized offering discount of approximately $1.0 million.
(3) Includes Common Stock, $.01 par value, 2,700,000 shares authorized and
1,436,239 shares issued and outstanding and Non-Voting Common Stock, $.01
par value, 2,100,000 shares authorized and 730,182 shares issued and
outstanding.
16
<PAGE> 22
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents our selected historical financial data and
that of our predecessors at the dates and for the periods indicated. The data
for the years ended December 31, 1995 and the three months ended March 31, 1996
are derived from the audited financial statements of our predecessor, Sovereign
Engineered Adhesives L.L.C. The data for the nine months ended December 31, 1996
are derived from the financial statements of Sovereign Specialty Chemicals,
L.P., our former parent. The data for the years ended December 31, 1997, 1998
and 1999 are derived from our audited financial statements. The data for the
three months ended March 31, 1999 and 2000 are derived from our unaudited
financial statements. The information set forth below should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this
prospectus. The transactions resulting in the acquisition by SSCI Investors LLC
of its 75% ownership stake were accounted for as a recapitalization.
<TABLE>
<CAPTION>
PREDECESSOR SOVEREIGN SPECIALTY CHEMICALS, INC.
------------------------ ----------------------------------------------------------
THREE NINE
YEAR MONTHS MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996(1) 1997 1998 1999
------------ --------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $21,129 $ 5,410 $37,792 $134,771 $211,335 $237,408
Cost of goods sold...... 13,734 3,580 26,637 92,889 144,039 162,550
------- ------- ------- -------- -------- --------
Gross profit............ 7,395 1,830 11,155 41,882 67,296 74,858
Selling, general and
administrative
expenses............... 5,633 1,603 9,613 30,272 46,010 47,486
Stock compensation
expense................ -- -- -- 22 408 864
Special charges(2)...... -- -- -- -- -- 14,153
------- ------- ------- -------- -------- --------
Operating income........ 1,762 227 1,542 11,588 20,878 12,355
Interest expense, net... -- -- 1,666 9,080 14,712 15,076
Loss on sale of
business............... -- -- -- 1,025 --
------- ------- ------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... 1,762 227 (124) 2,508 5,141 (2,721)
Income taxes(3)......... 705 91 (99) 1,315 3,494 4,218
------- ------- ------- -------- -------- --------
Income (loss) before
extraordinary item..... 1,057 136 (25) 1,193 1,647 (6,939)
Extraordinary losses,
net(4)................. -- -- 281 1,409 176 1,055
------- ------- ------- -------- -------- --------
Net income (loss)....... $ 1,057 $ 136 $ (306) $ (216) $ 1,471 $ (7,994)
======= ======= ======= ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and
amortization........... $ 901 $ 191 $ 1,600 $ 6,049 $ 9,477 $ 10,965
Capital expenditures.... 106 131 688 1,834 4,472 6,280
Ratio of earnings to
fixed charges(5)....... 441.5x 114.5x --(6) 1.3x 1.3x --(6)
BALANCE SHEET DATA (END
OF PERIOD):
Cash.................... $ 1 $ 1 $ 104 $ 6,413 $ 5,863 $ 17,005
Working capital
(deficit).............. 1,786 (5,019) 11,936 29,618 29,739 17,311
Total assets............ 9,394 9,612 69,960 242,759 225,804 257,839
Total indebtedness...... -- -- 41,652 159,277 132,264 158,582
Stockholders' equity.... 7,013 7,149 17,444 52,053 54,194 56,616
<CAPTION>
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
1999 2000
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 55,766 $ 60,812
Cost of goods sold...... 37,880 41,302
-------- --------
Gross profit............ 17,886 19,510
Selling, general and
administrative
expenses............... 11,848 13,176
Stock compensation
expense................ 90 --
Special charges(2)...... -- --
-------- --------
Operating income........ 5,948 6,334
Interest expense, net... 3,462 4,176
Loss on sale of
business............... -- --
-------- --------
Income (loss) before
income taxes and
extraordinary item..... 2,486 2,158
Income taxes(3)......... 1,106 1,221
-------- --------
Income (loss) before
extraordinary item..... 1,380 937
Extraordinary losses,
net(4)................. -- (4,828)
-------- --------
Net income (loss)....... $ 1,380 $ (3,891)
======== ========
OTHER FINANCIAL DATA:
Depreciation and
amortization........... 2,451 3,076
Capital expenditures.... 2,180 780
Ratio of earnings to
fixed charges(5)....... 1.7x 1.5x
BALANCE SHEET DATA (END
OF PERIOD):
Cash.................... $ 6,053 $ 9,483
Working capital
(deficit).............. 31,091 40,034
Total assets............ 234,547 254,765
Total indebtedness...... 140,160 169,450
Stockholders' equity.... 55,580 52,615
</TABLE>
- ---------------
(1) Period from March 31, 1996, date of inception, through December 31, 1996.
(2) Special charges relating to the acquisition by SSCI Investors LLC on
December 30, 1999 include $11.3 million in non-cash stock compensation
expense related to accelerated vesting of incentive equity awards previously
issued to certain members of management, $1.5 million in compensation
expenses related to a disbursement made to employees under the Long-Term
Incentive Plan of our former parent partnership, $0.8 million in cash
bonuses related to the transaction and $0.6 million in transaction fees.
(3) Prior to our restructuring on July 31, 1997, we were composed of entities
including a limited partnership and a limited liability company for which
income taxes are "passed through" to their owners and, as a result, no
income taxes are reflected prior to July 31, 1997. Effective July 31, 1997,
our predecessor was merged with and into SIA Adhesives, Inc., a subchapter C
corporation, and its business became subject to income taxes. As a result,
income taxes have been reflected for the year ended December 31, 1997 for
taxable earnings subsequent to the merger.
(4) Extraordinary loss relates to the write-off of deferred financing costs
associated with the early extinguishment of debt.
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes and fixed charges. Fixed charges
consist of interest expense, amortization of deferred debt issuance costs
and the portion of occupancy expense deemed representative of interest.
(6) Earnings were inadequate to cover fixed charges for the nine months ended
December 31, 1996, and for the year ended December 31, 1999 by $0.1 million
and $2.7 million, respectively.
17
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the consolidated
financial statements and accompanying notes included in this prospectus.
GENERAL
We have grown through the acquisition and integration of businesses in the
highly fragmented U.S. adhesives, sealants and coatings segment of the specialty
chemicals industry. From 1996 to 1999, we increased our annual net sales through
acquisitions and internal growth from $43.2 million to $237.4 million.
Approximately $27.4 million of this net sales increase is attributable to
internal growth. We plan to continue our growth through a combination of new
product development, continued market penetration, strategic acquisitions and
international expansion.
This table describes the acquisitions we made since our inception in March
1996.
<TABLE>
<CAPTION>
DATE OF
ACQUISITION ACQUISITION APPLICATION
- ----------- ----------- -----------
<S> <C> <C>
Adhesives Systems Division of B.F. March 1996 Specialty adhesives used primarily for
Goodrich (renamed SIA Adhesives, automotive, aerospace and general
Inc.) industrial applications
Pierce & Stevens Corp. August 1996 Specialty coatings and adhesives for
performance-oriented niche
applications
U.S. Adhesives, Sealants and Coatings August 1997 Adhesives and sealants primarily
Division of Laporte PLC(1) utilized for housing repair,
remodeling and construction and
industrial applications
Coatings and Adhesives Division of June 1998 Specialty polyurethane formulations
K.J. Quinn & Co., Inc. for adhesives and coatings
PL Adhesives & Sealants brand and August 1998 Adhesives and sealants for consumer
product line from ChemRex Inc. applications
Flexible packaging coating business of April 1999 Radiation curable, water and solvent
The Valspar Corporation Corporation products
</TABLE>
- ---------------
(1) The companies acquired from Laporte PLC comprised Laporte Construction
Chemicals North America, Inc., which was renamed OSI Sealants, Inc.,
Evode-Tanner Industries, Inc., which was renamed Tanner Chemicals, Inc., and
Mercer Products Company, Inc., which was sold to Burke Industries, Inc. in
April 1998. Mercer is a manufacturer of extruded vinyl flooring profiles and
related products for the commercial and residential construction and
renovation markets. We sold Mercer due to our strategy of focusing on
adhesives, sealants and coatings.
The results of acquired businesses have been included for all periods
subsequent to their respective dates of acquisition.
On December 30, 1999, SSCI Investors LLC, an entity owned by an investor
group led by AEA Investors Inc., acquired approximately 75% of our outstanding
capital stock directly from the former majority stockholder with the balance
owned by other investors, including our current management team. Funding for the
purchased stock was provided by equity financing from the investor group owning
SSCI Investors LLC. Concurrently with the completion of the acquisition, we
entered into our new credit facility and repaid all outstanding amounts under
our former credit facility. Amounts drawn under our new credit facility were
used to repay existing debt and not to finance the acquisition. The transactions
resulting in the acquisition by SSCI Investors LLC of its approximately 75%
stake in our company will be accounted for as a recapitalization. The
transaction resulted in a change of controlling stockholder of the company;
18
<PAGE> 24
however, generally accepted accounting principles do not require a change in
carrying value of assets and liabilities and, as such, we continue to carry
assets and liabilities at their historical carrying value.
SSCI Investors LLC's acquisition of our stock constituted a change of
control under the terms of the indenture relating to our 9 1/2% Senior
Subordinated Notes due 2007 and, as a result, we were required to make an offer
to purchase for cash any and all of our outstanding $125.0 million principal
amount of 9 1/2% notes for 101% of their principal amount plus accrued and
unpaid interest to the date of repurchase. The repurchase was completed on March
6, 2000 with the repurchase of the entire $125.0 million principal amount of
9 1/2% notes for an aggregate purchase price of approximately $127.4 million
which was financed with borrowings under our credit facility. We used proceeds
from the issuance of the outstanding notes to repay amounts drawn under our
credit facility for the repurchase of the 9 1/2% notes.
RESULTS OF OPERATIONS
The following table presents the major components of the statement of
operations on a historical basis and as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------------------------------ ENDED
1997 1998 1999 MARCH 31, 2000
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales............ $134,771 100.0% $211,335 100.0% $237,408 100.0% $60,812 100.0%
Cost of goods sold... 92,889 68.9% 144,039 68.2% 162,550 68.5% 41,302 67.9%
Selling, general and
administrative
expense............ 30,294 22.5% 46,418 22.0% 62,503 26.3% 13,176 21.7%
Operating income..... 11,588 8.6% 20,878 9.9% 12,355 5.2% 6,334 10.4%
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net Sales. Net sales were $60.8 million for the first quarter of 2000, an
increase of $5.0 million, or 9.0%, over 1999 net sales. Net sales increased in
2000 due to organic growth (approximately 4.4%) and growth through acquisitions
(approximately 4.6%). Each of our business units achieved organic sales growth
in the quarter. Contributors to this organic growth were increased sales of
insulation coatings by SIA Tanner, adhesives for housing and construction
applications sold through the do-it-yourself channel by OSI Sealants and
flexible packaging, and overprint coatings by Pierce & Stevens.
Cost of Goods Sold. Costs of goods sold was $41.3 million in the first
quarter of 2000, an increase of $3.4 million, or 9.0%, over 1999. As a
percentage of net sales, cost of goods sold remained constant at 67.9% for the
first quarter of 2000 and 1999, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13.2 million for 2000, an increase of $1.2
million, or 10.4% over 1999. As a percentage of net sales, selling, general and
administrative expenses increased to 21.7% for 2000 from 21.4% in 1999. This
percentage increase was due primarily to an increase in management fees paid to
our principal investor for advisory and consulting services.
Interest Expense. Net interest expense was $0.7 million higher in 2000
primarily due to higher average borrowings in the first quarter of 2000.
Income Taxes. Income tax expense was $1.2 million and $1.1 million in the
first quarter of 2000 and 1999, respectively.
Income before extraordinary loss. Income before extraordinary loss for the
quarter ended March 31, 2000 was $0.9 million compared to $1.4 million in the
prior year. This decrease was primarily due to matters discussed above.
19
<PAGE> 25
Extraordinary Loss (net of tax benefit). The extraordinary loss of $4.8
million, net of the income tax benefit of $3.2 million, relates to the write off
of unamortized deferred financing costs and the payment of the 1% premium
relative to the repurchase of the 9 1/2% notes.
Net Income (loss). Primarily as a result of the extraordinary loss
recognized relative to the repurchase of the 9 1/2% notes, a net loss of $3.9
million was incurred in the first quarter of 2000 compared to net income of $1.4
million in the prior year.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales. Net sales were $237.4 million for 1999, an increase of $26.1
million, or 12.3%, over 1998 net sales. The 1998 results include four months of
sales from Mercer Products ($7.2 million), a business sold in April 1998.
Excluding Mercer sales from 1998, net sales increased by 16.3% in 1999 due to
organic growth (approximately 5.7%) and growth through acquisitions
(approximately 10.6%). Each of our business units achieved organic sales growth
in 1999. Strong contributors to this organic growth were increased sales of
insulation coatings by SIA Tanner, adhesives for housing and construction
applications sold through the do-it-yourself channel by OSI Sealants and
flexible packaging and overprint coatings by Pierce & Stevens.
Cost of Goods Sold. Cost of goods sold was $162.6 million for 1999, an
increase of $18.5 million, or 12.9%, over 1998. As a percentage of net sales,
cost of goods sold increased slightly to 68.5% for 1999 from 68.2% in 1998
primarily as a result of the lower margins associated with the phase-in of
production of the PL(R) brand of adhesives and sealants and Valspar
applications, partially offset by improvements in raw material costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including stock compensation expense but net of special
charges, were $48.4 million for 1999, an increase of $1.9 million, or 4.2%, over
1998. As a percentage of net sales, selling, general and administrative expenses
decreased to 20.4% for 1999 from 22.0% in 1998. This decrease was due primarily
to maintaining corporate overhead costs relatively constant despite expanding
net sales. Special charges of $14.2 million, comprised principally of
equity-based incentive compensation, were incurred in 1999 in connection with
the December 30, 1999 sale of a controlling equity interest in our company.
Interest Expense. Net interest expense was $0.4 million higher in 1999
primarily due to higher average borrowings in 1999 as compared to 1998.
Income Taxes. Income tax expense increased by $0.7 million or 20.7% despite
the $2.7 million loss before income taxes and extraordinary item. This is due
primarily to the increase in nondeductible stock compensation expense recognized
in 1999.
Income (loss) before extraordinary loss. Loss before extraordinary loss for
the year ended December 31, 1999 was $6.9 million. This was primarily the result
of special charges of $14.2 million.
Extraordinary Loss (net of tax benefit). The extraordinary loss of $1.1
million, net of the income tax benefit of $0.7 million, relates to the write off
of unamortized deferred financing costs due to the refinancing of our credit
facility.
Net Income (loss). As a result of the change in controlling stockholder of
our company and resultant special charges and the extraordinary loss associated
with writing off unamortized deferred financing costs due to the refinancing of
the former credit facility, a net loss of $8.0 million was incurred for 1999
compared to net income of $1.5 million in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Our net sales in 1998 were $211.3 million, an increase of $76.6
million, or 56.8%, over the comparable period in 1997. The increase is
attributable primarily to the acquisition of OSI Sealants and Tanner Chemicals
in August 1997, the K.J. Quinn & Co. coatings and adhesives business in June
1998 and the PL(R) brand of adhesives and sealants in August 1998, offset
somewhat by the sale of Mercer in
20
<PAGE> 26
April 1998. Excluding acquisitions, net sales increased by $5.6 million, or
6.4%. The sales increase was the result of increased sales of 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 original
equipment manufacturers due to design-outs. Sales for flexible packaging
products 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 $51.2 million, or 55.1%, over 1997. Gross margin improved to 31.8%
in 1998 from 31.1% in 1997. Net of acquisitions, gross margin improved to 29.3%
in 1998 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. Our selling, general and
administrative expenses, including stock compensation expense, 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 costs as a percentage of rapidly expanding net sales
and other efficiencies offset partially by the full year impact of increased
goodwill amortization associated with the purchase of OSI Sealants and Tanner
Chemicals, non-recurring management severance expenses recorded in 1998 and the
non-cash compensation expense on management incentive plans.
Interest Expense, net. Interest expense, net was $14.7 million in 1998
representing a $5.6 million, or 62.0%, increase over the comparable period in
1997. This increase was the result of the full year's impact of increased debt
incurred as a result of the purchase of OSI Sealants and Tanner Chemicals in
August 1997, partially offset by the impact of repayment of a $30.0 million term
loan in April 1998.
Loss on Sale of Business. In April 1998, we sold our Mercer subsidiary to
Burke Industries, Inc. Net proceeds from the sale were approximately $35.3
million. We 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
these entities generally "pass through" to their owners. Since the
restructuring, Sovereign and its subsidiaries have filed consolidated federal
income tax returns. The consolidated financial statements include pro forma
income taxes for 1997, as if the companies had been subject to income taxes for
all of 1997. See note 3 of the notes to the consolidated financial statements.
Income before extraordinary loss. Income before extraordinary loss for 1998
was $1.6 million representing a $0.5 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 $0.2
million, net of income tax benefit of $0.1 million, relates to the write-off of
deferred financing costs resulting from the early extinguishment of a $30.0
million term loan in April 1998.
Net Income. Our 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.
INFLATION
We do not believe that inflation has had a material impact on net sales or
income during any of the periods presented above. Our business could be affected
by inflation in the future.
21
<PAGE> 27
YEAR 2000 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. We have actively addressed the Year 2000 issue. Our total cost of
addressing all Year 2000 issues was less than $0.5 million, substantially all of
which was incurred as of December 31, 1999 and has been expensed or capitalized,
as appropriate. To date, as a result of these efforts, we have not experienced
any significant functional problems related to the Year 2000 issue. In addition,
to date, we have not experienced any significant Year 2000 issue with respect to
vendors and/or third parties with whom we conduct business. While we believe
that the identification of significant Year 2000 issues is unlikely at this
time, there is an ongoing risk that Year 2000 related problems could still occur
and we will continue to monitor the situation. In the event any Year 2000 issues
arise, we have developed contingency plans to address them.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $10.6 million in the first
quarter of 2000. Adjusting the net loss for non-cash charges, such as
depreciation and amortization, amortization of deferred financing costs and
extraordinary loss results in positive cash flow of approximately $4.4 million.
This cash flow from operations was offset by an increase in accounts receivable
of $3.9 million, increases in prepaid and other assets of $2.5 million, and a
net buildup of inventory levels of $1.1 million. In addition accrued expenses
decreased by approximately $7.3 million in the quarter. The increases in
accounts receivable are consistent with the percentage sales increases year over
year. The increase in prepaid and other assets is due primarily to increases in
income taxes receivable and amounts due from the former Parent Partnership. The
decreases in accrued expenses relate primarily to the payments of approximately
$2.3 million relative to the December 28, 1999 stock repurchase, $1.5 million in
Long Term Incentive Plan payable and 1999 accrued bonuses.
Net cash provided by operating activities was $11.0 million in 1999. Net
loss adjusted for non-cash charges, such as depreciation and amortization, stock
compensation expense, amortization of deferred financing costs and extraordinary
loss was approximately $19.0 million of cash flow from operations. Accounts
payable and accrued expenses increased by $1.2 million in 1999. These increases
in cash flow from operations were offset by increases in accounts receivable of
$4.8 million, and a net buildup of inventory levels of $5.3 million. The
increases in accounts receivable are consistent with the percentage sales
increases year over year from 1998, excluding Mercer which was sold in April
1998.
Net cash provided by operating activities in 1998 totaled $13.6 million,
which represented a $7.2 million increase over 1997. Net income adjusted for
non-cash charges, such as 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 the disposition of Mercer,
accounts payable and other liabilities increased by $5.9 million in 1998. These
increases to net cash by operating activities were partially offset by increases
in accounts receivable and inventories of $7.4 million and $1.3 million. The
increase in accounts receivable was due primarily to increased sales volume
primarily due to 1998 acquisitions.
Net cash used in investing activities was $0.7 million in the first quarter
of 2000 and resulted from capital additions to property, plant and equipment.
Net cash used in investing activities was $22.0 million in 1999 and
resulted from capital additions to property, plant and equipment of $6.3 million
and the acquisition in April 1999 of the flexible packaging coatings business of
The Valspar Corporation.
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 cash of $35.3 million and the
acquisitions of the K.J. Quinn & Co. coatings and adhesives business in June
1998 and the PL(R) adhesives and sealants product line in August 1998 required
cash of $15.1 million.
22
<PAGE> 28
We sold Mercer in April 1998 due to our strategy of focusing on adhesives,
sealants and coatings. Mercer, a manufacturer of extruded vinyl flooring
profiles and related products for the commercial and residential construction
and renovation markets, was acquired in August 1997 as part of our purchase of
OSI Sealants and Tanner Chemicals.
In the June 1998 acquisition of the coatings and adhesives business of K.J.
Quinn & Co., we paid cash and issued $2.8 million in notes payable to the
previous owners.
In August 1998, we acquired ChemRex Inc.'s PL(R) adhesives and sealants
product line. PL(R) consists of solvent-based and polyurethane adhesives and
sealants. We borrowed $6.2 million under a former credit facility to finance the
acquisition which was subsequently repaid in full prior to December 31, 1998.
Most of the production of the PL(R) applications was transferred to our Mentor,
Ohio production facility in the first quarter of 1999.
Net cash provided by financing activities was $3.8 million in the first
quarter of 2000.
Net cash provided by financing activities was $22.1 million in 1999. Net
cash used in financing activities was $29.9 million in 1998. We used proceeds
from the Mercer sale to repay our $30.0 million term loan in April 1998.
Debt at March 31, 2000 consisted of $148.9 million principal amount of
11 7/8% notes, net of unamortized discount, $14.0 million drawn under our credit
facility and $1.1 million drawn under a $1.5 million sub-facility obtained by
our Singapore-based sales office. We also had approximately $5.5 million
outstanding of other indebtedness, including capital leases.
On December 28, 1999, we redeemed a portion of outstanding shares of common
stock held by our former parent for an aggregate price of approximately $3.3
million.
As of December 29, 1999, we entered into a management agreement with AEA
Investors Inc. pursuant to which AEA Investors Inc. will provide us with
advisory and consulting services. The management agreement provides for an
annual aggregate fee of $999,999 plus reasonable out-of-pocket costs and
expenses.
On December 30, 1999, we repaid all outstanding amounts under our former
credit facility and entered into a new credit agreement which then provided for
aggregate borrowings of $200 million, including a (1) Revolving Credit Facility
of $50.0 million, (2) Term A Loan Facility of $75.0 million and (3) Term B Loan
Facility of $75.0 million. Borrowings under the Revolving Credit Facility are
available on a fully revolving basis and may be used for general corporate
purposes, including to a limited extent acquisitions. The Revolving Credit
Facility will mature on December 30, 2005. Borrowings under the Term A Loan
Facility may be used for general corporate purposes, including acquisitions, and
commitments to lend under this facility terminate June 30, 2001 to the extent
not then drawn. Borrowings under the Term B Loan Facility were available for
general corporate purposes and were fully drawn on March 6, 2000 as part of the
$127.4 million which we used to repurchase $125.0 million principal amount of
9 1/2% notes. On March 6, 2000 after making that repurchase, we had outstanding
$60.0 million principal amount under the Term A Loan Facility, $75.0 million
principal amount under the Term B Loan Facility and $20.0 million principal
amount under the Revolving Credit Facility. In addition to this amount, we had
approximately $6.6 million outstanding of other indebtedness. Net proceeds of
the issuance of the outstanding notes on March 29, 2000 were approximately
$144.8 million and were used to repay all amounts outstanding under the Term A
Loan Facility and Term B Loan Facility and approximately $6.0 million
outstanding under the Revolving Credit Facility. As of March 31, 2000, we had
$75.0 million of borrowing availability under the Term A Loan Facility and $34.9
million of borrowing availability under our $50.0 million Revolving Credit
Facility. Upon its repayment on March 29, 2000, the Term B Loan Facility was
terminated. We may incur additional indebtedness to the extent that we complete
any acquisitions.
Interest payments on the amounts drawn under our credit facility, as well
as our other indebtedness and obligations, represent significant obligations for
us. Our remaining liquidity demands relate to capital
23
<PAGE> 29
expenditures and working capital needs. Our capital expenditures were
approximately $0.8 million in the first quarter of 2000 and $6.3 million in 1999
and we currently anticipate our capital expenditures will be approximately $8.1
million in 2000 and approximately $8.6 million in 2001. While we are engaged in
ongoing evaluations of, and discussions with, third parties regarding possible
acquisitions, as of the date of this prospectus, we have no binding agreements
or commitments with respect to any acquisitions. Exclusive of the impact of any
future acquisitions, joint venture arrangements or similar transactions, we do
not expect our capital expenditure requirements to increase materially in the
foreseeable future.
Our primary sources of liquidity are cash flows from operations and
borrowings under our credit facility. Based on current and anticipated financial
performance, we expect cash flow from operations and borrowings under our credit
facility will be adequate to meet anticipated requirements for capital
expenditures, working capital and scheduled interest payments, including
interest payments on the amounts outstanding under the notes, our credit
facility and our other indebtedness. However, our capital requirements may
change, particularly if we should complete any additional material acquisition.
Our ability to satisfy capital requirements will be dependent upon our future
financial performance and ability to repay or refinance our debt obligations
which in turn will be subject to economic conditions and to financial, business
and other factors, many of which are beyond our control.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not historically engaged in hedging or other derivative trading
activities since our debt obligations were primarily fixed rate in nature and,
as such, were not sensitive to changes in interest rates. While we repurchased
the 9 1/2% notes on March 6, 2000 with variable rate borrowings under our credit
facility that are sensitive to interest rates, that indebtedness was
subsequently refinanced through the issuance of the outstanding notes which are
fixed rate obligations. Our credit facility requires that, by June 30, 2000, at
least 45% of our funded indebtedness be fixed-rate or subject to interest rate
hedging agreements to reduce the risk associated with variable rate debt. We do
not currently anticipate that the events that would give rise to the requirement
that we enter into interest rate hedging agreements will occur. In addition, we
may enter into foreign exchange currency hedging agreements in connection with
foreign acquisitions, if any.
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<PAGE> 30
BUSINESS
INTRODUCTION
We are a leading developer, producer and distributor of adhesives, sealants
and coatings for use in four primary markets: industrial; flexible packaging;
overprint coatings; and housing repair, remodeling and new construction. We
focus on select value-added market niches in which we have established
leadership positions and competitive advantages in product development,
manufacturing and distribution. We believe that approximately 45% of our 1999
net sales were from applications in which we have the number one or two position
in the United States. We frequently design our products in cooperation with our
customers to meet unique specifications and to provide critical performance
attributes to their products, resulting in a significant number of long-lived
primary supplier relationships. For the year ended December 31, 1999 and the
three months ended March 31, 2000, we had net sales of approximately $237.4
million, and $60.8 million.
We are headquartered in Chicago, Illinois, and were formed by Robert B.
Covalt and other investors to acquire and consolidate specialty chemicals
businesses in the adhesives, sealants and coatings segment. We have successfully
expanded our business through six strategic acquisitions which we have
integrated into our three business units: SIA Tanner, Pierce & Stevens and OSI
Sealants. SIA Tanner manufactures high-performance specialty adhesives and
coatings for automotive, aerospace, recreational vehicle, manufactured housing,
air handling and transportation textile applications. Pierce & Stevens
manufactures coating and adhesive products for overprint coating, flexible
packaging and industrial applications. OSI Sealants manufactures branded caulks,
sealants and adhesives for professional contractors and do-it-yourself
applications. We plan to continue our growth through a combination of new
product development, continued market penetration, strategic acquisitions and
international expansion.
The chart below depicts our organizational structure and principal
applications of each business unit:
[FLOW CHART]
<TABLE>
<S> <C> <C>
- - Structural transportation - Overprint coatings - Branded caulks, sealants
adhesives - Flexible packaging and adhesives for
- - Automotive friction adhesives construction/
adhesives - Dualite(R) microspheres repair/remodeling
- - Industrial adhesives - Hybond(R) contact adhesives
- - Flame-retardant coatings - Custom products
- - Industrial polyurethane
polymers
- - Cryogenic grinding
</TABLE>
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<PAGE> 31
On December 30, 1999, SSCI Investors LLC, an entity owned by an investor
group led by AEA Investors Inc., acquired approximately 75% of our capital
stock, with the balance owned by other investors, including our current
management team. The aggregate purchase price for the transaction was $360.0
million, including the retained equity interest, assuming a balance sheet free
of cash and indebtedness. AEA Investors Inc. is an international private equity
firm supported by industrial families and chief executives of major corporations
from around the world.
INDUSTRY OVERVIEW
We operate in one business segment: the production, manufacture and
distribution of adhesives, sealants and coatings. The adhesives, sealants and
coatings segment of the specialty chemicals industry is a large and growing
global segment, which has exhibited strong stable growth. Total sales for the
adhesives, sealants and coatings segment in the United States were approximately
$30.1 billion in 1998. Adhesives are replacing mechanical fasteners in many
manufacturing processes, and adhesives and sealants can reduce weight and parts
requirements and provide superior performance characteristics such as protection
against corrosion and vibration. In addition, we expect international sales of
adhesives, sealants and coatings to grow due to increased use in developing
markets.
Adhesives, sealants and coatings are used in a wide range of products with
applications in numerous categories, including
- Industrial. Typical industrial applications include corrosion resistant
industrial coatings, general assembly adhesives, fire-retardant textile
coatings, coatings for electronic components and industrial lamination
adhesives.
- Consumer. 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. Automotive applications include primers and top coats, body
sealants, structural adhesives and interior and exterior trim adhesives.
- Construction. Typical construction applications include
contractor-applied architectural coatings, joint sealants and flooring
and roofing adhesives.
- Packaging. Packaging applications include portion packaging and flexible
consumer packaging films and foils, seam sealers and container coatings.
- Aerospace. 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 companies, a significant majority of which we believe are small and
regional. While smaller companies have successfully competed in market niches,
the industry is expected to consolidate as companies seek to enhance operating
efficiencies in new product development, sales and marketing, distribution,
production and administrative overhead. Larger specialty chemicals companies
also benefit through a greater diversification of end-use applications,
customers, technologies and geography, reducing the impact of industry or
regional cyclicality.
Total sales for the U.S. adhesives, sealants and coatings segment grew from
approximately $13.8 billion in 1986 to approximately $30.1 billion in 1998,
representing a compound annual growth rate of 6.7%. Continued future growth is
expected to result from the following factors:
New Markets and More Stringent Demands of End-Users. Adhesives and sealants
are increasingly being used in new applications, particularly in the
transportation and construction sectors, as end-users desire simpler design and
manufacture, lower costs, improved bonding, lower weight, and reduced vibration
and corrosion. For example, in the bonding of automotive window glass to steel
body panels, high-performance adhesives provide structural reinforcement to the
adjacent steel panels, thus providing additional integrity to the car body. In
highway construction, new, long-lasting sealants are replacing
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<PAGE> 32
traditional bitumen, a traditional sealant used between adjacent slabs of
concrete and other materials that exhibit poor longevity.
New Materials. The growing use of nonferrous parts including 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.
International Sales. International sales of adhesives, sealants and
coatings are also expected to grow due to increased use of these products
internationally. Total worldwide sales for adhesives, sealants and coatings were
approximately $83.7 billion in 1998. In 1998, the United States accounted for
approximately 36% of worldwide sales, while Europe accounted for approximately
40% of worldwide sales and Japan accounted for approximately 11% of worldwide
sales. Sales to the remainder of the world accounted for approximately 13% of
total segment sales. Strong growth is expected in developing markets,
particularly in the Far East, Eastern Europe and Latin America.
COMPETITIVE STRENGTHS
We believe we have the following competitive strengths:
Leadership Positions in Attractive Market Niches. We enjoy leadership
positions in growing, value-added market niches as a result of our
customer-driven product development, reputation for quality, high levels of
customer service and brand name recognition. Our brand and trade names are
particularly well recognized among our customers, and include Pierce &
Stevens(TM), OSI(R), Pro-Series(R), PL(R), Polyseamseal(R), Miracure(R),
Plastilock(R), Latiseal Dualite(R), Hybond(R), Proxseal(TM), Magic Seal(R)
and Glaze'N Seal(R). We believe our leadership positions, technological
expertise and strong customer relationships provide us with significant
advantages in the development of new products and the penetration of new
market niches.
Technological Expertise. We are a technology leader within the markets
we serve. Our current technology portfolio, comprising numerous customized
and proprietary formulations with unique performance characteristics,
provides us with a broad technological base to satisfy our customers'
requirements. We continually leverage our technological expertise to
develop new products and additional applications for existing product
formulations. In addition, we have enhanced our technological expertise
both through cooperative research and development efforts and joint
technological alliances with world-class suppliers, customers and
universities.
Strong Customer Relationships. Our business teams work hand-in-hand
with our customers to develop innovative, high-performance solutions to
satisfy current and future needs. By directly involving customers in the
product development process, we strengthen our relationships with them and
are better able to develop products that will add value to their
businesses. We sell our products to some of the world's largest companies,
including Airbus Industrie, Baxter International Inc., The Boeing Company,
General Motors Corporation, The Home Depot, Inc., Johns Manville
Corporation, Lowe's Companies, Inc., Milliken & Company and The Stanley
Works. Many of our industrial, overprint coatings and flexible packaging
products have been certified through rigorous, customer-specific technical
and regulatory approval processes. Once our products have been approved,
our customers are often unwilling to switch to another supplier because of
the significant costs involved. Our relationships with retailers and
professional distributors of our housing repair, remodeling and
construction products are strengthened by our broad product line, strong
brands and reputation for quality. We have been doing business with 14 of
our top 20 customers for over 10 years.
Broad Product Offerings and Diverse Customer Base. We manufacture over
5,000 products that are sold through multiple distribution channels to over
5,000 customers for a wide variety of applications. In 1999, no single
customer accounted for over 5% of our net sales, and our top 20 customers
accounted for less than 30% of our net sales. This diversity of customers,
products and distribution channels provides us with a broad base from which
to increase sales and expand customer relationships, and reduces exposure
to any particular customer, end market or geographic region.
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<PAGE> 33
Proven Management Team. Our strong management team, led by Robert B.
Covalt, averages over 22 years of experience in the specialty chemicals
industry. Current members of management hold approximately 16% of our
equity on a fully diluted basis. As part of our philosophy, management
seeks to foster an entrepreneurial environment, which empowers employees
and encourages and rewards individual initiative. This philosophy has been
successful in generating top-line growth and improving profitability. Since
inception, our management team has successfully executed and integrated six
strategic acquisitions. From 1996 to 1999 we increased our annual net sales
from $43.2 million to $237.4 million through acquisitions and internal
growth.
BUSINESS STRATEGY
Continued Focus on Niche Products in Attractive Markets. We will continue
to develop product offerings for value-added, end-use applications with
attractive growth prospects, including
- structural adhesives
- flame-retardant adhesives and coatings
- food and medical packaging adhesives and coatings
- environmentally friendly products
Pursue Strategic Acquisitions. We have successfully grown through
acquisitions and intend to pursue additional strategic acquisitions that will
allow us to further increase sales in targeted markets. We believe that the high
degree of fragmentation in the U.S. adhesives, sealants and coatings segment
will continue to provide suitable acquisition candidates. Potential acquisition
candidates will be evaluated based upon our ability to
- expand our product line and customer relationships
- enhance our product development capabilities
- market products through new or expanded distribution channels
- increase utilization of our available manufacturing capacity
- generate cost savings
- add to our technology portfolio
- open new market opportunities
Achieve Significant Operating Efficiencies. We believe we can continue to
achieve operating efficiencies resulting in enhanced revenue opportunities, cost
savings and improved cash flow through
- cross-selling our products across the broader distribution and customer
network that we have developed through our acquisitions
- consolidating raw material and freight purchases to increase purchasing
economies of scale
- improving manufacturing and distribution operations
- lowering working capital levels by optimizing SKU counts and inventory
management
Increase International Presence. We believe we have significant
opportunities in international markets to increase sales to existing
multinational customers, enter developing markets and establish new customer
relationships. While sales of adhesives, sealants and coatings outside the
United States in 1999 represented approximately $57.1 billion or 64% of the
worldwide market, our sales outside the United States represented less than 11%
of our total revenues for 1999 with most of those sales consisting of export
shipments. In addition, international sales are expected to benefit from the
increased use of adhesives,
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<PAGE> 34
sealants and coatings in developing markets. We intend to expand our global
sales, particularly in Europe, Southeast Asia and Latin America, by
- increasing sales and marketing activities in targeted regions
- entering into strategic alliances
- pursuing targeted acquisitions
We have sales and technical offices in Singapore and the United Kingdom. We
manage our sales and marketing activities in Latin America through our existing
operations in Mexico.
APPLICATIONS
The table below sets forth selected applications in each of our four
primary categories.
<TABLE>
<CAPTION>
CATEGORY SELECTED APPLICATIONS
- -------- ---------------------
<S> <C>
Industrial................................... Aerospace structural adhesives
Automotive structural, friction and trim
adhesives
Commercial insulation adhesives and coatings
Flame-retardant textile adhesives and
coatings
Panel lamination adhesives for recreational
vehicles
Power staple and nail gun cartridge adhesives
Flexible Packaging........................... Blister packaging adhesives and coatings
Food and product packaging adhesives and
coatings
Food packaging laminating adhesives
Overprint Coatings........................... High gloss, scratch and abrasion resistant
coatings
Housing Repair, Remodeling and Aluminum and vinyl siding sealants
Construction............................... Drywall and subflooring adhesives
Tub and tile sealants
Window and door sealants
</TABLE>
Industrial. Our industrial products consist primarily of high-performance,
specialty adhesives and coatings for automotive, aerospace, manufactured housing
and textile applications. We often develop structural adhesives in conjunction
with the technical staff of our customers and these adhesives are used in many
demanding automotive applications that include brake bonding and body panel
assembly. Our aerospace bonding films are used to bond the composite tail
structures in commercial aircraft and meet rigid performance requirements. In
addition, we manufacture and market microspheres, including Dualite(R), a
lightweight inert filler that can both reduce the weight and enhance the
strength of products to which it is added. Our industrial customers include
Airbus Industrie, Baxter International Inc., The Boeing Company, General Motors
Corporation, Johns Manville Corporation, Milliken & Company and The Stanley
Works.
Flexible Packaging. We produce flexible packaging adhesives including:
heat-activated lidding adhesives used to apply flexible paper or foil lids to
plastic tubs used in the food industry, including individually packaged
condiments, creamers and cream cheese tubs; film-to-film adhesives used to bond
different types of plastic film, such as metalized and moisture barrier films
used in snack food bags; foil or paper blister packaging for products such as
pharmaceuticals, batteries, toys and tool accessories; and medical packaging
adhesives.
Overprint Coatings. We produce 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, and playing and
trading cards. We are a leading manufacturer of coatings for paperback book
covers and trading cards. Overprint coatings customers include printers, custom
coaters and magazine manufacturers.
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<PAGE> 35
Housing Repair, Remodeling and Construction. Our housing repair, remodeling
and construction products are primarily sealants and adhesives used in exterior
and interior applications. We are a leader in aluminum and vinyl siding sealants
as well as kitchen and bath sealants, offering ease of use, durability and color
match capabilities. These products are marketed for do-it-yourself retail and
professional applications. We offer a broad range of well-established branded
products including PL(R) and Polyseamseal(R) for retail do-it-yourself
applications and Pro-Series(R) and PL(R) for professional applications.
SALES AND MARKETING
We operate an extensive sales and marketing network for our customers. This
network consists of a direct sales force of over 50 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. Our sales efforts are complemented by our product
development and technical support staff, who work together with the sales force
to develop new products based on customer needs. We augment our direct sales and
marketing coverage through a network of distributors and independent agents who
specialize in particular areas. This specialization allows our applications to
gain access to a broader range of distribution channels and end users and
further strengthens our brand names.
Our sales and marketing efforts and customer relationships are enhanced by
the numerous customer-specific technical approvals we have 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 us and our
customers and can lead to additional sales and marketing opportunities.
RAW MATERIALS
We use a variety of specialty and commodity chemicals in our manufacturing
processes. These raw materials are generally available from numerous independent
suppliers. We typically purchase strategic raw materials on a contract basis.
Some of our raw materials are derived from propylene, crude oil derivatives and
ethylene. There have been historical periods of rapid and significant movements
in the price of propylene, crude oil derivatives and ethylene both upward and
downward. We have historically been successful in passing on price increases to
our customers over a period of time, but may not be able to do so in the future.
TECHNOLOGY
We maintain a strong commitment to technology, with over 75 chemists and
chemical engineers focused on the development of new products and processes. We
work hand-in-hand with our 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 enhances
the creation of products that will add value to our customers' businesses.
Over recent years we have focused our research and development efforts on
the development of high performance, environmentally safe products. This effort
has led to a broad range of technologies and applications, including
- high temperature resistant, reactive hot melt used in industrial
construction applications
- reactive epoxy liquid used as structural bonding adhesive in truck bed
assembly
- acrylated epoxy ultraviolet/electron-beam curable systems used as
coatings for multi-wall bags that allow bags to be stacked without
slipping while greatly enhancing their appearance
- pre-formulated dispersions that function as medical packaging adhesives,
fiber locking binders, and food packaging lidding adhesives
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<PAGE> 36
- advanced toughened epoxy systems used to bond composites and as surface
films for composites in aircraft construction
Our technical activities are further enhanced through alliances with key
industry suppliers and large multinational customers. These include BASF AG,
Baxter International Inc., The Boeing Company, The Dow Chemical Company, E.I. du
Pont de Nemours and Company, and Johns Manville Corporation, among others.
Our patents and qualified formulations, in combination with our customer
integrated approach to product and application design, should enhance our
ability to create a sustainable, competitive advantage in the next several
years.
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 our product line. Our competitors include Ciba
Specialty Chemicals, Cytec Industries Inc., GE Sealants and Adhesives (a unit of
General Electric Company), H.B. Fuller Company, Imperial Chemical Industries
PLC, Rohm & Haas Co. and RPM Incorporated. 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. Some of
our competitors are larger, have greater financial resources and are less
leveraged than we are. As a result, these competitors may be better able to
withstand a change in market conditions within the specialty chemical industry
and throughout the economy as a whole. These competitors may also be able to
maintain significantly greater operating and financial flexibility than we can.
EMPLOYEES
As of December 31, 1999, we had 686 employees, of whom 100 were members of
unions under contracts which expire between 2001 and 2002. In April 1999,
employees at our Akron facility conducted a two-day strike. This dispute was
satisfactorily resolved. We believe that our relations with our employees are
good.
ENVIRONMENTAL MATTERS
We are subject to extensive laws and regulations pertaining to air
emissions, waste water discharges, the handling and disposal of solid and
hazardous wastes, the remediation of contamination, and otherwise relating to
health, safety and protection of the environment. Our operations and the
environmental condition of our real property could give rise to liabilities
under these laws, which could result in material costs.
In connection with our acquisitions, we have performed substantial due
diligence to assess the environmental liabilities associated with acquired
businesses and have negotiated contractual indemnifications, which, supplemented
by commercial environmental insurance coverage designed for each acquisition, is
currently expected to adequately address a substantial portion of known and
foreseeable environmental liabilities. We do not currently believe that
environmental liabilities will have a material adverse effect on our business,
financial condition or results of operations. We cannot be certain, 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 a material adverse effect.
In connection with soil and groundwater contamination resulting from
historic operations under prior ownership of our Greenville, South Carolina
facility, in November 1994, the former owner of the business entered into a
consent agreement with the South Carolina Department of Health and Environmental
Control that requires the facility to complete investigation and remediation of
soil and groundwater
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<PAGE> 37
contamination at the site. These activities are currently projected to cost
between approximately $3.0 million and $8.0 million. We are indemnified by the
former owner with respect to this matter, excluding groundwater monitoring costs
incurred after August 5, 2002, as well as certain other known and unknown
pre-closing environmental liabilities, subject to an overall limit well in
excess of the currently estimated cost of cleanup. The former owner has agreed
to conduct and finance the investigation and remediation of this matter.
Our facility located in Akron, Ohio is part of a larger industrial complex
formerly operated by The B.F. Goodrich Company, the prior owner of SIA
Adhesives, Inc. The B.F. Goodrich Company, as part of a voluntary cleanup
agreement with the Ohio Environmental Protection Agency, is conducting an
assessment of soil and groundwater contamination throughout the entire complex.
In connection with our 1996 acquisition of SIA Adhesives, Inc., The B.F.
Goodrich Company agreed to indemnify us with respect to this matter (as well as
other known and unknown pre-closing environmental liabilities).
In connection with the 1996 acquisition of Pierce & Stevens, our
environmental due diligence detected conditions of subsurface contamination
primarily associated with storage tank farms and at various other areas of the
Pierce & Stevens facilities. Our current estimate of the total cost of
investigation and remediation is approximately $1.5 million, but this amount
could be significantly higher, depending upon the extent of contamination. In
connection with the acquisition, The Sherwin-Williams Company agreed to
indemnify us with respect to this and other environmental and non-environmental
pre-closing liabilities, subject to a $9.0 million overall limit. In June 1998,
The Sherwin-Williams Company paid us $2.7 million as indemnification for the
tank farm replacement as well as a number of other environmental issues. Upon
receipt of the funds, we recorded an environmental reserve in other long term
liabilities and other current liabilities. To date, approximately $2.3 million
has been spent to address these issues, and we currently maintain an
environmental reserve of approximately $0.4 million. The June 1998 settlement
expressly acknowledged that the settlement does not affect our right to
indemnification for matters not addressed in the settlement.
As is the case with manufacturers in general, if a release of hazardous
materials occurs at real property owned or operated by us or our predecessors or
at any off-site disposal location utilized by us or our predecessors, we 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 and similar environmental laws. We have been
named potentially responsible parties under these laws for cleanup of
approximately fifteen multi-party waste disposal sites, the liability for
several of which has been resolved, subject to standard terms, including the
ability to reopen the matter, found in these kinds of settlements. Due to what
we currently believe is our relatively minor contribution of waste to these
sites, we do not believe that our liability with respect to these sites will
have a material adverse effect on our business, financial condition or results
of operations. In addition, the agreements with former owners of our business
include indemnification for these issues.
The U.S. Environmental Protection Agency issued a notice of violation to
our Carol Stream, Illinois facility alleging that the facility stored hazardous
waste onsite for greater than 90 days during a 13-day period in 1997. Under a
consent agreement finalized in September 1999, the facility agreed to pay a
penalty of $50,000 and to install a cooling water tower, which is expected to
cost approximately $145,000. The penalty has been paid and construction of the
cooling tower began in December 1999. In addition, the consent agreement
requires the facility to close its main hazardous waste accumulation area at an
estimated cost between approximately $15,000 and $100,000.
Some of our facilities may be subject to maximum achievable control
technology requirements that are anticipated to become effective in 2003 for
surface coating manufacturing processes under Title III of the Clean Air Act
Amendments of 1990. We do not currently believe that capital expenditures
relating to achieving compliance with these requirements or other environmental
regulations will have a material adverse effect on our business, financial
condition or results of operations. However, environmental laws are constantly
evolving and we cannot predict accurately the effect they may have upon our
capital expenditures, cash flow or competitive position in the future. Should
these laws become more stringent, the
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cost of compliance would increase. If we cannot pass on future costs to our
customers, such increases may have an adverse effect on our business, financial
condition or results of operations.
BACKLOG
Most orders for our products are received and shipped in the same month.
Total backlog orders at December 31, 1999 were approximately $11.3 million. All
1999 backlog orders are expected to be filled within the current year. Backlog
orders at December 31, 1998 were $2.2 million.
PRODUCTION
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. Our principal manufacturing processes are blending,
polymerization, extrusion and film coating. Blending consists of dissolving or
dispersing various compounds in organic solvents or water. In polymerization,
vinyl, acrylic and urethane polymers are synthesized in closed reactor systems.
Extrusion consists of feeding formulated materials through an extruder to
compound pressure sensitive and hot melt products. Film coating consists of
transferring blended formulations onto release paper or polyethylene liners to
produce thin films of pressure sensitive, hot melt and epoxy products. Many of
our manufacturing processes can be performed at more than one of our facilities.
PROPERTIES
We operate the manufacturing plants and facilities described in the table
below. Management believes that our 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 that we operate.
<TABLE>
<CAPTION>
SQUARE
LOCATION OWNED/LEASED(1) FOOTAGE APPLICATION SERVED
- -------- --------------- ------- ------------------
<S> <C> <C> <C>
Akron, Ohio...................... Owned 214,300 Industrial
Mentor, Ohio..................... Owned 175,000 Home Repair, Remodeling and
Construction
Buffalo, New York................ Owned 165,000 Industrial, Overprint Coatings,
Flexible Packaging
Greenville, South Carolina....... Leased(2) 104,500 Industrial
Carol Stream, Illinois........... Owned 81,800 Industrial, Overprint Coatings,
Flexible Packaging
LaGrange, Georgia................ Owned 80,500 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/
Salisbury, Massachusetts......... Owned 21,800 Industrial, Flexible Packaging
</TABLE>
- ---------------
(1) All of our owned facilities are subject to mortgages pursuant to the
credit facility. In addition, the Seabrook, New Hampshire/Salisbury,
Massachusetts property is subject to mortgages relating to the financing
of the acquisition of the property.
(2) Lease expires December 31, 2008.
(3) Lease expires December 31, 2004.
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Our executive offices are located in Chicago, Illinois. We also have sales and
technical offices in Singapore and the United Kingdom.
LEGAL PROCEEDINGS
We are a party to various litigation matters incidental to the conduct of
our business. We do not believe that the outcome of any of the matters in which
we are currently involved will have a material adverse effect on our financial
condition or results of operations.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to: (1)
each member of Sovereign's Board of Directors; (2) each executive officer of
Sovereign; and (3) certain key managers of Sovereign and its subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert B. Covalt....................... 68 Chairman, President, Chief Executive Officer and
Director of Sovereign and Chairman and Director of
OSI Sealants, Pierce & Stevens, SIA Adhesives and
Tanner Chemicals
John R. Mellett........................ 50 Vice President, Chief Financial Officer, Chief
Accounting Officer and Treasurer of Sovereign, Pierce
& Stevens, SIA Adhesives, OSI Sealants and Tanner
Chemicals
Martyn Howell-Jones.................... 62 Vice President -- International
Richard W. Johnston.................... 53 Vice President -- Technology of Sovereign and
Executive Vice President of Pierce & Stevens
Paul Gavlinski......................... 53 Vice President -- Manufacturing and Engineering of
Sovereign, Pierce & Stevens, SIA Adhesives, OSI
Sealants and Tanner Chemicals
Karen K. Seeberg....................... 48 Vice President -- Human Resources of Sovereign,
Pierce & Stevens, SIA Adhesives, OSI Sealants and
Tanner Chemicals
Frederick A. Quinn..................... 54 President of Pierce & Stevens
Gerard A. Loftus....................... 45 President of SIA Adhesives and Tanner Chemicals
Peter Longo............................ 40 President of OSI Sealants
Louis M. Pace.......................... 29 Vice President -- Mergers & Acquisitions, Assistant
Secretary and Assistant Treasurer
Patrick W. Stanton..................... 32 Principal Accounting Officer
John L. Garcia......................... 43 Director
Karl D. Loos........................... 49 Director
John D. Macomber....................... 72 Director
Robert H. Malott....................... 73 Director
Thomas P. Salice....................... 40 Director
Norman E. Wells, Jr. .................. 51 Director
</TABLE>
Robert B. Covalt has served as our Chairman, President and Chief Executive
Officer and as a director of our company since its inception in 1996. Mr. Covalt
is Chairman and a director of each of our domestic subsidiaries. From 1979 to
1990, Mr. Covalt served as President of the Specialty Chemicals Group of
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Morton International, Inc. During this period, Mr. Covalt grew Morton's
specialty chemicals group from $175.0 million to $1.3 billion in sales and he
completed 13 acquisitions ranging in size from $3.0 million to $170.0 million.
From 1990 to 1993, Mr. Covalt was Morton's Corporate Executive Vice President.
Prior to that time, Mr. Covalt served in various capacities in Morton's Chemical
Division which he joined in 1956. 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, 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 our 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 our Vice President -- International since
October 1996 pursuant to a consulting arrangement. Mr. Howell-Jones is
responsible for our international sales and marketing efforts. Prior to joining
our 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
International, Inc. in its European specialty chemicals business. Mr.
Howell-Jones holds a B.S. degree from London University.
Richard W. Johnston has served as our Vice President -- Technology 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.
Paul Gavlinski has served as our Vice President -- Manufacturing and
Engineering 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 International, Inc. in various chemical manufacturing capacities. Mr.
Gavlinski holds a B.S. in Chemical Engineering from the University of Illinois.
Karen K. Seeberg has been our Vice President -- Human Resources since
February 1998. From January 1997 to February 1998, Ms. Seeberg was Director of
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 of Pierce & Stevens since March 1999.
Mr. Quinn has been responsible for the identification and development of new
strategic business opportunities within our 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, Inc. 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 M.B.A. from the University of Southern
California.
35
<PAGE> 41
Gerard A. Loftus has served as President of Tanner Chemicals 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. In 1994, Mr. Loftus
served as the division business manager of the Adhesives Systems Division with
responsibility for all sales, marketing and technical activities. From 1990 to
1994, Mr. Loftus was business manager of the aerospace products group of the
Adhesives Systems Division. Upon joining the Adhesives Systems Division in 1986,
Mr. Loftus served in a variety of capacities, including materials manager and
controller. Mr. Loftus, who is a Certified Public Accountant., and holds a
B.B.A. in Accounting from Ohio University and a Masters of Accountancy from
Cleveland State University.
Peter Longo has been President 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.
Louis M. Pace has been our Vice President -- Mergers & Acquisitions since
March 1999 and has served as our Director of Mergers & Acquisitions since
January 1998. From August 1996 to December 1997, he served as our Director of
Corporate Development and Assistant Secretary. From 1995 to August 1996, Mr.
Pace was an associate with First Chicago Equity Capital. 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.
Patrick W. Stanton has served as our Principal Accounting Officer since
September, 1998. From April 1998 to August 1998, he served as our 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.
John L. Garcia has been a Director since December 1999. For administrative
purposes, Mr. Garcia has also served as Vice President, Assistant Treasurer, and
Assistant Secretary since December 1999. Mr. Garcia is currently a Managing
Director of AEA Investors Inc. From 1994 to 1999, Mr. Garcia was associated with
Credit Suisse First Boston, where he served as Global Head of the Chemicals
Group, a member of the European Investment Banking Department Management
Committee and Head of the European Acquisition and Leveraged Finance and
Financial Sponsors Group. Mr. Garcia is a Director of Acetex Corporation and
Sterling Chemicals, Inc.
Karl D. Loos has been a director since February 2000. Mr. Loos also served
as a director from August 1996 until December 1999. 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.
John D. Macomber has been a Director since December 1999. Mr. Macomber has
been a principal of JDM Investment Group since 1992 and is a Director of IRI
International, Lehman Brothers Holdings Inc., Mettler-Toledo International Inc.,
Rand McNally & Company and Textron Inc. Mr. Macomber is the former Chairman and
President of the Export-Import Bank of the United States, Chairman and Chief
Executive Officer of Celanese Corporation and Senior Partner of McKinsey & Co.
Robert H. Malott has been a director since December 1999. Prior to his
retirement in 1997, Mr. Malott was Chairman of the Executive Committee of FMC
Corporation from November 1991 through May 1997. Mr. Malott served as Chairman
of the Board and Chief Executive Officer of FMC Corporation from 1973 to 1991.
Mr. Malott is a former Director of FMC Corporation, Amoco Corporation and United
Technologies Corporation.
36
<PAGE> 42
Thomas P. Salice has been a Director since December 1999. For
administrative purposes, Mr. Salice has also served as Vice President, Assistant
Treasurer, and Assistant Secretary since December 1999. He is President, Chief
Executive Officer and a Director of AEA Investors Inc. and has been associated
with AEA Investors Inc. since June 1989. Mr. Salice is also a Director of Waters
Corporation and Mettler-Toledo International Inc.
Norman E. Wells, Jr., has been a Director since December 1999. Prior to his
retirement in 1999, Mr. Wells served as President and Chief Executive Officer of
Easco Aluminum Inc. from November 1996 to December 1999. Mr. Wells was a
Director of CasTech Aluminum Group Inc. from June 1992 to September 1996 and
served as CasTech's President and Chief Executive Officer from March 1993 to
September 1996.
BOARD COMMITTEE MEMBERSHIP
Our board of directors has two standing committees: a compensation
committee and an audit committee. The compensation committee of our board of
directors is comprised of Messrs. Macomber, Salice and Wells. The audit
committee is comprised of Messrs. Malott, Garcia and Wells.
DIRECTOR COMPENSATION
Members of our board of directors are reimbursed for traveling costs and
other out-of-pocket expenses incurred in attending board of directors and
committee meetings. Members of the board of directors who are also our officers
or employees of AEA Investors Inc. do not receive additional compensation for
being on the board of directors or its committees. Mr. Loos will receive a fee
of $2,500 per meeting. Messrs. Macomber, Malott and Wells were given a one-time
opportunity to purchase units in a partnership which owns all of the equity in
SSCI Investors LLC upon their election to the board of directors but receive no
compensation for their services as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following former directors served on the compensation committee of our
board of directors prior to SSCI Investors LLC's purchase of approximately 75%
of our capital stock: Charles A. Aldag, Karl D. Loos, Reeve B. Waud and Carol E.
Bramson. All of these persons resigned from the board of directors in December
1999. In connection with SSCI Investors LLC's purchase of our stock, our board
of directors was initially reconstituted to be comprised of Robert B. Covalt,
John L. Garcia and Thomas P. Salice. These directors approved various actions
with respect to the current compensation arrangements of our executive officers.
Mr. Covalt is one of our officers. Messrs. Garcia and Salice are officers of
Sovereign for administrative purposes only and are officers of AEA Investors
Inc. Approximately 75% of our capital stock is owned by SSCI Investors LLC,
which is owned by an investor group led by AEA Investors Inc. For a more
detailed discussion of relationships between AEA Investors Inc. and Sovereign
see "Certain Relationships and Related Transactions." As of February 2000, the
compensation committee of our board of directors is comprised of John D.
Macomber, Thomas P. Salice and Norman E. Wells.
37
<PAGE> 43
EXECUTIVE COMPENSATION
The table below summarizes compensation information for our Chief Executive
Officer and each of the four other most highly compensated executive officers of
our company and/or our domestic subsidiaries for services rendered during the
years ended December 31, 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------- OTHER SECURITIES ALL OTHER
FISCAL ANNUAL UNDERLYING COMPEN-
YEAR SALARY($) BONUS($) COMPENSATION(1) OPTIONS(#) SATION($)(2)
------ --------- -------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Covalt................... 1999 $291,644 $215,880 -- 48,000 $16,756,469
Chairman, President 1998 259,500 154,470 -- -- 335,022
and Chief Executive Officer of 1997 250,000 140,158 -- -- 17,512
Sovereign, and Chairman of OSI
Sealants, Pierce & Stevens, SIA
Adhesives and Tanner Chemicals
John R. Mellett(3)................. 1999 $166,677 $ 59,997 $30,000(4) 15,000 $ 2,250,862
Vice President and Chief
Financial 1998 -- -- -- -- --
Officer of Sovereign, 1997 -- -- -- -- --
OSI Sealants, Pierce &
Stevens, SIA Adhesives and
Tanner Chemicals
Peter Longo(5)..................... 1999 $193,428 $ 69,080 -- 9,200 $ 359,599
President of OSI Sealants 1998 185,658 68,028 -- -- 3,333
1997 77,358 64,980 -- -- 2,577
Frederick A. Quinn(6).............. 1999 $148,936 $ 56,908 -- 9,500 $ 443,958
President of Pierce & Stevens 1998 67,209 12,918 -- -- $ 5,342
1997 -- -- -- -- --
Gerard A. Loftus................... 1999 $147,843 $ 56,175 -- -- 3,763
President of SIA Adhesives
and Tanner Chemicals
</TABLE>
- ---------------
(1) Except as set forth below, the aggregate amount of perquisites and other
personal benefits for any of the executives named in the above table was
less than the lesser of $50,000 or 10% of the total annual salary and bonus
reported for the named executive officer.
(2) For fiscal year 1999, represents matching and profit sharing contributions
under our 401(k) plans in the amount of $3,200, $7,486, $8,200, $6,970 and
$6,338 for Messrs. Covalt, Mellett, Longo, Quinn and Loftus, respectively,
and payments made by our former parent partnership, Sovereign Specialty
Chemicals, L.P., under its 1997 Stock Incentive Pool upon the sale of
approximately 75% of Sovereign's equity to SSCI Investors LLC in the amount
of $16,753,269, $2,243,376, $351,399, $436,988 and $258,390 to Messrs.
Covalt, Mellett, Longo, Quinn and Loftus, respectively.
(3) Mr. Mellett became an employee of Sovereign in March 1999.
(4) Reflects payments made to Mr. Mellett in fiscal 1999 for temporary living
accommodations and travel expenses.
(5) Mr. Longo became an employee of Sovereign in August 1997 upon Sovereign's
acquisition of OSI Sealants.
(6) Mr. Quinn became an employee of Sovereign in June 1998 upon Sovereign's
acquisition of Pierce & Stevens.
38
<PAGE> 44
STOCK OPTIONS
The table below sets forth information with respect to grants of options to
purchase shares of our common stock during the year ended December 31, 1999 to
the executives listed in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ---------- ------------ --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Covalt.......... 48,000(2) 31.20% 129.50 12/29/09 1,608,000 6,216,000
John R. Mellett........... 15,000(3) 9.75% 129.50 12/29/09 502,500 1,942,500
Peter Longo............... 9,200(3) 5.98% 129.50 12/29/09 308,200 1,191,400
Frederick A. Quinn........ 9,500(3) 6.18% 129.50 12/29/09 318,250 1,230,250
Gerard A. Loftus.......... 9,500(3) 6.18% 129.50 12/29/09 318,250 1,230,250
</TABLE>
- ---------------
(1) Values are based on assumed rates of annual compounded appreciation of 5%
and 10% from the date the option was granted over the full option term.
These assumed rates of appreciation are established by the Securities and
Exchange Commission and do not represent our estimate or projection of
future stock price.
(2) Mr. Covalt's options become exercisable with respect to 1/16th of the shares
covered by these options on each March 31, June 30, September 30 and
December 31, beginning March 31, 2000 and ending December 31, 2003. The
options will become immediately exercisable in full in the event of a change
in control of our company.
(3) The options become exercisable with respect to the shares covered by these
options on December 30th in each of 2000, 2001, 2002, 2003 and 2004. The
options will become immediately exercisable in full in the event of a change
in control of our company.
The following table sets forth information concerning the value of
unexercised in-the-money options held for each of the executives listed in the
Summary Compensation Table as of December 31, 1999.
AGGREGATE OPTION EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE YEAR-END(#) FISCAL YEAR-END($)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- ----------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Robert B. Covalt......... 0 0 0/48,000 0/0
John R. Mellett.......... 0 0 0/15,000 0/0
Peter Longo.............. 0 0 0/ 9,200 0/0
Frederick A. Quinn....... 0 0 0/ 9,500 0/0
Gerard A. Loftus......... 0 0 0/ 9,500 0/0
</TABLE>
- ---------------
(1) There was no public trading market for our common stock at December 31,
1999. Accordingly, these values of exercisable and unexercisable
in-the-money options are based on the fair market value of our common stock
at December 31, 1999, $100 per share, as determined by our board of
directors, and the applicable exercise price per share.
39
<PAGE> 45
MANAGEMENT INCENTIVE COMPENSATION PLAN AND EMPLOYMENT AGREEMENTS
We believe 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. We have instituted the
following plans and programs for this purpose.
Management Incentive Compensation Plan
We adopted our management incentive compensation plan effective January 1,
2000. Selected members of our management and corporate staff judged to have the
greatest impact on our economic results are eligible to participate in this
plan. Participants are eligible for cash bonus awards based on our financial
performance, measured in terms of revenues and EBITDA, and on individual
role-specific goals. Participants in this program are assigned a percentage of
their base salary as their bonus target for the then current fiscal year. Awards
may be higher or lower than the target bonus as our financial performance and/or
the individual's performance is above or below the level expected to achieve the
target bonus. Target bonuses range from 25% to 75% of base salary dependent upon
position. However, no participant may earn a bonus for a specific year unless at
least 90% of both the target EBITDA and revenue thresholds for that year have
been attained. In addition, our chief executive officer may award participants
bonuses supplemental to those earned under the plan for producing extraordinary
results. The management incentive compensation plan is administered by our chief
executive officer and vice president-human resources, under the general
direction of the compensation committee of our board of directors.
Employment Agreements
We have entered into employment agreements with Messrs. Covalt, Mellett,
Longo, Quinn and Loftus, effective December 29, 1999, providing for their
employment in their current capacities. Pursuant to the agreements, Messrs.
Covalt, Mellett, Longo, Quinn and Loftus are entitled to annual base salaries of
$300,000, $200,000, $196,000, $155,000 and $150,000, respectively, and are
eligible to receive an annual performance-based bonus of up to 75% in the case
of Mr. Covalt, and 40% for the four other named executives, of the applicable
executive's base salary determined in accordance with the terms of the bonus
plan adopted by our board of directors for the calendar year. Additionally, each
executive is eligible for a discretionary bonus as determined by the board of
directors. Under their respective employment agreements, the executives received
non-qualified stock options as described in the Option Grants in Last Fiscal
Year Table above, and are entitled to participate in all health, welfare and
other benefit plans we provide to our executives.
The employment agreements for Messrs. Covalt and Mellett each provide for a
term expiring on December 31, 2003 and for Messrs. Longo, Quinn and Loftus each
provide for a term expiring December 31, 2002, in each case subject to automatic
one-year renewal terms. If we terminate an executive's employment without cause
(as defined in the employment agreements), or an executive resigns with good
grounds (as defined in the employment agreements), we are required to
(1) pay the executive any unpaid portion of his base salary earned
through the date of termination or resignation,
(2) continue to pay the executive his then current annual base salary
during the one-year period following termination or resignation,
(3) continue the executive's participation in employee benefit plans
during the one-year period following termination or resignation, and
(4) pay the executive a pro rata portion of his potential target
annual bonus for the calendar year of termination if the executive resigns
for good grounds. However, if we terminate the executive's employment
without cause, the pro rata potential target annual bonus will be paid,
- in the case of Mr. Covalt, at the discretion of the compensation
committee of the board of directors, or
- in the case of all other executives, at the discretion of the chief
executive officer.
40
<PAGE> 46
All severance benefits and payments are conditioned on the executive's
execution of a general release and his compliance with certain non-competition,
non-solicitation and non-disclosure covenants.
1999 Stock Option Plan
In 1999, we adopted the Sovereign Specialty Chemicals, Inc. Stock Option
Plan to provide for the grant of nonqualified stock options to our, and our
affiliates', key employees and directors. The maximum number of shares of common
stock underlying the options available for award under the stock option plan is
240,713 shares. Of these shares, 48,000, 15,000, 9,200, 9,500 and 9,500 were
granted to Messrs. Covalt, Mellett, Longo, Quinn and Loftus, respectively. If
any options terminate, or expire unexercised, the shares subject to such
unexercised options are again available for grant under the stock option plan.
The stock option plan will be administered by the compensation committee of
the board of directors. Generally, the committee interprets and implements the
stock option plan, grants options, exercises all powers, authority, and
discretion of the board under the stock option plan, and determines the terms
and conditions of option agreements, including the vesting provisions, exercise
price, and termination date of options.
Each option is evidenced by an agreement between us and an optionee. Unless
determined otherwise by the committee, 20% of the shares subject to the option
vest on each of the first five anniversaries of the grant date. Additionally,
the committee may accelerate the vesting of any option grant. The option price
is specified in each option agreement at an amount not less than the fair market
value on the grant date, unless determined otherwise by the committee. All
optionees are required to become parties to the management shareholders
agreement, which are described under "Certain Relationships and Related
Transactions," upon the grant of all options.
In the event of a transaction that constitutes a change in control of
Sovereign, as described in the stock option plan, unless determined otherwise by
the compensation committee, all options become fully exercisable immediately
prior to the date of the transaction, and we may cancel any options unexercised
as of the change in control upon our payment to the holders of options the
difference between the fair market value of the underlying stock and the option
exercise price. In the event of specified transactions that result in holders of
common stock receiving payments or securities in respect of, or in exchange for,
their common stock that do not result in a change in control of our company, as
described in the stock option plan, unless determined otherwise by the
compensation committee, options remain subject to the terms of the stock option
plan and the applicable option agreement, and thereafter upon exercise,
optionees will be entitled to receive in respect of any option the same per
share consideration received by holders of common stock at the time of the
transaction. Options will in no event entitle the holder of the option to
ordinary cash dividends payable upon the common stock issuable upon exercise of
the options.
In order to prevent dilution or enlargement of the rights of participants,
the stock option plan provides that the aggregate number of shares subject to
the stock option plan, any option, the purchase price to be paid upon exercise
of an option and the amount to be received in connection with the exercise of
any option will be automatically adjusted to reflect any stock splits, reverse
stock splits or dividends paid in the form of common stock, and equitably
adjusted as determined by the committee for any other increase or decrease in
the number of issued shares of common stock resulting from the subdivision or
combination of shares or other capital adjustments.
Our board of directors may amend, alter, or terminate the stock option
plan. Any board action may not adversely alter outstanding options without the
consent of the optionee. The stock option plan will terminate ten years from its
effective date, but all outstanding options will remain effective until
satisfied or terminated under the terms of the stock option plan.
41
<PAGE> 47
Employee Stock Purchase Plan
On January 26, 2000, we adopted the Sovereign Specialty Chemicals, Inc.
Employee Stock Purchase Plan. Under the stock purchase plan eligible employees
purchased 7,045 shares of our voting common stock at $100.00 per share.
The compensation committee will administer the stock purchase plan.
Generally, the compensation committee will determine which employees are
eligible to participate in the stock purchase plan, interpret the plan,
determine the number of shares and purchase price for common stock sold under
the plan and make all other determinations under the plan.
If the number of outstanding shares of common stock has increased,
decreased, changed into, or been exchanged for a different number or kind of
shares or securities of our company through any reorganization, merger,
recapitalization, reclassification, stock split, stock consolidation or similar
transaction, appropriate and proportionate adjustments will be made in the
number and/or kind of shares which are subject to stock purchase rights awarded
under the stock purchase plan and in the purchase price applicable to such
outstanding rights and in the number and kind of shares which may be sold under
the stock purchase plan.
We may, at any time, suspend, amend or terminate the stock purchase plan.
No amendment or termination may, however, amend, alter or impair the rights of
any participant with respect to shares of common stock previously purchased
under the stock purchase plan. Unless terminated earlier, the stock purchase
plan will terminate on April 30, 2000.
Common stock acquired under the stock purchase plan will be purchased
pursuant to subscription agreements which define the rights and limitations of
holders of the shares. A management subscription agreement will be used for
grants to employees who have entered into the management shareholders agreement,
which are described in "Certain Relationships and Related Transactions," and are
governed by the terms of the management shareholders agreement. An employee
subscription agreement will be used for grants to other employees. A summary of
the employee subscription agreement is provided below.
The employee subscription agreement provides for (1) restrictions on
transfer, (2) the right of SSCI Investors LLC, in a sale of 50% or more of its
ownership interest in the company to compel holders of shares of common stock
acquired under the stock purchase plan to sell a proportionate number of shares
and (3) rights for holders of shares of common stock acquired under the stock
purchase plan to participate in certain sales by SSCI Investors LLC.
The agreement provides further that, if we terminate for cause the
employment of a holder of shares purchased under the stock purchase plan, then
we will have the opportunity to purchase all of the holder's shares of common
stock purchased under the stock purchase plan at the lower of (1) the price paid
for the shares and (2) the then current fair market value of the shares. If the
holder's employment is terminated other than by us for cause, then we will have
the opportunity to purchase all of his or her shares at 100% of their then
current fair market value.
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<PAGE> 48
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information regarding the beneficial ownership
of our voting common stock by each person known by us to beneficially own more
than five percent of our voting common stock and by our directors, certain
executive officers and key managers, individually, and as a group.
As used in this table, beneficial ownership means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from the date of this prospectus through the exercise
of any option, warrant or right. Shares of common stock subject to options,
warrants or rights that are currently exercisable or exercisable within 60 days
are deemed outstanding for the computation of the ownership percentage of the
person holding such options, warrants or rights, but are not deemed outstanding
for the computation of the ownership percentage of any other person. Our
non-voting common stock is convertible into voting common stock, unless the
holder or its affiliate is prohibited by law or regulation from holding our
voting common stock. As a result, certain holders of our non-voting common stock
are deemed to hold the voting common stock into which their non-voting common
stock may be converted.
In the table below, unless otherwise noted, the address of the person is
care of our company.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES OF SHARES
---------------- ----------
<S> <C> <C>
FIVE PERCENT SECURITY HOLDERS
SSCI Investors LLC(1)....................................... 1,624,815.75 81.9%
Robert B. Covalt(2)......................................... 133,837.25 9.3%
OFFICERS AND DIRECTORS
Robert B. Covalt(2)......................................... 133,837.25 9.3%
John R. Mellett............................................. 13,322.04 *
Martyn Howell-Jones......................................... 8,495.02 *
Richard W. Johnston......................................... 5,200.23 *
Paul Gavlinski.............................................. 4,126.46 *
Karen K. Seeberg............................................ 2,347.57 *
Frederick A. Quinn.......................................... 5,000.00 *
Gerard A. Loftus............................................ 5,136.23 *
Peter Longo................................................. 10,651.63 *
Louis M. Pace............................................... 2,169.65 *
Patrick W. Stanton.......................................... 349.61 *
John L. Garcia(3)........................................... -- *
Karl D. Loos................................................ 1,801.16 *
John D. Macomber............................................ -- *
Robert H. Malott............................................ -- *
Thomas P. Salice(3)......................................... -- *
Norman E. Wells, Jr. ....................................... -- *
All executive officers, key managers and directors as a
group (18 persons)........................................ 192,436.85 13.4%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent.
(1) Includes 547,636.50 shares of non-voting common stock. The address for SSCI
Investors LLC is c/o AEA Investors Inc., Park Avenue Tower, 65 East 55th
Street, New York, New York 10022. The general partner of a partnership that
wholly owns SSCI Investors LLC is a wholly owned subsidiary of AEA Investors
Inc. AEA Investors Inc. disclaims beneficial ownership of the shares owned
by SSCI Investors LLC, except to the extent of its pecuniary interest
therein.
(2) Includes 47,544.61, 642.76, and 642.76 shares of common stock held by
Tregooden Partners, L.P., Nautical Partners, L.P. and Serendipity Partners,
L.P., respectively, which may be deemed to be beneficially owned by Mr.
Covalt. Includes 3,000 shares of common stock issuable upon exercise of
options granted to Mr. Covalt that are exercisable as of March 31, 2000.
(3) Does not include shares beneficially owned by SSCI Investors LLC. Messrs.
Garcia and Salice are each limited partners in SSCI Investors L.P., the
partnership which owns SSCI Investors LLC and are officers and directors of
AEA SSC Investors Inc., the general partner of SSCI Investors LP. Mr. Salice
is also president, chief executive officer and a director of AEA Investors
Inc. Mr. Garcia is also a managing director of AEA Investors Inc.
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<PAGE> 49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, Sovereign Specialty Chemicals, L.P., our former parent, accrued
approximately $2.8 million notes receivable from management. The notes
receivable represented a portion of management's purchase price of its equity in
our former parent. These loans were repaid in 1999.
On December 28, 1999, we redeemed shares of outstanding common stock held
by our former parent for an aggregate price of approximately $3.3 million.
In connection with the acquisition of approximately 75% of our common stock
by SSCI Investors LLC, we entered into an arrangement with our former parent
pursuant to which it agreed to indemnify us for any liability in excess of $2.5
million in the aggregate that is determined to be payable under an outstanding
note we issued in connection with an acquisition. Our obligations under this
note have been settled, subject to execution of definitive settlement
documentation, for an amount less than this indemnification threshold. In
addition, our former parent has agreed to provide indemnification to us in
respect of various tax matters pursuant to an agreement with SSCI Investors LLC.
In connection with the acquisition of approximately 75% of our common stock
by SSCI Investors LLC, our former parent repaid to us approximately $970,000 in
intercompany receivables.
Affiliates of J.P. Morgan Securities Inc. currently own 63,330.71 shares of
our voting common stock and 182,545.5 shares of our non-voting common stock.
J.P. Morgan Securities Inc. acted as our financial advisor in connection with
SSCI Investors LLC's acquisition of our capital stock. J.P. Morgan Securities
Inc. is also the joint lead arranger, a joint book-running manager and
documentation agent for our credit facility.
See also "Management -- Management Incentive Compensation Plan and
Employment Agreements" for a description of the arrangements between us and our
stockholders who are employees.
In connection with SSCI Investors LLC's acquisition of approximately 75% of
our common stock, we, SSCI Investors LLC and several members of our management
entered into a shareholders agreement under which SSCI Investors LLC has agreed
that, prior to the completion of an underwritten public offering of our common
stock, SSCI Investors LLC will vote all shares of common stock owned or
controlled by it, and will take all necessary or desirable actions within its
control to (1) elect Robert B. Covalt, a director of our company and to cause
Mr. Covalt to hold the position of Chairman of the Board and Chief Executive
Officer of our company and Chairman of the Board of each domestic subsidiary for
so long as the Covalt Family Group, as defined in the shareholders agreement,
owns at least 5% of the outstanding shares of our common stock and (2) cause at
least two members of the board of directors to be members of the investor group
led by AEA Investors Inc. who are not also officers or employees of AEA
Investors Inc. The obligation to elect Mr. Covalt to be a director and have the
titles described above will terminate in specified instances when Mr. Covalt is
no longer employed by our company. The management shareholders agreement also
(1) imposes certain transfer restrictions on the management parties, (2)
subjects employee parties to the right of SSCI Investors LLC, in a sale of 50%
or more of its ownership interest in our company, to compel other shareholders
to sell a proportionate number of shares, (3) provides rights to management to
participate in sales by SSCI Investors LLC, (4) provides for a call option on
employees' option and subsequently acquired shares in specified termination
events, (5) provides that employee parties may request that the Company purchase
some of their stock in specified events, and (6) provides employee parties with
piggyback registration rights under specified circumstances.
We have also entered into a shareholders agreement with SSCI Investors LLC
and our remaining (non-employee) shareholders. This shareholders agreement
provides for (1) board observer rights for 10% shareholders, (2) restrictions on
transfer, (3) the right of SSCI Investors LLC, in a sale of 50% or more of its
ownership interest in our company to compel other shareholders to sell a
proportionate number of shares, (4) rights for other shareholders to participate
in sales by SSCI Investors LLC, (5) preemptive rights to 5% shareholders to
purchase new issuances, (6) information rights, and (7) piggyback registration
rights.
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<PAGE> 50
We entered into a management agreement with AEA Investors Inc. pursuant to
which AEA Investors Inc. will provide us with advisory and consulting services.
The management agreement provides for an annual aggregate fee of $999,999 plus
reasonable out-of-pocket costs and expenses.
In connection with our employee stock purchase plan, we repurchased 7,045
shares of voting common stock from AEA Investors Inc. at $100.00 per share. All
shares repurchased were sold to our employees pursuant to the stock purchase
plan at the same price per share.
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<PAGE> 51
DESCRIPTION OF OUR CREDIT FACILITY
NEW CREDIT FACILITY
The following is a summary of the material terms of our new credit facility
entered into as of December 29, 1999, and as amended and restated on April 6,
2000, with the lenders party thereto, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and J.P. Morgan Securities Inc., each as a joint lead arranger and
a joint book-running manager, and The Chase Manhattan Bank, as administrative
agent. The following summary is qualified in its entirety by reference to our
credit facility. A copy of the credit agreement has been filed as an exhibit to
the registration statement of which this prospectus is a part.
Structure
Prior to the completion of the offering of our outstanding notes, the
credit facility provided for aggregate borrowings of $200.0 million, and
consisted of (1) a Revolving Credit Facility of $50.0 million, (2) a Term A Loan
Facility of $75.0 million and (3) a Term B Loan Facility of $75.0 million. Upon
completion of the offering of the outstanding notes, we repaid all amounts
outstanding under the Term B Loan Facility and it was terminated. As a result,
our credit facility currently provides for aggregate borrowings of up to $125.0
million. The Revolving Credit Facility provides for a $20.0 million letter of
credit subfacility and a $20.0 million swing line subfacility, drawings under
which reduce the amount available under the Revolving Credit Facility. A portion
of the swing line subfacility is multicurrency and permits us and our
subsidiaries to borrow U.S. dollars, Canadian dollars, Singapore dollars, Pounds
Sterling or Euros.
Availability
Availability under the credit facility is subject to various conditions
precedent typical of syndicated loans. Borrowings under the Revolving Credit
Facility are available on a fully revolving basis and may be used for general
corporate purposes, including to a limited extent acquisitions. The Revolving
Credit Facility will mature on December 30, 2005. Borrowings under the Term A
Loan Facility may be used for general corporate purposes, including
acquisitions, and commitments to lend under this facility terminate on June 30,
2001, to the extent not then drawn. Both we and our foreign subsidiaries may use
availability under the Term A Loan Facility and Revolving Credit Facility.
As of March 31, 2000, after giving effect to the issuance of the
outstanding notes and the application of the net proceeds to repay all amounts
outstanding under the Term A Loan Facility and Term B Loan Facility and
approximately $6.0 million outstanding under the Revolving Credit Facility, the
Term B Loan Facility was terminated, and we had $75.0 million of borrowing
availability under the Term A Loan Facility and $34.9 million of borrowing
availability under our $50.0 million Revolving Credit Facility.
Interest
Borrowings under the credit facility bear interest payable quarterly, at a
rate per annum equal, at our option, to either (1) the higher of (a) the current
base rate as offered by The Chase Manhattan Bank or (b) 1/2 of 1% per annum
above the federal funds rate plus, in either case, an applicable margin or (2) a
eurodollar rate plus an applicable margin. The applicable margin will be based
on our ratios of total debt to EBITDA and senior debt to EBITDA determined as of
June 30, 2000 and periodically thereafter and varies for Revolving Credit
Facility borrowings and for loans under the Term A Loan Facility, from 1.75% to
2.50% for eurodollar rate loans and from 0.75% to 1.5% for base rate loans.
Maturity and Amortization
Loans under the Term A Loan Facility and the Revolving Credit Facility
mature on December 30, 2005. Scheduled repayments of amounts outstanding under
the Term A Loan Facility, including portions used for acquisitions by foreign
subsidiaries, begin on September 30, 2001 and through December 31, 2003
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<PAGE> 52
amount to 50% of the amount outstanding under the Term A Loan Facility on June
30, 2001, with the remaining 50% to be paid in equal quarterly payments through
December 30, 2005.
Commitment Reductions and Repayments
Subject to some exceptions, we are required to make mandatory prepayments
upon receipt of proceeds of certain insurance awards, assets sales or equity
sale proceeds, debt issuance proceeds, and a specified percentage of annual
excess cash flow. Mandatory prepayments under the Term A Loan Facility will be
applied first to amortization payments scheduled for the 12 month period after
the prepayment event and second to the remaining scheduled amortization
payments. Additionally, we may prepay the loans at any time without premium or
penalty (except for prepayments of eurodollar loans, as to which breakage costs
may be payable).
Fees
The credit facility requires us to pay customary commitment, letter of
credit and other fees.
Security and Guarantees
Our obligations under the credit facility are
- secured by a first priority security interest in substantially all of our
assets, including 100% of the capital stock of our currently owned, or
later created or acquired, direct and indirect domestic subsidiaries, but
limited to 66% of the capital stock of our currently owned or later
created or acquired first tier foreign subsidiaries
- guaranteed by each of our direct and indirect domestic subsidiaries, and
each such guarantee will be secured by a first priority security interest
in substantially all of such guarantor's assets, including 100% of the
capital stock of its currently owned, or later created or acquired,
direct and indirect domestic subsidiaries, but limited to 66% of the
capital stock of its currently owned or later created or acquired first
tier foreign subsidiaries
The obligations of our foreign subsidiaries under the credit facility will
be
- secured, to the extent it would not cause adverse consequences under
local law or applicable tax rules, by a first priority security interest
in substantially all of the assets of the subsidiary borrower including
100% of the capital stock of its currently owned, or later created or
acquired, direct and indirect subsidiaries
- guaranteed, to the extent it would not cause adverse consequences under
local law or applicable tax rules, by each of the foreign borrower's
direct and indirect subsidiaries, and each guarantee will be secured,
subject to similar exceptions for adverse consequences, by a first
priority security interest in substantially all of the assets of each
guarantor
- guaranteed by us and each of our direct and indirect domestic
subsidiaries, and each guarantee will be secured by a first priority
security interest in substantially all of each guarantor's assets
including 100% of the capital stock of our currently owned, or later
created or acquired, direct and indirect domestic subsidiaries, but
limited to 66% of the capital stock of our currently owned or later
acquired first tier foreign subsidiaries
Covenants and Conditions
The credit facility includes covenants that restrict our ability to
- incur additional indebtedness
- incur liens on property or assets
- make acquisitions
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<PAGE> 53
- merge or consolidate with third parties
- make restricted payments and investments
- pay dividends and make distributions
- repurchase or redeem capital stock
- dispose of assets
- guarantee obligations
- enter into sale and leaseback transactions
- prepay debt
- amend certain agreements, including the Indenture
- make capital expenditures
- organize non-wholly owned subsidiaries
- engage in certain transactions with subsidiaries and affiliates and
otherwise restrict corporate activities
In addition, the credit facility requires us to comply with specified
financial ratios and tests including maintenance of specified total debt to
EBITDA ratios, senior debt to EBITDA ratios, fixed charge coverage ratios and
interest expense coverage ratios.
Events of Default
The credit facility includes customary events of default, including
- non-payment of principal, interest or fees
- violation of covenants after customary cure periods
- inaccuracy of representations and warranties
- cross-default to other material agreements and indebtedness
- bankruptcy
- material judgments
- ERISA matters
- invalidity of loan documentation or security interest
- change of control
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<PAGE> 54
DESCRIPTION OF EXCHANGE NOTES
The exchange notes will be issued under the indenture dated as of March 29,
2000 among Sovereign, the Guarantors and The Bank of New York, as trustee (the
"Trustee"). The terms of the exchange notes include those stated in the
indenture and those made a part of the indenture by reference to the Trust
Indenture Act of 1939.
The following is a summary of the material provisions of the indenture and
does not purport to be complete. We urge you to read the indenture because it
defines your rights as a Holder of the exchange notes. A copy of the indenture
has been filed as an exhibit to the registration statement of which this
prospectus is a part. See "Where You Can Find More Information." For definitions
of capitalized terms used in the following summary, see "-- Certain
Definitions." For purposes of this section, the term "Company" means Sovereign
Specialty Chemicals, Inc. without any of its Subsidiaries and the term notes
means the outstanding notes and the exchange notes.
GENERAL
The exchange notes will be issued only in registered form, without coupons,
in denominations of $1,000 and integral multiples of $1,000. The Company has
appointed the Trustee to serve as registrar and paying agent under the indenture
at its offices at 101 Barclay Street, New York, NY 10286. No service charge will
be made for any registration of transfer or exchange of the exchange notes,
except for any tax or other governmental charge that may be imposed in
connection therewith.
RANKING
The exchange notes will rank junior to, and be subordinated in right of
payment to, all existing and future Senior Indebtedness of the Company, equal in
right of payment with all senior subordinated Indebtedness of the Company and
senior in right of payment to all Subordinated Indebtedness of the Company. At
March 31, 2000, the Company had $19.5 million of Senior Indebtedness and/or
Guarantor Senior Indebtedness outstanding. All debt incurred under the Senior
Credit Facility is and will be Senior Indebtedness of the Company, is and will
be guarantied by each of the Guarantors on a senior basis and is and will be
secured by substantially all of the assets of the Company and the Guarantors.
MATURITY, INTEREST AND PRINCIPAL OF THE NOTES
The notes will be limited to $200.0 million aggregate principal amount, of
which $150.0 million were issued in the offering of the outstanding notes. Up to
$150.0 million of exchange notes may be issued in the exchange offer. To the
extent exchange notes are issued in the exchange offer, the amount of
outstanding notes will be reduced by a like amount. The notes will mature on
March 15, 2010. Additional amounts may be issued in one or more series from time
to time (the "Additional Notes"), subject to certain limitations described under
"Certain Covenants -- Limitation on Indebtedness." Cash interest on the notes
will accrue at a rate of 11 7/8% per annum and will be payable semi-annually in
arrears on each March 15 and September 15, commencing September 15, 2000, to the
holders of record of notes at the close of business on March 1 and September 1,
respectively, immediately preceding such interest payment date. Cash interest
will accrue from the most recent interest payment date to which interest has
been paid or, if no interest has been paid, from March 29, 2000. Interest will
be computed on the basis of a 360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
The notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after March 15, 2005, at the redemption prices
(expressed as a percentage of principal amount) set forth below, plus accrued
and unpaid interest thereon, if any, to the redemption date (subject to the
right of
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<PAGE> 55
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the twelve-month period
beginning on March 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2005........................................................ 105.938%
2006........................................................ 103.958%
2007........................................................ 101.979%
2008 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to March 15,
2003, the Company may redeem in the aggregate up to 35% of the original
aggregate principal amount of the notes issued under the indenture (calculated
after giving effect to the original issuance of Additional Notes, if any) with
the net cash proceeds of one or more Equity Offerings by the Company, at a
redemption price in cash equal to 111.875% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of redemption (subject
to the right of Holders of record on the relevant record date to receive
interest due on the relevant interest payment date); provided, however, that at
least 65% original aggregate principal amount of the notes issued under the
indenture (calculated after giving effect to the original issuance of Additional
Notes, if any) must remain outstanding immediately after giving effect to each
such redemption (excluding any notes issued under the indenture and held by the
Company or any of its Affiliates). Notice of any such redemption must be given
within 60 days after the date of the closing of the relevant Equity Offering of
the Company.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are to be redeemed at any time
pursuant to an optional redemption, selection of such notes for redemption will
be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the notes are listed or, if the
notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided, however, that no notes of a principal amount of $1,000 or less shall
be redeemed in part; provided, further, however, that if a partial redemption is
made with the net cash proceeds of an Equity Offering by the Company, selection
of the notes or portions thereof for redemption shall be made by the Trustee
only on a pro rata basis or on as nearly a pro rata basis as is practicable
(subject to the procedures of The Depository Trust Company), unless such method
is otherwise prohibited. Notice of redemption shall be mailed by first-class
mail at least 30 but not more than 60 days before the redemption date to each
Holder of notes to be redeemed at its registered address. If any note is to be
redeemed in part only, the notice of redemption that relates to such note shall
state the portion of the principal amount thereof to be redeemed. A note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original note. On and after
the redemption date, interest will cease to accrue on notes or portions thereof
called for redemption as long as the Company has deposited with the paying agent
for the notes funds in satisfaction of the applicable redemption price pursuant
to the indenture.
SUBORDINATION OF THE NOTES
The payment of the principal of, premium, if any, and interest on the notes
is subordinated in right of payment, to the extent and in the manner provided in
the indenture, to the prior payment in full in cash of all Senior Indebtedness.
Upon any payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities (excluding any
payment or distribution of Permitted Junior Securities and excluding any payment
from the trust described under "Satisfaction and Discharge of Indenture;
Defeasance" (a "Defeasance Trust Payment")), upon any dissolution or winding-up
or total liquidation or reorganization of the Company, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings, all
Senior Indebtedness shall first be paid in full in cash
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<PAGE> 56
before the Holders of the notes or the Trustee on behalf of such Holders shall
be entitled to receive any payment by the Company of the principal of, premium,
if any, or interest on the notes, or any payment by the Company to acquire any
of the notes for cash, property or securities, or any distribution by the
Company with respect to the notes of any cash, property or securities (excluding
any payment or distribution of Permitted Junior Securities and excluding any
Defeasance Trust Payment). Before any payment may be made by, or on behalf of,
the Company of the principal of, premium, if any, or interest on the notes upon
any such dissolution or winding-up or total liquidation or reorganization, any
payment or distribution of assets or securities of the Company of any kind or
character, whether in cash, property or securities (excluding any payment or
distribution of Permitted Junior Securities and excluding any Defeasance Trust
Payment), to which the Holders of the notes or the Trustee on their behalf would
be entitled, but for the subordination provisions of the indenture, shall be
made by the Company or by any receiver, trustee in bankruptcy, liquidation
trustee, agent or other Person making such payment or distribution, directly to
the holders of the Senior Indebtedness (pro rata to such holders on the basis of
the respective amounts of Senior Indebtedness held by such holders) or their
representatives or to the trustee or trustees or agent or agents under any
agreement or indenture pursuant to which any of such Senior Indebtedness may
have been issued, as their respective interests may appear, to the extent
necessary to pay all such Senior Indebtedness in full in cash after giving
effect to any prior or concurrent payment, distribution or provision therefor to
or for the holders of such Senior Indebtedness.
No direct or indirect payment (excluding any payment or distribution of
Permitted Junior Securities and excluding any Defeasance Trust Payment) by or on
behalf of the Company of principal of, premium, if any, or interest on the
notes, whether pursuant to the terms of the notes, upon acceleration, pursuant
to an Offer to Purchase or otherwise, will be made if, at the time of such
payment, there exists a default in the payment of all or any portion of the
obligations on any Designated Senior Indebtedness, whether at maturity, on
account of mandatory redemption or prepayment, acceleration or otherwise, and
such default shall not have been cured or waived or the benefits of this
sentence waived by or on behalf of the holders of such Designated Senior
Indebtedness. In addition, during the continuance of any non-payment event of
default with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may be immediately accelerated, and upon receipt by the Trustee
of written notice (a "Payment Blockage Notice") from the holder or holders of
such Designated Senior Indebtedness or the trustee or agent acting on behalf of
the holders of such Designated Senior Indebtedness, then, unless and until such
event of default has been cured or waived or has ceased to exist or such
Designated Senior Indebtedness has been discharged or repaid in full in cash or
the benefits of these provisions have been waived by the holders of such
Designated Senior Indebtedness, no direct or indirect payment (excluding any
payment or distribution of Permitted Junior Securities and excluding any
Defeasance Trust Payment) will be made by or on behalf of the Company of
principal of, premium, if any, or interest on the notes, to such Holders, during
a period (a "Payment Blockage Period") commencing on the date of receipt of such
notice by the Trustee and ending 179 days thereafter.
Notwithstanding anything in the subordination provisions of the indenture
or the notes to the contrary:
(1) in no event will a Payment Blockage Period extend beyond 179 days
from the date the Payment Blockage Notice in respect thereof was given;
(2) there shall be a period of at least 181 consecutive days in each
360-day period when no Payment Blockage Period is in effect; and
(3) not more than one Payment Blockage Period may be commenced with
respect to the notes during any period of 360 consecutive days.
No event of default that existed or was continuing on the date of
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period (to the extent the
holder of Designated Senior Indebtedness, or trustee or agent, giving notice
commencing such Payment Blockage Period had knowledge of such existing or
continuing event of default) may be, or be made, the basis for the commencement
of any other Payment Blockage Period by
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<PAGE> 57
the holder or holders of such Designated Senior Indebtedness or the trustee or
agent acting on behalf of such Designated Senior Indebtedness, whether or not
within a period of 360 consecutive days, unless such event of default has been
cured or waived for a period of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
notes by reason of the provisions of the indenture described under this
"Subordination of the Notes" heading will not be construed as preventing the
occurrence of any Event of Default in respect of the notes. See "Events of
Default" below.
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders of
the notes will be paid to the holders of Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full in cash, and the Company may be
unable to meet fully its obligations with respect to the notes.
At the time of the issuance of the notes, borrowings under the Senior
Credit Facility and approximately $4.5 million of capital lease obligations and
other debt are expected to be the only outstanding Senior Indebtedness or
Guarantor Senior Indebtedness. Subject to the restrictions set forth in the
indenture, in the future the Company may issue additional Senior Indebtedness to
refinance existing Indebtedness or for other corporate purposes.
GUARANTIES OF THE NOTES
The indenture provides that each of the Guarantors will unconditionally
guaranty on a joint and several basis (the "Guaranties") all of the Company's
obligations under the notes, including its obligations to pay principal,
premium, if any, and interest with respect to the notes. The Guarantors are also
guarantying all obligations of the Company under the Senior Credit Facility, and
each Guarantor has granted a security interest in all or substantially all of
its assets to secure the obligations under the Senior Credit Facility (except
for certain stock in Foreign Subsidiaries). The obligations of each Guarantor
are limited to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of such Guarantor and after giving effect to
any collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guaranty or
pursuant to its contribution obligations under the indenture, will result in the
obligations of such Guarantor under its Guaranty not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under a Guaranty shall be entitled to a
contribution from each other Guarantor in a pro rata amount based on the net
assets of each Guarantor determined in accordance with GAAP. Except as provided
in the Senior Credit Facility and in "Certain Covenants" below, the Company is
not restricted from selling or otherwise disposing of any of the Equity
Interests of the Guarantors.
The indenture provides that each of the Company's Subsidiaries (other than
Foreign Subsidiaries) on the Issue Date and each of the Company's Subsidiaries
(excluding Unrestricted Subsidiaries and Foreign Subsidiaries) formed or
acquired thereafter are required to be Guarantors, provided that Foreign
Subsidiaries shall also be required to be Guarantors to the extent such Foreign
Subsidiaries guarantee Indebtedness of the Company or of any Subsidiary which is
not a Foreign Subsidiary in a principal amount equal to or greater than $25.0
million in the aggregate for all Foreign Subsidiaries. The Company shall cause
each Restricted Subsidiary issuing a Guaranty after the Issue Date to:
(1) execute and deliver to the Trustee a supplemental indenture in
form reasonably satisfactory to the Trustee pursuant to which such
Restricted Subsidiary shall become a party to the indenture and thereby
unconditionally guaranty all of the Company's Obligations under the notes
and the indenture on the terms set forth therein; and
(2) deliver to the Trustee an opinion of counsel that such
supplemental indenture has been duly authorized, executed and delivered by
such Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary (which opinion may be
subject to customary assumptions and qualifications).
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Thereafter, such Restricted Subsidiary shall (unless released in accordance with
the terms of this indenture) be a Guarantor for all purposes of the indenture.
The indenture provides that if:
(1) the notes issued under the indenture are defeased in accordance
with the terms of the indenture; or
(2) subject to the requirements of the first paragraph under "Certain
Covenants -- Merger, Sale of Assets, Etc.," all or substantially all of the
assets of any Guarantor or all of the Equity Interests of any Guarantor are
sold (including by issuance or otherwise) by the Company in a transaction
constituting an Asset Sale, and (A) the Net Cash Proceeds from such Asset
Sale are used in accordance with the covenant described under "Certain
Covenants -- Disposition of Proceeds of Asset Sales" or (B) the Company
delivers to the Trustee an Officers' Certificate representing that the Net
Cash Proceeds from such Asset Sale shall be used in accordance with the
covenant described under "Certain Covenants -- Disposition of Proceeds of
Asset Sales" and within the time limits specified by such covenant,
then such Guarantor (in the event of a sale or other disposition of all of the
Equity Interests of such Guarantor) or the corporation acquiring such assets (in
the event of a sale or other disposition of all or substantially all of the
assets of such Guarantor) shall be released and discharged of its Guaranty
obligations in respect of the indenture and the notes.
The Guaranties will be general unsecured obligations of the Guarantors. The
obligations of each Guarantor under its Guaranty will be subordinated and junior
in right of payment to the prior payment in full of all existing and future
Guarantor Senior Indebtedness of such Guarantor to substantially the same extent
as the notes are subordinated to all existing and future Senior Indebtedness of
the Company.
Any Guarantor that is designated an Unrestricted Subsidiary pursuant to and
in accordance with "Certain Covenants -- Designation of Unrestricted
Subsidiaries" below shall upon such Designation be released and discharged of
its Guaranty obligations in respect of the indenture and the notes and any
Unrestricted Subsidiary (other than a Foreign Subsidiary) whose Designation is
revoked pursuant to "Certain Covenants -- Designation of Unrestricted
Subsidiaries" below will be required to become a Guarantor in accordance with
the procedure described in the second paragraph under this "Guaranties of the
Notes" section.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
In the event of the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company shall notify the
Holders of the notes of such occurrence in the manner prescribed by the
indenture and shall, within 20 days after the Change of Control Date (or, at the
Company's option, prior to such Change of Control Date), make an Offer to
Purchase all notes then outstanding, and shall purchase all notes validly
tendered, at a purchase price in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the
Purchase Date (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date); provided,
that any Offer to Purchase made prior to any Change of Control Date shall be
made only in the reasonable anticipation of such Change of Control, and
provided, further, that the Company shall not purchase any notes tendered
pursuant to such Offer to Purchase if such Change of Control does not occur.
If a Change of Control occurs which also constitutes an event of default
under the Senior Credit Facility, the lenders under the Senior Credit Facility
would be entitled to exercise the remedies available to a secured lender under
applicable law and pursuant to the terms of the Senior Credit Facility.
Accordingly, any claims of such lenders with respect to the assets of the
Company will be prior to any claim of the Holders of the notes with respect to
such assets.
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If an Offer to Purchase is made, the Company may not have available funds
sufficient to pay for all of the notes that might be tendered by Holders of
notes seeking to accept the Offer to Purchase. If the Company fails to
repurchase all of the notes tendered for purchase, such failure will constitute
an Event of Default under the indenture. See "Events of Default" below.
If the Company makes an Offer to Purchase, the Company will comply with all
applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable federal or state securities laws and regulations and any applicable
requirements of any securities exchange on which the notes are listed, and any
violation of the provisions of the indenture relating to such Offer to Purchase
occurring as a result of such compliance shall not be deemed an Event of Default
or an event that, with the passing of time or giving of notice, or both, would
constitute an Event of Default.
Except as described above with respect to a Change of Control, the
indenture does not contain provisions that permit the Holders of the notes to
require that the Company repurchase or redeem the notes in the event of a
takeover, recapitalization or similar transaction.
CERTAIN COVENANTS
Limitation on Restricted Payments. The Company shall not, and shall not
cause or permit any Restricted Subsidiary to, directly or indirectly:
(1) declare or pay any dividend or any other distribution on any
Equity Interests of the Company or any Restricted Subsidiary or make any
payment or distribution to the direct or indirect holders (in their
capacities as such) of Equity Interests of the Company or any Restricted
Subsidiary (other than any dividends, distributions and payments made to
the Company or any Restricted Subsidiary and dividends or distributions
payable to any Person solely in Qualified Equity Interests of the Company
or in options, warrants or other rights to purchase Qualified Equity
Interests of the Company);
(2) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Restricted Subsidiary (other than
any such Equity Interests owned by the Company or any Restricted
Subsidiary);
(3) purchase, redeem, defease or retire for value, or make any
principal payment on, prior to any scheduled maturity, scheduled repayment
or scheduled sinking fund payment, any Subordinated Indebtedness (other
than any Subordinated Indebtedness held by the Company or any Restricted
Subsidiary); or
(4) make any Investment (other than Permitted Investments) in any
Person (other than in the Company, any Restricted Subsidiary or a Person
that becomes a Restricted Subsidiary, or is merged with or into or
consolidated with the Company or a Restricted Subsidiary (provided the
Company or a Restricted Subsidiary is the survivor), as a result of or in
connection with such Investment)
(any such payment or any other action (other than any exception thereto)
described in (1), (2), (3) or (4) above is each a "Restricted Payment"), unless:
(I) no Default shall have occurred and be continuing at the time or
immediately after giving effect to such Restricted Payment;
(II) immediately after giving effect to such Restricted Payment, the
Company would be able to Incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the Consolidated Coverage Ratio of the first
paragraph of "-- Limitation on Indebtedness" below; and
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(III) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date does not exceed an amount equal to the sum of:
(A) 50% of cumulative Consolidated Net Income determined for the
period (taken as one period) from the beginning of the first fiscal
quarter commencing after the Issue Date and ending on the last day of
the most recent fiscal quarter immediately preceding the date of such
Restricted Payment for which consolidated financial information of the
Company is available (or if such cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss), plus
(B) the aggregate net cash proceeds received by the Company either
(i) as capital contributions to the Company after the Issue Date or (ii)
from the issue and sale (other than to a Restricted Subsidiary) of its
Qualified Equity Interests after the Issue Date (excluding the net
proceeds from any issuance and sale of Qualified Equity Interests
financed, directly or indirectly, using funds borrowed from the Company
or any Restricted Subsidiary until and to the extent such borrowing is
repaid), plus
(C) the principal amount (or accreted amount (determined in
accordance with GAAP), if less) of any Indebtedness of the Company or
any Restricted Subsidiary Incurred after the Issue Date which has been
converted into or exchanged for Qualified Equity Interests of the
Company, plus
(D) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the Issue Date, an amount
(to the extent not included in the computation of Consolidated Net
Income) equal to the lesser of (i) the return of capital with respect to
such Investment and (ii) the amount of such Investment which was treated
as a Restricted Payment, in either case, less the cost of the
disposition of such Investment and net of taxes, plus
(E) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after
the Issue Date in accordance with "Designation of Unrestricted
Subsidiaries" below, the Company's proportionate interest in an amount
equal to the excess of (i) the total assets of such Subsidiary, valued
on an aggregate basis at Fair Market Value, over (ii) the total
liabilities of such Subsidiary, determined in accordance with GAAP (and
provided that such amount shall not in any case exceed the Designation
Amount with respect to such Restricted Subsidiary upon its Designation),
plus
(F) to the extent not included in the computation of Consolidated
Net Income, the amount of cash dividends or cash distributions (other
than to pay taxes) received from any Unrestricted Subsidiary since the
Issue Date, minus
(G) the greater of (i) $0 and (ii) the Designation Amount (measured
as of the date of Designation) with respect to any Subsidiary of the
Company which has been designated as an Unrestricted Subsidiary after
the Issue Date in accordance with "Designation of Unrestricted
Subsidiaries" below.
The foregoing provisions will not prevent:
(1) (A) the payment of any dividend or distribution on, or redemption
of, Equity Interests within 60 days after the date of declaration of such
dividend or distribution or the giving of formal notice of such redemption,
if at the date of such declaration or giving of such formal notice such
payment or redemption would comply with the provisions of the indenture or
(B) the payment of any dividend or distribution on a pro rata basis to
holders of minority Equity Interests in a Restricted Subsidiary out of the
net income from the Issue Date of such Restricted Subsidiary;
(2) the purchase, redemption, retirement or other acquisition of any
Equity Interests of the Company in exchange for, or out of the net cash
proceeds of (or the payment of a dividend or distribution to Holdings out
of the net cash proceeds of) the substantially concurrent issue and sale
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(other than to a Restricted Subsidiary) of, other Equity Interests of the
Company (other than Disqualified Equity Interests, in the case of any such
purchase, redemption, retirement or other acquisition of Qualified Equity
Interests); provided, however, that any such net cash proceeds and the
value of any Qualified Equity Interests issued in exchange for such retired
Equity Interests are excluded from clause (III)(B) of the preceding
paragraph (and were not included therein at any time);
(3) the purchase, redemption, retirement, defeasance or other
acquisition of Subordinated Indebtedness, or any other payment thereon,
made in exchange for, or out of the net cash proceeds of, a substantially
concurrent issue and sale (other than to a Restricted Subsidiary) of:
(A) Qualified Equity Interests of the Company; provided, however,
that any such net cash proceeds and the value of any Qualified Equity
Interests issued in exchange for Subordinated Indebtedness are excluded
from clauses (III)(B) and (III)(C) of the preceding paragraph (and were
not included therein at any time) or
(B) other Subordinated Indebtedness having no stated maturity for
the payment of principal thereof prior to the final stated maturity of
the notes;
(4) any Investment to the extent that it is funded with the net cash
proceeds of the substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of Qualified Equity Interests of the Company;
provided, however, that any such net cash proceeds are excluded from clause
(III)(B) of the preceding paragraph (and were not included therein at any
time);
(5) the purchase, redemption or other acquisition, cancellation or
retirement for value of Equity Interests, or options, warrants, equity
appreciation rights or other rights to purchase or acquire Equity
Interests, of the Company or any Restricted Subsidiary, or similar
securities, held by officers or employees or former officers or employees
of the Company or any Restricted Subsidiary (or their estates or
beneficiaries under their estates), upon death, disability, retirement or
termination of employment, or otherwise held pursuant to any employee
equity subscription agreement, stock option agreement or stock ownership
arrangement or dividends by the Company to Holdings to effect the same in
respect of its Equity Interests held by officers or employees or former
officers or employees of the Company or any Restricted Subsidiary (or their
estates or beneficiaries under their estates), upon death, disability,
retirement or termination of employment, or otherwise held pursuant to any
employee equity subscription agreement, stock option agreement or stock
ownership arrangement not to exceed $2.0 million per fiscal year; provided
that if the full $2.0 million is not utilized in any fiscal year, such
unutilized portion may be so utilized in any subsequent fiscal year; and
provided, further, that in no fiscal year shall such payments exceed $6.0
million;
(6) Restricted Payments not to exceed $4.0 million in the aggregate
since the Issue Date;
(7) payments to Holdings and/or AEA to pay general and administrative
expenses of Holdings and/or AEA not to exceed $375,000 in any fiscal year
plus actual fees, expenses and indemnity payments incurred by its officers
and directors;
(8) any purchase or repayment of Subordinated Indebtedness upon a
Change of Control or an Asset Sale to the extent required by the agreement
governing such Subordinated Indebtedness but only if:
(A) in the case of a Change of Control, the Company shall have
complied with all of its obligations under the covenant described under
"Offer to Purchase upon Change of Control" and purchased all the notes
tendered pursuant to the Offer to Purchase required thereby prior to
purchasing or repaying such Subordinated Indebtedness or
(B) in the case of an Asset Sale, the Company shall have applied
the Net Cash Proceeds from such Asset Sale in accordance with the
covenant described under "-- Disposition of Proceeds of Asset Sales,";
provided that (a) in either case the purchase price (stated as a
percentage of principal amount or issue price plus accrued original
discount, if less) of such
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Subordinated Indebtedness shall not be greater than the price (stated as
a percentage of principal amount) of the notes pursuant to any Offer to
Purchase and (b) in the case of an Asset Sale, the aggregate amount of
such Subordinated Indebtedness that the Company may purchase or repay
shall not exceed the amount of Unutilized Net Cash Proceeds, if any,
remaining after the Company has purchased all notes tendered pursuant to
such Offer to Purchase;
(9) the payment of principal and interest on the Junior Subordinated
Seller Notes in accordance with the terms thereof; and
(10) payments to Holdings in an amount necessary to permit the payment
by Holdings of principal on the Contingent Note in accordance with the
terms thereof; provided that (i) the contingency that would give rise to
any obligations in respect of the Contingent Note shall have been satisfied
in accordance with its terms on or prior to December 31, 2000 and (ii)
Holdings immediately uses such amount for such purpose;
provided, however, that in the case of each of clauses (2), (3), (5), (7), (8)
and (10) no Default shall have occurred and be continuing or would arise
therefrom.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (1), (5), (6), (8) and (10) of
the immediately preceding paragraph shall be included as Restricted Payments and
amounts expended pursuant to clauses (2), (3), (4), (7) and (9) shall be
excluded. The amount of any non-cash Restricted Payment shall be deemed to be
equal to the Fair Market Value thereof at the date of the making of such
Restricted Payment.
Limitation on Indebtedness. The Company shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness) or issue any Disqualified Equity
Interests, except for Permitted Indebtedness; provided, however, that (1) the
Company and any Restricted Subsidiary may Incur Indebtedness (other than
Disqualified Equity Interests) and (2) the Company may issue Disqualified Equity
Interests if, in any such case, at the time of and immediately after giving pro
forma effect to such Incurrence of Indebtedness or issuance of Disqualified
Equity Interests and the application of the proceeds therefrom, the Consolidated
Coverage Ratio of the Company would be greater than 2.0 to 1.0.
The foregoing limitations will not apply to the Incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(1) Indebtedness of $150.0 million principal amount under the notes,
the Guarantees and the indenture;
(2) Existing Indebtedness;
(3) Indebtedness of the Company and any Guarantor pursuant to the
Senior Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed (A) the sum of (i) the greater of (a) $50.0
million and (b) the sum of 85% of the net book value of the accounts
receivable of the Company and the Restricted Subsidiaries on a consolidated
basis in accordance with GAAP plus 50% of the net book value of the
inventory of the Company and the Restricted Subsidiaries on a consolidated
basis in accordance with GAAP with respect to revolving loans thereunder
plus (ii) $75.0 million with respect to term loans, additional revolving
loans or other loans Incurred on or prior to March 31, 2002, provided that,
in the case of this subclause (A)(ii), at the time of and after giving pro
forma effect to any Incurrence of such Indebtedness and the application of
the proceeds therefrom, the Consolidated Leverage Ratio of the Company
would be less than or equal to 5.15:1.00 less (B) amounts Incurred and
outstanding pursuant to clause (4) below; provided that the calculation
under subclause (A)(i)(b) shall exclude the net book value of accounts
receivable sold to or financed through any Accounts Receivable Subsidiary
and the net book value of the accounts receivable and inventory of Foreign
Subsidiaries to the extent of Indebtedness Incurred by any Foreign
Subsidiary pursuant to clause (11)(A) below;
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(4) Indebtedness Incurred on or prior to March 31, 2002 by Foreign
Subsidiaries in an aggregate principal amount at any one time outstanding
not to exceed $60.0 million, provided that, at the time of and after giving
pro forma effect to any Incurrence of such Indebtedness and the application
of the proceeds therefrom, the Consolidated Leverage Ratio of the Company
would be less than or equal to 5.15:1.00 less amounts Incurred and
outstanding pursuant to clause (3)(A)(ii) above in excess of $15.0 million;
(5) Indebtedness of any Restricted Subsidiary owed to and held by the
Company or any Restricted Subsidiary and Indebtedness of the Company owed
to and held by any Restricted Subsidiary, which Indebtedness is unsecured
and subordinated in right of payment to the payment and performance of the
Company's obligations under any Senior Indebtedness, the indenture and the
notes; provided, however, that an Incurrence of Indebtedness that is not
permitted by this clause (5) shall be deemed to have occurred upon (i) any
sale or other disposition of any Indebtedness of the Company or any
Restricted Subsidiary referred to in this clause (5) to a Person (other
than the Company or any Restricted Subsidiary), and (ii) the designation of
a Restricted Subsidiary which holds Indebtedness of the Company or any
other Restricted Subsidiary as an Unrestricted Subsidiary;
(6) the Guaranties and guaranties by the Company or any Restricted
Subsidiary of Indebtedness permitted to be Incurred under this covenant to
the extent such Indebtedness could have itself been Incurred by such
Person;
(7) Hedging Obligations of the Company and the Restricted
Subsidiaries;
(8) Indebtedness of the Company or any Restricted Subsidiary
consisting of Purchase Money Indebtedness, Capital Expenditures
Indebtedness and Capitalized Lease Obligations (and refinancings thereof)
in an aggregate principal amount which, when aggregated with the principal
amount of all other Indebtedness then outstanding and Incurred pursuant to
this clause (8), does not exceed the greater of (A) 10.0% of Consolidated
Net Tangible Assets at the time of Incurrence and (B) $25.0 million;
(9) Indebtedness of the Company or a Restricted Subsidiary to the
extent representing a replacement, renewal, refinancing or extension
(collectively, a "refinancing") of outstanding Indebtedness Incurred in
compliance with the Consolidated Coverage Ratio of the first paragraph of
this covenant or clause (1) or clause (2) or, after March 31, 2002,
subclause (A)(ii) of clause (3) and clause (4) of this paragraph of this
covenant; provided, however, that:
(A) any such refinancing shall not exceed the sum of the principal
amount (or accreted amount (determined in accordance with GAAP), if
less) of the Indebtedness or Disqualified Equity Interests being
refinanced, plus the amount of accrued interest or dividends thereon,
plus the amount of any reasonably determined prepayment premium
necessary to accomplish such refinancing and such reasonable fees and
expenses incurred in connection therewith,
(B) Indebtedness representing a refinancing of Indebtedness other
than Senior Indebtedness shall have a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of the
Indebtedness being refinanced;
(C) Indebtedness that is pari passu with the notes may only be
refinanced with Indebtedness that is made pari passu with or subordinate
in right of payment to the notes and Subordinated Indebtedness may only
be refinanced with Subordinated Indebtedness or Disqualified Equity
Interests and Disqualified Equity Interests may only be refinanced with
other Disqualified Equity Interests; and
(D) refinancing Indebtedness incurred by a Restricted Subsidiary
which is not a Guarantor may only be used to refinance Indebtedness of a
Restricted Subsidiary which is not a Guarantor;
(10) in addition to the items referred to in clauses (1) through (9)
above and clauses (11) through (12) below, Indebtedness of the Company or
any Restricted Subsidiary
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(including any Indebtedness under the Senior Credit Facility that utilizes
this subparagraph (10)) having an aggregate principal amount not to exceed
$15.0 million at any time outstanding;
(11) Indebtedness of Foreign Subsidiaries (which may be Incurred under
the Senior Credit Facility or otherwise) (A) in an aggregate principal
amount at any one time outstanding not to exceed the sum of (a) 85% of the
net book value of the accounts receivable of such Foreign Subsidiaries in
accordance with GAAP and (b) 50% of the net book value of the inventory of
such Foreign Subsidiaries in accordance with GAAP (provided that the
calculation under this clause (A) shall exclude the net book value of
accounts receivable and inventory sold to or financed through any Accounts
Receivable Subsidiary) or (B) representing guaranties of Indebtedness of
another Foreign Subsidiary incurred pursuant to subclause (A) of this
clause (11); and
(12) unsecured Indebtedness Incurred by the Company to former
employees in connection with the purchase or redemption of Equity Interests
of the Company not to exceed in the aggregate $2.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness described in clauses (1) through (12) above
(other than Indebtedness under the Senior Credit Agreement outstanding on the
Issue Date, which will be deemed to have been Incurred under clause (3)) or is
entitled to be Incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify or reclassify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been Incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof.
Limitation on Layering. The Company shall not, directly or indirectly,
Incur any Indebtedness that by its terms would expressly rank senior in right of
payment to the notes and expressly rank subordinate in right of payment to any
other Indebtedness of the Company; provided, that the foregoing restriction
shall not apply to distinctions between categories of Indebtedness that exist
solely by reason or Liens of Guaranties arising or created in respect of some
but not all such Indebtedness.
The Company shall not permit any Guarantor to, and no Guarantor shall,
directly or indirectly, Incur any Indebtedness that by its terms would expressly
rank senior in right of payment to the Guaranty of such Guarantor and expressly
rank subordinate in right of payment to any Guarantor Senior Indebtedness of
such Guarantor; provided, that the foregoing restriction shall not apply to
distinctions between categories of Indebtedness that exist solely by reason or
Liens of Guaranties arising or created in respect of some but not all such
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to: (A) pay dividends or make any other
distributions to the Company or any other Restricted Subsidiary on its Equity
Interests or with respect to any other interest or participation in, or measured
by, its profits, or pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (B) make loans or advances to, or guaranty any
Indebtedness or other obligations of, the Company or any other Restricted
Subsidiary or (C) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of:
(1) the Senior Credit Facility, or any other agreement of the Company
or the Restricted Subsidiaries outstanding on the Issue Date, in each case
as in effect on the Issue Date, and any amendments, restatements, renewals,
replacements or refinancings thereof; provided, however, that any such
amendment, restatement, renewal, replacement or refinancing is no more
restrictive in the aggregate with respect to such encumbrances or
restrictions than those contained in the agreement being amended, restated,
renewed, replaced or refinanced;
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(2) applicable law;
(3) any instrument of an Acquired Person acquired by the Company or
any Restricted Subsidiary as in effect at the time of such acquisition
(except to the extent such instrument was entered into by such Acquired
Person in connection with, as a result of or in contemplation of such
acquisition); provided, however, that such encumbrances and restrictions
are not applicable to any Restricted Subsidiary, or the properties or
assets of any Restricted Subsidiary, other than the Acquired Person;
(4) customary non-assignment provisions in leases, licenses or
contracts;
(5) Purchase Money Indebtedness and Capitalized Lease Obligations for
property acquired in the ordinary course of business that only imposes
encumbrances and restrictions on the property so acquired;
(6) any agreement for the sale or disposition of the Equity Interests
or assets of any Restricted Subsidiary; provided, however, that such
encumbrances and restrictions described in this clause (6) are only
applicable to such Restricted Subsidiary or assets, as applicable, and any
such sale or disposition is made in compliance with "Disposition of
Proceeds of Asset Sales" below to the extent applicable thereto;
(7) refinancing Indebtedness permitted under clause (9) of the second
paragraph of "Limitation on Indebtedness" above; provided, however, that
such encumbrances and restrictions contained in the agreements governing
such Indebtedness are no more restrictive in the aggregate than those
contained in the agreements governing the Indebtedness being refinanced
immediately prior to such refinancing;
(8) the indenture;
(9) contained in any other indenture governing debt securities that
are no more restrictive than those contained in the indenture;
(10) customary restrictions in any instrument governing Indebtedness
of a Foreign Subsidiary permitted to be Incurred pursuant to the covenant
described above under "Limitation on Indebtedness"; provided that the
aggregate Consolidated EBITDA for the four quarter period of the most
recent four consecutive fiscal quarters ending prior to the date such
Indebtedness is Incurred of all Foreign Subsidiaries subject to such
restrictions shall not exceed 30% of the Consolidated EBITDA for such four
quarter period of the Company; provided, further that Consolidated EBITDA
shall be calculated after giving effect on a pro forma basis to any
transactions which would require adjustment pursuant to the calculation
described under the definition of "Consolidated Coverage Ratio" as if such
transaction had occurred on the first day of such four quarter period; or
(11) any restriction contained in any security agreement or mortgage
securing Indebtedness of any Restricted Subsidiary to the extent such
restriction restricts the transfer of the property subject to such security
agreement or mortgage.
Designation of Unrestricted Subsidiaries. The Company may designate after
the Issue Date any Subsidiary of the Company as an "Unrestricted Subsidiary"
under the indenture (a "Designation") only if:
(1) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation;
(2) at the time of and after giving effect to such Designation, the
Company could Incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the Consolidated Coverage Ratio of the first paragraph
of "Limitation on Indebtedness" above; and
(3) assuming the effectiveness of such Designation, the Designation
and an Investment (other than a Permitted Investment (except for
Investments described in clauses (10) and (11) of the definition of
"Permitted Investments")) in an amount (the "Designation Amount") equal to
the Fair
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Market Value of the Company's aggregate Investment in such Subsidiary on
such date could be made in compliance with the first paragraph of
"Limitation on Restricted Payments" above.
Neither the Company nor any Restricted Subsidiary shall at any time (A)
provide credit support for, subject any of its property or assets (other than
the Equity Interests of any Unrestricted Subsidiary) to the satisfaction of, or
guaranty, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness), (B) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (C) be directly or indirectly liable for any Indebtedness which
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a default
with respect to any Indebtedness of any Unrestricted Subsidiary, except for any
non-recourse guaranty given solely to support the pledge by the Company or any
Restricted Subsidiary of the capital stock of any Unrestricted Subsidiary. All
Subsidiaries of Unrestricted Subsidiaries shall be automatically deemed to be
Unrestricted Subsidiaries.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(1) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation; and
(2) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at
such time, have been permitted to be Incurred for all purposes of the
indenture.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
Limitation on Liens. The Company shall not, and shall not cause or permit
any Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist
any Liens (other than Permitted Liens) against or upon any of their respective
properties or assets now owned or hereafter acquired, or any proceeds therefrom
or any income or profits therefrom, to secure any Specified Indebtedness unless
contemporaneously therewith effective provision is made, in the case of the
Company, to secure the notes and all other amounts due under the indenture, and
in the case of a Restricted Subsidiary which is a Guarantor, to secure such
Restricted Subsidiary's Guaranty of the notes and all other amounts due under
the indenture, equally and ratably with such Indebtedness (or, in the event that
such Indebtedness is subordinated in right of payment to the notes or such
Guarantor's Guaranty, prior to such Indebtedness) with a Lien on the same
properties and assets securing such Indebtedness for so long as such
Indebtedness is secured by such Lien.
Disposition of Proceeds of Asset Sales. The Company shall not, and shall
not cause or permit any Restricted Subsidiary to, directly or indirectly, make
any Asset Sale, unless:
(1) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the assets sold or otherwise disposed of, and
(2) at least 75% of such consideration consists of (A) cash or Cash
Equivalents, (B) properties and capital assets to be used in a Related
Business, (C) Equity Interests in any Person which thereby becomes a Wholly
Owned Restricted Subsidiary whose assets consist primarily of properties
and capital assets used in a Related Business or (D) "earn out" or similar
rights providing for a cash payment contingent upon operating results or
the financial condition of the business and/or Person subject to such Asset
Sale.
The amount of any (A) Indebtedness (other than any Subordinated
Indebtedness) of the Company or any Restricted Subsidiary that is actually
assumed by the transferee in such Asset Sale and from which the Company and the
Restricted Subsidiaries are fully released shall be deemed to be cash for
purposes of
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determining the percentage of cash consideration received by the Company or the
Restricted Subsidiaries and (B) notes, securities or other similar obligations
received by the Company or the Restricted Subsidiaries from such transferee that
are immediately converted, sold or exchanged (or are converted, sold or
exchanged within thirty days of the related Asset Sale) by the Company or the
Restricted Subsidiaries into cash shall be deemed to be cash, in an amount equal
to the net cash proceeds realized upon such conversion, sale or exchange for
purposes of determining the percentage of cash consideration received by the
Company or the Restricted Subsidiaries.
The Company or such Restricted Subsidiary, as the case may be, may:
(1) apply the Net Cash Proceeds of any Asset Sale within 365 days of
receipt thereof to repay Senior Indebtedness;
(2) commit in writing to acquire, construct or improve properties and
capital assets to be used in a Related Business and so apply such Net Cash
Proceeds within 365 days after the receipt thereof; or
(3) apply the Net Cash Proceeds of any Asset Sale within 365 days of
receipt thereof or commence an offer or otherwise become obligated to repay
Pari Passu Debt not exceeding the Pari Passu Debt Pro Rata Share;
provided that the Company or such Restricted Subsidiary may use up to $15.0
million of aggregate Net Cash Proceeds from Asset Sales for any purpose not
prohibited by the indenture.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are
not applied or committed within 365 days of such Asset Sale as described in
clause (1), (2) or (3) or the proviso of the immediately preceding paragraph
(such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"), the Company shall,
within 20 days after such 365th day, make an Offer to Purchase all outstanding
notes up to a maximum principal amount (expressed as a multiple of $1,000) of
notes equal to such Unutilized Net Cash Proceeds, at a purchase price in cash
equal to 100% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the Purchase Date; provided, however, that the Offer to
Purchase may be deferred until there are aggregate Unutilized Net Cash Proceeds
equal to or in excess of $15.0 million, at which time the entire amount of such
Unutilized Net Cash Proceeds, and not just the amount in excess of $15.0
million, shall be applied as required pursuant to this paragraph.
With respect to any Offer to Purchase effected pursuant to this covenant,
among the notes, to the extent the aggregate principal amount of notes tendered
pursuant to such Offer to Purchase exceeds the Unutilized Net Cash Proceeds to
be applied to the repurchase thereof, such notes shall be purchased pro rata
based on the aggregate principal amount of such notes tendered by each Holder.
To the extent the Unutilized Net Cash Proceeds exceed the aggregate amount of
notes tendered by the Holders of the notes pursuant to such Offer to Purchase,
the Company may retain and utilize any portion of the Unutilized Net Cash
Proceeds not applied to repurchase the notes for any general corporate purposes.
Upon the completion of an Offer to Purchase pursuant to this covenant, the
amount of unutilized Net Cash Proceeds shall be reset to zero.
In the event that the Company makes an Offer to Purchase the Exchange
Notes, the Company shall comply with any applicable securities laws and
regulations, including any applicable requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act, and any violation of the provisions of the
indenture relating to such Offer to Purchase occurring as a result of such
compliance shall not be deemed a Default or an event that with the passing of
time or giving of notice, or both, would constitute an Event of Default.
Each Holder shall be entitled to tender all or any portion of the notes
owned by such Holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a note tendered must be tendered in an integral
multiple of $1,000 principal amount and subject to any proration among tendering
Holders as described above.
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Merger, Sale of Assets, etc. The Company shall not consolidate with or
merge with or into (whether or not the Company is the Surviving Person) any
other entity and the Company shall not and shall not cause or permit any
Restricted Subsidiary to, sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Company's and the Restricted
Subsidiaries' properties and assets (determined on a consolidated basis for the
Company and the Restricted Subsidiaries) to any entity in a single transaction
or series of related transactions, unless:
(1) either (A) the Company shall be the Surviving Person or (B) the
Surviving Person (if other than the Company) shall be a corporation
organized and validly existing under the laws of the United States of
America or any State thereof or the District of Columbia, and shall, in any
such case, expressly assume by a supplemental indenture, the due and
punctual payment of the principal of, premium, if any, and interest on all
the notes and the performance and observance of every covenant of the
indenture and the Registration Rights Agreement to be performed or observed
on the part of the Company;
(2) immediately thereafter, on a pro forma basis after giving effect
to such transaction as if it had occurred at the beginning of the four
quarter period immediately preceding such transaction for which
consolidated financial statements of the Company are available, no Default
or Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to any such transaction including
the Incurrence by the Company or any Restricted Subsidiary, directly or
indirectly, of additional Indebtedness (and treating any Indebtedness not
previously an obligation of the Company or any Restricted Subsidiary in
connection with or as a result of such transaction as having been Incurred
at the time of such transaction), the Surviving Person could Incur, on a
pro forma basis after giving effect to such transaction as if it had
occurred at the beginning of the four quarter period immediately preceding
such transaction for which consolidated financial statements of the Company
are available, at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the Consolidated Coverage Ratio of the first
paragraph of "Limitation on Indebtedness" above; and
(4) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the indenture.
Notwithstanding the foregoing clause (3) of the immediately preceding
paragraph, any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries the Equity Interests of which constitute all or substantially all
the properties and assets of the Company shall be deemed to be the transfer of
all or substantially all the properties and assets of the Company.
No Guarantor (other than a Guarantor whose Guaranty is to be released in
accordance with the terms of its Guaranty and the indenture as provided in the
third paragraph under "Guaranties of the Notes" above) shall consolidate with or
merge with or into another Person, whether or not such Person is affiliated with
such Guarantor and whether or not such Guarantor is the Surviving Person, unless
(A) the Surviving Person (if other than such Guarantor) is a corporation
organized and validly existing under the laws of the United States, any State
thereof or the District of Columbia; (B) the Surviving Person (if other than
such Guarantor) expressly assumes by a supplemental indenture all the
obligations of such Guarantor under its Guaranty of the notes and the
performance and observance of every covenant of the indenture and the
Registration Rights Agreement to be performed or observed by such Guarantor; (C)
at the time of and immediately after such Disposition, on a pro forma basis
after giving effect to such transaction as if it had occurred at the beginning
of the four quarter period immediately preceding such transaction for which
consolidated financial statements of the Company are available, no Default or
Event
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of Default shall have occurred and be continuing; and (D) the Company will have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the indenture.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraphs in
which the Company or a Guarantor, as the case may be, is not the Surviving
Person and the Surviving Person is to assume all the Obligations of the Company
under the notes, the indenture and the Registration Rights Agreement or of such
Guarantor under its Guaranty, the indenture and the Registration Rights
Agreement, as the case may be, pursuant to a supplemental indenture, such
Surviving Person shall succeed to, and be substituted for, and may exercise
every right and power of, the Company or such Guarantor, as the case may be, and
the Company shall be discharged from its Obligations under the indenture and the
notes or such Guarantor shall be discharged from its Obligations under the
indenture and its Guaranty.
Transactions with Affiliates. The Company shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into any transaction (or series of related transactions) with
or for the benefit of any of their respective Affiliates (each an "Affiliate
Transaction"), unless:
(1) such Affiliate Transaction, taken as a whole, is on terms which
are no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than would be available in a comparable transaction with an
unaffiliated third party; and
(2) if such Affiliate Transaction or series of related Affiliate
Transactions (other than any such Affiliate Transactions between the
Company or a Restricted Subsidiary and an Unrestricted Subsidiary or an
Accounts Receivable Subsidiary in the ordinary course of business) involves
aggregate payments or other consideration having a Fair Market Value in
excess of $5.0 million, such Affiliate Transaction is in writing and a
majority of the disinterested members of the Board of Directors of the
Company shall have approved such Affiliate Transaction and determined that
such Affiliate Transaction complies with the foregoing provisions, or, in
the event that there are no independent directors, the Trustee has received
a written opinion from an Independent Financial Advisor stating that the
terms of such Affiliate Transaction are fair, from a financial point of
view, to the Company or the Restricted Subsidiary involved in such
Affiliate Transaction, as the case may be.
In addition, any Affiliate Transaction (other than an Affiliate Transaction
between the Company or a Restricted Subsidiary and an Unrestricted Subsidiary or
an Accounts Receivable Subsidiary in the ordinary course of business) involving
aggregate payments or other consideration having a Fair Market Value in excess
of $10.0 million will also require a written opinion from an Independent
Financial Advisor (filed with the Trustee) stating that the terms of such
Affiliate Transaction are fair, from a financial point of view, to the Company
or the Restricted Subsidiary involved in such Affiliate Transaction, as the case
may be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to:
(1) transactions with or among the Company and any Restricted
Subsidiary or between or among Restricted Subsidiaries;
(2) customary directors' fees, indemnification and similar
arrangements, consulting fees, employee salaries, bonuses or employment
agreements, compensation or employee benefit arrangements and incentive
arrangements with any officer, director or employee of the Company or any
Restricted Subsidiary entered into in the ordinary course of business
(including customary benefits thereunder) and payments under any
indemnification arrangements permitted by applicable law;
(3) any transactions undertaken pursuant to any contractual
obligations in existence on the Issue Date (as renewed or amended from time
to time in a manner not adverse to the Holders of notes);
(4) the issue and sale by the Company to its stockholders of Qualified
Equity Interests;
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(5) any Restricted Payments made in compliance with "Limitation on
Restricted Payments" above;
(6) loans and advances to officers, directors and employees of the
Company or any Restricted Subsidiary for travel, entertainment, moving and
other relocation expenses, in each case made in the ordinary course of
business;
(7) the Incurrence of intercompany Indebtedness permitted pursuant to
clause (5) of the second paragraph of "Limitation on Indebtedness" above;
(8) the pledge of Equity Interests of Unrestricted Subsidiaries to
support the Indebtedness thereof;
(9) the payment to AEA of fees in an aggregate amount not to exceed
$1.6 million in any fiscal year, the reimbursement of reasonable
out-of-pocket expenses incurred by AEA and payments to AEA in respect of
indemnification obligations under existing agreements or agreements
permitted to be entered into in accordance with the indenture, in each case
in connection with its performance of services pursuant to the Management
Agreement;
(10) shareholders and registration rights agreements among the Company
and its shareholders; and
(11) any transaction in the ordinary course of business or approved by
a majority of the disinterested directors, between the Company or any
Restricted Subsidiary and any Affiliate of the Company controlled by the
Company that is a joint venture or similar entity primarily engaged in a
Related Business.
Limitation on the Sale or Issuance of Preferred Equity Interests of
Restricted Subsidiaries. The Company shall not sell any Preferred Equity
Interest of a Restricted Subsidiary, and shall not cause or permit any
Restricted Subsidiary to issue any of its Preferred Equity Interests or sell any
Preferred Equity Interests of another Restricted Subsidiary (other than to the
Company or a Wholly Owned Restricted Subsidiary or to the directors as
director's qualifying shares to the extent required by applicable law, or if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary).
Provision of Financial Information. Whether or not the Company is subject
to Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the SEC (if permitted by SEC practice and
applicable law and regulations) the annual reports, quarterly reports and other
documents which the Company would have been required to file with the SEC
pursuant to such Section 13(a) or 15(d) (each, an "Exchange Act Report") or any
successor provision thereto if the Company were so subject, such documents to be
filed with the SEC on or prior to the respective dates (the "Required Filing
Dates") by which the Company would have been required so to file such documents
if the Company were so subject. If, at any time prior to the consummation of the
exchange offer required pursuant to the Registration Rights Agreement when the
Company is not subject to such Section 13(a) or 15(d), the information which
would be required in an Exchange Act Document is included in a public filing of
the Company under the Securities Act at the applicable Required Filing Date,
such public filing shall fulfill the filing requirement with the SEC with
respect to the applicable Exchange Act Document.
The Company shall also in any event:
(1) within 15 days of each Required Filing Date (whether or not
permitted or required to be filed with the SEC) file with the Trustee,
copies of the annual reports, quarterly reports and other documents which
the Company is required to file with the SEC pursuant to the preceding
sentence, or, if such filing is not so permitted (or, prior to the
consummation of the exchange offer required pursuant to the Registration
Rights Agreement, when the Company is not subject to Section 13(a) or 15(d)
of the Exchange Act), information and data of a similar nature, and
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(2) if, notwithstanding the preceding clause (1), filing such
documents by the Company with the SEC is not permitted by SEC practice or
applicable law or regulations, promptly upon written request supply copies
of such documents to any Holder.
In addition, for so long as any notes remain outstanding, the Company will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act, and, to any beneficial holder of notes, if
not obtainable from the SEC, information of the type that would be filed with
the SEC pursuant to the foregoing provisions, upon the request of any such
holder.
EVENTS OF DEFAULT
The occurrence of any of the following will be defined as an "Event of
Default" under the indenture:
(1) failure to pay principal of (or premium, if any, on) any note when
due (whether or not prohibited by the provisions of the indenture described
under "Subordination of the Notes" above);
(2) failure to pay any interest on any note when due, continued for 30
days or more (whether or not prohibited by the provisions of the indenture
described under "Subordination of the Notes" above);
(3) default in the payment of principal of or interest on any note
required to be purchased pursuant to any Offer to Purchase required by the
indenture when due and payable or failure to pay on the Purchase Date the
Purchase Price for any note validly tendered pursuant to any Offer to
Purchase (whether or not prohibited by the provisions of the indenture
described under "Subordination of the Notes" above);
(4) failure to perform or comply with any of the provisions described
under "Certain Covenants -- Merger, Sale of Assets, etc." above;
(5) failure to perform any other covenant, warranty or agreement of
the Company under the indenture or in the notes or of the Guarantors under
the indenture or in the Guaranties continued for 30 days or more after
written notice to the Company by the Trustee or to the Trustee and the
Company by Holders of at least 25% in aggregate principal amount of the
outstanding notes;
(6) default or defaults under the terms of one or more instruments
evidencing or securing Indebtedness of the Company or any of its
Significant Restricted Subsidiaries having an outstanding principal amount
of greater than $10.0 million individually or in the aggregate that have
resulted in the acceleration of the payment of such Indebtedness or failure
by the Company or any of its Significant Restricted Subsidiaries to pay
principal when due at the stated maturity of any such Indebtedness;
(7) the rendering of a final judgment or judgments (not subject to
appeal) against the Company or any of its Significant Restricted
Subsidiaries in an amount of greater than $10.0 million (net of any amounts
covered by reputable and creditworthy insurance or bonding companies) which
remain undischarged or unstayed for a period of 60 days after the date on
which the right to appeal has expired;
(8) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any of its Significant Restricted Subsidiaries; or
(9) other than as provided in or pursuant to any Guaranty or the
indenture, any Guaranty ceases to be in full force and effect or is
declared null and void and unenforceable or found to be invalid or any
Guarantor denies its liability under its Guaranty (other than by reason of
a release of such Guarantor from its Guaranty in accordance with the terms
of the indenture and such Guaranty).
Subject to the provisions of the indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights
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or powers under the indenture at the request or direction of any of the Holders
of notes, unless such Holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the Holders of a majority in aggregate principal amount of the outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on such Trustee.
If an Event of Default with respect to the notes (other than an Event of
Default with respect to the Company described in clause (8) of the first
paragraph of this section) occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding notes, by
notice in writing to the Trustee and the Company, may declare the unpaid
principal of (and premium, if any) and accrued interest to the date of
acceleration on all the outstanding notes to be due and payable immediately and,
upon any such declaration, such principal amount (and premium, if any) and
accrued interest, notwithstanding anything contained in the indenture or the
notes to the contrary will become immediately due and payable; provided,
however, that so long as the Senior Credit Facility shall be in full force and
effect, if an Event of Default shall have occurred and be continuing (other than
an Event of Default with respect to the Company described in clause (8) of the
first paragraph of this section), the notes shall not become due and payable
until the earlier to occur of (A) five Business Days following delivery of
written notice of such acceleration of the notes to the agent under the Senior
Credit Facility and (B) the acceleration (ipso facto or otherwise) of any
Indebtedness under the Senior Credit Facility. If an Event or Default specified
in clause (8) of the first paragraph of this section with respect to the Company
occurs under the indenture, the notes will ipso facto become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder of the notes.
Notwithstanding the foregoing, in the event of a declaration of
acceleration in respect of the notes because an Event of Default specified in
clause (6) above shall have occurred and be continuing, such declaration of
acceleration of the notes and such Event of Default shall be automatically
annulled and rescinded and be of no further effect if the Indebtedness that is
the subject of such Event of Default has been discharged or paid in full or such
Event of Default shall have been cured or waived by holders of such Indebtedness
and if such Indebtedness or such Event or Default shall have been accelerated,
then the holders thereof have rescinded their declaration of acceleration in
respect of such Indebtedness and written notice of such discharge, cure or
waiver and rescission, as the case may be, shall have been given to the Trustee
within 60 days after such declaration of acceleration in respect of the notes by
the Company or by the requisite holders of such Indebtedness or a trustee,
fiduciary or agent for such holders or other evidence satisfactory to the
Company of such events is provided to the Trustee and no other Event of Default
shall be occurred which has not been cured or waived during such 60-day period.
Any such declaration with respect to the notes may be annulled by the
Holders of a majority in aggregate principal amount of the outstanding notes
upon the conditions provided in the indenture. For information as to waiver of
defaults, see "Modification and Waiver" below.
The indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the notes
outstanding, give the Holders of the notes thereof notice of all uncured
Defaults or Events of Default thereunder known to it. Except in the case of a
Default or an Event of Default in payment with respect to the notes or a Default
or Event of Default in complying with "Certain Covenants -- Merger, Sale of
Assets, etc." above, the Trustee may withhold such notice if and so long as a
committee of its trust officers in good faith determines that the withholding of
such notice is in the interest of the Holders of the notes.
No Holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default thereunder and unless the Holders of at least 25% of the aggregate
principal amount of the outstanding notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as the
Trustee, and the Trustee shall have not have received from the Holders of a
majority in aggregate principal amount of such outstanding notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations
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do not apply to a suit instituted by a Holder of such a note for enforcement of
payment of the principal of and premium, if any, or interest on such note on or
after the respective due dates expressed in such note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by it of certain of its obligations under the indenture
and as to any default in such performance. The Company is also required to
notify the Trustee within 30 days of becoming aware of a Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any of its Affiliates, as such, shall have any liability for any obligations
of the Company or any of its Affiliates under the notes or the indenture or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The indenture will be discharged and the Company's and the Guarantors'
substantive obligations in respect of the notes will cease when either:
(1) (A) all notes theretofore authenticated and delivered have been
delivered to the Trustee for cancellation or (B) all notes not theretofore
delivered to the Trustee for cancellation (i) have become due and payable,
(ii) will become due and payable at their Stated Maturity within one year
or (iii) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense of, the Company;
(2) the Company has deposited or caused to be deposited with the
Trustee, in trust for the benefit of the holders of the notes, all sums
payable by it on account of principal of, premium, if any, and interest on
all notes (except lost, stolen or destroyed notes which have been replaced
or paid) or otherwise, together with irrevocable instructions from the
Company directing the Trustee to apply such funds to the payment thereof at
the Stated Maturity or redemption date, as the case may be; and
(3) complying with certain other requirements set forth in the
indenture.
In addition to the foregoing, the Company may, provided that no Default or
Event of Default has occurred and is continuing or would arise therefrom (or,
with respect to a Default or Event of Default specified in clause (8) of "Events
of Default" above, occurs at any time on or prior to the 91st calendar day after
the date of the Company deposits with the Trustee all sums payable by it on
account of principal of, premium, if any, and interest on all notes or otherwise
(it being understood that this condition shall not be deemed satisfied until
after such 91st day)) under the indenture and provided that no default under any
Senior Indebtedness would result therefrom, terminate its and the Guarantors'
substantive obligations in respect of the notes (except for its obligations to
pay the principal of (and premium, if any, on) and the interest on the notes and
the Guarantors' Guaranty thereof) by:
(1) depositing with the Trustee, under the terms of an irrevocable
trust agreement, money or United States Government Obligations sufficient
to pay all remaining Indebtedness on such notes;
(2) delivering to the Trustee either an Opinion of Counsel or a ruling
directed to the Trustee from the Internal Revenue Service to the effect
that the Holders of the notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and termination of
obligations; and
(3) complying with certain other requirements set forth in the
indenture.
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In addition, the Company may, provided that no Default or Event of Default
has occurred and is continuing or would arise therefrom (or, with respect to a
Default or Event of Default specified in clause (8) of "Events of Default"
above, occurs at any time on or prior to the 91st calendar day after the date of
such deposit (it being understood that this condition shall not be deemed
satisfied until after such 91st day)) under the indenture and provided that no
default under any Senior Indebtedness would result therefrom, terminate all of
its and the Guarantors' substantive obligations in respect of the notes
(including its obligations to pay the principal of (and premium, if any, on) and
interest on the notes and the Guarantors' Guaranty thereof) by:
(1) depositing with the Trustee, under the terms of an irrevocable
trust agreement, money or United States Government Obligations sufficient
to pay all remaining Indebtedness on the notes;
(2) delivering to the Trustee either a ruling directed to the Trustee
from the Internal Revenue Service to the effect that the Holders of the
notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and termination of obligations or an
Opinion of Counsel addressed to the Trustee based upon such a ruling or
based on a change in the applicable federal tax law since the date of the
indenture, to such effect; and
(3) complying with certain other requirements set forth in the
indenture.
The Company may make an irrevocable deposit pursuant to these provisions
only if at such time it is not prohibited from doing so under the subordination
provisions of the indenture or certain covenants in the Senior Indebtedness and
the Company has delivered to the Trustee and any Paying Agent an Officers'
Certificate to that effect.
GOVERNING LAW
The indenture, the notes and the Guaranties will be governed by the laws of
the State of New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of the indenture may be made by the Company,
the Guarantors, and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the outstanding notes (including consents obtained
in connection with a tender offer or exchange offer for the notes); provided,
however, that no such modification or amendment to the indenture may, without
the consent of the Holder of each note affected thereby:
(1) change the maturity of the principal of or any installment of
interest on any such Note or alter the optional redemption or repurchase
provisions of any such note or the indenture in a manner materially adverse
to the Holders of the notes;
(2) reduce the principal amount (or the premium) of any such note;
(3) reduce the rate of or extend the time for payment of interest on
any such note;
(4) change the currency of payment of principal of (or premium) or
interest on any such note;
(5) impair the right of the Holders of notes to institute suit for the
enforcement of any payment on or with respect to any such note or any
Guaranty in respect thereof;
(6) reduce the percentage of the principal amount of outstanding notes
necessary for amendment to or waiver of compliance with any provision of
the indenture or the notes or for waiver of any Default in respect thereof;
(7) waive a Default in the payment of principal of, interest on, or
redemption payment with respect to, the notes (except a rescission of
acceleration of the notes by the Holders thereof as provided in the
indenture and a waiver of the payment default that resulted from such
acceleration);
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(8) modify the ranking or priority of any note or the Guaranty in
respect thereof of any Guarantor or modify the definition of Senior
Indebtedness or Guarantor Senior Indebtedness or amend or modify the
subordination provisions of the indenture, in any case in any manner
adverse to the Holders of the notes;
(9) modify the provisions of any covenant (or the related definitions)
in the indenture requiring the Company to make an Offer to Purchase
following an event or circumstance which may give rise to the requirement
to make an Offer to Purchase in a manner materially adverse to the Holders
of notes affected thereby otherwise than in accordance with the indenture;
or
(10) release any Guarantor from any of its obligations under its
Guaranty or the indenture otherwise than in accordance with the indenture.
The Holders of a majority in aggregate principal amount of the outstanding
notes, on behalf of all Holders of notes, may waive compliance by the Company
and the Guarantors with certain restrictive provisions of the indenture. Subject
to certain rights of the Trustee, as provided in the indenture, the Holders of a
majority in aggregate principal amount of the notes, on behalf of all Holders,
may waive any past default under the indenture (including any such waiver
obtained in connection with a tender offer or exchange offer for the notes),
except a default in the payment of principal, premium or interest or a default
arising from failure to purchase any notes tendered pursuant to an Offer to
Purchase, or a default in respect of a provision that under the indenture cannot
be modified or amended without the consent of the Holder of each note that is
affected.
THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the indenture. During the existence
of a Default, the Trustee will exercise such rights and powers vested in it
under the indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The indenture contains limitations on the rights of the Trustee, should it
become a creditor of the Company, any Guarantor or any other obligor upon the
notes, to obtain payment of claims in certain cases or to realize on certain
property received by it in respect of any such claim as security or otherwise.
The Trustee is permitted to engage in other transactions with the Company or an
Affiliate of the Company; provided, however, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full definition of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accounts Receivable Subsidiary" means any Subsidiary of the Company that
is, directly or indirectly, wholly owned by the Company (other than director
qualifying shares) and engaged solely in (1) purchasing, financing and
collecting accounts receivable obligations of customers of the Company or its
Subsidiaries, (2) the sale or financing of such accounts receivable or interest
therein and (3) other activities incident thereto.
"Acquired Indebtedness" means Indebtedness of a Person (1) assumed in
connection with an Acquisition from such Person or (2) existing at the time such
Person becomes a Restricted Subsidiary or is merged or consolidated with or into
the Company or any Restricted Subsidiary.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (1) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company
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or any Restricted Subsidiary to any other Person, or any acquisition or purchase
of Equity Interests of any other Person by the Company or any Restricted
Subsidiary, in either case pursuant to which such Person shall become a
Restricted Subsidiary or shall be consolidated with or merged into the Company
or any Restricted Subsidiary or (2) any acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute substantially
all of an operating unit or line of business of such Person or which is
otherwise outside of the ordinary course of business.
"Additional Interest" has the meaning provided in the Registration Rights
Agreement.
"AEA" means AEA Investors Inc., a Delaware corporation, or any legal
successor thereto as a result of a reorganization thereof that does not involve
any change in control thereof.
"Affiliate" of any specified person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that (i) only for purposes of compliance with the covenant described under
"Certain Covenants -- Transactions with Affiliates", beneficial ownership of
15.0% or more of the then outstanding Equity Interests of a Person shall be
deemed to be control; and (ii) no individual, other than a director of the
Company or an officer of the Company with a policy making function, shall be
deemed an Affiliate of the Company or any of its Subsidiaries, solely by reason
of such individual's employment, position or responsibilities by or with respect
to the Company or any of its Subsidiaries.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Company or a Wholly Owned Restricted Subsidiary, in one
transaction or a series of related transactions, of:
(1) any Equity Interest of any Restricted Subsidiary;
(2) any material license, franchise or other authorization of the
Company or any Restricted Subsidiary;
(3) any assets of the Company or any Restricted Subsidiary which
constitute substantially all of an operating unit or line of business of
the Company or any Restricted Subsidiary; or
(4) any other property or asset of the Company or any Restricted
Subsidiary outside of the ordinary course of business (including the
receipt of proceeds paid on account of the loss of or damage to any
property or asset and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceedings).
For the purposes of this definition, the term "Asset Sale" shall not
include:
(A) any transaction consummated in compliance with "Certain
Covenants -- Merger, Sale of Assets, etc." above and the creation of any
Lien not prohibited by "Certain Covenants -- Limitation on Liens" above;
provided, however, that any transaction consummated in compliance with
"Certain Covenants -- Merger, Sale of Assets, etc." above involving a sale,
conveyance, assignment, transfer, lease or other disposal of less than all
of the properties or assets of the Company shall be deemed to be an Asset
Sale with respect to the properties or assets of the Company and the
Restricted Subsidiaries that are not so sold, conveyed, assigned,
transferred, leased or otherwise disposed of in such transaction;
(B) sales of property or equipment that has become worn out, obsolete
or damaged or otherwise unsuitable for use in connection with the business
of the Company or any Restricted Subsidiary;
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(C) any transaction consummated in compliance with "Certain
Covenants -- Limitation on Restricted Payments" above;
(D) sales of accounts receivable for cash at fair market value;
(E) any sale, conveyance or transfer of accounts receivable in the
ordinary course of business to an Accounts Receivable Subsidiary or to
third parties that are not Affiliates of the Company or any Subsidiary of
the Company;
(F) any transaction or series of related transactions involving assets
with a Fair Market Value not in excess of $500,000;
(G) the sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment, or the proceeds of such sale are reasonably promptly applied to
the purchase price of similar replacement equipment;
(H) in the ordinary course of business, the license of patents,
trademarks, copyrights and know-how to third Persons;
(I) a Restricted Payment that is permitted by the "Limitation on
Restricted Payments" covenant; and
(J) the sale, conveyance, transfer or disposition by the Company or a
Restricted Subsidiary (1) constituting or pursuant to a Permitted Lien or
(2) of Equity Interests in an Unrestricted Subsidiary.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Business Day" means a day that is not a Saturday, a Sunday or a day on
which banking institutions in New York, New York or the State of Illinois are
not required to be open.
"Capital Expenditure Indebtedness" means any Indebtedness of the Company or
any Restricted Subsidiary (whether consisting of Capital Lease Obligations,
Purchase Money Indebtedness or otherwise) incurred (x) for the purpose of
refinancing all or any part of the purchase price, cost of construction or
improvement of any fixed or capital assets used in a Related Business and (y) no
later than 180 days after the date of such acquisition or the date of completion
of such construction or improvement.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Cash Equivalents" means:
(1) U.S. dollars and any other currency that is convertible into U.S.
dollars without legal restrictions and which is utilized by the Company or
any of the Restricted Subsidiaries in the ordinary course of its business;
(2) securities issued or directly and fully guarantied or insured by
the U.S. government or any agency or instrumentality thereof having
maturities of not more than one year from the date of acquisition;
(3) certificates of deposit and time deposits with maturities of one
year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding one year and overnight bank deposits, in each case
with any commercial bank having capital and surplus in excess of $500.0
million (or the foreign currency equivalent thereof);
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
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(5) commercial paper rated P-1, A-1 or the equivalent thereof by
Moody's Investors Service, Inc. or Standard & Poor's Ratings Group,
respectively, and in each case maturing within one year after the date of
acquisition;
(6) any money market deposit accounts issued or offered by a financial
institution meeting the qualifications specified in clause (3) above;
(7) investments in funds investing primarily in investments of the
type (1) through (6); and
(8) other short-term investments utilized by Foreign Subsidiaries in
accordance with normal investment practices for cash management not
exceeding a dollar equivalent amount of $1,000,000 in the aggregate
principal amount outstanding at any time.
"Change of Control" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company):
(1) any Person (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(1)
under the Exchange Act), other than one or more Permitted Holders, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total voting power
of the then outstanding Voting Equity Interests of the Company or, so long
as Holdings owns a majority of the Voting Equity Interests of the Company,
Holdings (or, for so long as Holdings is a limited liability company, its
managing member);
(2) the Company consolidates with, or merges with or into, another
Person (other than a Guarantor which is a Wholly Owned Restricted
Subsidiary) or the Company or the Restricted Subsidiaries sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of
the assets of the Company and the Restricted Subsidiaries (determined on a
consolidated basis) to any Person (other than the Company or a Guarantor
which is a Wholly Owned Restricted Subsidiary), other than any such
transaction where immediately after such transaction the Person or Persons
that "beneficially owned" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time) immediately prior to such transaction, directly or indirectly, the
then outstanding Voting Equity Interests of the Company "beneficially own"
(as so determined), directly or indirectly, a majority of the total voting
power of the then outstanding Voting Equity Interests of the surviving or
transferee Person; or
(3) following the first public offering of Voting Equity Interests of
the Company, during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of a majority of the directors of the
Company then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office.
"Change of Control Date" has the meaning set forth under "Offer to Purchase
upon Change of Control" above.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four quarter
period of the most recent four consecutive fiscal
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quarters ending prior to the date of such determination (the "Four Quarter
Period") to (ii) Consolidated Interest Expense for such Four Quarter Period;
provided, however, that:
(1) if the Company or any Restricted Subsidiary has incurred any
Indebtedness since the beginning of such Four Quarter Period that remains
outstanding on such date of determination or if the transaction giving rise
to the need to calculate the Consolidated Coverage Ratio is an Incurrence
of Indebtedness, Consolidated EBITDA and Consolidated Interest Expense for
such Four Quarter Period shall be calculated after giving effect on a pro
forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such Four Quarter Period and the discharge of any other
Indebtedness repaid, repurchased or otherwise discharged with the proceeds
of such new Indebtedness as if such discharge had occurred on the first day
of such Four Quarter Period,
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased, retired or otherwise discharged (a "Discharge") any
Indebtedness since the beginning of such Four Quarter Period that no longer
remains outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio
involves a Discharge of Indebtedness, Consolidated EBITDA and Consolidated
Interest Expense for such Four Quarter Period shall be calculated after
giving effect on a pro forma basis to such Discharge of Indebtedness,
including with the proceeds of any new Indebtedness, as if such Discharge
(and Incurrence of new Indebtedness, if any) had occurred on the first day
of such Four Quarter Period,
(3) if since the beginning of such Four Quarter Period the Company or
any Restricted Subsidiary shall have disposed of any business or group of
assets in any Asset Sale, the Consolidated EBITDA for such Four Quarter
Period shall be reduced by an amount equal to the Consolidated EBITDA (if
positive) directly attributable to the assets that are the subject of such
Asset Sale for such Four Quarter Period or increased by an amount equal to
the Consolidated EBITDA (if negative) directly attributable thereto for
such Four Quarter Period and Consolidated Interest Expense for such Four
Quarter Period shall be reduced by an amount equal to the Consolidated
Interest Expense directly attributable to any Indebtedness of the Company
or any Restricted Subsidiary repaid, repurchased or otherwise discharged
with respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Sale for such Four Quarter Period (or, if the
Equity Interests of any Restricted Subsidiary are sold, the Consolidated
Interest Expense for such Four Quarter Period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale),
(4) if since the beginning of such Four Quarter Period the Company or
any Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person that becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, which constitutes all or substantially
all of an operating unit of a business, Consolidated EBITDA and
Consolidated Interest Expense for such Four Quarter Period shall be
calculated after giving pro forma effect thereto (including the Incurrence
of any Indebtedness) as if such Investment or acquisition occurred on the
first day of such Four Quarter Period and
(5) if since the beginning of such Four Quarter Period any Person
(that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
Four Quarter Period) shall have made any Asset Sale or any Investment or
acquisition of assets that would have required an adjustment pursuant to
clause (3) or (4) above if made by the Company or a Restricted Subsidiary
during such Four Quarter Period, Consolidated EBITDA and Consolidated
Interest Expense for such Four Quarter Period shall be calculated after
giving pro forma effect thereto as if such Asset Sale, Investment or
acquisition of assets occurred on, with respect to any Investment or
acquisition, the first day of such Four Quarter Period and, with respect to
any Asset Sale, the day prior to the first day of such Four Quarter Period.
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For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets, the amount of income or earnings and any cost
savings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any agreement under which Hedging Obligations relating to interest are
outstanding applicable to such Indebtedness if such agreement under which such
Hedging Obligations are outstanding has a remaining term as at the date of
determination in excess of 12 months).
"Consolidated EBITDA" means, for any period, the Consolidated Net Income
for such period, minus any non-cash item increasing Consolidated Net Income
during such period, plus the following to the extent deducted in calculating
such Consolidated Net Income:
(1) Consolidated Income Tax Expense for such period;
(2) Consolidated Interest Expense for such period;
(3) depreciation expense for such period;
(4) amortization expense for such period; and
(5) all other non-cash items reducing Consolidated Net Income for such
period (other than any non-cash item requiring an accrual or a reserve for
cash disbursements in any future period (other than non-cash, non-recurring
items related to restructuring operations (including severance payments) of
the Company or any Restricted Subsidiary ("restructuring charges");
provided that any cash disbursements relating to any such restructuring
charges shall (notwithstanding GAAP or any other provision of the
indenture) without duplication, reduce Consolidated EBITDA when made)).
"Consolidated Income Tax Expense" means, with respect to the Company for
any period, the provision for Federal, state, local and foreign income taxes
payable by the Company and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company for any
period, without duplication, the sum of:
(1) the interest expense of the Company and the Restricted
Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) the net cost under
Hedging Obligations relating to interest, (b) the interest portion of any
deferred payment obligation, (c) all commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers' acceptance
financing and (d) all capitalized interest and all accrued interest, but
excluding (I) amortization of fees and expenses incurred in connection with
Company entering into a new credit agreement at the time of the acquisition
by Holdings of approximately 75% of the Company's capital stock or the
offering of the notes, (II) interest expense on deferred compensation or
customer deposits and (III) amortization of deferred financing costs,
discounts and other non-cash interest expense;
(2) the interest component of Capital Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Company and the Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP; and
(3) dividends and distributions in respect of Disqualified Equity
Interests of the Company (other than dividends or distributions consisting
solely of Qualified Equity Interests) during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Leverage Ratio" means, on any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Company and the
Restricted Subsidiaries on a consolidated basis
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outstanding on such date to (ii) the aggregate amount of Consolidated EBITDA for
the then most recent Four Quarter Period; provided, however, that
(1) if since the beginning of such Four Quarter Period the Company or
any Restricted Subsidiary shall have disposed of any business or group of
assets in any Asset Sale, the Consolidated EBITDA for such Four Quarter
Period shall be reduced by an amount equal to the Consolidated EBITDA (if
positive) directly attributable to the assets that are the subject of such
Asset Sale for such Four Quarter Period or increased by an amount equal to
the Consolidated EBITDA (if negative) directly attributable thereto for
such Four Quarter Period,
(2) if since the beginning of such Four Quarter Period the Company or
any Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person that becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, which constitutes all or substantially
all of an operating unit of a business, Consolidated EBITDA for such Four
Quarter Period shall be calculated after giving pro forma effect thereto as
if such Investment or acquisition occurred on the first day of such Four
Quarter Period and
(3) if since the beginning of such Four Quarter Period any Person
(that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
Four Quarter Period) shall have made any Asset Sale or any Investment or
acquisition of assets that would have required an adjustment pursuant to
clause (1) or (2) above if made by the Company or a Restricted Subsidiary
during such Four Quarter Period, Consolidated EBITDA for such Four Quarter
Period shall be calculated after giving pro forma effect thereto as if such
Asset Sale, Investment or acquisition of assets occurred on, with respect
to any Investment or acquisition, the first day of such Four Quarter Period
and, with respect to any Asset Sale, the day prior to the first day of such
Four Quarter period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings and any cost savings
relating thereto the pro forma calculations shall be determined in good faith by
a responsible financial or accounting officer of the Company.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of the Company and the Restricted Subsidiaries; provided, however,
that there shall not be included in such Consolidated Net Income:
(1) any net income (loss) of any Person if such Person is not the
Company or a Restricted Subsidiary, except that subject to the limitations
contained in clause (4) below, the Company's equity in the net income of
any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in
clause (3) below);
(2) any net income (loss) of any person acquired by the Company or a
Restricted Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition;
(3) any net income (loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company except that
subject to the limitations contained in (4) below, the Company's equity in
the net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
that could have been distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a dividend
(subject, in the case of a dividend that could have been made to another
Restricted Subsidiary, to the limitation contained in this clause);
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(4) any gain or loss realized upon the sale or other disposition of
any asset of the Company or the Restricted Subsidiaries (including pursuant
to any sale/leaseback transaction) that is not sold or otherwise disposed
of in the ordinary course of business and any gain or loss realized upon
the sale or other disposition of any Equity Interests of any Person;
(5) any extraordinary gain or loss;
(6) the cumulative effect of a change in accounting principles;
(7) all deferred financing costs written off in connection with the
early extinguishment of Indebtedness under the Company's former credit
agreement that was repaid and terminated on December 30, 1999, the
Company's 9 1/2% notes due 2007, the Senior Credit Facility or the notes as
recorded on the statement of operations in accordance with GAAP;
(8) non-recurring charges related to any Acquisition by the Company or
any Restricted Subsidiary occurring after the Issue Date as recorded on the
statement of operations in accordance with GAAP;
(9) non-cash, non-recurring charges as recorded on the statement of
operations in accordance with GAAP;
(10) unrealized gains or losses in respect of Hedge Agreements
permitted by clause (6) of the "Limitation on Indebtedness" covenant as
recorded on the statement of operations in accordance with GAAP; and
(11) unrealized foreign currency transaction gains or losses in
respect of Indebtedness of any Person denominated in a currency other than
the functional currency of such Person and permitted to be Incurred under
the "Limitation on Indebtedness covenant as recorded on the statement of
operations in accordance with GAAP;
provided that in the case of clauses (7), (8), (9), (10) and (11) such amount or
charge shall be net of any tax or tax benefit to the Company or any of its
consolidated Subsidiaries resulting therefrom.
"Consolidated Net Tangible Assets" means, with respect to any Person, the
total assets minus unamortized deferred tax assets, goodwill, patents,
trademarks, service marks, trade names, copyrights and all other items which
would be treated as intangibles, in each case on the most recent consolidated
balance sheet of such Person and its Restricted Subsidiaries prepared in
accordance with GAAP.
"Contingent Note" means the $7.5 million subordinated note issued by the
Holdings to Sovereign Specialty Chemicals, L.P., payable upon the acquisition of
all or substantially all of the assets described therein and upon the conditions
described therein as in effect on the Issue Date.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (1) any Indebtedness outstanding
under the Senior Credit Facility and (2) any other Senior Indebtedness which, at
the time of determination, has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least $15.0
million, if the instrument governing such Senior Indebtedness expressly states
that such Indebtedness is "Designated Senior Indebtedness" for purposes of the
indenture and a Board Resolution setting forth such designation by the Company
has been filed with the Trustee.
"Designation" has the meaning set forth under "Certain
Covenants -- Designation of Unrestricted Subsidiaries" above.
"Designation Amount" has the meaning set forth under "Certain
Covenants -- Designation of Unrestricted Subsidiaries" above.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale,
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assignment, transfer, lease, conveyance or other disposition of all or
substantially all of such Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder thereof), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof, in
whole or in part, or exchangeable into Indebtedness on or prior to the maturity
date of the notes; provided that any Equity Interest that would not constitute
Disqualified Equity Interests but for provisions thereof giving holders thereof
the right to require the issuer to purchase or redeem such Equity Interests upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
maturity date of the notes shall not constitute Disqualified Equity Interests if
(1) the "asset sale" or "change of control" provisions applicable to such Equity
Interest are not more favorable in any respect to the holders of such Equity
Interests than the terms applicable to the notes and described under the
captions "Offer to Purchase upon Change of Control" and "Certain
Covenants -- Disposition of Proceeds of Asset Sales" and (2) any such
requirement only becomes operative after compliance with such terms applicable
to the notes, including the purchase of any notes tendered in respect of any
Offer.
"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, in
such Person, including any Preferred Equity Interests.
"Equity Offering" means, with respect to the Company, (1) an underwritten
primary public or private offering of Qualified Equity Interests of the Company
or (2) a purchase of Qualified Equity Interests of the Company which results in
net cash proceeds to the Company of at least $25.0 million by any Person which
(A) has a common equity market capitalization in excess of $500 million and (B)
is engaged in a Related Business.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Existing Indebtedness" means any Indebtedness of the Company and its
Restricted Subsidiaries in existence on the Issue Date until such amounts are
repaid; provided that Existing Indebtedness shall not include Indebtedness
repurchased or repaid with the proceeds of the offering of the notes.
"Expiration Date" has the meaning set forth in the definition of "Offer to
Purchase" below.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction; provided, however, that the Fair Market
Value of any such asset or assets shall be determined conclusively by the Board
of Directors of the Company acting in good faith, and shall be evidenced by
resolutions of the Board of Directors of the Company delivered to the Trustee.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company that is
not organized under the laws of the United States of America or any state
thereof or the District of Columbia.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Coverage Ratio" above.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"Guarantor" means (1) each of the Subsidiaries of the Company (other than
Foreign Subsidiaries) as of the Issue Date and their respective successors, and
(2) each other Restricted Subsidiary, formed,
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created or acquired before or after the Issue Date, required to become a
Guarantor after the Issue Date pursuant to "Guaranties of the Notes" above.
"Guarantor Senior Indebtedness" means, with respect to any Guarantor, at
any date:
(1) all Obligations of such Guarantor under the Senior Credit
Facility;
(2) all Hedging Obligations of such Guarantor;
(3) to the extent that it may constitute Indebtedness, Obligations of
such Guarantor under stand-by letters of credit; and
(4) all other Indebtedness of such Guarantor for borrowed money,
including principal, premium, if any, and interest (including Post-Petition
Interest) on such Indebtedness unless the instrument under which such
Indebtedness of such Guarantor for money borrowed is Incurred expressly
provides that such Indebtedness for money borrowed is not senior or
superior in right of payment to such Guarantor's Guaranty of the notes, and
all renewals, extensions, modifications, amendments or refinancings
thereof.
Notwithstanding the foregoing, Guarantor Senior Indebtedness shall not
include:
(A) to the extent that it may constitute Indebtedness, any Obligation
for federal, state, local or other taxes;
(B) any Indebtedness among or between such Guarantor and any
Subsidiary of such Guarantor;
(C) to the extent that it may constitute Indebtedness, any Obligation
in respect of any trade payable Incurred for the purchase of goods or
materials, or for services obtained, in the ordinary course of business;
(D) Indebtedness evidenced by such Guarantor's Guaranty of the notes;
(E) Indebtedness of such Guarantor that is expressly subordinate or
junior in right of payment to any other Indebtedness of such Guarantor;
(F) to the extent that it may constitute Indebtedness, any obligation
owing under leases (other than Capitalized Lease Obligations) or management
agreements; and
(G) any obligation that by operation of law is subordinate to any
general unsecured obligations of such Guarantor.
"guaranty" means, as applied to any obligation, (1) a guaranty (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (2) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit. A guaranty shall include, without
limitation, any agreement to maintain or preserve any other Person's financial
condition or to cause any other Person to achieve certain levels of operating
results.
"Guaranty" means the guaranty of the notes by each Guarantor under the
indenture.
"Hedging Obligations" means, with respect to any Person, the Obligations of
such Person under (1) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (2) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates and (3) foreign currency or commodity hedge, exchange or similar
protection agreements (agreements referred to in this definition being referred
to herein as "Hedging Agreements").
"Holder" means the registered holder of any note.
"Holdings" means SSCI Investors LLC, a Delaware limited liability company,
and its successors.
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"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guaranty or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of any Acquired Person or any of its
Subsidiaries existing at the time such Acquired Person becomes a Restricted
Subsidiary (or is merged into or consolidated with the Company or any Restricted
Subsidiary), whether or not such Indebtedness was Incurred in connection with,
as a result of, or in contemplation of, such Acquired Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Company or
any Restricted Subsidiary), shall be deemed Incurred at the time any such
Acquired Person becomes a Restricted Subsidiary or merges into or consolidates
with the Company or any Restricted Subsidiary.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent:
(1) every obligation of such Person for money borrowed;
(2) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses;
(3) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person;
(4) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding (A) earnout or other
similar obligations until such time as the amount of such obligation is
capable of being determined and its payment is probable, (B) trade accounts
payable incurred in the ordinary course of business and payable in
accordance with industry practices, or (C) other accrued liabilities
arising in the ordinary course of business which are not overdue or which
are being contested in good faith);
(5) every Capital Lease Obligation of such Person;
(6) every net obligation under Hedging Agreements of such Person;
(7) every obligation of the type referred to in clauses (1) through
(6) of another Person and all dividends of another Person the payment of
which, in either case, such Person has guarantied or is responsible or
liable for, directly or indirectly, as obligor, guarantor or otherwise; and
(8) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (1) through (7) above.
Indebtedness:
(A) shall never be calculated taking into account any cash and cash
equivalents held by such Person;
(B) shall not include obligations of any Person (1) arising from the
honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently drawn against insufficient funds in the
ordinary course of business, provided that such obligations are
extinguished within two Business Days of their incurrence, (2) resulting
from the endorsement of negotiable instruments for collection in the
ordinary course of business and consistent with past business practices and
(3) under stand-by letters of credit to the extent collateralized by cash
or Cash Equivalents;
(C) which provides that an amount less than the principal amount
thereof shall be due upon any declaration of acceleration thereof shall be
deemed to be incurred or outstanding in an amount equal to the accreted
value thereof at the date of determination;
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(D) shall include the liquidation preference and any mandatory
redemption payment obligations in respect of any Disqualified Equity
Interests of the Company or any Preferred Equity Interest of any Restricted
Subsidiary; and
(E) shall not include obligations under performance bonds, performance
guaranties, surety bonds and appeal bonds, letters of credit or similar
obligations, incurred in the ordinary course of business.
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness denominated in a foreign currency,
the U.S. dollar-equivalent principal amount of such Indebtedness Incurred
pursuant thereto shall be calculated based on the relevant currency exchange
rate in effect on the date that such Indebtedness was Incurred if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-denominated restriction to be exceeded if calculated at the relevant
currency exchange rate in effect on the date of such refinancing, such U.S.
dollar-denominated restriction shall be deemed not to have been exceeded so long
as the principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. The principal amount of
any Indebtedness Incurred to refinance other Indebtedness, if Incurred in a
different currency from the Indebtedness being refinanced, shall be calculated
based on the currency exchange rate applicable to the currencies in which such
respective Indebtedness is denominated that is in effect on the date of such
refinancing.
In addition, for the purpose of avoiding duplication in calculating the
outstanding principal amount of Indebtedness for purposes of the "Limitation on
Indebtedness" covenant of the indenture, Indebtedness arising solely by reason
of the existence of a Lien permitted under the "Limitation on Liens" covenant of
the indenture to secure other Indebtedness permitted to be Incurred under the
"Limitation on Indebtedness" covenant of the indenture will not be considered to
be incremental Indebtedness.
"Independent Financial Advisor" means a nationally recognized accounting,
appraisal, investment banking firm or consultant that is, in the judgment of the
Company's Board of Directors, qualified to perform the task for which it has
been engaged (1) which does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in the Company
and (2) which, in the judgment of the Board of Directors of the Company, is
otherwise independent and qualified to perform the task for which it is to be
engaged.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"interest" means, with respect to the notes, the sum of any cash interest
and any Additional Interest on the notes.
"Investment" means, with respect to any Person, any direct or indirect
loan, advance, guaranty or other extension of credit or capital contribution to
(by means of transfers of cash or other property or assets to others or payments
for property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any other Person. The amount
of any Investment shall be the original cost of such Investment, plus the cost
of all additions thereto, and minus the amount of any portion of such Investment
repaid to such Person in cash as a repayment of principal or a return of
capital, as the case may be, but without any other adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment. In determining the amount of any Investment involving a transfer of
any property or asset other than cash, such property shall be valued at its fair
market value at the time of such transfer, as determined in good faith by the
Board of Directors (or comparable body) of the Person making such transfer.
Investments shall not include loans and advances made to employees to the extent
such loan or advance is used to purchase Qualified Equity Interests from the
Company (provided that any such purchase shall be excluded from clause (III)(B)
of the first paragraph of "-- Certain Covenants --
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Limitation on Restricted Payments" until such loan or advance has been repaid in
cash by such employee).
"Issue Date" means the original issue date of the notes.
"Junior Subordinated Seller Notes" means the $3.0 million aggregate
principal amount 8% Note due 2002 issued by the Company held by Laporte plc, the
$900,000 aggregate principal amount Note due 2000 issued by Pierce & Stevens
held by K.J. Quinn & Co., Inc., and the related obligation to pay $100,000 to
K.J. Quinn & Co. Inc. under the noncompetition agreement entered into by K.J.
Quinn & Co., Inc.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Management Agreement" means the Management Agreement dated as of March 9,
2000, between AEA and the Company, as amended or renewed to the extent permitted
under the indenture.
"Maturity Date" means March 15, 2010.
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or
Cash Equivalents received by the Company or any Restricted Subsidiary in respect
of any Asset Sale, including all cash or Cash Equivalents received upon any
sale, liquidation or other exchange of proceeds of Asset Sales received in a
form other than cash or Cash Equivalents, net of:
(1) the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof;
(2) taxes paid or payable as a result thereof;
(3) amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such
Asset Sale;
(4) amounts deemed, in good faith, appropriate by the Board of
Directors of the Company to be provided as a reserve, in accordance with
GAAP, against any liabilities associated with such assets which are the
subject of such Asset Sale (provided that the amount of any such reserves
shall be deemed to constitute Net Cash Proceeds at the time such reserves
shall have been released or are not otherwise required to be retained as a
reserve); and
(5) cash payments attributable to Persons owning an interest in the
assets subject to the Asset Sale.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Offer" has the meaning set forth in the definition of "Offer to Purchase"
below.
"Offer to Purchase" means a written offer (the "Offer") sent by or on
behalf of the Company by first-class mail, postage prepaid, to each Holder at
his address appearing in the register for the notes on the date of the Offer
offering to purchase up to the principal amount of notes specified in such Offer
at the purchase price specified in such Offer (as determined pursuant to the
indenture). Unless otherwise required by applicable law, the Offer shall specify
an expiration date (the "Expiration Date") of the Offer to Purchase, which shall
be not less than 20 Business Days nor more than 60 days after the date of such
Offer, and a settlement date (the "Purchase Date") for purchase of notes to
occur no later than five Business Days after the Expiration Date. The Company
shall notify the Trustee at least 5 Business Days (or such shorter period as is
acceptable to the Trustee) prior to the mailing of the Offer of the Company's
obligation to make an Offer to Purchase, and the Offer shall be mailed by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company. The Offer shall
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contain all the information required by applicable law to be included therein.
The Offer shall also contain information concerning the business of the Company
and its Subsidiaries which the Company in good faith believes will enable such
Holders to make an informed decision with respect to the Offer to Purchase,
which at a minimum will include:
(1) the most recent annual and quarterly financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the documents required to be filed with the
Trustee pursuant to the indenture (which requirements may be satisfied by
delivery of such documents together with the Offer);
(2) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred
to in clause (1) (including a description of the events requiring the
Company to make the Offer to Purchase);
(3) if applicable, appropriate pro forma financial information
concerning the Offer to Purchase and the events requiring the Company to
make the Offer to Purchase; and
(4) any other information required by applicable law to be included
therein.
The Offer shall contain all instructions and materials necessary to enable
such Holders to tender notes pursuant to the Offer to Purchase. The Offer shall
also state:
(1) the Section of the indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding notes offered to
be purchased by the Company pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such amount has been determined
pursuant to the Section of the indenture requiring the Offer to Purchase)
(the "Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of notes accepted for payment (as specified
pursuant to the indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the notes
registered in the name of such Holder and that any portion of a note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(6) the place or places where notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each Holder electing to tender all or any portion of a note
pursuant to the Offer to Purchase will be required to surrender such note
at the place or places specified in the Offer prior to the close of
business on the Expiration Date (such note being, if the Company or the
Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Trustee
duly executed by, the Holder thereof or his attorney duly authorized in
writing);
(10) that Holders will be entitled to withdraw all or any portion of
notes tendered if the Company (or its Paying Agent) receives, not later
than the close of business on the Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the note the Holder tendered, the certificate number of
the note the Holder tendered and a statement that such Holder is
withdrawing all or a portion of his tender;
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(11) that (a) if notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such notes and (b)
if notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only notes in denominations of $1,000 principal
amount or integral multiples thereof shall be purchased); and
(12) that in the case of any Holder whose note is purchased only in
part, the Company shall execute and the Trustee shall authenticate and
deliver to the Holder of such note without service charge, an exchange note
or notes, of any authorized denomination as requested by such Holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
"Officer" means the Chairman, any Vice Chairman, the President, any Vice
President, the Chief Financial Officer, the Treasurer or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers or by
one Officer and any Assistant Treasurer or the Assistant Secretary of the
Company and which complies with the provisions of the indenture.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Pari Passu Debt" means Indebtedness of the Company or any Guarantor that
neither constitutes Senior Indebtedness or Guarantor Senior Indebtedness, as
applicable, or Subordinated Indebtedness.
"Pari Passu Debt Pro Rata Share" means the amount of the applicable Net
Cash Proceeds obtained by multiplying the amount of such Net Cash Proceeds by a
fraction, (1) the numerator of which is the aggregate accreted value and/or
principal amount, as the case may be, of all Pari Passu Debt outstanding at the
time of the applicable Asset Sale with respect to which the Company is required
to use Net Cash Proceeds to repay or make an offer to purchase or repay and (2)
the denominator of which is the sum of (a) the aggregate principal amount of all
notes outstanding at the time of the applicable Asset Sale and (b) the aggregate
principal amount or the aggregate accreted value, as the case may be, of all
Pari Passu Debt outstanding at the time of the applicable Offer to Purchase with
respect to which the Company is required to use the applicable Net Cash Proceeds
to offer to repay or make an offer to purchase or repay.
"Permitted Holder" means AEA and its current and future employees,
stockholders, directors and officers, Robert B. Covalt and the officers of the
Company, (i) trusts for the benefit of such Persons or the spouses, issue,
parents or other relatives of such Persons, (ii) entities controlling or
controlled by such Persons and (iii) in the event of the death of any such
individual Person, heirs or testamentary legatees of such Person.
"Permitted Indebtedness" has the meaning set forth in the second paragraph
of "Certain Covenants -- Limitation on Indebtedness" above.
"Permitted Investments" means:
(1) Cash Equivalents;
(2) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits;
(3) loans and advances to employees made in the ordinary course of
business not to exceed $2.0 million in the aggregate at any one time
outstanding;
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(4) Hedging Obligations;
(5) bonds, notes, debentures or other securities received as a result
of Asset Sales in compliance with "Certain Covenants -- Disposition of
Proceeds of Asset Sales" above and any "earn out" or similar right
permitted under "Certain Covenants -- Disposition of Proceeds of Asset
Sales";
(6) transactions with officers, directors and employees of the Company
or any Restricted Subsidiary entered into in the ordinary course of
business (including compensation, employee benefit or indemnity
arrangements with any such officer, director or employee) and consistent
with past business practices;
(7) Investments in existence or made pursuant to written commitments
existing as of the Issue Date and any amendment, extension, renewal or
modification thereof to the extent that any such amendment, extension,
renewal or modification complies with the terms of the indenture;
(8) any Investment to the extent that the consideration therefor
consists of Qualified Equity Interests of the Company;
(9) any Investment consisting of a guaranty by a Guarantor of Senior
Indebtedness or any guaranty permitted under clause (6) of the second
paragraph of "Limitation on Indebtedness" above;
(10) Investments in Persons primarily engaged in a Related Business in
an aggregate amount not to exceed $15.0 million;
(11) Investments in the form of the sale (on a "true sale"
non-recourse basis) or the servicing of receivables transferred from the
Company or any Restricted Subsidiary, or transfers of cash, to an Accounts
Receivable Subsidiary as a capital contribution or in exchange for
Indebtedness of such Accounts Receivable Subsidiary or cash, in each case
in the ordinary course of business;
(12) Investments consisting of non-cash consideration received in the
form of securities, notes or similar obligations in connection with
dispositions of obsolete or worn out assets permitted pursuant to the
indenture not at any time exceeding, in the case of all such notes and
similar obligations, the amount of $5 million;
(13) advances, loans or extensions of credit to suppliers in the
ordinary course of business by the Company or any Restricted Subsidiary
consistent with past practice as of the Issue Date; and
(14) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of suppliers and customers and in
settlement of delinquent obligations of, and other disputes with, customers
and suppliers arising in the ordinary course of business.
"Permitted Junior Securities" means any securities of the Company or any
other Person that are:
(1) equity securities without special covenants; or
(2) subordinated in right of payment to all Senior Indebtedness that
may at the time be outstanding, to substantially the same extent as, or to
a greater extent than, the notes are subordinated as provided in the
indenture, in any event pursuant to a court order so providing and as to
which (a) the rate of interest on such securities shall not exceed the
effective rate of interest on the notes on the date of the indenture, (b)
such securities shall not be entitled to the benefits of covenants or
defaults materially more beneficial to the holders of such securities than
those in effect with respect to the notes on the date of the indenture and
(c) such securities shall not provide for amortization (including sinking
fund and mandatory prepayment provisions) commencing prior to the date six
months following the final scheduled maturity date of the Senior
Indebtedness (as modified by the plan of reorganization of readjustment
pursuant to which such securities are issued).
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"Permitted Liens" means:
(1) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Restricted Subsidiary;
provided, however, that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not secure any
property or assets of the Company or any Restricted Subsidiary other than
the property or assets subject to the Liens prior to such merger or
consolidation;
(2) Liens imposed by law such as carriers', warehousemen's and
mechanics' Liens and other similar Liens arising in the ordinary course of
business which secure payment of obligations not more than 60 days past due
or which are being contested in good faith and by appropriate proceedings;
(3) Liens existing on the Issue Date;
(4) Liens securing only the notes;
(5) Liens in favor of the Company or any Restricted Subsidiary;
(6) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided, however, that any reserve or other appropriate provision as shall
be required in conformity with GAAP shall have been made therefor;
(7) easements, reservation of rights of way, restrictions and other
similar easements, licenses, restrictions on the use of properties, or
minor imperfections of title that in the aggregate are not material in
amount and do not in any case materially detract from the properties
subject thereto or interfere with the ordinary conduct of the business of
the Company and the Restricted Subsidiaries;
(8) Liens resulting from the deposit of cash or notes in connection
with contracts, tenders or expropriation proceedings, or to secure workers'
compensation, surety or appeal bonds, costs of litigation when required by
law and public and statutory obligations or obligations under franchise
arrangements entered into in the ordinary course of business;
(9) Liens securing Indebtedness consisting of Capitalized Lease
Obligations, Purchase Money Indebtedness, mortgage financings, industrial
revenue bonds or other monetary obligations, in each case incurred solely
for the purpose of financing all or any part of the purchase price or cost
of construction or installation of assets used in the business of the
Company or the Restricted Subsidiaries, or repairs, additions or
improvements to such assets, provided, however, that (I) such Liens secure
Indebtedness in an amount not in excess of the original purchase price or
the original cost of any such assets or repair, addition or improvement
thereto (plus an amount equal to the reasonable fees and expenses in
connection with the incurrence of such Indebtedness), (II) such Liens do
not extend to any other assets of the Company or the Restricted
Subsidiaries (and, in the case of repair, addition or improvements to any
such assets, such Lien extends only to the assets (and improvements thereto
or thereon) repaired, added to or improved), (III) the Incurrence of such
Indebtedness is permitted by "Certain Covenants -- Limitation on
Indebtedness" above and (IV) such Liens attach within 180 days of such
purchase, construction, installation, repair, addition or improvement;
(10) Liens to secure any refinancings, renewals, extensions,
modifications or replacements (collectively, "refinancing") (or successive
refinancings), in whole or in part, of any Indebtedness secured by Liens
referred to in the clauses above so long as such Lien does not extend to
any other property (other than improvements thereto);
(11) Liens securing letters of credit entered into in the ordinary
course of business and consistent with past business practice;
(12) Liens on and pledges of the Equity Interests of any Unrestricted
Subsidiary securing any Indebtedness of such Unrestricted Subsidiary;
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(13) Liens securing money borrowed (or any securities purchased
therewith) which is (or are, in the case of securities) set aside at the
time of the Incurrence of any Indebtedness permitted to be Incurred by
"Certain Covenants -- Limitation on Indebtedness" above in order to prefund
the payment of interest on such Indebtedness;
(14) Liens arising solely by virtue of any statutory or common law
provision relating to bankers' liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a credit
or depository institution; provided that (A) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions
against access by the Company or any Subsidiary in excess of those set
forth by regulations promulgated by the Federal Reserve Board, and (B) such
deposit account is not intended by the Company or any Subsidiary to provide
collateral to the depository institution;
(15) Liens evidenced by UCC financing statements regarding operating
leases permitted by the indenture or in respect of consigned goods;
(16) Liens consisting of judgment or judicial attachments liens
(including prejudgment attachment); provided that the enforcement of such
Liens is effectively stayed or payment of which is covered in full (subject
to customary deductibles) by insurance or which do not otherwise result in
an Event of Default;
(17) Liens securing debt of Foreign Subsidiaries to the extent such
Indebtedness is permitted by "Certain Covenants -- Limitation on
Indebtedness" above;
(18) any encumbrances or restriction (including any put and call
arrangements) with respect to the Equity Interests of any joint venture
agreement to which the Company or any of its Restricted Subsidiaries is a
party;
(19) Liens securing Hedging Agreements permitted under the indenture;
and
(20) Liens to secure Indebtedness or other obligations of any
Receivables Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding against such Person in
accordance with and at the contract rate (including, without limitation, any
rate applicable upon default) specified in the agreement or instrument creating,
evidencing or governing such Indebtedness, whether or not, pursuant to
applicable law or otherwise, the claim for such interest is allowed as a claim
in such Insolvency or Liquidation Proceeding.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
"Purchase Amount" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary Incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the Fair Market Value of such property or such purchase
price or cost, including any refinancing of such Indebtedness that does not
increase the aggregate principal amount (or accreted amount, if less) thereof as
of the date of refinancing.
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"Purchase Price" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Registration Rights Agreement" means the Registration Rights Agreement to
be dated as of March 29, 2000.
"Related Business" means (1) those businesses in which the Company or any
of the Restricted Subsidiaries is engaged on the date of the indenture, or that
are reasonably related, ancillary, incidental or complementary thereto and (2)
any business (the "Other Business") which forms a part of a business (the
"Acquired Business") which is acquired by the Company or any of the Restricted
Subsidiaries if the primary intent of the Company or such Restricted Subsidiary
was to acquire that portion of the Acquired Business which meets the
requirements of clause (1) of this definition.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a resolution of the
Board of Directors of the Company delivered to the Trustee, as an Unrestricted
Subsidiary pursuant to "Certain Covenants -- Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"SEC" means the Securities and Exchange Commission.
"Senior Credit Facility" means the Credit Agreement, dated as of December
29, 1999, between the Company, the lenders named therein, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as Joint Lead Arranger, Joint Book Manager and
Syndication Agent, J.P. Morgan Securities Inc., as Joint Lead Arranger, Joint
Book Manager and Documentation Agent and The Chase Manhattan Bank, as
Administrative Agent, including any deferrals, renewals, extensions,
replacements (which need not be in lieu of a corresponding reduction in
commitments under the aforementioned Credit Agreement), refinancings or
refundings thereof, or amendments, modifications or supplements thereto and any
agreement providing therefor (including any restatements thereof and any
increases in the amount of commitments thereunder), whether by or with the same
or any other lender, creditor, or any one or more group of lenders or group of
creditors (whether or not including any or all of the financial institutions
party to the aforementioned Credit Agreement), and including related notes,
guaranty and note agreements and other instruments and agreements executed in
connection therewith.
"Senior Indebtedness" means, at any date,
(1) all Obligations of the Company under the Senior Credit Facility;
(2) all Hedging Obligations of the Company;
(3) all Obligations of the Company under stand-by letters of credit;
and
(4) all other Indebtedness of the Company for borrowed money,
including principal, premium, if any, and interest (including Post-Petition
Interest) on such Indebtedness, unless the instrument under which such
Indebtedness of the Company for money borrowed is Incurred expressly
provides that such Indebtedness for money borrowed is not senior or
superior in right of payment to the notes, and all renewals, extensions,
modifications, amendments or refinancings thereof. Notwithstanding the
foregoing, Senior Indebtedness shall not include (a) to the extent that it
may constitute Indebtedness, any Obligation for federal, state, local or
other taxes; (b) any Indebtedness among or between the Company and any
Subsidiary of the Company, unless and for so long as such Indebtedness has
been pledged to secure Obligations under the Senior Credit Facility; (c) to
the extent that it may constitute Indebtedness, any Obligation in respect
of any trade payable Incurred for the purchase of goods or materials, or
for services obtained, in the ordinary course of business; (d) Indebtedness
evidenced by the notes; (e) Indebtedness of the Company that is expressly
pari passu with or subordinate or junior in right of payment to any other
Indebtedness of the Company; (f) to the extent that it may constitute
Indebtedness, any obligation owing under leases (other than Capital Lease
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Obligations) or management agreements; and (g) any obligation that by
operation of law is subordinate to any general unsecured obligations of the
Company.
"Significant Restricted Subsidiary" means, at any date of determination:
(1) any Restricted Subsidiary that, together with its Subsidiaries
that constitute Restricted Subsidiaries (A) for the most recent fiscal year
of the Company accounted for more than 5.0% of the consolidated revenues of
the Company and the Restricted Subsidiaries or (B) as of the end of such
fiscal year, owned more than 5.0% of the consolidated assets of the Company
and the Restricted Subsidiaries, all as set forth on the consolidated
financial statements of the Company and the Restricted Subsidiaries for
such year prepared in conformity with GAAP, and
(2) any Restricted Subsidiary which, when aggregated with all other
Restricted Subsidiaries that are not otherwise Significant Restricted
Subsidiaries and as to which any event described in clause (6), (7) or (8)
of "Events of Default" above has occurred, would constitute a Significant
Restricted Subsidiary under clause (1) of this definition.
"Specified Indebtedness" means (1) any Indebtedness of the Company or any
Guarantor that is Pari Passu Debt or Subordinated Indebtedness or (2) any
Indebtedness of any Restricted Subsidiary that is subordinated to any other
Indebtedness of such Restricted Subsidiary, provided, however, that Specified
Indebtedness shall never include any Obligation arising under the Senior Credit
Facility or otherwise constituting Guarantor Senior Indebtedness or Senior
Indebtedness.
"Stated Maturity," when used with respect to any note or any installment of
interest thereon, means the date specified in such note as the fixed date on
which the principal of such note or such installment of interest is due and
payable.
"Subordinated Indebtedness" means, with respect to the Company or any
Guarantor, the Junior Subordinated Seller notes and any Indebtedness of the
Company or such Guarantor, as the case may be, which is expressly subordinated
in right of payment to the notes or such Guarantor's Guaranty, as the case may
be.
"Subsidiary" means, with respect to any Person, (a) any corporation of
which the outstanding Voting Equity Interests having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of which
at least a majority of Voting Equity Interests are at the time, directly or
indirectly, owned by such first named Person.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"United States Government Obligations" means direct non-callable
obligations of the United States of America for the payment of which the full
faith and credit of the United States is pledged.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to "Certain Covenants -- Designation of Unrestricted Subsidiaries"
above. Any such designation may be revoked by a resolution of the Board of
Directors of the Company delivered to the Trustee, subject to the provisions of
such covenant.
"Unutilized Net Cash Proceeds" has the meaning set forth in the third
paragraph under "Certain Covenants -- Disposition of Proceeds of Asset Sales"
above.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (1) the sum of the
products obtained by multiplying (A) the
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amount of each then remaining installment, sinking fund, serial maturity or
other required scheduled payment of principal, including payment of final
maturity, in respect thereof, by (B) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of such
payment, by (2) the then outstanding aggregate principal amount of such
Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of
the outstanding Voting Equity Interests (other than directors' qualifying
shares) of which are owned, directly or indirectly, by the Company.
BOOK-ENTRY; DELIVERY AND FORM
Exchange notes will be represented by a single, permanent global note in
definitive, fully registered book-entry form (the "Global Securities") which
will be registered in the name of a nominee of The Depository Trust Company
("DTC") and deposited on behalf of purchasers of the notes represented thereby
with a custodian for DTC for credit to the respective accounts of the purchasers
(or to such other accounts as they may direct) at DTC or will remain in the
custody of the trustee pursuant to the FAST Balance Certificate Agreement
between DTC and the trustee.
The Global Securities. We expect that pursuant to procedures established by
DTC
(1) upon deposit of the Global Securities, DTC or its custodian will
credit on its internal system portions of the Global Securities which shall
be comprised of the corresponding respective amount of the Global
Securities to the respective accounts of persons who have accounts with
such depositary and
(2) ownership of the notes will be shown on, and the transfer of
ownership of the notes will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants (as defined
below)) and the records of participants (with respect to interests of
persons other than participants).
Such accounts initially will be designated by or on behalf of the initial
purchaser and ownership of beneficial interests in the Global Securities will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Noteholders may hold their interests in a
Global Security directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system.
So long as DTC or its nominee is the registered owner or holder of any of
the notes, DTC or such nominee will be considered the sole owner or holder of
such notes represented by such Global Securities for all purposes under the
indenture and under the notes represented thereby. No beneficial owner of an
interest in the Global Securities will be able to transfer such interest except
in accordance with the applicable procedures of DTC in addition to those
provided for under the indenture.
Payments of the principal, premium, interest and other amounts on the notes
represented by the Global Securities will be made to DTC or its nominee, as the
case may be, as the registered owner of the notes represented by the Global
Securities. None of we, the trustee or any paying agent under the indenture will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of the
principal, premium, interest or other amounts on the notes represented by the
Global Securities, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the Global Securities
as shown on the records of DTC or its nominee. We also expect that payments by
participants to owners of beneficial interests in the Global Securities held
through such participants will be governed by standing instructions and
customary practice as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payment
will be the responsibility of such
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participants. Transfers between participants in DTC will be effected in
accordance with DTC rules and procedures and will be settled in immediately
available funds.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes (including the presentation of notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in the Global Securities are credited and only in respect of the
aggregate principal amount of as to which such participant or participants has
or have given such direction.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and
- a "clearing agency" registered pursuant to the provisions of Section 17A
of the U.S. Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Securities among participants of
DTC, DTC is under no obligation to perform such procedures, and such procedures
may be discontinued at any time. None of we, the trustee or the paying agent
will have any responsibility for the performance by DTC or its direct or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Certificated Securities. Interests in the Global Securities will be
exchanged for physical delivery of certificates ("certificated securities") only
if
(1) DTC is at any time unwilling or unable to continue as depositary
for the Global Securities, or DTC ceases to be a "Clearing Agency"
registered under the U.S. Securities Exchange Act of 1934, as amended, and
a successor depositary is not appointed by us within 90 days or
(2) an event of default under the indenture has occurred and is
continuing with respect to the notes. Upon the occurrence of either of the
events described in the preceding sentence, we will cause the appropriate
certificated securities to be delivered, which certificated securities
will, if applicable, bear legends restricting the transfer of the
securities.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We sold the outstanding notes to J.P. Morgan Securities Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Chase Securities Inc., the
initial purchasers, on March 29, 2000. The initial purchasers subsequently
resold the outstanding notes to qualified institutional buyers pursuant to Rule
144A under the Securities Act and to non-U.S. persons outside the United States
in reliance on Regulation S under the Securities Act. In connection with the
issuance of the outstanding notes, we and the guarantor subsidiaries entered
into a registration rights agreement with the initial purchasers of the
outstanding notes. The registration rights agreement requires us to register the
exchange notes under the federal securities laws and offer to exchange the
exchange notes for the outstanding notes. The exchange notes will be issued
without a restrictive legend and generally may be resold without registration
under the federal securities laws. We are effecting the exchange offer to comply
with the registration rights agreement.
The registration rights agreement requires us to
- file with the Securities and Exchange Commission a registration statement
for the exchange offer and the exchange notes on or before May 28, 2000
- use our reasonable best efforts to cause the registration statement filed
for the exchange offer and the exchange notes to be declared effective by
the Securities and Exchange Commission on or before September 25, 2000
- complete the exchange offer on or before October 25, 2000
These requirements under the registration rights agreement will be
satisfied when we complete the exchange offer. However, if we fail to meet any
of these requirements, we must pay additional interest on the outstanding notes
at the rate of 0.25% per year until the applicable requirement has been met. We
must pay an additional 0.25% per year for each 90 days that a requirement has
not been met. However, we will not be required to pay more than 1.0% per year in
additional interest on the outstanding notes. Immediately following the
completion of a requirement, any additional interest with respect to that
particular requirement will cease to accrue. We have also agreed to keep the
registration statement for the exchange offer effective for at least 30 days (or
longer, if required by applicable law) after the date on which notice of the
exchange offer is mailed to holders.
Under the registration rights agreement, our obligations to register the
exchange notes will terminate upon the completion of the exchange offer.
However, we will be required to file a "shelf" registration statement for a
continuous offering by the holders of the outstanding notes if
- because of any change in law or applicable interpretations thereof by the
staff of the Securities and Exchange Commission, we are not permitted to
effect the exchange offer as contemplated by the registration rights
agreement
- any outstanding notes validly tendered pursuant to the exchange offer are
not exchanged for exchange notes by January 23, 2001
- any of the initial purchasers of the outstanding notes so requests with
respect to outstanding notes not eligible to be exchanged for exchange
notes in the exchange offer
- any applicable law or interpretation thereof by the staff of the
Securities and Exchange Commission does not permit any holder of
outstanding notes to participate in the exchange offer
- any holder of outstanding notes that participates in the exchange offer
does not receive freely transferable exchange notes in exchange for
tendered notes (other than due solely to the status of a holder (other
than an initial purchaser) as an affiliate of Sovereign or the guarantors
within the meaning of the federal securities laws, and other than any
state securities law restrictions which,
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individually or in the aggregate, do not materially adversely affect the
ability of any such holder to resell the securities held by such holder),
or
- we so elect
If we are required to file a shelf registration statement, we will be
required to use our reasonable best efforts to keep the registration statement
effective for two years, subject to some exceptions. Additionally, under
specific circumstances we will have the ability to suspend the availability of
the shelf registration statement for up to two periods of 45 consecutive days
(except for the consecutive 45-day period immediately prior to maturity of the
notes). Other than as described above, no holder will have the right to require
us to file a shelf registration statement or otherwise register such holder's
notes under the federal securities laws.
The registration rights agreement also provides that we
- shall make available for a period of 180 days after the completion of the
exchange offer a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any
exchange notes, and
- shall pay all expenses incident to the exchange offer and will indemnify
holders of the notes (including any broker-dealer) against specified
liabilities, including liabilities under the Securities Act. A
broker-dealer that delivers a prospectus to purchasers in connection with
such resales will be subject to some of the civil liability provisions
under the Securities Act, and will be bound by the provisions of the
registration rights agreement (including certain indemnification rights)
A holder who sells notes pursuant to a shelf registration statement
generally will be required to provide us with specific information, be named as
a selling security holder in the related prospectus and deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the registration rights agreement which are applicable to such a
holder (including certain indemnification obligations).
This summary includes only the material terms of the registration rights
agreement. For a full description, you should refer to the complete copy of the
registration rights agreement, which has been filed as an exhibit to the
registration statement for the exchange offer and the exchange notes. See "Where
You Can Find More Information."
TRANSFERABILITY OF THE EXCHANGE NOTES
Based on an interpretation of the Securities Act by the staff of the
Securities and Exchange Commission in several no-action letters issued to third
parties, we believe that you, or any other person receiving such notes, may
offer for resale, resell or otherwise transfer the exchange notes without
complying with the registration and prospectus delivery requirements of the
federal securities laws, if
- you, or the person or entity receiving such notes, are acquiring the
exchange notes in the ordinary course of business
- neither you nor any such person or entity is engaging in or intends to
engage in a distribution of the exchange notes within the meaning of the
federal securities laws
- neither you nor any such person or entity has an arrangement or
understanding with any person or entity to participate in any
distribution of the exchange notes
- neither you nor any such person or entity is an "affiliate" of Sovereign
or the guarantors, as such term is defined under Rule 405 under the
Securities Act, and
- you are not acting on behalf of any person or entity who could not
truthfully make these statements
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To participate in the exchange offer, you must represent as the holder of
outstanding notes that each of these statements is true.
Any holder of the outstanding notes who is our affiliate or who intends to
participate in the exchange offer for the purpose of distributing the exchange
notes
- will not be able to rely on the interpretation of the staff of the
Securities and Exchange Commission set forth in the no-action letters
described above
- will not be able to tender notes in the exchange offer, and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the notes,
unless the sale or transfer is made pursuant to an exemption from those
requirements
Broker-dealers receiving exchange notes in exchange for outstanding notes
acquired for their own account through market-making or other trading activities
may not rely on this interpretation by the Securities and Exchange Commission.
Such broker-dealers may be deemed to be "underwriters" within the meaning of the
Securities Act and must therefore acknowledge, by signing the letter of
transmittal, that they will deliver a prospectus meeting the requirements of the
Securities Act in connection with resale of the exchange notes. The letter of
transmittal states that by acknowledging that it will deliver, and by
delivering, a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. The Securities and
Exchange Commission has taken the position that participating broker-dealers may
fulfill their prospectus delivery requirements with respect to the exchange
notes, other than a resale of an unsold allotment from the original sale of the
outstanding notes, with the prospectus contained in the exchange offer
registration statement. As described above, under the registration rights
agreement, we have agreed to allow participating broker-dealers and other
persons, if any, subject to similar prospectus delivery requirements to use the
prospectus contained in the exchange offer registration statement in connection
with the resale of the exchange notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER; ACCEPTANCE OF TENDERED NOTES
Upon the terms and subject to the conditions in this prospectus and in the
letter of transmittal, we will accept any and all outstanding notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on June 27,
2000. We will issue $1,000 principal amount of exchange notes in exchange for
each $1,000 principal amount of outstanding notes accepted in the exchange
offer. Holders may tender some or all of their notes pursuant to the exchange
offer. However, notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes except that
- the exchange notes have been registered under the federal securities laws
and will not bear any legend restricting their transfer
- the exchange notes bear a Series B designation and a different CUSIP
number from the outstanding notes, and
- the holders of the exchange notes will not be entitled to certain rights
under the registration rights agreement, including the provisions for an
increase in the interest rate on the outstanding notes in some
circumstances relating to the timing of the exchange offer
The exchange notes will evidence the same debt as the outstanding notes.
Holders of exchange notes will be entitled to the benefits of the indenture.
As of the date of this prospectus, $150.0 million aggregate principal
amount of notes was outstanding. We have fixed the close of business on May 25,
2000 as the record date for the exchange offer for
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purposes of determining the persons to whom this prospectus and the letter of
transmittal will be mailed initially. We intend to conduct the exchange offer in
accordance with the applicable requirements of the Securities Exchange Act of
1934 and the rules and regulations of the Securities and Exchange Commission
under the Securities Exchange Act of 1934.
We shall be deemed to have accepted validly tendered notes when, and if we
have given oral or written notice to the exchange agent of our acceptance. The
exchange agent will act as agent for the tendering holders for the purpose of
receiving the exchange notes from us. If any tendered notes are not accepted for
exchange because of an invalid tender, the occurrence of other events in this
prospectus or otherwise, we will return the certificates for any unaccepted
notes, at our expense, to the tendering holder as promptly as practicable after
the expiration of the exchange offer.
Holders who tender exchange notes in the exchange offer will not be
required to pay brokerage commissions or fees with respect to the exchange of
notes. Tendering holders will also not be required to pay transfer taxes in the
exchange offer. We will pay all charges and expenses in connection with the
exchange offer as described under the subheading "-- Solicitation of Tenders;
Fees and Expenses." However, we will not pay any taxes incurred in connection
with a holder's request to have exchange notes or non-exchanged notes issued in
the name of a person other than the registered holder. See "-- Transfer Taxes"
in this section below.
EXPIRATION DATE; EXTENSIONS; AMENDMENT
The exchange offer will expire at 5:00 p.m., New York City time, on June
27, 2000, unless we extend the exchange offer. To extend the exchange offer, we
will notify the exchange agent and each registered holder of any extension
before 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date. We reserve the right to extend the
exchange offer, delay accepting any tendered notes or, if any of the conditions
described below under the heading "-- Conditions to the Exchange Offer" have not
been satisfied, to terminate the exchange offer. We also reserve the right to
amend the terms of the exchange offer in any manner. We will give oral or
written notice of such delay, extension, termination or amendment to the
exchange agent.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest from the most recent interest payment
date to which interest has been paid on the notes or, if no interest has been
paid, from March 29, 2000. Interest on the outstanding notes accepted for
exchange will cease to accrue upon the issuance of the exchange notes.
Interest on the notes is payable semi-annually on each September 15 and
March 15, commencing on September 15, 2000.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
Only a holder of outstanding notes may tender notes in the exchange offer.
To tender in the exchange offer, you must
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal
- have the signatures guaranteed if required by the letter of transmittal,
and
- mail or otherwise deliver the letter of transmittal or such facsimile,
together with the outstanding notes and any other required documents, to
the exchange agent prior to 5:00 p.m., New York City time, on the
expiration date
To tender outstanding notes effectively, you must complete the letter of
transmittal and other required documents and the exchange agent must receive all
the documents prior to 5:00 p.m., New York City time, on the expiration date.
Delivery of the outstanding notes may be made by book-entry transfer in
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accordance with the procedures described below. The exchange agent must receive
confirmation of book-entry transfer prior to the expiration date.
By executing the letter of transmittal you will make to us the
representations set forth in the first paragraph under the heading
"-- Transferability of the Exchange Notes."
All tenders not withdrawn before the expiration date and the acceptance of
the tender by us will constitute agreement between you and us under the terms
and subject to the conditions in this prospectus and in the letter of
transmittal including an agreement to deliver good and marketable title to all
tendered notes prior to the expiration date free and clear of all liens,
charges, claims, encumbrances, adverse claims and rights and restrictions of any
kind.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION
AND SOLE RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, YOU SHOULD USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW FOR
SUFFICIENT TIME TO ENSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION OF THE EXCHANGE OFFER. YOU MAY REQUEST YOUR BROKER, DEALER,
COMMERCIAL BANK, TRUST COMPANY OR NOMINEE TO EFFECT THESE TRANSACTIONS FOR
YOU. YOU SHOULD NOT SEND ANY NOTE, LETTER OF TRANSMITTAL OR OTHER REQUIRED
DOCUMENT TO US.
If your notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you desire to tender, you should
contact the registered holder promptly and instruct the registered holder to
tender on your behalf. See "Instruction to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner" included with the letter of
transmittal.
The exchange of notes will be made only after timely receipt by the
exchange agent of certificates for outstanding notes, a letter of transmittal
and all other required documents, or timely completion of a book-entry transfer.
If any tendered notes are not accepted for any reason or if outstanding notes
are submitted for a greater principal amount than the holder desires to
exchange, the exchange agent will return such unaccepted or non-exchanged notes
to the tendering holder promptly after the expiration or termination of the
exchange offer. In the case of outstanding notes tendered by book-entry
transfer, the exchange agent will credit the non-exchanged notes to an account
maintained with The Depository Trust Company.
GUARANTEE OF SIGNATURES
Holders must obtain a guarantee of all signatures on a letter of
transmittal or a notice of withdrawal unless the outstanding notes are tendered
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal, or
- for the account of an "eligible guarantor institution"
Signature guarantees must be made by a member of or participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program, the Stock Exchange Medallion Program, or by an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 promulgated
under the Securities Exchange Act (namely, banks; brokers and dealers; credit
unions; national securities exchanges; registered securities associations;
learning agencies; and savings associations).
SIGNATURE ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS
If the letter of transmittal is signed by a person other than the
registered holder of the outstanding notes listed in the letter of transmittal,
the registered holder must endorse the outstanding notes or provide a properly
completed bond power. Any such endorsement or bond power must be signed by the
registered holder as that registered holder's name appears on the outstanding
notes. Signatures on such outstanding notes and bond powers must be guaranteed
by an "eligible guarantor institution."
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If you sign the letter of transmittal or any outstanding notes or bond
power as a trustee, executor, administrator, guardian, attorney-in-fact, officer
of a corporation, fiduciary or in any other representative capacity, you must so
indicate when signing. You must submit satisfactory evidence to the exchange
agent of your authority to act in such capacity.
BOOK-ENTRY TRANSFER
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the
outstanding notes at the book-entry transfer facility, The Depository Trust
Company, for the purpose of facilitating the exchange offer. Subject to the
establishment of the accounts, any financial institution that is a participant
in DTC's system may make book-entry delivery of outstanding notes by causing DTC
to transfer the notes into the exchange agent's account in accordance with DTC's
procedures for such transfer. However, although delivery of outstanding notes
may be effected through book-entry transfer into the exchange agent's account at
DTC, the letter of transmittal (or a manually signed facsimile of the letter of
transmittal) with any required signature guarantees, or an "agent's message" in
connection with a book-entry transfer, and any other required documents, must,
in any case, be transmitted to and received by the exchange agent, or the
guaranteed delivery procedures set forth below must be complied with, in each
case, prior to the expiration date. Delivery of documents to DTC does not
constitute delivery to the exchange agent.
The exchange agent and DTC have confirmed that the exchange offer is
eligible for the DTC Automated Tender Offer Program. Accordingly, the DTC
participants may electronically transmit their acceptance of the exchange offer
by causing the DTC to transfer outstanding notes to the exchange agent in
accordance with DTC's Automated Tender Offer Program procedures for transfer.
Upon receipt of such holder's acceptance through the Automated Tender Offer
Program, DTC will edit and verify the acceptance and send an "agent's message"
to the exchange agent for its acceptance. Delivery of tendered notes must be
made to the exchange agent pursuant to the book-entry delivery procedures set
forth above, or the tendering DTC participant must comply with the guaranteed
delivery procedures set forth below.
The term "agent's message" means a message transmitted by DTC, and received
by the exchange agent and forming part of the confirmation of a book-entry
transfer, which states that
- DTC has received an express acknowledgment from the participant in DTC
tendering notes subject to the book-entry confirmation
- the participant has received and agrees to be bound by the terms of the
letter of transmittal, and
- we may enforce such agreement against such participant.
In the case of an agent's message relating to guaranteed delivery, the term
means a message transmitted by DTC and received by the exchange agent, which
states that DTC has received an express acknowledgment from the participant in
DTC tendering notes that such participant has received and agrees to be bound by
the notice of guaranteed delivery.
DETERMINATION OF VALID TENDERS; SOVEREIGN'S RIGHTS UNDER THE EXCHANGE OFFER
All questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of tendered notes will be determined by the us in our
sole discretion, which determination will be final and binding on all parties.
We expressly reserve the absolute right, in our sole discretion, to reject any
or all outstanding notes not properly tendered or any outstanding notes the
acceptance of which would, in the opinion of our counsel, be unlawful. We also
reserve the absolute right in our sole discretion to waive or amend any
conditions of the exchange offer or to waive any defects or irregularities of
tender for any particular note, whether or not similar defects or irregularities
are waived in the case of other notes. Our interpretation of the terms and
conditions of the exchange offer will be final and binding on all parties. No
alternative, conditional or contingent tenders will be accepted. Unless waived,
any defects or irregularities
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in connection with tenders of outstanding notes must be cured by the tendering
holder within such time as we determine.
Although we intend to notify holders of defects or irregularities in
tenders of outstanding notes, neither we, the exchange agent or any other person
shall be under any duty to give notification of defects or irregularities in
such tenders or will incur any liability to holders for failure to give such
notification. Holders will be deemed to have tendered outstanding notes only
when such defects or irregularities have been cured or waived. The exchange
agent will return to the tendering holder, after the expiration of the exchange
offer, any outstanding notes that are not properly tendered and as to which the
defects have not been cured or waived.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender outstanding notes pursuant to the exchange offer
and (1) certificates representing such outstanding notes are not immediately
available, (2) time will not permit your letter of transmittal, certificates
representing such outstanding notes and all other required documents to reach
the exchange agent on or prior to the expiration date, or (3) the procedures for
book-entry transfer (including delivery of an agent's message) cannot be
completed on or prior to the expiration date, you may nevertheless tender such
notes with the effect that such tender will be deemed to have been received on
or prior to the expiration date if all the following conditions are satisfied
- you must effect your tender through an "eligible guarantor institution,"
which is defined above under the heading "-- Guarantee of Signatures"
- a properly completed and duly executed notice of guaranteed delivery,
substantially in the form provided by us herewith, or an agent's message
with respect to guaranteed delivery that is accepted by us, is received
by the exchange agent on or prior to the expiration date as provided
below, and
- the certificates for the tendered notes, in proper form for transfer (or
a book-entry confirmation of the transfer of such notes into the exchange
agent account at DTC as described above), together with a letter of
transmittal (or a manually signed facsimile of the letter of transmittal)
properly completed and duly executed, with any signature guarantees and
any other documents required by the letter of transmittal or a properly
transmitted agent's message, are received by the exchange agent within
three New York Stock Exchange, Inc. trading days after the date of
execution of the notice of guaranteed delivery
The notice of guaranteed delivery may be sent by hand delivery, facsimile
transmission or mail to the exchange agent and must include a guarantee by an
eligible guarantor institution in the form set forth in the notice of guaranteed
delivery.
WITHDRAWAL RIGHTS
Except as otherwise provided in this prospectus, you may withdraw tendered
notes at any time before 5:00 p.m., New York City time, on June 27, 2000. For a
withdrawal of tendered notes to be effective, a written or facsimile
transmission notice of withdrawal must be received by the exchange agent on or
prior to the expiration of the exchange offer. For DTC participants, a written
notice of withdrawal may be made by electronic transmission through DTC's
Automated Tender Offer Program. Any notice of withdrawal must
- specify the name of the person having tendered the notes to be withdrawn
- identify the notes to be withdrawn, including the certificate number(s)
and principal amount of such notes, or, in the case of notes transferred
by book-entry transfer, the name and number of the account at DTC
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such notes were tendered, with any
required signature guarantees, or be accompanied by
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documents of transfer sufficient to have the trustee with respect to the
notes register the transfer such notes into the name of the person
withdrawing the tender and a properly completed irrevocable proxy
authorizing such person to effect such withdrawal on behalf of such
holder, and
- specify the name in which any such notes are to be registered, if
different from that of the registered holder
Any permitted withdrawal of notes may not be rescinded. Any notes properly
withdrawn will thereafter be deemed not to have been validly tendered for
purposes of the exchange offer. The exchange agent will return any withdrawn
notes without cost to the holder promptly after withdrawal of the notes. Holders
may retender properly withdrawn notes at any time before the expiration of the
exchange offer by following one of the procedures described above under the
heading "-- Procedures for Tendering Outstanding Notes."
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange any exchange notes for, any
outstanding notes, and may terminate or amend the exchange offer as provided in
this prospectus before the acceptance of the outstanding notes, if
- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or materially impair the contemplated
benefits of the exchange offer to us, or any material adverse development
has occurred in any existing action or proceeding with respect to us or
any of our subsidiaries,
- any law, statute, rule, regulation or interpretation by the staff of the
Securities and Exchange Commission is proposed, adopted or enacted,
which, in our sole judgment, might impair our ability to proceed with the
exchange offer or impair the contemplated benefits of the exchange offer
to us, or
- any governmental approval has not been obtained, which we believe, in our
sole discretion, is necessary for the completion of the exchange offer as
outlined in this prospectus
If we determine in our sole discretion that any of the conditions are not
satisfied, we may
- refuse to accept any notes and return all tendered notes to the tendering
holders
- extend the exchange offer and retain all notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw their notes, or
- waive such unsatisfied conditions of the exchange offer and accept all
properly tendered notes which have not been withdrawn
These conditions are for the sole benefit of us and the guarantors and may
be asserted or waived by us at any time in our sole discretion. Our failure to
exercise any of these rights at any time will not be deemed a waiver of such
rights. These rights will be ongoing and may be asserted by us at any time.
In addition, we will not complete the exchange offer if any stop order is
threatened or issued with respect to the registration statement for the exchange
offer and the exchange notes. In any such event, we must make every reasonable
effort to obtain the withdrawal of any stop order at the earliest possible
moment.
EFFECT OF NOT TENDERING
To the extent outstanding notes are tendered and accepted in the exchange
offer, the principal amount of outstanding notes will be reduced by the amount
so tendered and a holder's ability to sell untendered outstanding notes could be
adversely affected. In addition, after the completion of the exchange offer, the
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outstanding notes will remain subject to restrictions on transfer. Since the
outstanding notes have not been registered under the federal securities laws,
they bear a legend restricting their transfer absent registration or the
availability of a specific exemption from registration. The holders of
outstanding notes not tendered will have no further registration rights, except
for the limited registration rights described above under the heading
"-- Purpose of the Exchange Offer."
Accordingly, the notes not tendered may be resold only
- to our company or our subsidiaries
- pursuant to a registration statement which has been declared effective
under the Securities Act
- for so long as the notes are eligible for resale pursuant to Rule 144A
under the Securities Act to a person the seller reasonably believes is a
qualified institutional buyer that purchases for its own account or for
the account of a qualified institutional buyer to whom notice is given
that the transfer is being made in reliance on Rule 144A, or
- pursuant to any other available exemption from the registration
requirements of the Securities Act (in which case Sovereign and the
trustee shall have the right to require the delivery of an opinion of
counsel, certifications and/or other information satisfactory to
Sovereign and the trustee), subject in each of the foregoing cases to any
requirements of law that the disposition of the seller's property or the
property of such investor account or accounts be at all times within its
or their control and to compliance with any applicable state securities
laws
Upon completion of the exchange offer, due to the restrictions on transfer
of the outstanding notes and the absence of such restrictions applicable to the
exchange notes, it is likely that the market, if any, for outstanding notes will
be relatively less liquid than the market for exchange notes. Consequently,
holders of outstanding notes who do not participate in the exchange offer could
experience significant diminution in the value of their outstanding notes,
compared to the value of the exchange notes.
REGULATORY APPROVALS
Other than the federal securities laws, there are no federal or state
regulatory requirements that we must comply with and there are no approvals that
we must obtain in connection with the exchange offer.
SOLICITATION OF TENDERS; FEES AND EXPENSES
We will bear the expenses of soliciting tenders. We are mailing the
principal solicitation. However, our officers and regular employees and those of
our affiliates may make additional solicitation by telegraph, telecopy,
telephone or in person.
We have not retained any dealer-manager in connection with the exchange
offer. We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
outstanding notes. The carrying value is face value, less the original issue
discount (net of amortization) as reflected in our accounting records on the
date of exchange. Accordingly, we will recognize no gain or loss for accounting
purposes. The expenses of the exchange offer will be expensed over the term of
the exchange notes.
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TRANSFER TAXES
We will pay all transfer taxes, if any, required to be paid by Sovereign in
connection with the exchange of the outstanding notes for the exchange notes.
However, holders who instruct us to register exchange notes in the name of, or
request that outstanding notes not tendered or not accepted for exchange be
returned to, a person other than the registered holder will be responsible for
the payment of any transfer tax arising from such transfer.
THE EXCHANGE AGENT
The Bank of New York is serving as the exchange agent for the exchange
offer. ALL EXECUTED LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE EXCHANGE AGENT
AT THE ADDRESS LISTED BELOW. Questions, requests for assistance and requests for
additional copies of this prospectus or the letter of transmittal should be
directed to the exchange agent at the address or telephone number listed below.
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn: Duong Nguyen
Reorganization Section 7th Floor, 7 East
By Facsimile: (212) 815-6339
Attn: Duong Nguyen
Confirm by Telephone: (212) 815-5920
Originals of all documents sent by facsimile should be promptly sent to the
exchange agent by registered or certified mail, by hand, or by overnight
delivery service.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes, in the case of U.S. holders, the material
U.S. federal income tax consequences and, in the case of non-U.S. holders, the
material U.S. income and federal estate tax consequences, of the acquisition,
ownership and disposition of the exchange notes. This summary does not discuss
all of the aspects of U.S. federal income and estate taxation which may be
relevant to investors in light of their particular investment or other
circumstances. In addition, this summary does not discuss any U.S. state or
local income or foreign income or other tax consequences. This summary is based
upon the provisions of the Internal Revenue Code of 1986, as amended, U.S.
Treasury Department regulations, rulings and judicial decisions, all as in
effect as of the date of this prospectus and all of which are subject to change
or differing interpretation, possibly with retroactive effect. The discussion
below deals only with exchange notes held as capital assets within the meaning
of the Internal Revenue Code, and does not address holders of the exchange notes
that may be subject to special rules. Holders that may be subject to special
rules include
- certain U.S. expatriates
- financial institutions
- insurance companies
- tax-exempt entities
- dealers in securities or currencies
- traders in securities
- holders whose functional currency is not the U.S. dollar
- persons that hold the exchange notes as part of a straddle, hedge,
conversion or other integrated transaction
You should consult your own tax advisor regarding the particular U.S.
federal, state and local and foreign income and other tax consequences of
acquiring, owning and disposing of the exchange notes that may be applicable to
you.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of the outstanding notes for the exchange notes in the
exchange offer will not be a taxable exchange for U.S. federal income tax
purposes and, accordingly, for such purposes a holder will not recognize any
taxable gain or loss as a result of such exchange and will have the same tax
basis and holding period in the exchange notes as it had in the outstanding
notes immediately before the exchange.
U.S. FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
For purposes of the following discussion, a U.S. holder is a beneficial
owner of an exchange note that is, for U.S. federal income tax purposes
- a citizen or individual resident of the United States
- a corporation or partnership created or organized in or under the laws of
the United States or any of its political subdivisions
- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source
- a trust if, in general, the trust is subject to the supervision of a
court within the United States and the control of one or more United
States persons as described in Section 7701(a)(30) of the Internal
Revenue Code.
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Taxation of Stated Interest. In general, stated interest paid on an
exchange note will be included in the gross income of a U.S. holder as ordinary
interest income at the time it is received or accrued in accordance with the
U.S. holder's regular method of accounting for U.S. federal income tax purposes.
Market Discount and Bond Premium. If a U.S. holder purchases an exchange
note (or purchased the outstanding note for which the exchange note was
exchanged, as the case may be) at a price that is less than its principal
amount, the excess of the principal amount over the U.S. holder's purchase price
will be treated as "market discount." However, the market discount will be
considered to be zero if it is less than 1/4 of 1% of the principal amount
multiplied by the number of complete years to maturity from the date the U.S.
holder purchased the exchange note or outstanding note, as the case may be.
Under the market discount rules of the Internal Revenue Code, a U.S. holder
generally will be required to treat any principal payment on, or any gain
realized on the sale, exchange, retirement or other disposition of, an exchange
note as ordinary income (generally treated as interest income) to the extent of
the market discount which accrued but was not previously included in income. In
addition, the U.S. holder may be required to defer, until the maturity of the
exchange note or its earlier disposition in a taxable transaction, the deduction
of all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry the exchange note (or the outstanding note for
which the exchange note was exchanged, as the case may be). In general, market
discount will be considered to accrue ratably during the period from the date of
the purchase of the exchange note (or outstanding note for which the exchange
note was exchanged, as the case may be) to the maturity date of the exchange
note, unless the U.S. holder makes an irrevocable election (on an
instrument-by-instrument basis) to accrue market discount under a constant yield
method. A U.S. holder may elect to include market discount in income currently
as it accrues (under either a ratable or constant yield method), in which case
the rules described above regarding the treatment as ordinary income of gain
upon the disposition of the exchange note and upon the receipt of certain
payments and the deferral of interest deductions will not apply. The election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the Internal Revenue Service.
If a U.S. holder purchases an exchange note (or purchased the outstanding
note for which the exchange note was exchanged, as the case may be) for an
amount in excess of the amount payable at maturity of the exchange note, the
U.S. holder will be considered to have purchased the exchange note (or
outstanding note) with "bond premium" equal to the excess of the U.S. holder's
purchase price over the amount payable at maturity (or on an earlier call date
if it results in a smaller amortizable bond premium). A U.S. holder may elect to
amortize the premium using a constant yield method over the remaining term of
the exchange note (or until an earlier call date, as applicable). The amortized
amount of the premium for a taxable year generally will be treated first as a
reduction of interest on the exchange note included in such taxable year to the
extent thereof, then as a deduction allowed in that taxable year to the extent
of the U.S. holder's prior interest inclusions on the exchange note, and finally
as a carryforward allowable against the U.S. holder's future interest inclusions
on the exchange note. The election, once made, is irrevocable without the
consent of the Internal Revenue Service and applies to all taxable bonds held
during the taxable year for which the election is made or subsequently acquired.
Dispositions. Upon the sale, exchange, retirement, redemption or other
taxable disposition of an exchange note, a U.S. holder generally will recognize
taxable gain or loss in an amount equal to the difference, if any, between the
amount realized on the disposition and the U.S. holder's adjusted tax basis in
the exchange note. A U.S. holder's adjusted tax basis in an exchange note will
generally equal the cost of the exchange note (or, in the case of an exchange
note acquired in exchange for an outstanding note in the exchange offer, the tax
basis of the outstanding note, as discussed above under "U.S. Federal Income Tax
Consequences of the Exchange Offer"), increased by the amount of any market
discount previously included in the U.S. holder's gross income, and reduced by
the amount of any amortizable bond premium applied to reduce, or allowed as a
deduction against, interest with respect to the exchange note.
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Gain or loss recognized by a U.S. holder on the taxable disposition of an
exchange note generally will be capital gain or loss (except with respect any
amount received that is attributable to accrued but unpaid interest, which will
be taxable in the manner described above under "Taxation of Stated Interest").
Such capital gain or loss will be long-term capital gain or loss if the exchange
note has been held for more than one year at the time of the disposition (taking
into account for this purpose, in the case of an exchange note received in
exchange for an outstanding note in the exchange offer, the period of time that
the outstanding note was held). Long-term capital gain recognized by a
non-corporate U.S. holder generally will be subject to a maximum tax rate of
20%. Subject to limited exceptions, capital losses cannot be used to offset
ordinary income.
Backup Withholding. In general, "backup withholding" at a rate of 31% may
apply
- to payments of principal and interest made on an exchange note
- to payment of the proceeds of a sale or exchange of an exchange note
before maturity
that are made to a non-corporate U.S. holder if the holder fails to provide a
correct taxpayer identification number or otherwise comply with applicable
requirements of the backup withholding rules. The backup withholding tax is not
an additional tax and may be credited against a U.S. holder's U.S. federal
income tax liability, provided that correct information is provided to the
Internal Revenue Service. Corporate U.S. holders are not subject to backup
withholding. To avoid backup withholding, corporate holders may also be required
to provide a correct taxpayer identification number.
U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS
For the purposes of the following discussion, a non-U.S. holder is a
beneficial owner of an exchange note that is not, for U.S. federal income tax
purposes, a U.S. holder. An individual may, subject to exceptions, be deemed to
be a resident alien, as opposed to a non-resident alien, by virtue of being
present in the United States:
- on at least 31 days in the calendar year
- for an aggregate of at least 183 days during a three-year period ending
in the current calendar year, counting for such purposes all of the days
present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the
second preceding year
See "U.S. Federal Income Tax Consequences to U.S. holders" for a discussion
of the U.S. federal income tax consequences applicable to a resident alien.
Under present U.S. federal income and estate tax law and subject to the
discussion of backup withholding below:
(a) payments of principal, premium, if any, and interest on an exchange
note by us or any of our paying agents to a non-U.S. holder will not be subject
to withholding of U.S. federal income tax, provided that in the case of interest
- the non-U.S. holder does not directly or indirectly, actually or
constructively, own ten percent or more of the total combined voting
power of all classes of our voting stock within the meaning of Section
871(h)(3) of the Internal Revenue Code and the Treasury regulations
thereunder
- the non-U.S. holder is not (x) a controlled foreign corporation that
is related, directly or indirectly, to us through sufficient stock
ownership, or (y) a bank receiving interest described in Section
881(c)(3)(A) of the Internal Revenue Code
- such interest is not effectively connected with the conduct of a U.S.
trade or business by the non-U.S. holder
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- either (A) the beneficial owner of the exchange note certifies to us
or our paying agent, under penalties of perjury, that it is not a
"United States person" within the meaning of the Internal Revenue Code
and provides its name and address, or (B) a securities clearing
organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business
and holds the exchange note on behalf of the beneficial owner
certifies to us or our paying agent under penalties of perjury that
it, or the financial institution between it and the beneficial owner,
has received from the beneficial owner a statement, under penalties of
perjury, that it is not a "United States person" and provides the
payor with a copy of this statement
Non-U.S. holders may also be eligible for exemption or reduction from
applicable U.S. withholding taxes if the non-U.S. holder is eligible for the
benefits of an income tax treaty with the U.S. and satisfy applicable
documentation requirements.
(b) a non-U.S. holder will not be subject to U.S. federal income tax on any
gain or income realized on the sale, exchange, redemption, retirement at
maturity or other disposition of an exchange note (provided that, in the case of
proceeds representing accrued interest, the conditions described in paragraph
(a) above are met) unless
- in the case of gain, the non-U.S. holder is an individual who is present
in the United States for 183 days or more during the taxable year and
specific other conditions are met
- the gain is effectively connected with the conduct of a U.S. trade or
business by the non-U.S. holder, or if an income tax treaty applies, is
generally attributable to a U.S. "permanent establishment" maintained by
the non-U.S. holder
(c) an exchange note held by an individual who at the time of death is not
a citizen or resident of the United States will not be subject to U.S. federal
estate tax as a result of death if, at the time of death
- the individual did not directly or indirectly, actually or
constructively, own ten percent or more of the total combined voting
power of all classes of our stock entitled to vote within the meaning of
Section 871(h)(3) of the Internal Revenue Code and the Treasury
regulations thereunder
- the income on the exchange note would not have been effectively connected
with the conduct of a trade or business by the individual in the United
States
If a non-U.S. holder is engaged in a trade or business in the United States
and interest on the exchange note is effectively connected with the conduct of
that trade or business or, if an income tax treaty applies, and the non-U.S.
holder maintains a U.S. "permanent establishment" to which the interest is
generally attributable, interest on the exchange note will be exempt from the
withholding tax discussed in the preceding paragraph (a), provided that the
holder furnishes a properly executed IRS form on or before any payment date to
claim the exemption, but will be taxable income for U.S. federal income tax
purposes, and, accordingly, will be taxable in the manner described above under
"U.S. Federal Income Tax Consequences to U.S. holders-Taxation of Stated
Interest."
A foreign corporation that is a holder of an exchange note may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable income tax treaty. For this
purpose, interest on an exchange note or gain recognized on the disposition of
an exchange note will be included in earnings and profits if the interest or
gain is effectively connected with the conduct by the foreign corporation of a
trade or business in the United States.
Treasury regulations scheduled to be generally applicable to payments made
after December 31, 2000 will provide alternative methods for satisfying the
certification requirement described in paragraph (a) above. These regulations
may require a non-U.S. holder that provides an IRS form (as discussed above), or
that claims the benefit of an income tax treaty, to also provide its U.S.
taxpayer identification
105
<PAGE> 111
number. These regulations generally also will require, in the case of an
exchange note held by a foreign partnership, that
- the certification described in paragraph (a) above be provided by the
partners
- the partnership provide certain information, including a U.S. taxpayer
identification number
Further, a look-through rule will apply in the case of tiered partnerships.
Backup Withholding. Under current Treasury regulations, backup withholding
and information reporting will not apply to payments made by us or our paying
agents, in their capacities as such, to a non-U.S. holder of an exchange note if
the holder has provided the required certification that it is not a United
States person as set forth in paragraph (a) above, provided that neither we nor
our paying agent has actual knowledge that the holder is a United States person.
We or our paying agents may, however, report payments of interest on the
exchange notes. Payments of the proceeds from a disposition by a non-U.S. holder
of an exchange note made to or through a foreign office of a broker will not be
subject to information reporting or backup withholding, except that information
reporting and, under Treasury regulations scheduled to be generally applicable
to payments made after December 31, 2000, backup withholding may apply to those
payments if the broker is:
- a United States person
- a controlled foreign corporation for U.S. federal income tax purposes
- a foreign person 50% or more of whose gross income is effectively
connected with a U.S. trade or business for a specified three-year period
- with respect to payments made after December 31, 2000, a foreign
partnership, if at any time during its tax year, one or more of its
partners are U.S. persons, as defined in Treasury regulations, who in the
aggregate hold more than 50% of the income or capital interest in the
partnership or if, at any time during its tax year, the foreign
partnership is engaged in a U.S. trade or business
Payments of the proceeds from a disposition by a non-U.S. holder of an
exchange note made to or through the U.S. office of a broker is subject to
information reporting and backup withholding unless the holder or beneficial
owner certifies as to its taxpayer identification number or otherwise
establishes an exemption from information reporting and backup withholding.
You should consult your own tax advisor regarding application of backup
withholding in your particular circumstance and the availability of and
procedure for obtaining an exemption from backup withholding under current
Treasury regulations and the Treasury regulations that are scheduled to become
generally effective after December 31, 2000. Any amounts withheld under the
backup withholding rules from a payment to a non-U.S. holder will be allowed as
a refund or a credit against the holder's U.S. federal income tax liability,
provided the required information is furnished to the U.S. Internal Revenue
Service.
106
<PAGE> 112
PLAN OF DISTRIBUTION
Any broker-dealer who holds outstanding notes that are restricted
securities and notes that were acquired for its own account as a result of
market-marking activities or other trading activities other than restricted
securities acquired directly from us may exchange such outstanding notes
pursuant to the exchange offer. Such broker-dealer may be deemed to be an
"underwriter" within the meaning of the Securities Act, and, consequently, must
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of the exchange notes received by such broker-dealer
in the exchange offer.
Each broker-dealer participating in the exchange offer is required to
acknowledge in the letter of transmittal that, if the broker-dealer acquired the
outstanding notes as a result of market-making activities or other trading
activities, it will deliver a prospectus in connection with the resale of the
exchange notes.
Any profit on any resale of exchange notes and any commissions or
concessions received by any persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of exchange notes
received in exchange for outstanding notes if the outstanding notes were
acquired as a result of market-making activities or other trading activities.
We and our guarantor subsidiaries have agreed to make this prospectus, as
amended or supplemented, available to any broker-dealer to use in connection
with any such resale for a period of at least 180 days after the expiration
date.
Neither we nor our guarantor subsidiaries will receive any proceeds from
any sale of exchange notes by broker-dealers. Exchange notes received by
broker-dealers for their own accounts under the exchange offer may be sold from
time to time in one or more transactions
- in the over-the-counter market
- in negotiated transactions
- through the writing of options on the exchange notes or a combination of
such methods of resale
- at market prices prevailing at the time of resale
- at prices related to such prevailing market prices or
- at negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any such exchange notes.
We and each of our guarantor subsidiaries have jointly and severally agreed
to pay all expenses incident to the exchange offer, other than commissions or
concessions of any brokers or dealers. We will indemnify the holders of the
outstanding notes (including any broker-dealers) against liabilities under the
Securities Act.
107
<PAGE> 113
LEGAL MATTERS
The validity of the exchange notes as well as the validity of the
guarantees of the notes by SIA Adhesives, Inc. and Pierce & Stevens Corp. has
been passed upon for us by our counsel, Fried, Frank, Harris, Shriver & Jacobson
(a partnership including professional corporations), New York, New York. Fried,
Frank, Harris, Shriver & Jacobson, on behalf of its partners, is a limited
partner in a partnership which owns all of the equity in SSCI Investors LLC
which, in turn, owns approximately 75% of our capital stock. The validity of the
guarantees of the notes by OSI Sealants, Inc. and Tanner Chemicals, Inc. has
been passed upon by McBride Baker & Coles, and Wiggin & Nourie, P.A.,
respectively.
EXPERTS
The consolidated financial statements of Sovereign Specialty Chemicals,
Inc. and Subsidiaries, as of December 31, 1998 and 1999 and for the years ended
December 31, 1997, 1998 and 1999, included in this prospectus have been audited
by Ernst & Young LLP, independent auditors, as stated in their report appearing
in this prospectus and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We and our guarantor subsidiaries have filed with the Securities and
Exchange Commission a Registration Statement on Form S-4, the "exchange offer
registration statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto, pursuant to the Securities Act of 1933, and the
rules and regulations promulgated thereunder, covering the exchange notes being
offered. This prospectus does not contain all the information in the exchange
offer registration statement. For further information with respect to Sovereign,
the guarantor subsidiaries and the exchange offer, reference is made to the
exchange offer registration statement. Statements made in this prospectus as to
the contents of any contract, agreement or other documents referred to are not
necessarily complete. For a more complete understanding and description of each
contract, agreement or other document filed as an exhibit to the exchange offer
registration statement, we encourage you to read the documents contained in the
exhibits.
Pursuant to the indenture we have agreed, whether or not we are required to
do so by the rules and regulations of the Securities and Exchange Commission, to
furnish to the holders of the exchange notes and, to the extent permitted by
applicable law or regulation, file with the Securities and Exchange Commission
all reports and information that would be required to be filed with the
Securities and Exchange Commission pursuant to section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, or any successor provision by a
person subject to those provisions. In addition, for so long as any of the
exchange notes remain outstanding we have agreed under the indenture to make
available to any record holder, securities analysts and prospective investors,
upon their request, the information required by Rule 144A(d)(4) under the
Securities Act of 1933, as amended, during any period in which we are not
subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended.
You may read and copy any reports or other information filed by us at the
Securities and Exchange Commission public reference room at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
contained in the public reference room. Our filings with the Securities and
Exchange Commission are also available to the public from commercial document
retrieval services and at the Securities and Exchange Commission's Web site at
http://www.sec.gov.
108
<PAGE> 114
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
SOVEREIGN SPECIALTY CHEMICALS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998
and 1997............................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998
and 1997............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998
and 1997............................................... F-6
Notes to the Consolidated Financial Statements............ F-7
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 2000
(unaudited)............................................ F-26
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000
and 1999 (unaudited)................................... F-27
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000
and 1999 (unaudited)................................... F-28
Notes to the Consolidated Financial Statements............ F-29
</TABLE>
F-1
<PAGE> 115
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, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
February 25, 2000,
(Except for Note 18, as to which the date is March 23, 2000)
F-2
<PAGE> 116
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,005 $ 5,863
Accounts receivable, less allowance of $730 and $528...... 38,756 32,710
Inventories............................................... 26,028 19,822
Deferred income taxes..................................... 1,177 1,560
Other current assets...................................... 3,206 3,799
-------- --------
Total current assets........................................ 86,172 63,754
Property, plant, and equipment, net......................... 51,525 49,497
Goodwill, net............................................... 106,157 101,205
Deferred financing costs, net............................... 11,011 9,913
Other assets................................................ 2,974 1,198
-------- --------
Total assets................................................ $257,839 $225,567
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,591 $ 16,400
Accrued expenses.......................................... 19,814 13,452
Other current liabilities................................. 924 2,200
Current portion of long-term debt......................... 29,303 1,802
Current portion of capital lease obligations.............. 229 161
-------- --------
Total current liabilities................................... 68,861 34,015
Long-term debt, less current portion........................ 125,700 126,900
Capital lease obligations, less current portion............. 3,350 3,401
Deferred income taxes....................................... 2,676 2,849
Other long-term liabilities................................. 636 4,208
Stockholders' equity:
Common stock, $0.01 par value, 2,700,000 shares authorized,
1,436,239 issued and outstanding.......................... 15 --
Common stock, non-voting, $0.01 par value, 2,100,000 shares
authorized, 730,182 issued and outstanding................ 7 --
Additional paid-in capital.................................. 63,578 55,652
Retained earnings (accumulated deficit)..................... (7,045) 949
Management notes receivable................................. -- (2,535)
Cumulative translation adjustment........................... 61 128
-------- --------
Total stockholders' equity.................................. 56,616 54,194
-------- --------
Total liabilities and stockholders' equity.................. $257,839 $225,567
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 117
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $237,408 $211,335 $134,771
Cost of goods sold.......................................... 162,550 144,039 92,889
-------- -------- --------
Gross profit................................................ 74,858 67,296 41,882
Selling, general, and administrative expenses............... 48,350 46,418 30,294
Special charges............................................. 14,153 -- --
-------- -------- --------
Operating income............................................ 12,355 20,878 11,588
Interest expense............................................ (15,276) (14,979) (9,080)
Interest income............................................. 200 267 --
Loss on sale of business.................................... -- (1,025) --
-------- -------- --------
Income (loss) before income taxes and extraordinary loss.... (2,721) 5,141 2,508
Income taxes................................................ 4,218 3,494 1,315
-------- -------- --------
Income (loss) before extraordinary loss..................... (6,939) 1,647 1,193
Extraordinary losses, net of income tax benefits............ 1,055 176 1,409
-------- -------- --------
Net income (loss)........................................... $ (7,994) $ 1,471 $ (216)
======== ======== ========
Pro forma (See Note 3, "Income Taxes"):
Net income before income taxes and extraordinary loss, as
stated.................................................... $ 2,508
Income taxes:
As stated................................................. 1,315
Additional pro forma income taxes......................... 657
--------
................................... 1,972
--------
Net income before extraordinary loss........................ 536
Extraordinary loss.......................................... 1,409
--------
Net loss.................................................... $ (873)
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 118
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON EARNINGS MANAGEMENT OTHER
COMMON STOCK, ADDITIONAL (ACCUMULATED NOTES COMPREHENSIVE
STOCK NON-VOTING PAID-IN CAPITAL DEFICIT) RECEIVABLE INCOME TOTAL
------ ---------- --------------- ------------ ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997......... $ -- $ -- $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............... -- -- 900 -- -- -- 900
---- ---- ------- ------- ------- --- -------
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
Comprehensive loss:
Net loss......................... -- -- -- (7,994) -- -- (7,994)
Translation adjustment........... -- -- -- -- -- (67) (67)
-------
Total comprehensive
loss................... (8,061)
Recapitalization of capital
stock............................ 15 7 (22) -- -- -- --
Payments received on management/
notes receivable................. -- -- (2,480) -- 2,535 -- 55
Repurchase of common stock......... -- -- (3,328) -- -- -- (3,318)
Compensation expense under/
management incentive plans....... -- -- 13,746 -- -- -- 13,746
---- ---- ------- ------- ------- --- -------
Balance at December 31, 1999....... $ 15 $ 7 $63,578 $(7,045) $ -- $61 $56,616
==== ==== ======= ======= ======= === =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 119
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ (7,994) $ 1,471 $ (216)
Adjustments to reconcile net income (loss)to net cash
provided by operating activities:
Depreciation and amortization.......................... 10,965 9,477 6,049
Loss on sale of business............................... -- 1,025 --
Compensation expense under management incentive
plans................................................ 13,746 408 --
Deferred income taxes.................................. 200 2,025 238
Amortization of deferred financing costs............... 1,185 1,213 651
Extraordinary losses................................... 1,055 176 1,409
Changes in operating assets and liabilities (net of
acquisitions and disposition):
Accounts receivable.................................. (4,751) (7,371) 642
Inventories.......................................... (5,350) (1,293) (114)
Prepaid expenses and other assets.................... 747 567 (1,889)
Accounts payable and other liabilities............... 1,148 5,920 (384)
-------- -------- ---------
Net cash provided by operating activities................... 10,951 13,618 6,386
INVESTING ACTIVITIES
Proceeds from sale of business.............................. -- 35,308 --
Acquisition of businesses, net of acquired cash............. (15,769) (15,089) (133,338)
Purchase of property, plant, and equipment.................. (6,280) (4,472) (1,834)
-------- -------- ---------
Net cash provided by (used in) investing activities......... (22,049) 15,747 (135,172)
FINANCING ACTIVITIES
Capital contributions....................................... -- -- 33,800
Payments on management notes receivable..................... 55 230 --
Proceeds from credit facilities............................. 69,861 6,524 593
Payments on credit facilities............................... (42,660) (6,215) --
Proceeds from issuance of long term debt.................... -- -- 155,000
Deferred financing costs.................................... (4,041) (282) (12,672)
Payments on acquisition notes payable....................... (900) -- --
Payments on long-term debt.................................. -- (30,081) (41,360)
Payments on capital lease obligations....................... (194) (122) (270)
-------- -------- ---------
Net cash provided by (used in) financing activities......... 22,121 (29,946) 135,091
Effect of exchange rate changes on cash..................... 119 31 4
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 11,142 (550) 6,309
Cash and cash equivalents at beginning of year.............. 5,863 6,413 104
-------- -------- ---------
Cash and cash equivalents at end of year.................... $ 17,005 $ 5,863 $ 6,413
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 120
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. RECAPITALIZATION AND BASIS OF PRESENTATION
On December 28, 1999, Sovereign Specialty Chemicals, Inc. (the Company)
amended and restated its certificate and articles of incorporation in order to
reclassify, change and convert its Capital Stock which was wholly owned by
Sovereign Specialty Chemicals L.P. (the Parent Partnership). This
recapitalization converted 1,000 shares of common stock, par value $0.01 per
share into 2,700,000 authorized shares of common stock, par value $0.01 per
share (common stock) and 2,100,000 authorized shares of non-voting common stock,
par value $0.01 per share (non-voting common stock). Immediately upon the
effectiveness of the amended and restated certificate of incorporation, the
Company had outstanding 1,469,418 shares of common stock and 730,182 share of
non-voting common stock.
On December 28, 1999, the Company repurchased 33,179 shares of outstanding
common stock held by the Parent Partnership for an aggregate price of
approximately $3.3 million. The repurchase price of $2.3 million, net of $1.0
million in receivables due from the Parent Partnership, is a current liability
at December 31, 1999.
On December 30, 1999, SSCI Investors LLC, a newly formed entity owned by an
investor group acquired approximately 75% of the Company's outstanding common
stock directly from the Company's Parent Partnership, which represented all of
their remaining shares owned by the Parent Partnership (Former Parent
Partnership). The balance of the common stock is owned by other investors and
members of the Company's management. The transaction resulted in a change of
controlling stockholder of the Company; however, generally accepted accounting
principles do not require a change in carrying value of assets and liabilities
and, as such, the Company continues to carry its assets and liabilities at their
historical carrying value.
Effective July 31, 1997, 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. The financial statements 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.
Unless otherwise noted, all references to "the Company" herein refer to
Sovereign and its wholly owned subsidiaries.
F-7
<PAGE> 121
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
primarily using the first-in first-out (FIFO) method.
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 $4,591, $4,237 and $2,979 for the periods ended
December 31, 1999, 1998 and 1997, 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
$13,533 and $7,926 at December 31, 1999 and 1998, respectively.
Deferred Financing Costs
The costs of obtaining financing are capitalized and are being amortized
over the life of the related debt using a method which approximates the interest
method. Accumulated amortization was $2,645 and $1,877 at December 31, 1999 and
1998, respectively.
Long-Lived Assets
The Company evaluates its long-lived assets (including related goodwill) on
an ongoing basis. Long-lived assets 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.
F-8
<PAGE> 122
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 have filed a consolidated
federal tax return. The statement of operations for the year ended December 31,
1997 include "pro forma" income taxes as if the companies had been subject to
income taxes for all periods presented.
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 $4.7 million, $4.2 million and $3.0 million for
the periods ended December 31, 1999, 1998 and 1997, respectively.
Translation of Foreign Currencies
Except as noted below, the Company's foreign subsidiaries use the local
currency as their functional currency; accordingly, their balance sheets are
translated using the current exchange rates as of the reporting dates and the
statement of operations accounts are translated using a weighted-average
exchange rate during the period. Adjustments resulting from such translation are
included in cumulative translation adjustment, a separate component of
stockholder's equity. Mexico was classified as a hyperinflationary economy
through December 31, 1998 and, as a result, the Company's Mexican subsidiary was
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 and gains and losses on such remeasurement were included
in the statement of operations for the two years ended December 31, 1998.
Effective January 1, 1999, Mexico was no longer classified as a
hyper-inflationary economy and as a result the Company's Mexican subsidiary used
its local currency as its functional currency for the year ended December 31,
1999.
Segment Information
Management and the Company's chief operating decision maker assess
performance and make decisions about resource allocation on a consolidated basis
as the Company operates in one business segment, 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 receivable or net sales for the years
ended December 31, 1999, 1998 and 1997.
F-9
<PAGE> 123
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999
and 1998, 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.
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 allowance for
doubtful accounts.
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 years' amounts have been reclassified to conform to the 1999
presentation.
4. BUSINESS COMBINATIONS AND SALE OF BUSINESS
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 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
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.
F-10
<PAGE> 124
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective April 19, 1999, the Company acquired the net assets of the
flexible packaging coatings business from The Valspar Corporation. The purchase
price was approximately $15.8 million. Goodwill of approximately $10.5 million
and a covenant not to compete of $3.0 million were recognized in the acquisition
and are being amortized over a period of 15 and three years, respectively.
These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the allocation of the cost of the acquired assets and
liabilities have been made on the basis of the estimated fair value. The
consolidated financial statements include the operating results of each business
from the date of acquisition.
5. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Raw materials............................................... $ 9,920 $ 8,515
Work in process............................................. 386 326
Finished goods.............................................. 15,722 10,981
------- -------
$26,028 $19,822
======= =======
</TABLE>
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Land........................................................ $ 5,148 $ 4,891
Building and improvements................................... 22,956 19,677
Machinery and equipment..................................... 32,018 28,017
Furniture and fixtures...................................... 1,121 936
Construction-in-progress.................................... 2,618 3,742
------- -------
63,861 57,263
Less: Accumulated depreciation.............................. 12,336 7,766
------- -------
$51,525 $49,497
======= =======
</TABLE>
7. OTHER ASSETS
Other assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
------ ------
<S> <C> <C>
Covenants not to compete.................................... $2,483 $ 250
Other....................................................... 491 948
------ ------
$2,974 $1,198
====== ======
</TABLE>
The Company recorded covenants not to compete of $3.0 million and $0.3
million from certain acquisitions. These covenants are being amortized over a
three year period, the lives of the agreements. Accumulated amortization related
to the covenants was $817 and $50, at December 31, 1999 and 1998, respectively.
F-11
<PAGE> 125
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Interest.................................................... $ 5,212 $ 5,121
Compensations and benefits.................................. 5,816 4,118
Rebates and warranty........................................ 2,352 1,173
Stock repurchase............................................ 2,348 --
Long Term Incentive Plan payable............................ 1,536 --
Other....................................................... 2,550 3,040
------- -------
$19,814 $13,452
======= =======
</TABLE>
9. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Senior subordinated notes................................... $125,000 $125,000
Credit facilities........................................... 28,103 902
Acquisition notes payable................................... 1,900 2,800
-------- --------
155,003 128,702
Less: Current maturities.................................... 29,303 1,802
-------- --------
$125,700 $126,900
======== ========
</TABLE>
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 were subsequently registered with the Securities and Exchange
Commission. As a result of the change in control of the controlling stockholder
on December 30, 1999, the Company was required under the provisions of the
indenture, to offer to repurchase the Notes at a price equal to 101% of the
principal amount plus accrued and unpaid interest. See Note 18, "Subsequent
Events".
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 domestic 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 credit facilities, subject to certain limitations. See also Note 19
"Other Financial Information" for financial information as of December 31, 1999,
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.
F-12
<PAGE> 126
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facilities
On December 30, 1999, the Company repaid all outstanding amounts under its
former credit facility and entered into a new credit agreement (Credit
Agreement) providing for aggregate borrowings of $200.0 million. The Credit
Agreement includes (1) a $50.0 million revolving credit facility (Credit
Facility) (including letters of credit of up to $1.5 million, $1.1 million
balance at December 31, 1999), (2) a $75.0 million term loan (Term Loan A) and
(3) a $75.0 million term loan (Term Loan B) for, among other uses, working
capital purposes and to fund acquisitions.
The Credit Facility matures December 30, 2005. Commitment fees on the
unused portion of the Credit Facility of 0.375% to 0.050% are payable quarterly
in arrears. At December 31, 1999, the Company had $6.0 million outstanding and
$42.9 million in available borrowings under the Credit Facility.
Term Loan A and Term Loan B are payable in quarterly principal installments
based on a percentage of the aggregate principal balance outstanding, as defined
in the Credit Agreement, beginning March 31, 2001 through December 30, 2005 and
December 30, 2006, respectively. At December 31, 1999, the Company had $75.0
million available under Term Loan A and had $21.0 million outstanding and $54.0
million available under Term Loan B.
At the Company's election, amounts outstanding under the Credit Facility,
Term Loan A and Term Loan B will bear interest, payable quarterly, at either the
higher of the bank's prime rate (8.50% at December 31, 1999) or the Federal
Funds rate plus 1/2 to 1%, plus 0.75% to 2.00%, or LIBOR (6.00% at December 31,
1999) plus 1.75% to 3.00%. The variable spread to the prime rate or LIBOR is
determined by the Company's ratios of total debt to earnings before income
taxes, interest, depreciation and amortization expense (EBITDA) and senior debt,
as defined in the Agreement, to EBITDA after June 30, 2000.
The Credit Agreement contains covenants that, among other things, restrict
the ability to incur additional indebtedness, dispose of assets, repay or amend
other indebtedness, pay dividends, or make other changes in the business
conducted by the Company or its subsidiaries. In addition the Credit Agreement
requires compliance with specific financial ratios and tests, as defined in the
Credit Agreement. All covenants were met at December 31, 1999. The Credit
Facility and term loans are collateralized by substantially all assets of the
Company and pledged by the common stock of the Company's subsidiaries.
The Company's Singapore-based sales office has a facility providing for
borrowings up to SG $1.9 million and secured by a SG $1.9 million letter of
credit. Interest is payable at United States prime plus 1.0%. At December 31,
1999, approximately $1.1 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 is payable in two annual installments, and a $1.0 million
note payable that has a maturity date of June 30, 2003. Both notes accrue
interest at a rate of 8.5% payable on each June 30.
F-13
<PAGE> 127
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual Maturities
Annual maturities of the Company's long-term debt are as follows at
December 31, 1999:
<TABLE>
<S> <C>
2000...................................................... $ 29,303
2001...................................................... 200
2002...................................................... 200
2003...................................................... 300
2004...................................................... --
2005 and thereafter....................................... 125,000
--------
$155,003
========
</TABLE>
10. INCOME TAXES
The components of the provision for income taxes, are as follows for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current income taxes:
Federal.................................................. $3,417 $ 979 $ 801
State.................................................... 601 205 245
Foreign.................................................. -- 207 31
------ ------ ------
4,018 1,391 1,077
Deferred income taxes...................................... 200 2,103 238
------ ------ ------
4,218 3,494 1,315
Extraordinary items........................................ (703) (118) (948)
------ ------ ------
Income taxes............................................... $3,515 $3,376 $ 367
====== ====== ======
</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, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ -----
<S> <C> <C> <C>
Income taxes at federal statutory rate..................... $(1,523) $1,663 $ 47
Income not subject to income taxes......................... -- -- (558)
State taxes, net of federal benefit........................ 359 358 181
Foreign income taxes....................................... -- 207 31
Increase (decrease) in valuation allowance................. -- (400) 400
Non-deductible amortization of goodwill.................... 487 596 281
Non-deductible stock compensation expense.................. 4,151 124 --
Other...................................................... 41 828 (15)
------- ------ -----
Income taxes at the effective rate......................... $ 3,515 $3,376 $ 367
======= ====== =====
</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. Stock compensation expense represents the tax
impact of non-
F-14
<PAGE> 128
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deductible stock compensation expense recognized by the Company. This
significant increase in 1999 is due primarily to the accelerated vesting of
incentive units as a result of the sale of equity by the Parent Partnership.
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,
-----------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 366 $ 292
Inventory obsolescence reserve............................ 372 218
Inventory capitalization.................................. -- 197
Accrued liabilities....................................... 421 531
Deferred financing costs.................................. 310 334
Other..................................................... 262 553
------- -------
Deferred tax assets......................................... 1,731 2,125
Deferred tax liabilities:
Accelerated depreciation.................................. (2,562) (2,244)
Inventory capitalization.................................. (42) --
Amortization of goodwill.................................. (623) (1,051)
Refundable investment tax credits......................... -- (126)
------- -------
Deferred tax liabilities.................................... (3,227) (3,421)
------- -------
Net deferred tax liability.................................. $(1,496) $(1,296)
======= =======
</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-15
<PAGE> 129
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth the Company's two defined benefit plans:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Change in projected benefit obligations
Projected benefit obligation at beginning of year......... $1,965 $1,752
Service cost.............................................. 88 121
Interest cost............................................. 129 123
Actuarial (gains) losses.................................. (181) 75
Benefits paid............................................. (109) (106)
------ ------
Projected benefit obligation at end of year............... $1,892 $1,965
====== ======
Change in plan assets
Fair value of plan assets at beginning of year............ $1,621 $1,742
Actual return on plan assets.............................. 443 (114)
Company contributions..................................... 75 99
Benefits paid............................................. (108) (106)
------ ------
Fair value of plan assets at end of year.................. $2,031 $1,621
====== ======
Funded status
Funded status............................................. $ 139 $ (344)
Unrecognized net actuarial (gain) loss.................... 243 (223)
------ ------
Accrued benefit cost...................................... $ 104 $ 121
====== ======
Amounts recognized in the consolidated balance sheets
consist of:
Accrued benefit liability................................. $ 104 $ 121
====== ======
Weighted-average assumptions as of December 31
Discount rate............................................. 7.5% 6.75%
Expected return on plan assets............................ 10% 10%
Rate of compensation increase............................. 4.5% 4.5%
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost.............................................. $ 88 $ 121 $ 104
Interest cost............................................. 129 123 117
Expected return on plan assets............................ (160) (174) (316)
----- ----- -----
Net periodic benefit cost................................. $ 57 $ 70 $ (95)
===== ===== =====
</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 $1,042, $1,020 and $600 for the periods ended December 31,
1999, 1998 and 1997, respectively.
F-16
<PAGE> 130
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. MANAGEMENT INCENTIVE PLANS AND NOTES RECEIVABLE
The Company has implemented certain management incentive plans.
Stock Incentive Pool
The Former Parent Partnership established a Stock Incentive Pool in order
to provide incentives to employees and directors (including nonemployee
directors) of 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 were allocated by the Compensation Committee of
the Board of Directors of the Company. An award granted from the Stock Incentive
Pool was 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 stock compensation expense for the excess of the fair
market value of the units and common stock over the purchase price in the amount
of $864, $408 and $22 for the years ended December 31, 1999, 1998 and 1997. The
change in controlling stockholder on December 30, 1999, constituted a change in
control under the securities agreements governing the Stock Incentive Pool. As a
result all units and stock issued under the plan immediately vested on December
30, 1999. The Company recognized stock 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 $11.3 million. This expense has been classified in
special charges in our statement of operations. The Stock Incentive Pool was
terminated on December 30, 1999.
Long-Term Incentive Plan
The Former Parent Partnership established a Long-Term Incentive Plan to
provide long-term incentive awards to nonunion employees (excluding most
executives who participated directly in the Stock Incentive Pool). In connection
with the December 30, 1999 sale of the Company's common stock by the Parent
Partnership, the Board of directors determined that $1.5 million of cash should
be distributed to eligible employees. This value was contributed to the Company
from the Parent Partnership's net proceeds on December 30, 1999. The Company
recognized stock compensation expense for the value of the pool at December 30,
1999 of $1.5 million and has been classified in special changes in our statement
of operations.
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 the Company
as an equity contribution. The amount contributed was approximately $2.8
million. The notes receivable were collateralized by the Parent Partnership
units, and as such, the balance had been reflected as a reduction of the
Company's stockholder's equity. The balance of the management loans at December
30, 1999 was approximately $2.5 million. Upon the change of controlling
stockholder of the Company on December 30, 1999, the balance of management loans
were repaid by certain members of management from their net sale proceeds.
1999 Stock Option Plan
On December 29, 1999, the Company adopted its Sovereign Specialty
Chemicals, Inc. Stock Option Plan (the Plan), which provides incentives to key
employees and directors (including nonemployee directors) of the Company by
granting them nonqualified stock options of up to 240,713 shares of the
Company's common stock. The Plan is administered by a committee of the Board of
Directors which has the authority to determine the employees to whom options
will be granted, the number of options, and other terms and conditions of the
options. Options are granted at not less than the fair value on the date of
F-17
<PAGE> 131
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant. Options granted from the Plan are subject to a five year vesting period
and expire ten years from the date of grant. Options available for grant are
87,663 at December 31, 1999.
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 options under the Company's
Plan. Accordingly, compensation expense has only been recognized for options
with an exercise price below the market value at the date of grant. Had
compensation cost for the Company's Plan 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 6.50% and
expected award lives of 5 years for 1999. 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 options 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.
13. CAPITAL LEASES
Property under capital leases included within property, plant, and
equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1999 1998
------ ------
<S> <C> <C>
Buildings................................................... $1,912 $1,912
Machinery and equipment..................................... 298 105
------ ------
2,210 2,017
Less: Accumulated depreciation.............................. 539 324
------ ------
$1,671 $1,693
====== ======
</TABLE>
Future minimum lease payments under capital leases at December 31, 1999,
together with the present value of the minimum lease payments are as follows:
<TABLE>
<S> <C>
2000....................................................... $ 692
2001....................................................... 688
2002....................................................... 708
2003....................................................... 684
2004....................................................... 676
2005 and thereafter........................................ 2,611
------
Total minimum payments..................................... 6,059
Less: Amounts representing interest........................ 2,480
------
Present value of minimum payments.......................... 3,579
Less: Current portion...................................... 229
------
Total long-term portion.................................... $3,350
======
</TABLE>
F-18
<PAGE> 132
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 relating 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 clean up, and for certain damages resulting from past spills,
disposals, or other releases of hazardous substances. In connection with its
acquisitions 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 require or may require
remediation. In addition, 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 has negotiated contractual indemnifications from previous
owners of acquired businesses, 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, 1999, the Company had accrued reserves relating to
environmental matters of approximately $0.4 million. The liabilities are
included in the balance sheet as "other current liabilities" and represent known
environmental liabilities for which the Company have been indemnified.
Management estimates that it will incur approximately $0.4 million of these
indemnified liabilities in 2000. 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Cash paid for:
Interest............................................... $13,427 $13,675 $3,536
Income taxes........................................... 3,544 2,223 302
Supplemental disclosure of non-cash activity:
Debt issued for capital leased assets.................. 193 -- --
</TABLE>
16. SPECIAL CHARGES
As a result of the change of controlling stockholder of the Company on
December 30, 1999, the Company incurred incremental expenses totaling $14.2
million, consisting of $11.3 million in stock compensation expense related to
accelerated vesting of incentive equity awards previously issued to certain
members of management, $1.5 million in compensation expense related to a
disbursement made to employees under the Long-Term Incentive Plan, $0.8 million
in cash bonuses related to the transaction and $0.6 million in legal, accounting
and other fees.
17. EXTRAORDINARY LOSSES
During 1997, the Company repaid its outstanding debt obligations under
certain credit agreements and recognized an extraordinary loss related to the
write-off of unamortized deferred financing costs of $1,409, net of tax benefit
of $948.
F-19
<PAGE> 133
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, the Company repaid its outstanding debt obligations under its
$30.0 million term loan and recognized an extraordinary loss related to the
write-off of unamortized deferred financing costs of $176, net of tax benefit of
$118.
During 1999, the Company refinanced its prior credit facility and
recognized an extraordinary loss related to the write-off of unamortized
deferred financing costs of $1,055, net of tax benefit of $703.
18. SUBSEQUENT EVENTS
Employee Stock Purchase Plan
On January 26, 2000, the Company adopted its Sovereign Specialty Chemicals,
Inc. Employee Stock Purchase Plan in order to provide incentives to salaried
employees (excluding executives who participate directly in the Sovereign
Specialty Chemicals, Inc. Stock Option Plan) by providing them the opportunity
to purchase up to 20,000 shares of common stock of the Company. The compensation
committee of the Board of Directors will administer the plan. As of March 23,
2000, the Company's employees have subscribed to purchase 7,045 Class A common
shares.
Senior Subordinated Notes
The change of controlling stockholder of the Company constituted a change
of control under the terms of the indenture relating to the Company's 9 1/2%
Senior Subordinated Notes due 2007 and, as a result, the Company was required to
make an offer to purchase for cash any and all of its outstanding $125.0 million
principal amount of 9 1/2% notes for 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase. The repurchase of 100% of
the outstanding Notes was completed on March 6, 2000 with the repurchase of the
entire $125.0 million principal amount of 9 1/2% notes for an aggregate purchase
price of approximately $127.4 million which was financed with borrowings under
the Credit Agreement.
The Company is proposing to issue $150.0 million in aggregate principal
amount of senior subordinated notes due 2010 in a private placement to qualified
institutional investors in accordance with Securities Exchange Commission Rule
144A and outside of the United States in accordance with Regulation S under the
Securities Act of 1933. The Company intends to use proceeds from this offering,
if consummated, to repay amounts drawn under the Credit Agreement for the
repurchase of the 9 1/2% notes.
F-20
<PAGE> 134
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. 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, 1999,
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."
<TABLE>
<CAPTION>
GUARANTOR
SUBSIDIARIES
------------ NON-GUARANTOR
THE COMPANY SUBSIDIARIES TOTAL
------------ ------------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................... $227,794 $9,614 $237,408
Cost of goods sold...................................... 155,803 6,747 162,550
-------- ------ --------
Gross profit............................................ 71,991 2,867 74,858
Selling, general, and administrative expenses........... 60,293 2,210 62,503
-------- ------ --------
Operating income........................................ 11,698 657 12,355
Interest expense, net................................... 14,927 149 15,076
-------- ------ --------
Income (loss) before income taxes and extraordinary
loss.................................................. $ (3,229) $ 508 $ (2,721)
======== ====== ========
BALANCE SHEET DATA:
Assets:
Current assets.......................................... $ 80,156 $6,016 $ 86,172
Property, plant and equipment, net...................... 50,462 1,063 51,525
Goodwill, net........................................... 106,157 -- 106,157
Deferred financing costs, net........................... 11,011 -- 11,011
Other assets............................................ 2,878 96 2,974
-------- ------ --------
Total assets............................................ $250,664 $7,175 $257,839
======== ====== ========
Liabilities and stockholders' equity:
Current liabilities..................................... $ 62,799 $6,062 $ 68,861
Long-term liabilities................................... 132,362 -- 132,362
Total stockholders' equity.............................. 55,503 1,113 56,616
-------- ------ --------
Total liabilities and stockholders' equity.............. $250,664 $7,175 $257,839
======== ====== ========
</TABLE>
F-21
<PAGE> 135
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GUARANTOR
SUBSIDIARIES
------------ NON-GUARANTOR
THE COMPANY SUBSIDIARIES TOTAL
------------ ------------- --------
<S> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA
OPERATING ACTIVITIES
Net income (loss)....................................... $ (8,457) $ 463 $ (7,994)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 10,836 129 10,965
Deferred income taxes................................. 200 -- 200
Compensation expense on management incentive plan..... 13,746 -- 13,746
Amortization of deferred financing costs.............. 1,185 -- 1,185
Extraordinary losses.................................. 1,055 -- 1,055
Changes in operating assets and liabilities (net of
effect of acquired companies)...................... (7,883) (323) (8,206)
-------- ------ --------
Net cash provided by operating activities............... 10,682 269 10,951
INVESTING ACTIVITIES
Acquisition of business, net of acquired cash........... (15,769) -- (15,769)
Purchase of property, plant, and equipment.............. (5,908) (372) (6,280)
-------- ------ --------
Net cash used in investing activities................... (21,677) (372) (22,049)
FINANCING ACTIVITIES
Capital contributions................................... 55 -- 55
Net proceeds from revolving credit facilities........... 27,000 201 27,201
Deferred financing costs................................ (4,041) -- (4,041)
Payments on acquisition notes payable................... (900) -- (900)
Payments on capital lease obligations................... (194) -- (194)
-------- ------ --------
Net cash provided by financing activities............... 21,920 201 22,121
Effect of exchange rate changes on cash................. 221 (102) 119
-------- ------ --------
Net increase (decrease) in cash and cash equivalents.... 11,146 (4) 11,142
Cash and cash equivalents at beginning of year.......... 5,523 340 5,863
-------- ------ --------
Cash and cash equivalents at end of year................ $ 16,669 $ 336 $ 17,005
======== ====== ========
</TABLE>
F-22
<PAGE> 136
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following sets forth the financial data at December 31, 1998 and for
the year then ended. For purposes of this disclosure, the results of operations
for Mercer for the period ended April 21, 1998 (date of disposition) are
separately reported.
<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.................................... 1,016 182 1,198
-------- ------- --------
Total assets.................................... $221,215 $ 4,352 $225,567
======== ======= ========
Liabilities and stockholder's equity (deficit):
Current liabilities............................. $ 30,665 $ 3,350 $ 34,015
Long-term liabilities........................... 135,130 2,228 137,358
Total stockholder's equity (deficit)............ 55,420 (1,226) 54,194
-------- ------- --------
Total liabilities and stockholder's equity...... $221,215 $ 4,352 $225,567
======== ======= ========
</TABLE>
F-23
<PAGE> 137
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE 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)...... (1,189) (1,021) 33 (2,177)
-------- ------ ------- --------
Net cash provided by (used in) operating
activities.................................... 13,759 (277) 136 13,618
INVESTING ACTIVITIES
Acquisition, disposition of businesses, net (net
of acquired cash)............................. 20,255 (36) -- 20,219
Purchase of property, plant, and equipment...... (3,960) (188) (324) (4,472)
-------- ------ ------- --------
Net cash provided by (used in) investing
activities.................................... 16,295 (224) (324) 15,747
FINANCING ACTIVITIES
Capital contributions........................... 230 -- -- 230
Net proceeds from revolving credit facilities... (29) -- 338 309
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 provided by financings
activities.................................... (30,284) -- 338 (29,946)
Effect of exchange rate changes on cash......... 31 -- -- 31
-------- ------ ------- --------
Net increase decrease in cash and cash
equivalents................................... (199) (501) 150 (550)
Cash and cash equivalents at beginning of
year.......................................... 5,722 501 190 6,413
-------- ------ ------- --------
Cash and cash equivalents at end of year........ $ 5,523 $ -- $ 340 $ 5,863
======== ====== ======= ========
</TABLE>
F-24
<PAGE> 138
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE 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 1,703 30,294
--------- ------ ------ --------
Operating income (loss)......................... 10,651 1,125 (188) 11,588
Interest expense................................ 7,858 1,117 105 9,080
--------- ------ ------ --------
Income (loss) before income taxes and
extraordinary losses.......................... $ 2,793 $ 8 $ (293) $ 2,508
========= ====== ====== ========
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
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)...... (1,251) (391) (103) (1,745)
--------- ------ ------ --------
Net cash provided by (used in) operating
activities.................................... 6,279 476 (369) 6,386
INVESTING ACTIVITIES
Acquisition of businesses, net (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-25
<PAGE> 139
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,483
Accounts receivable, net.................................. 42,673
Inventories............................................... 27,109
Deferred income taxes..................................... 1,177
Other current assets...................................... 5,517
--------
Total current assets........................................ 85,959
Property, plant, and equipment, net......................... 50,518
Goodwill, net............................................... 104,687
Deferred financing costs, net............................... 9,714
Other assets................................................ 3,887
--------
Total assets................................................ $254,765
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,498
Accrued expenses.......................................... 10,123
Other current liabilities................................. 777
Current portion of long-term debt......................... 16,298
Current portion of capital lease obligations.............. 229
--------
Total current liabilities................................... 45,925
Long-term debt, less current portion........................ 149,632
Capital lease obligations, less current portion............. 3,291
Deferred income taxes....................................... 2,676
Other long-term liabilities................................. 626
Stockholders' equity:
Common stock, $0.01 par value, 2,700,000 shares authorized,
1,436,239 issued and outstanding.......................... 15
Common stock, non-voting, $0.01 par value, 2,100,000 shares
authorized, 730,182 issued and outstanding................ 7
Additional paid-in capital.................................. 63,578
Accumulated deficit......................................... (10,936)
Cumulative translation adjustments.......................... (49)
--------
Total stockholders' equity.................................. 52,615
--------
Total liabilities and stockholders' equity.................. $254,765
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 140
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales................................................... $60,812 $55,766
Cost of goods sold.......................................... 41,302 37,880
------- -------
Gross profit................................................ 19,510 17,886
Selling, general and administrative expenses................ 13,176 11,938
------- -------
Operating income............................................ 6,334 5,948
Interest expense, net....................................... 4,176 3,462
------- -------
Income before income taxes and extraordinary loss........... 2,158 2,486
Income taxes................................................ 1,221 1,106
------- -------
Income before extraordinary loss............................ 937 1,380
Extraordinary loss, net of income tax benefit............... (4,828) --
------- -------
Net (loss) income........................................... $(3,891) $ 1,380
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-27
<PAGE> 141
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income........................................... $ (3,891) $ 1,380
Adjustments to reconcile net (loss) income to cash used in
operating activities:
Depreciation and amortization............................. 3,076 2,451
Amortization of deferred financing costs.................. 351 295
Extraordinary loss........................................ 4,828 --
Compensation expense under management incentive plans..... -- 90
Changes in operating assets and liabilities:
Accounts receivable.................................... (3,917) (5,476)
Inventories............................................ (1,081) (4,133)
Prepaid expenses and other assets...................... (2,537) 490
Accounts payable....................................... (93) 3,436
Accrued expenses and other............................. (7,296) (3,975)
--------- ---------
Net cash used in operating activities....................... (10,560) (5,442)
INVESTING ACTIVITIES
Purchase of property, plant and equipment................... (780) (2,180)
--------- ---------
Net cash used in investing activities....................... (780) (2,180)
FINANCING ACTIVITIES
Payments on long-term debt.................................. (126,250) --
Proceeds from issuance of long-term debt.................... 148,932 --
Payments for deferred financing costs....................... (5,773) --
Payments on capital lease obligations....................... (59) (47)
Proceeds from revolving credit facilities................... 134,000 8,000
Payments on revolving credit facilities..................... (147,000) (57)
--------- ---------
Net cash provided by financing activities................... 3,851 7,896
Effect of exchange rate changes on cash..................... (32) (84)
--------- ---------
Net (decrease) increase in cash and cash equivalents........ (7,522) 190
Cash and cash equivalents at beginning of period............ 17,005 5,863
--------- ---------
Cash and cash equivalents at end of period.................. $ 9,483 $ 6,053
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-28
<PAGE> 142
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the periods ended March
31, 2000 and 1999, respectively, include the accounts of Sovereign Specialty
Chemicals, Inc. and its wholly-owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.
Management and the Company's chief operating decision makers assess performance
and make decisions about resource allocation on a consolidated basis as the
Company operates in one business segment. The Company operates in the adhesives
sealants and coatings segment of the specialty chemicals industry.
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.
INTERIM FINANCIAL INFORMATION
The unaudited interim consolidated financial statements of the Company, in
the opinion of management, reflect all necessary adjustments, consisting only of
normal recurring adjustments, for a fair presentation of results as of the dates
and for the interim periods covered by the financial statements. The results for
the interim periods are not necessarily indicative of the results of operations
to be expected for the entire year.
The unaudited interim consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and reporting
practices. Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission; however, the Company believes the
disclosures are adequate to make the information not misleading. The unaudited
interim consolidated financial statements contained herein should be read in
conjunction with the audited financial statements and notes included herein.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw Materials...................................... $ 9,821 $ 9,920
Work in process.................................... 448 386
Finished Goods..................................... 16,840 15,722
------- -------
$27,109 $26,028
======= =======
</TABLE>
3. LONG-TERM DEBT
The change of controlling stockholder of the Company, on December 30, 1999,
constituted a change of control under the terms of the indenture relating to the
Company's 9 1/2% Senior Subordinated Notes
F-29
<PAGE> 143
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Dollars in Thousands)
due 2007 and, as a result, the Company was required to make an offer to purchase
for cash any and all of its outstanding $125.0 million principal amount of
9 1/2% notes for 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. On March 6, 2000, the entire $125.0 million
principal amount of 9 1/2% notes was repurchased for an aggregate purchase price
of $127.4 million which was financed with borrowings under the credit agreement.
In connection with the repurchase transaction, the Company recognized an
extraordinary loss of $4.8 million, net of tax benefit of $3.2 million resulting
from the 1% premium paid at repurchase and the write-off of approximately $3.5
million of unamortized deferred financing costs.
On March 29, 2000, the Company completed a private placement issuance of
$150.0 million in principal amount of 11 7/8% Senior Subordinated Notes (the
Notes) due 2010 (the offering). The offering was made to qualified institutional
buyers pursuant to Rule 144A of the Securities and Exchange Commission (SEC).
The Notes were issued at a discount of $1.1 million which will be amortized to
interest expense over the life of the Notes.
Proceeds from the offering were used to repay $60.0 million principal drawn
under the Term A Loan Facility, $75.0 million drawn under Term B Loan Facility
and $6.0 million drawn under the Revolving Credit Facility and for general
corporate purposes. In connection with this repayment, Term B Loan Facility was
terminated and the aggregate borrowings under the credit agreement were reduced
from $200 million to $125 million.
The Notes mature on March 15, 2010. Interest is payable semi-annually in
arrears each March 15 and September 15, commencing September 15, 2000. On or
after March 15, 2005, 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>
2005 105.938%
2006 103.958%
2007 101.979%
2008 and thereafter 100.000%
</TABLE>
In addition, at any time on or prior to March 15, 2003, the Company may
redeem, in the aggregate, up to 35% of the original aggregate principal amount
of the Notes (calculated after giving effect to the original issuance of
additional Notes, if any) with the net cash proceeds of one or more public
equity offerings by the Company, at a redemption price in cash equal to 111.875%
of the principal amount thereof, 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 domestic subsidiaries -- SIA, P&S, OSI and Tanner (the
Guarantor Subsidiaries). Each of the Guarantor Subsidiaries' guarantees of the
Notes are full, unconditional, and joint and several.
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.
F-30
<PAGE> 144
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Dollars in Thousands)
4. COMPREHENSIVE (LOSS) INCOME
For the three months ended March 31, 2000 and 1999, respectively, the
calculation of comprehensive (loss) income is as follows:
<TABLE>
<CAPTION>
2000 1999
------- ------
<S> <C> <C>
Net (loss) income as reported........................... $(3,891) $1,380
Foreign currency translation adjustments................ (110) (84)
------- ------
Comprehensive (loss) income............................. $(4,001) $1,296
======= ======
</TABLE>
5. EMPLOYEE STOCK PURCHASE PLAN
On January 26, 2000, the Company adopted its Sovereign Specialty Chemicals,
Inc. Employee Stock Purchase Plan in order to provide incentives to salaried
employees (excluding executives who participate directly in the Sovereign
Specialty Chemicals, Inc. Stock Option Plan) by providing them the opportunity
to purchase up to 20,000 shares of common stock of the Company. The compensation
committee of the Board of Directors will administer the plan. As of March 31,
2000, the Company's employees had subscribed to purchase 7,045 Class A common
shares.
6. SUBSEQUENT EVENT
On April 10, 2000, the Company repurchased 7,045 Class A Common Shares from
AEA Investors Inc. at fair market value. All shares repurchased were sold to
employees at fair market value.
F-31
<PAGE> 145
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Dollars in Thousands)
7. 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 March 31, 2000 and
1999, 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."
<TABLE>
<CAPTION>
GUARANTOR
SUBSIDIARIES
------------ NON-GUARANTOR
THE COMPANY SUBSIDIARIES TOTAL
------------ ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $ 58,513 $2,299 $ 60,812
Cost of goods sold................................ 39,758 1,544 41,302
-------- ------ --------
Gross profit...................................... 18,755 755 19,510
Selling, general and administrative expenses...... 12,722 454 13,176
-------- ------ --------
Operating income.................................. 6,033 301 6,334
Interest income, net.............................. 4,138 38 4,176
-------- ------ --------
Income before income taxes and extraordinary
loss............................................ $ 1,895 $ 263 $ 2,158
======== ====== ========
BALANCE SHEET DATA:
Assets:
Current assets.................................... $ 82,134 $3,825 $ 85,959
Property, plant and equipment, net................ 49,433 1,085 50,518
Goodwill, net..................................... 104,687 -- 104,687
Deferred financing costs, net..................... 9,714 -- 9,714
Other assets...................................... 3,808 79 3,887
-------- ------ --------
Total assets...................................... $249,776 $4,989 $254,765
======== ====== ========
Liabilities and stockholders' equity:
Current liabilities............................... $ 41,356 $4,569 $ 45,925
Long-term liabilities............................. 156,225 -- 156,225
Total stockholders' equity........................ 52,195 420 52,615
-------- ------ --------
Total liabilities and stockholders' equity........ $249,776 $4,989 $254,765
======== ====== ========
</TABLE>
F-32
<PAGE> 146
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
GUARANTOR
SUBSIDIARIES
------------ NON-GUARANTOR
THE COMPANY SUBSIDIARIES TOTAL
------------ ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA:
OPERATING ACTIVITIES
Net income(loss)................................... $ (4,154) $263 $ (3,891)
Adjustments to reconcile net income (loss) to net
cash
provided by operating activities:
Depreciation and amortization.................... 3,036 40 3,076
Compensation expense on management incentive
plan.......................................... -- -- --
Amortization of deferred financing costs......... 351 -- 351
Extraordinary losses............................. 4,828 -- 4,828
Changes in operating assets and liabilities...... (15,056) 132 (14,924)
--------- ---- ---------
Net cash provided by (used in) operating
activities....................................... (10,995) 435 (10,560)
INVESTING ACTIVITIES
Acquisition, disposition of businesses............. -- -- --
Purchase of property, plant and equipment.......... (716) (64) (780)
--------- ---- ---------
Net cash provided by (used in) investing
activities....................................... (716) (64) (780)
FINANCING ACTIVITIES
Payments on long-term debt......................... (126,250) -- (126,250)
Proceeds from long-term debt....................... 148,932 -- 148,932
Deferred financing costs........................... (5,773) -- (5,773)
Payments on capital lease obligations.............. (59) -- (59)
Proceeds from revolving credit facility............ 134,000 -- 134,000
Payments on revolving credit facility.............. (146,996) (4) (147,000)
--------- ---- ---------
Net cash provided by (used in) financing
activities....................................... 3,854 (4) 3,850
Effect of foreign currency changes on cash......... 45 (77) (32)
--------- ---- ---------
Net increase (decrease) in cash.................... (7,812) 290 (7,522)
Cash and cash equivalents at beginning of period... 16,669 336 17,005
--------- ---- ---------
Cash and cash equivalents at end of period......... $ 8,857 $626 $ 9,483
========= ==== =========
</TABLE>
F-33
<PAGE> 147
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Dollars in Thousands)
The following sets forth financial data at March 31, 1999 and for the three
months then ended.
<TABLE>
<CAPTION>
GUARANTOR
SUBSIDIARIES
------------ NON-GUARANTOR
THE COMPANY SUBSIDIARIES TOTAL
------------ ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $ 54,124 $1,642 $ 55,766
Cost of goods sold................................ 36,685 1,195 37,880
-------- ------ --------
Gross profit...................................... 17,439 447 17,886
Selling, general and administrative expenses...... 11,613 325 11,938
-------- ------ --------
Operating income.................................. 5,826 122 5,948
Interest expense, net............................. 3,423 39 3,462
-------- ------ --------
Income before income taxes and extraordinary
loss............................................ $ 2,403 $ 83 $ 2,486
======== ====== ========
</TABLE>
F-34
<PAGE> 148
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
GUARANTOR
SUBSIDIARIES
------------ NON-GUARANTOR
THE COMPANY SUBSIDIARIES TOTAL
------------ ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA:
OPERATING ACTIVITIES
Net income(loss).................................. $ 1,305 $ 75 $ 1,380
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................... 2,421 30 2,451
Compensation expense on management incentive
plan......................................... 90 -- 90
Amortization of deferred financing costs........ 295 -- 295
Extraordinary losses............................ -- -- --
Changes in operating assets and liabilities..... (9,857) 199 (9,658)
------- ---- -------
Net cash provided by (used in) operating
activities...................................... (5,746) 304 (5,442)
INVESTING ACTIVITIES
Acquisition, disposition of businesses............ -- -- --
Purchase of property, plant and equipment......... (2,094) (86) (2,180)
------- ---- -------
Net cash provided by (used in) investing
activities...................................... (2,094) (86) (2,180)
FINANCING ACTIVITIES
Payments on long-term debt........................ -- -- --
Proceeds from long-term debt...................... -- -- --
Deferred financing costs.......................... -- -- --
Payments on capital lease obligations............. (47) -- (47)
Proceeds from revolving credit facility........... 8,000 -- 8,000
Payments on revolving credit facility............. (57) -- (57)
------- ---- -------
Net cash provided by (used in) financing
activities...................................... 7,896 -- 7,896
Effect of foreign currency changes on cash........ (3) (81) (84)
------- ---- -------
Net increase (decrease) in cash................... 53 137 190
Cash and cash equivalents at beginning of
period.......................................... 5,523 340 5,863
------- ---- -------
Cash and cash equivalents at end of period........ $ 5,576 $477 $ 6,053
======= ==== =======
</TABLE>
F-35
<PAGE> 149
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$150,000,000
[SOVERIGN SPECIALTY CHEMICALS, INC. LOGO]
SOVEREIGN
SPECIALTY CHEMICALS, INC.
11 7/8% SENIOR SUBORDINATED NOTES DUE 2010
--------------------
PROSPECTUS
--------------------
May 26, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 150
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sovereign and SIA Adhesives, Inc. are incorporated under the laws of the
State of Delaware. Section 145 of the Delaware General Corporation Law (the
"DGCL") provides that a Delaware corporation may indemnify directors and
officers as well as other employees and individuals against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement in connection
with specified actions, suits and proceedings, whether civil, criminal,
administrative, or investigative (other than action by or in the right of the
corporation -- a "derivative action"), if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such action, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
certificate of incorporation, bylaws, disinterested director vote, stockholder
vote, agreement, or otherwise.
The DGCL further authorizes a Delaware corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
The respective by-laws of Sovereign and SIA Adhesives provide that the
corporation shall indemnify, to the fullest extent permitted by the DGCL, any
person who was or is a party or is threatened to be made a party to or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he or she is or was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director, officer or member of
another corporation, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding and that such indemnification
will continue as to an indemnity who has ceased to be a director or officer. The
by-laws of Sovereign and SIA Adhesives further provide that any employee or
agent of the corporation, or any person serving at the request of the
corporation will be indemnified in the same manner as a director or officer of
the corporation.
The respective by-laws of Sovereign and SIA Adhesives provide that the
corporation may purchase and maintain insurance on its own behalf and on behalf
of any person who is or was a director, officer, employee, fiduciary, or agent
of the corporation or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, whether or not the
corporation would have the power to indemnify such person against such liability
under its by-laws.
Pierce & Stevens is incorporated under the laws of the State of New York.
Sections 722 and 723 of the Business Corporation Law of the State of New York
(the "New York Law") provides that a corporation may indemnify any person made a
party to an action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he, his testator or intestate, is or was
a director or officer of the corporation, against the reasonable expenses,
including attorneys' fees, actually and necessarily incurred by him in
connection with the defense of such action, or in connection with an appeal
therein, except in relation to matters as to which such director or officer is
adjudged to have breached his duty to the corporation under the New York law.
II-1
<PAGE> 151
A New York corporation may indemnify any person, made, or threatened to be
made, a party to an action or proceeding other than one by or in the right of
the corporation to procure a judgment in its favor, whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
The New York Law also authorizes a corporation to purchase and maintain
insurance to indemnify the corporation for any obligation which it incurs as a
result of the indemnification of directors and officers, to indemnify directors
and officers in instances in which they may be indemnified by the corporation,
and to indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of the New York
Law provided the contract of insurance covering such directors and officers
provides for a retention amount and for co-insurance.
The by-laws of Pierce & Stevens do not contain provisions regarding the
indemnification of directors and officers.
OSI Sealants is incorporated under the laws of the State of Illinois.
Section 8.75 of the Business Corporation Act of 1983 of the State of Illinois
(the "Illinois Law") contains provisions permitting an Illinois corporation to
indemnify any person who was or is a party, or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or who is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, if such person acted in good
faith an in a manner he or she reasonably believed to be in, or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
An Illinois corporation may indemnify any person who was or is a party, or
is threatened to be made a party, to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, if such person
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to the best interests of the corporation, provided that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the corporation, unless, and
only to the extent that, the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability,
but in view of the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court shall deem
proper.
The Illinois Law further authorizes an Illinois corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or who is or was serving at the request of
the corporation as a director, officer, employee or agent of another
II-2
<PAGE> 152
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify such person against such liability
under the provisions of Section 8.75.
Tanner Chemicals, Inc. is incorporated under the laws of the State of New
Hampshire. Section 293-A:8 of the Business Corporation Act of the State of New
Hampshire (the "New Hampshire Law") contains provisions permitting a New
Hampshire corporation to indemnify directors, employees, and agents of the
corporation who are made a party to a proceeding if they acted in good faith and
reasonably believed that their conduct was in the best interests of the
corporation, or in the case of an employee benefit plan, in the best interests
of the participants and beneficiaries of the plan.
The New Hampshire Law further authorizes a New Hampshire corporation to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against this liability under the
provisions of the New Hampshire Law.
The by-laws of each of OSI Sealants and Tanner provide that the corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that he or she is or was a director or officer of such corporation
or other entity, or is or was serving at the request of such corporation as a
director, officer or member of another corporation so long as such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of such corporation, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
and that such indemnification shall continue as to an indemnitee who has ceased
to be a director or officer and shall inure to the benefit of the indemnitee's
heirs, executors and administrators. The by-laws of each of OSI Sealants and
Tanner further provide that any employee or agent of such corporation, or any
person serving at the request of such corporation an employee or agent of
another corporation, partnership, joint venture or other enterprise shall be
indemnified in the same manner as a director or officer of such entity.
The by-laws of each of OSI Sealants and Tanner provide that each such
corporation may purchase and maintain insurance on its own behalf and on behalf
of any person who is or was a director, officer, employee, fiduciary, or agent
of such corporation or was serving at the request of that corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, whether or not the
corporation would have the power to indemnify such person against such liability
under its by-laws.
We have obtained an indemnification insurance policy insuring our directors
and officers against certain liabilities they may incur in their capacity as
directors and officers. Under these policies, the insurer, on our behalf, may
also pay amounts for which we have granted indemnification to the directors or
officers.
II-3
<PAGE> 153
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
3.1 -- Certificate of Incorporation Sovereign Specialty
Chemicals, Inc., incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-8 as
filed on January 28, 2000.
3.2 -- By-Laws of Sovereign Specialty Chemicals, Inc.,
incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-8 as filed on January
28, 2000.
3.3 -- Certificate of Incorporation of Pierce & Stevens Corp.,
incorporated by reference to Exhibit 3.3 of the Company's
Registration Statement on Form S-4, as amended
(Registration No. 333-39373).
3.4 -- By-laws of Pierce & Stevens Corp., incorporated by
reference to Exhibit 3.4 of the Company's Registration
Statement on Form S-4, as amended (Registration No.
333-39373).
3.5 -- Certificate of Incorporation of SIA Adhesives, Inc.,
incorporated by reference to Exhibit 3.5 of the Company's
Registration Statement on Form S-4, as amended
(Registration No. 333-39373).
3.6 -- By-Laws of SIA Adhesives, Inc., incorporated by reference
to Exhibit 3.6 of the Company's Registration Statement on
Form S-4, as amended (Registration No. 333-39373).
3.7 -- Amended and Restated Articles of Incorporation of OSI
Sealants, Inc., incorporated by reference to Exhibit 3.7
of the Company's Registration Statement on Form S-4, as
amended (Registration No. 333-39373).
3.8 -- By-Laws of OSI Sealants, Inc., incorporated by reference
to Exhibit 3.8 of the Company's Registration Statement on
Form S-4, as amended (Registration No. 333-39373).
3.9 -- Articles of Incorporation of Tanner Chemicals, Inc.,
incorporated by reference to Exhibit 3.11 of the
Company's Registration Statement on Form S-4, as amended
(Registration No. 333-39373).
3.10 -- By-Laws of Tanner Chemicals, Inc., as amended,
incorporated by reference to Exhibit 3.12 of the
Company's Registration Statement on Form S-4, as amended
(Registration No. 333-39373).
4.1 -- Amended and Restated Credit Agreement, dated April 6,
2000 among Sovereign Specialty Chemicals, Inc., the
Guarantors and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, J.P. Morgan Securities Inc. and the Chase
Manhattan Bank.+*
4.2 -- Amended and Restated Shareholders Agreement, dated May
12, 2000 between and among Sovereign Specialty Chemicals,
Inc., SSCI Investors LLC and the Shareholders listed on
Schedule I thereto.*
4.3 -- Amended and Restated Shareholders Agreement, dated
December 14, 1999, by and among Sovereign Specialty
Chemicals, Inc., SSCI Investors LLC, and Sovereign
Specialty Chemicals, L.P., incorporated by reference to
Exhibit 4.3 of the Company's Annual Report on Form 10-K
as filed on March 24, 2000.
</TABLE>
II-4
<PAGE> 154
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
4.3A -- Amendment No. 1 to Amended and Restated Shareholders
Agreement dated December 14, 1999, by and among Sovereign
Specialty Chemicals, Inc., SSCI Investors LLC, and
Sovereign Specialty Chemicals, L.P., incorporated by
reference to Exhibit 4.3A of the Company's Annual Report
on Form 10-K as filed on March 24, 2000.
4.4 -- Indenture dated March 29, 2000 among Sovereign Specialty
Chemicals, Inc., the Guarantors and The Bank of New York,
as trustee.*
4.5 -- Forms of 11 7/8% Senior Subordinated Notes due 2010,
Series A and Series B Notes (contained in Exhibit 4.4 as
Exhibit A and B thereto, respectively).*
4.6 -- Form of Guarantee (contained in Exhibit 4.4 as Exhibit A
and B thereto).*
4.7 -- Registration Rights Agreement dated March 29, 2000 among
Sovereign Specialty Chemicals, Inc., the Guarantors, J.P.
Morgan Securities Inc., Merrill Lynch, Pierce Fenner &
Smith Incorporated and Chase Securities Inc.*
5.1 -- Opinion and consent of Fried, Frank, Harris, Shriver &
Jacobson.*
5.2 -- Opinion and consent of McBride Baker & Coles.*
5.3 -- Opinion and consent of Wiggin & Nourie, P.A.*
10.1 -- Employment Agreement, dated December 29, 1999 between
Sovereign Specialty Chemicals, Inc., and Robert B.
Covalt, incorporated by reference to Exhibit 10.1 of the
Company's Annual Report on Form 10-K as filed on March
24, 2000.
10.1A -- First Amendment to Employment Agreement between Sovereign
Specialty Chemicals, Inc. and Robert B. Covalt, dated
January 2, 2000, incorporated by reference to Exhibit
10.1A of the Company's Annual Report on Form 10-K as
filed on March 24, 2000.
10.2 -- Employment Agreement, dated December 29, 1999 between
Sovereign Specialty Chemicals, Inc. and Gerard A. Loftus,
incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K as filed on March
24, 2000.
10.3 -- Employment Agreement, dated December 29, 1999 between
Sovereign Specialty Chemicals, Inc. and Peter Longo,
incorporated by reference to Exhibit 10.3 of the
Company's Annual Report on Form 10-K as filed on March
24, 2000.
10.4 -- Employment Agreement, dated December 29, 1999 between
Sovereign Specialty Chemicals, Inc. and Frederick Quinn,
incorporated by reference to Exhibit 10.4 of the
Company's Annual Report on Form 10-K as filed on March
24, 2000.
10.5 -- Employment Agreement, dated December 29, 1999 between
Sovereign Specialty Chemicals, Inc. and John Mellett,
incorporated by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K as filed on March
24, 2000.
10.6 -- Sovereign Specialty Chemicals, Inc. Management Incentive
Compensation Plan dated January 1, 2000, incorporated by
reference to Exhibit 10.6 of the Company's Annual Report
on Form 10-K as filed on March 24, 2000.
10.7 -- Sovereign Specialty Chemicals, Inc. Stock Option Plan,
dated December 29, 1999, incorporated by reference to
Exhibit 10.7 of the Company's Annual Report on Form 10-K
as filed on March 24, 2000.
10.8 -- Non-qualified Stock Option Agreement between Sovereign
Specialty Chemicals, Inc. and Robert B. Covalt, dated
December 31, 1999, incorporated by reference to Exhibit
10.8 of the Company's Annual Report on Form 10-K as filed
on March 24, 2000.
</TABLE>
II-5
<PAGE> 155
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
10.8A -- First Amendment to Non-qualified Stock Option Agreement
between Sovereign Specialty Chemicals, Inc. and Robert B.
Covalt, dated January 4, 2000, incorporated by reference
to Exhibit 10.8A of the Company's Annual Report on Form
10-K as filed on March 24, 2000.
10.9 -- Sovereign Specialty Chemicals, Inc. Employee Stock
Purchase Plan, incorporated by reference to Exhibit 10.9
of the Company's Registration Statement on Form S-8 as
filed on January 28, 2000.
10.10 -- Non-qualified stock option Agreement between Sovereign
Specialty Chemicals, Inc. and the individuals listed in
Schedule 1 thereto, dated December 29, 1999, incorporated
by reference to Exhibit 10.10 of the Company's Annual
Report on Form 10-K as filed on March 24, 2000.
10.14 -- Asset Purchase Agreement dated March 31, 1996 among The
BFGoodrich Company, Sovereign Engineered Adhesives,
L.L.C. and the Parent Partnership, incorporated by
reference to Exhibit 10.14 of the Company's Registration
Statement on Form S-4, as amended (Registration No.
333-39373).+
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,
incorporated by reference to Exhibit 10.15 of the
Company's Registration Statement on Form S-4, as amended
(Registration No. 333-39373).+
10.16 -- Stock Purchase Agreement dated May 22, 1997 between
Laporte Inc. and the Parent Partnership, incorporated by
reference to Exhibit 10.16 of the Company's Registration
Statement on Form S-4, as amended (Registration No.
333-39373).+
10.17 -- Closing Agreement dated August 5, 1997 between Laporte
Inc., the Parent Partnership and the Company,
incorporated by reference to Exhibit 10.17 of the
Company's Registration Statement on Form S-4, as amended
(Registration No. 333-39373).+
10.20 -- Stock Purchase Agreement, dated March 5, 1998, by among
Burke Industries, Inc., Mercer and the Company,
incorporated by reference to Exhibit 10.20 of the
Company's Registration Statement on Form S-4, as amended
(Registration No. 333-39373).+
12 -- Computation of ratios of earnings to fixed charges.
21.1 -- Subsidiaries of the Company and the Guarantors,
incorporated by reference to Exhibit 21.1 of the
Company's Annual Report on Form 10-K as filed on March
24, 2000.
23.1 -- Consent of Ernst & Young LLP (independent auditors).
23.2 -- Consent of Fried, Frank, Harris, Shriver and Jacobson
(included in Exhibit 5.1).*
23.3 -- Consent of McBride Baker & Coles (included in Exhibit
5.2).*
23.4 -- Consent of Wiggin & Nourie, P.A. (included in Exhibit
5.3).*
24.1 -- Powers of Attorney.*
25.1 -- Statement of Eligibility of Trustee on Form T-1.*
</TABLE>
II-6
<PAGE> 156
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
99.1 -- Cautionary Statements for Purposes of "Safe Harbor"
Provisions of Securities Reform Act of 1995, incorporated
by reference to Exhibit 99.1 of the Company's Annual
Report on Form 10-K as filed on March 24, 2000.
99.2 -- Form of Letter of Transmittal.
99.3 -- Form of Notice of Guaranteed Delivery.
99.4 -- Form of Instructions to Registered Holder and/or
Book-Entry Transfer Facility Participant From Beneficial
Owner.
</TABLE>
- ---------------
+ The Company agrees to furnish supplementary 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.
* Previously filed.
(b) Schedules
Schedule II -- Financial Statement Schedules
ITEM 22. UNDERTAKINGS
The registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for the purpose of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act (and where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the
II-7
<PAGE> 157
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(6) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(7) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-8
<PAGE> 158
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Sovereign Specialty Chemicals, Inc. has duly caused this Registration Statement
on Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois, on the 26th day of May,
2000.
SOVEREIGN SPECIALTY CHEMICALS, INC.
By: /s/ JOHN R. MELLETT
----------------------------------
John R. Mellett
Vice President, Chief Financial
Officer,
Chief Accounting Officer and
Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman and Director
- -----------------------------------------------------
Robert B. Covalt
/s/ JOHN R. MELLETT Vice President, Chief Financial Officer, Chief
- ----------------------------------------------------- Accounting Officer and Treasurer
John R. Mellett
* Director
- -----------------------------------------------------
John L. Garcia
* Director
- -----------------------------------------------------
Karl D. Loos
* Director
- -----------------------------------------------------
John D. Macomber
* Director
- -----------------------------------------------------
Robert H. Malott
* Director
- -----------------------------------------------------
Thomas P. Salice
* Director
- -----------------------------------------------------
Norman E. Wells, Jr.
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
Amended Registration Statement pursuant to the Power of Attorney executed by
the above-named officers and directors of the Registrant and previously filed
with the Securities and Exchange Commission on behalf of such officers and
directors.
<TABLE>
<C> <S>
By: /s/ JOHN R. MELLETT Attorney-in-Fact
-------------------------------------------------
John R. Mellett
</TABLE>
Dated: May 26, 2000
II-9
<PAGE> 159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Pierce & Stevens Corp. has duly caused this Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago, State of Illinois, on the 26th day of May, 2000.
PIERCE & STEVENS CORP.
By: /s/ JOHN R. MELLETT
----------------------------------
John R. Mellett
Vice President, Chief Financial
Officer,
Chief Accounting Officer and
Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
* Chairman and Director
- -----------------------------------------------------
Robert B. Covalt
/s/ JOHN R. MELLETT Vice President, Chief Financial
- ----------------------------------------------------- Officer, Chief Accounting
John R. Mellett Officer and Treasurer
* Director
- -----------------------------------------------------
John L. Garcia
* Director
- -----------------------------------------------------
Thomas P. Salice
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
Amended Registration Statement pursuant to the Power of Attorney executed by
the above-named officers and directors of the Registrant and previously filed
with the Securities and Exchange Commission on behalf of such officers and
directors.
<TABLE>
<C> <S>
By: /s/ JOHN R. MELLETT Attorney-in-Fact
-------------------------------------------------
John R. Mellett
</TABLE>
Dated: May 26, 2000
II-10
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, SIA
Adhesives, Inc. has duly caused this Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Chicago, State of Illinois, on the 26th day of May, 2000.
SIA ADHESIVES, INC.
By: /s/ JOHN R. MELLETT
----------------------------------
John R. Mellett
Vice President, Chief Financial
Officer,
Chief Accounting Officer and
Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman and Director
- -----------------------------------------------------
Robert B. Covalt
/s/ JOHN R. MELLETT Vice President, Chief Financial Officer, Chief
- ----------------------------------------------------- Accounting Officer and Treasurer
John R. Mellett
* Director
- -----------------------------------------------------
John L. Garcia
* Director
- -----------------------------------------------------
Thomas P. Salice
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
Amended Registration Statement pursuant to the Power of Attorney executed by
the above-named officers and directors of the Registrant and previously filed
with the Securities and Exchange Commission on behalf of such officers and
directors.
<TABLE>
<C> <S>
By: /s/ JOHN R. MELLETT Attorney-in-Fact
-------------------------------------------------
John R. Mellett
</TABLE>
Dated: May 26, 2000
II-11
<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, OSI
Sealants, Inc. has duly caused this Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Chicago, State of Illinois, on the 26th day of May, 2000.
OSI SEALANTS, INC.
By: /s/ JOHN R. MELLETT
----------------------------------
John R. Mellett
Vice President, Chief Financial
Officer,
Chief Accounting Officer and
Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
* Chairman and Director
- -----------------------------------------------------
Robert B. Covalt
/s/ JOHN R. MELLETT Vice President, Chief Financial
- ----------------------------------------------------- Officer, Chief Accounting
John R. Mellett Officer and Treasurer
* Director
- -----------------------------------------------------
John L. Garcia
* Director
- -----------------------------------------------------
Thomas P. Salice
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
Amended Registration Statement pursuant to the Power of Attorney executed by
the above-named officers and directors of the Registrant and previously filed
with the Securities and Exchange Commission on behalf of such officers and
directors.
<TABLE>
<C> <S>
By: /s/ JOHN R. MELLETT Attorney-in-Fact
-------------------------------------------------
John R. Mellett
</TABLE>
Dated: May 26, 2000
II-12
<PAGE> 162
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Tanner Chemicals, Inc. has duly caused this Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago, State of Illinois, on the 26th day of May, 2000.
TANNER CHEMICALS, INC.
By: /s/ JOHN R. MELLETT
----------------------------------
John R. Mellett
Vice President, Chief Financial
Officer,
Chief Accounting Officer and
Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman and Director
- -----------------------------------------------------
Robert B. Covalt
/s/ JOHN R. MELLETT Vice President, Chief Financial Officer, Chief
- ----------------------------------------------------- Accounting Officer and Treasurer
John R. Mellett
* Director
- -----------------------------------------------------
John L. Garcia
* Director
- -----------------------------------------------------
Thomas P. Salice
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
Amended Registration Statement pursuant to the Power of Attorney executed by
the above-named officers directors of the Registrant and previously filed with
the Securities and Exchange Commission on behalf of such officers and
directors.
<TABLE>
<C> <S>
By: /s/ JOHN R. MELLETT Attorney-in-Fact
-------------------------------------------------
John R. Mellett
</TABLE>
Dated: May 26, 2000
II-13
<PAGE> 1
EXHIBIT 12 : COMPUTATION OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------------------ ------------------------------------------------------------------
Year Ended Period Ended Period Ended
December 31, March 31, December 31, Year Ended Year Ended Year Ended
1995 1996 1996 1997 1998 1999
------------ -------------- --------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense $ -- $ -- $ 1,666 $ 9,080 $ 14,712 $ 15,076
Interest portion of rental
expense 4 2 13 117 213 184
-------- -------- -------- -------- -------- --------
Total fixed charges $ 4 $ 2 $ 1,679 $ 9,197 $ 14,925 $ 15,260
======== ======== ======== ======== ======== ========
Earnings:
Income (loss) before
income taxes and
extraordinary item $ 1,762 $ 227 $ (124) $ 2,508 $ 5,141 $ (2,721)
Fixed charges 4 2 1,679 9,197 14,925 15,260
-------- -------- -------- -------- -------- --------
Total earnings $ 1,766 $ 229 $ 1,555 $ 11,705 $ 20,066 $ 12,539
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges 441.5 114.5 * 1.3 1.3 *
Excess of fixed charges over
earnings $ -- $ -- $ 124 $ -- $ -- $ 2,721
<CAPTION>
THE COMPANY
-----------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
1999 2000
------------ --------------
<S> <C> <C>
Fixed charges:
Interest expense $ 3,462 $ 4,176
Interest portion of rental
expense 46 50
-------- --------
Total fixed charges $ 3,508 $ 4,226
======== ========
Earnings:
Income (loss) before
income taxes and
extraordinary item $ 2,486 $ 2,158
Fixed charges 3,508 4,226
-------- --------
Total earnings $ 5,994 $ 6,384
======== ========
Ratio of earnings to fixed
charges 1.7 1.5
Excess of fixed charges over
earnings $ -- $ --
</TABLE>
* Earnings are inadequate to cover fixed charges
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 25, 2000, with respect to the consolidated
financial statements and schedule of Sovereign Specialty Chemicals, Inc.,
included in the Registration Statement (Form S-4 No. 333-36898) and related
Prospectus of Sovereign Specialty Chemicals, Inc. for the Registration of
$150,000,000 of 11 7/8% Senior Subordinated Notes due 2010.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
May 26, 2000
<PAGE> 1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
11 7/8% SENIOR SUBORDINATED NOTES DUE 2010
OF
SOVEREIGN SPECIALTY CHEMICALS, INC.
PURSUANT TO THE PROSPECTUS DATED MAY 26, 2000
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 27, 2000 UNLESS EXTENDED.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C>
By Mail: Facsimile Transmission:
The Bank of New York (for eligible institutions only)
101 Barclay Street (212) 815-6339
New York, New York 10286 Confirm by Telephone:
Attn: Duong Nguyen (212) 815-6331
Reorganization Section
</TABLE>
By Hand/Overnight Delivery:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn: Duong Nguyen
Reorganization Section
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA A FACSIMILE
TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
The undersigned hereby acknowledges receipt of the prospectus, dated May
26, 2000, of Sovereign Specialty Chemicals, Inc. which, together with this
letter of transmittal, constitute Sovereign's offer to exchange $1,000 principal
amount of 11 7/8% Senior Subordinated Notes due 2010, Series B, which have been
registered under the Securities Act of 1933, as amended, of Sovereign, for each
$1,000 principal amount of outstanding 11 7/8% Senior Subordinated Notes due
2010, Series A, of Sovereign, of which $150,000,000 aggregate principal amount
is outstanding.
IF YOU DESIRE TO EXCHANGE YOUR 11 7/8% SENIOR SUBORDINATED NOTES DUE 2010,
SERIES A, FOR AN EQUAL AGGREGATE PRINCIPAL AMOUNT OF 11 7/8% SENIOR SUBORDINATED
NOTES DUE 2010, SERIES B, YOU MUST VALIDLY TENDER (AND NOT VALIDLY WITHDRAW)
YOUR NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE
OFFER.
YOU MUST SIGN THIS LETTER OF TRANSMITTAL WHERE INDICATED BELOW. PLEASE READ
THE INSTRUCTIONS SET FORTH BELOW CAREFULLY BEFORE COMPLETING THIS LETTER OF
TRANSMITTAL.
This letter of transmittal is to be completed by holders of Sovereign's
outstanding notes either if certificates representing such notes are to be
forwarded herewith or, unless an agent's message is utilized,
<PAGE> 2
tenders of such notes are to be made by book-entry transfer to an account
maintained by the exchange agent at The Depository Trust Company pursuant to the
procedures set forth in the prospectus under the heading "The Exchange
Offer -- Book-Entry Transfer."
The undersigned has completed, executed and delivered this letter of
transmittal to indicate the action the undersigned desires to take with respect
to the exchange offer.
Holders that are tendering by book-entry transfer to the exchange agent's
account at DTC can execute the tender though the DTC Automated Tender Offer
Program, for which the exchange offer is eligible. DTC participants that are
tendering pursuant to the exchange offer must transmit their acceptance through
the Automated Tender Offer Program to DTC, which will edit and verify the
acceptance and send an agent's message to the exchange agent for its acceptance.
In order to properly complete this letter of transmittal, a holder of
outstanding notes must:
(1) complete the box entitled "Description of Notes,"
(2) if appropriate, check and complete the boxes relating to
guaranteed delivery, Special Issuance Instructions and Special Delivery
Instructions,
(3) sign the letter of transmittal, and
(4) complete Substitute Form W-9.
If a holder desires to tender notes pursuant to the exchange offer and (1)
certificates representing such notes are not immediately available, (2) time
will not permit this letter of transmittal, certificates representing such notes
or other required documents to reach the exchange offer on or prior to the
expiration date, or (3) the procedures for book-entry transfer (including
delivery of an agent's message) cannot be completed on or prior to the
expiration date, such holder may nevertheless tender such notes with the effect
that such tender will be deemed to have been received on or prior to the
expiration date if the guaranteed delivery procedures described in the
prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures" are
followed. See Instruction 1 below.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING THE INSTRUCTIONS,
AND THE PROSPECTUS CAREFULLY BEFORE COMPLETING THIS LETTER OF TRANSMITTAL OR
CHECKING ANY BOX BELOW. The instructions included with this letter of
transmittal must be followed. Questions and requests for assistance or for
additional copies of the prospectus and this letter of transmittal, the Notice
of Guaranteed Delivery and related documents may be directed to The Bank of New
York, at the address and telephone number set forth on the cover page of this
letter of transmittal. See instruction 11 below.
2
<PAGE> 3
List below the outstanding notes to which this letter of transmittal
relates. If the space provided is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this letter of transmittal. Tenders of outstanding notes will be accepted only
in principal amounts equal to $1,000 or integral multiples of $1,000.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF NOTES
- ------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF AGGREGATE PRINCIPAL
REGISTERED HOLDER(S) CERTIFICATE AMOUNT PRINCIPAL AMOUNT
(PLEASE FILL IN) NUMBER(S) REPRESENTED** TENDERED**
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL AMOUNT OF NOTES
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by holders delivering by book-entry transfer (see
below).
** Unless otherwise indicated in the column "Principal Amount Tendered" and
subject to the terms and conditions of the exchange offer, the holder
will be deemed to have tendered the entire aggregate principal amount
represented by each note listed above and delivered to the exchange
agent. See Instruction 4.
- --------------------------------------------------------------------------------
3
<PAGE> 4
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING THE
BOXES BELOW
[ ] CHECK HERE IF CERTIFICATES FOR TENDERED OUTSTANDING NOTES ARE ENCLOSED
HEREWITH.
[ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DTC AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution:
--------------------------------------------
Account Number with DTC:
--------------------------------------------------
Transaction Code Number:
--------------------------------------------------
[ ] CHECK HERE IF YOU TENDERED BY BOOK-ENTRY TRANSFER AND DESIRE ANY
NON-EXCHANGED NOTES TO BE RETURNED TO YOU BY CREDITING THE BOOK-ENTRY
TRANSFER FACILITY ACCOUNT NUMBER SET FORTH ABOVE.
USE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 1)
[ ] To be completed only if tendered notes are being delivered pursuant to a
notice of guaranteed delivery previously sent to the exchange agent.
Complete the following (please enclose a photocopy of such notice of
guaranteed delivery):
Name of Registered Holder(s):
-------------------------------------------
Window Ticket Number (if any):
------------------------------------------
Date of Execution of the Notice of Guaranteed Delivery:
-----------------
Name of Eligible Institution that Guaranteed Delivery:
------------------
If Delivered By Book-Entry Transfer, Complete The Following:
Name of Tendering Institution:
------------------------------------------
Account Number at DTC:
--------------------------------------------------
Transaction Code Number:
------------------------------------------------
BROKER-DEALER STATUS
[ ] Check here if you are a broker-dealer that acquired your tendered notes for
your own account as a result of market making or other trading activities
and wish to receive 10 additional copies of the prospectus and any
amendments or supplements thereto.
Name:
----------------------------------------------------------------------
Address:
-------------------------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW
4
<PAGE> 5
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the exchange offer, the
undersigned hereby tenders to Sovereign the principal amount of outstanding
notes described above. Subject to, and effective upon, the acceptance for
exchange of the outstanding notes tendered herewith, the undersigned hereby
sells, assigns and transfers to, or upon the order of, Sovereign all right,
title and interest in and to such outstanding notes.
The undersigned hereby irrevocably constitutes and appoints the exchange
agent as the true and lawful agent and attorney-in-fact of the undersigned (with
full knowledge that the exchange agent also acts as the agent of Sovereign and
as trustee under the indenture relating to the outstanding notes) with respect
to such tendered notes, with full power of substitution and resubstitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest) to (1) deliver certificates representing such tendered notes, or
transfer ownership of such notes, on the account books maintained by DTC, and to
deliver all accompanying evidence of transfer and authenticity to, or upon the
order of, Sovereign upon receipt by the exchange agent, as the undersigned's
agent, of the exchange notes to which the undersigned is entitled upon the
acceptance by Sovereign of such outstanding notes for exchange pursuant to the
exchange offer, (2) receive all benefits and otherwise to exercise all rights of
beneficial ownership of such outstanding notes, all in accordance with the terms
of the exchange offer, and (3) present such outstanding notes for transfer on
the relevant security register.
The undersigned hereby represents and warrants that the undersigned (1)
owns the notes tendered and is entitled to tender such notes, and (2) has full
power and authority to tender, sell, exchange, assign and transfer the
outstanding notes and to acquire exchange notes issuable upon the exchange of
such tendered notes, and that, when the same are accepted for exchange,
Sovereign will acquire good and marketable title to the tendered notes, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim or right or restriction of any kind. The undersigned also
warrants that it will, upon request, execute and deliver any additional
documents deemed by the exchange agent or Sovereign to be necessary or desirable
to complete the sale, exchange, assignment and transfer of tendered notes or to
transfer ownership of such notes on the account books maintained by DTC.
The undersigned understands that tenders of the outstanding notes pursuant
to any one of the procedures described in the prospectus under the caption "The
Exchange Offer -- Procedures for Tendering Outstanding Notes" and in the
instructions to this letter of transmittal will, upon Sovereign's acceptance of
the notes for exchange, constitute a binding agreement between the undersigned
and Sovereign in accordance with the terms and subject to the conditions of the
exchange offer.
The exchange offer is subject to the conditions set forth in the prospectus
under the caption "The Exchange Offer -- Conditions to the Exchange Offer." The
undersigned recognizes that as a result of these conditions (which may be
waived, in whole or in part, by Sovereign) as more particularly set forth in the
prospectus, Sovereign may not be required to exchange any of the outstanding
notes tendered by this letter of transmittal and, in such event, the outstanding
notes not exchanged will be returned to the undersigned at the address shown
below the signature of the undersigned.
The undersigned hereby represents and warrants that:
- the undersigned (or the person or entity receiving notes pursuant to this
letter of transmittal) is acquiring the offered notes in the ordinary
course of business of the undersigned (or such other person);
- neither the undersigned nor any such person or entity is engaging in or
intends to engage in a distribution of the offered notes within the
meaning of the federal securities laws;
- neither the undersigned nor any such person or entity has an arrangement
or understanding with any person or entity to participate in a
distribution of the offered notes;
5
<PAGE> 6
- neither the undersigned nor any such person or entity is an "affiliate,"
as such term is defined under Rule 405 promulgated under the Securities
Act of 1933, of Sovereign; and
- the undersigned is not acting on behalf of any person or entity who could
not truthfully make the foregoing representations.
If the undersigned is a broker-dealer that will receive offered notes for
its own account in exchange for outstanding notes that were acquired as a result
of market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such offered notes,
however, by so acknowledging and delivering a prospectus, the undersigned will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
All authority herein conferred or agreed to be conferred shall not be
affected by, and shall survive the death, bankruptcy or incapacity of the
undersigned and every obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, executors, administrators, successors,
assigns, trustees in bankruptcy and other legal representatives of the
undersigned.
Tendered outstanding notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time on June 27, 2000 or on such later date or time to which
Sovereign may extend the exchange offer.
Unless otherwise indicated herein under the box entitled "Special Issuance
Instructions" below, exchange notes, and outstanding notes not tendered or
accepted for exchange, will be issued in the name of the undersigned. Similarly,
unless otherwise indicated under the box entitled "Special Delivery
Instructions" below, exchange notes, and outstanding notes not tendered or
accepted for exchange, will be delivered to the undersigned at the address shown
below the signature of the undersigned. In the case of a book-entry delivery of
notes, the exchange agent will credit the account maintained by DTC with any
notes not tendered. The undersigned recognizes that Sovereign has no obligation
pursuant to the "Special Issuance Instructions" to transfer any outstanding
notes from the name of the registered holder thereof if Sovereign does not
accept for exchange any of the principal amount of such outstanding notes so
tendered.
The exchange notes will bear interest from the most recent interest payment
date to which interest has been paid on the notes, or if no interest has been
paid, from March 29, 2000. Interest on the outstanding notes accepted for
exchange will cease to accrue upon the issuance of the exchange notes.
6
<PAGE> 7
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF OUTSTANDING NOTES REGARDLESS OF
WHETHER NOTES
ARE BEING PHYSICALLY DELIVERED HEREWITH, UNLESS AN AGENT'S MESSAGE IS DELIVERED
IN CONNECTION WITH A BOOK-ENTRY TRANSFER OF SUCH NOTES)
This letter of transmittal must be signed by the registered holder(s) of
outstanding notes exactly as their name(s) appear(s) on certificate(s) for
outstanding notes or on a security position listing, or by person(s) authorized
to become registered holder(s) by endorsements and documents transmitted with
this letter of transmittal. If the signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer or other person acting in a
fiduciary or representative capacity, such person must set forth his or her full
title below under "Capacity" and submit evidence satisfactory to the exchange
agent of such person's authority to so act. See Instruction 5 below.
If the signature appearing below is not of the registered holder(s) of the
outstanding notes, then the registered holder(s) must sign a valid power of
attorney.
X
------------------------------------------------------------------------------
X
------------------------------------------------------------------------------
SIGNATURE(S) OF HOLDER(S) OR AUTHORIZED SIGNATORY
Dated: , 2000
---------------------------
Name(s)
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capacity
-----------------------------------------------------------------------
Address
------------------------------------------------------------------------
(INCLUDING ZIP CODE)
Area Code and Telephone No.
-----------------------------------------------------
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
SIGNATURE GUARANTEE
(IF REQUIRED -- SEE INSTRUCTIONS 2 AND 5 BELOW)
CERTAIN SIGNATURES MUST BE GUARANTEED BY A SIGNATURE GUARANTOR
- --------------------------------------------------------------------------------
(NAME OF SIGNATURE GUARANTOR GUARANTEEING SIGNATURES)
- --------------------------------------------------------------------------------
(ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER (INCLUDING AREA CODE) OF
FIRM)
- --------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
- --------------------------------------------------------------------------------
(PRINTED NAME)
- --------------------------------------------------------------------------------
(TITLE)
Dated: , 2000
---------------------------
7
<PAGE> 8
<TABLE>
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
To be completed ONLY if certificates for To be completed ONLY if certificates for
outstanding notes in a principal amount not outstanding notes in a principal amount not
tendered are to be issued in the name of, or tendered, or exchange notes, are to be sent to
exchange notes issued pursuant to the exchange someone other than the person or persons whose
offer are to be issued in the name of, someone name(s) appear(s) within this letter of transmittal
other than the person or persons whose name(s) to an address different from that shown in the box
appear(s) within this letter of transmittal or entitled "Description of Notes" within this letter
issued to an address different from that shown in of transmittal.
the box entitled "Description of Notes" within this
letter of transmittal.
Issue: [ ] Exchange Notes Deliver: [ ] Exchange Notes
[ ] Outstanding Notes [ ] Outstanding Notes
(Complete as applicable) (Complete as applicable)
Name Name
------------------------------------------- -------------------------------------------
(PLEASE PRINT) (PLEASE PRINT)
Address Address
----------------------------------------- -----------------------------------------
(PLEASE PRINT) (PLEASE PRINT)
- --------------------------------------------------- ---------------------------------------------------
(ZIP CODE) (ZIP CODE)
- --------------------------------------------------- ---------------------------------------------------
TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER
(SEE SUBSTITUTE FORM W-9 HEREIN)
Credit outstanding notes not tendered, but Is this a permanent address change?
represented by certificates tendered by this letter [ ] Yes [ ] No (check one box)
of transmittal, by book-entry transfer to:
[ ] The Depository Trust Company
[ ]
----------------------------------------------
Account Number
------------------------------------
Credit exchange notes issued pursuant to the
exchange offer by book-entry transfer to:
[ ] The Depository Trust Company
Account Number
------------------------------------
</TABLE>
8
<PAGE> 9
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND NOTES. This letter of
transmittal is to be completed by holders of outstanding notes if certificates
representing such notes are to be forwarded herewith, or, unless an agent's
message is utilized, if delivery of such certificates is to be made by
book-entry transfer to the account maintained by DTC, pursuant to the procedures
set forth in the prospectus under "The Exchange Offer -- Procedures for
Tendering Outstanding Notes." For a holder to properly tender notes pursuant to
the exchange offer, a properly completed and duly executed letter of transmittal
(or a manually signed facsimile thereof), together with any signature guarantees
and any other documents required by these Instructions, or a properly
transmitted agent's message in the case of a book-entry transfer, must be
received by the exchange agent at its address set forth herein on or prior to
the expiration date, and either (1) certificates representing such notes must be
received by the exchange agent at its address, or (2) such notes must be
transferred pursuant to the procedures for book-entry transfer described in the
prospectus under "The Exchange Offer -- Book-Entry Transfer" and a book-entry
confirmation must be received by the exchange agent on or prior to the
expiration date. A holder who desires to tender notes and who cannot comply with
procedures set forth herein for tender on a timely basis or whose notes are not
immediately available must comply with the guaranteed delivery procedures
discussed below.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OUTSTANDING NOTES
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
SOLE RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, HOLDERS SHOULD USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, HOLDERS SHOULD ALLOW FOR
SUFFICIENT TIME TO ENSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
OF THE EXCHANGE OFFER. HOLDERS MAY REQUEST THEIR BROKER, DEALER, COMMERCIAL
BANK, TRUST COMPANY OR NOMINEE TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDER.
HOLDERS SHOULD NOT SEND ANY NOTE, LETTER OF TRANSMITTAL OR OTHER REQUIRED
DOCUMENT TO SOVEREIGN.
If a holder desires to tender notes pursuant to the exchange offer and (1)
certificates representing such notes are not immediately available, (2) time
will not permit such holder's letter of transmittal, certificates representing
such notes or other required documents to reach the exchange agent on or prior
to the expiration date, or (3) the procedures for book-entry transfer (including
delivery of an agent's message) cannot be completed on or prior to the
expiration date, such holder may nevertheless tender such notes with the effect
that such tender will be deemed to have been received on or prior to the
expiration date if the guaranteed delivery procedures set forth in the
prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures" are
followed. Pursuant to such procedures, (1) the tender must be made by or through
an eligible guarantor institution (as defined in Instruction 2 below), (2) a
properly completed and duly executed notice of guaranteed delivery,
substantially in the form provided by Sovereign herewith, or an agent's message
with respect to a guaranteed delivery that is accepted by Sovereign, must be
received by the exchange agent on or prior to the expiration date, and (3) the
certificates for the tendered notes, in proper form for transfer (or a
book-entry confirmation of the transfer of such notes into the exchange agent's
account at DTC as described in the prospectus) together with a letter of
transmittal (or manually signed facsimile thereof) properly completed and duly
executed, with any required signature guarantees and any other documents
required by the letter of transmittal, or a properly transmitted agent's
message, must be received by the exchange agent within three New York Stock
Exchange, Inc. trading days after the execution of the notice of guaranteed
delivery.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures set forth above.
2. GUARANTEE OF SIGNATURES. Signatures on this letter of transmittal must
be guaranteed by a member of or participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange, Inc. Medallion Signature Program
or the Stock Exchange Medallion Program or by an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 promulgated under the Securities
Exchange Act of 1934, as amended (banks; brokers and dealers; credit unions;
national securities exchanges;
9
<PAGE> 10
registered securities associations; learning agencies; and savings associations)
unless the notes tendered hereby are tendered (1) by a registered holder of
notes (or by a participant in DTC whose name appears on a security position
listing as the owner of such notes) who has not completed any of the boxes
entitled "Special Issuance Instructions" or "Special Delivery Instructions," on
the letter of transmittal, or (2) for the account of an "eligible guarantor
institution." If the notes are registered in the name of a person other than the
signer of the letter of transmittal or if notes not tendered are to be returned
to, or are to be issued to the order of, a person other than the registered
holder or if notes not tendered are to be sent to someone other than the
registered holder, then the signature on this letter of transmittal accompanying
the tendered notes must be guaranteed as described above. Beneficial owners
whose notes are registered in the name of a broker, dealer, commercial bank,
trust company or other nominee must contact such broker, dealer, commercial
bank, trust company or other nominee if they desire to tender notes. See "The
Exchange Offer -- Procedures for Tendering Outstanding Notes," in the
prospectus.
3. WITHDRAWAL OF TENDERS. Except as otherwise provided in the prospectus,
tenders of notes may be withdrawn at any time on or prior to the expiration
date. For a withdrawal of tendered notes to be effective, a written or facsimile
transmission notice of withdrawal must be received by the exchange agent on or
prior to the expiration date at its address set forth on the cover of this
letter of transmittal. Any such notice of withdrawal must (1) specify the name
of the person who tendered the notes to be withdrawn, (2) identify the notes to
be withdrawn, including the certificate number or numbers shown on the
particular certificates evidencing such notes (unless such notes were tendered
by book-entry transfer) and the aggregate principal amount represented by such
notes, and (3) be signed by the holder of such notes in the same manner as the
original signature on the letter of transmittal by which such notes were
tendered (including any required signature guarantees), or be accompanied by (i)
documents of transfer sufficient to have the trustee register the transfer of
the notes into the name of the person withdrawing such notes, and (ii) a
properly completed irrevocable proxy authorizing such person to effect such
withdrawal on behalf of such holder. If the notes to be withdrawn have been
delivered or otherwise identified to the exchange agent, a signed notice of
withdrawal is effective immediately upon written or facsimile notice of such
withdrawal even if physical release is not yet effected.
Any permitted withdrawal of notes may not be rescinded. Any notes properly
withdrawn will thereafter be deemed not validly tendered for purposes of the
exchange offer. However, properly withdrawn notes may be retendered by following
one of the procedures described in the prospectus under the caption "The
Exchange Offer -- Procedures for Tendering Outstanding Notes" at any time prior
to the expiration date.
4. PARTIAL TENDERS. Tenders of notes pursuant to the exchange offer will be
accepted only in principal amounts equal to $1,000 or integral multiples of
$1,000. If less than the entire principal amount of any notes evidenced by a
submitted certificate is tendered, the tendering holder must fill in the
principal amount tendered in the last column of the box entitled "Description of
Notes" herein. The entire principal amount represented by the certificates for
all notes delivered to the exchange agent will be deemed to have been tendered
unless otherwise indicated. If the entire principal amount of all notes held by
the holder is not tendered, certificates for the principal amount of notes not
tendered and exchange notes issued in exchange for any notes tendered and
accepted will be sent (or, if tendered by book-entry transfer, returned by
credit to the account at DTC designated herein) to the holder unless otherwise
provided in the appropriate box on this letter of transmittal (see Instruction
6), as soon as practicable following the expiration date.
5. SIGNATURE ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this letter of transmittal is signed by the
registered holder(s) of the outstanding notes tendered hereby, the signature
must correspond with the name(s) as written on the face of certificates without
alteration, enlargement or change whatsoever. If this letter of transmittal is
signed by a participant in DTC whose name is shown as the owner of the notes
tendered hereby, the signature must correspond with the name shown on the
security position listing the owner of the notes.
10
<PAGE> 11
If any of the notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this letter of transmittal. If any
tendered notes are registered in different names on several certificates, it
will be necessary to complete, sign and submit as many copies of this letter of
transmittal and any necessary accompanying documents as there are different
names in which certificates are held.
If this letter of transmittal is signed by the holder, and the certificates
for any principal amount of notes not tendered are to be issued (or if any
principal amount of notes that is not tendered is to be reissued or returned) to
or, if tendered by book-entry transfer, credited to the account of DTC of the
registered holder, and exchange notes exchanged for outstanding notes in
connection with the exchange offer are to be issued to the order of the
registered holder, then the registered holder need not endorse any certificates
for tendered notes nor provide a separate bond power. In any other case
(including if this letter of transmittal is not signed by the registered
holder), the registered holder must either properly endorse the certificates for
notes tendered or transmit a separate properly completed bond power with this
letter of transmittal (in either case, executed exactly as the name(s) of the
registered holder(s) appear(s) on such notes, and, with respect to a participant
in DTC whose name appears on a security position listing as the owner of notes,
exactly as the name(s) of the participant(s) appear(s) on such security position
listing), with the signature on the endorsement or bond power guaranteed by a
signature guarantor or an eligible guarantor institution, unless such
certificates or bond powers are executed by an eligible guarantor institution.
See Instruction 2.
Endorsements on certificates for notes and signatures on bond powers
provided in accordance with this Instruction 5 by registered holders not
executing this letter of transmittal must be guaranteed by an eligible
institution. See Instruction 2.
If this letter of transmittal or any certificates representing notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
proper evidence satisfactory to the exchange agent of their authority so to act
must be submitted with this letter of transmittal.
6. SPECIAL ISSUANCE AND SPECIAL DELIVERY INSTRUCTIONS. Tendering holders
should indicate in the applicable box or boxes the name and address to which
notes for principal amounts not tendered or exchange notes exchanged for
outstanding notes in connection with the exchange offer are to be issued or
sent, if different from the name and address of the holder signing this letter
of transmittal. In the case of issuance in a different name, the
taxpayer-identification number of the person named must also be indicated. If no
instructions are given, notes not tendered will be returned to the registered
holder of the notes tendered. For holders of notes tendered by book-entry
transfer, notes not tendered will be returned by crediting the account at DTC
designated above.
7. TAXPAYER IDENTIFICATION NUMBER AND SUBSTITUTE FORM W-9. Each tendering
holder is required to provide the exchange agent with its correct taxpayer
identification number, which, in the case of a holder who is an individual, is
his or her social security number. If the exchange agent is not provided with
the correct taxpayer identification number, the holder may be subject to backup
withholding and a $50 penalty imposed by the Internal Revenue Service. If
withholding results in an over-payment of taxes, a refund may be obtained.
Certain holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on substitute Form W-9" for additional instructions.
To prevent backup withholding, each holder tendering outstanding notes must
provide such holder's correct taxpayer identification number by completing the
Substitute Form W-9, certifying that the taxpayer identification number provided
is correct (or that such holder is awaiting a taxpayer identification number),
and that (i) the holder has not been notified by the Internal Revenue Service
that such holder is subject to backup withholding as a result of failure to
report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the outstanding notes are registered in more than one name or are not in the
name of the actual owner, consult the "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for information on which tax payer
identification number to report.
11
<PAGE> 12
Sovereign reserves the right in its sole discretion to take whatever steps
are necessary to comply with its obligation regarding backup withholding.
8. TRANSFER TAXES. Sovereign will pay all transfer taxes, if any, required
to be paid by Sovereign in connection with the exchange of the outstanding notes
for the exchange notes. If, however, exchange notes, or outstanding notes for
principal amounts not tendered or accepted for exchange, are to be delivered to,
or are to be issued in the name of, any person other than the registered holder
of the outstanding notes tendered, or if a transfer tax is imposed for any
reason other than the exchange of the outstanding notes in connection with the
exchange offer, then the amount of any transfer tax (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of the transfer taxes or exemption therefrom
is not submitted with the letter of transmittal, the amount of such transfer
taxes will be billed directly to the tendering holder.
9. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES. Any holder whose
exchange notes have been mutilated, lost, stolen or destroyed should contact the
exchange agent at the address indicated above for further instructions.
10. IRREGULARITIES. All questions as to the validity, form, eligibility,
time of receipt, acceptance and withdrawal of any tenders of notes pursuant to
the procedures described in the prospectus and the form and validity of all
documents will be determined by Sovereign, in its sole discretion, which
determination shall be final and binding on all parties. Sovereign reserves the
absolute right, in its sole discretion, to reject any or all tenders of any
notes determined by it not to be in proper form or the acceptance of which may,
in the opinion of Sovereign's counsel, be unlawful. Sovereign also reserves the
absolute right, in its sole discretion, to waive or amend any of the conditions
of the exchange offer or to waive any defect or irregularity in the tender of
any particular notes, whether or not similar defects or irregularities are
waived in the case of other tenders. Sovereign's interpretations of the terms
and conditions of the exchange offer (including, without limitation, the
instructions in this letter of transmittal) shall be final and binding. No
alternative, conditional or contingent tenders will be accepted. Unless waived,
any irregularities in connection with tenders must be cured within such time as
Sovereign shall determine. None of Sovereign, the exchange agent or any other
person will be under any duty to give notification of any defects or
irregularities in such tenders or will incur any liability to holders for
failure to give such notification. Tenders of such notes shall not be deemed to
have been made until such irregularities have been cured or waived. Any notes
received by the exchange agent that are not properly tendered and as to which
the irregularities have not been cured or waived will be returned by the
exchange agent to the tendering holders, unless such holders have otherwise
provided herein, promptly following the expiration date.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for assistance or additional copies
of the prospectus and this letter of transmittal, may be directed to the
exchange agent at the address and telephone number set forth above. Holders may
also contact their broker, dealer, commercial bank, trust company or other
nominee for assistance concerning the exchange offer.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER WITH
CERTIFICATES FOR OUTSTANDING NOTES AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE
OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO
5:00 P.M., NEW YORK CITY TIME ON THE EXPIRATION DATE.
12
<PAGE> 13
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: THE BANK OF NEW YORK
- ---------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN
IN THE BOX AT RIGHT AND CERTIFY BY -----------------------------------
FORM W-9 SIGNING AND DATING BELOW. Social Security Number(s)
OR
Employer Identification Number(s)
- ---------------------------------------------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY PART 2 -- CERTIFICATION -- UNDER PART 3 --
PENALTIES OF PERJURY, I CERTIFY
THAT: Awaiting TIN [ ]
INTERNAL REVENUE SERVICE (1) The number shown on this form
is my correct taxpayer
PAYER'S REQUEST FOR identification number (or I am
TAXPAYER IDENTIFICATION waiting for a number to be
NUMBER ("TIN") issued to me), and
(2) I am not subject to backup
withholding because: (a) I am
exempt from backup withholding,
(b) I have not been notified by
the Internal Revenue Service
(the "IRS") that I am subject
to backup withholding as a
result of a failure to report
all interest or dividends, or
(c) the IRS has notified me
that I am no longer subject to
backup withholding.
- ---------------------------------------------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you
are subject to backup withholding because of underreporting interest or dividends on your tax return. However,
if after being notified by the IRS that you are subject to backup withholding you receive another notification
from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2).
SIGNATURE DATE
-------------------------------------------------------- ----------------------------, 2000
NAME (please print)
----------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
- --------------------------------------------------------------------------------
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration office, or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable cash payments made to me thereafter will be withheld until I provide
a taxpayer identification number to the payer and that, if I do not provide my
taxpayer identification number within sixty days, such retained amounts shall be
remitted to the IRS as backup withholding.
SIGNATURE DATE
---------------------------------------- ----------------, 2000
NAME (please print)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM W-9 MAY RESULT IN BACKUP
WITHHOLDING AND A $50 PENALTY IMPOSED BY THE INTERNAL REVENUE SERVICE.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
13
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY
TO TENDER FOR EXCHANGE
11 7/8% SENIOR SUBORDINATED NOTES DUE 2010
OF
SOVEREIGN SPECIALTY CHEMICALS, INC.
PURSUANT TO THE PROSPECTUS DATED MAY 26, 2000
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 27, 2000, UNLESS EXTENDED.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C>
By Mail: Facsimile Transmission:
The Bank of New York (for eligible institutions only)
101 Barclay Street (212) 815-6339
New York, New York 10286 Confirm by Telephone:
Attn: Duong Nguyen (212) 815-6331
Reorganization Section
</TABLE>
By Hand/Overnight Delivery:
The Bank of New York
101 Barclay Street
New York, New York 100286
Attn: Duong Nguyen
Reorganization Section
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA A
FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
Outstanding notes must be received by the exchange agent within three New
York Stock Exchange, Inc. Trading days after the date of this notice of
guaranteed delivery.
As set forth in the prospectus, dated May 26, 2000, of Sovereign Specialty
Chemicals, Inc. under "The Exchange Offer -- Guaranteed Delivery Procedures,"
and in the instructions of the letter of transmittal, this form, or one
substantially equivalent hereto, or an agent's message relating to guaranteed
delivery, must be used to accept Sovereign's offer to exchange $1,000 principal
amount of 11 7/8% Senior Subordinated Notes due 2010, Series B, of Sovereign,
for each $1,000 principal amount of outstanding 11 7/8% Senior Subordinated
Notes due 2010, Series A, of Sovereign, if certificates representing such notes
are not immediately available, time will not permit the letter of transmittal,
certificates representing such notes or other required documents to reach the
exchange agent, or the procedures for book-entry transfer (including a properly
transmitted agent's message with respect thereto) cannot be completed, on or
prior to the expiration date.
This form is not to be used to guarantee signatures. If a signature on the
letter of transmittal is required to be guaranteed by signature guarantor under
the instructions thereto, such signature guarantee must appear in the applicable
space provided in the letter of transmittal.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tender(s) to Sovereign Specialty Chemicals, Inc.,
upon the terms and subject to the conditions set forth in the prospectus and the
letter of transmittal, receipt of which is hereby acknowledged, the aggregate
principal amount of outstanding notes set forth below pursuant to the guaranteed
delivery procedures set forth in the prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures." The undersigned hereby authorizes the
exchange agent to deliver this notice of guaranteed delivery to Sovereign with
respect to the outstanding notes tendered pursuant to the exchange offer.
The undersigned understands that tenders of the outstanding notes will be
accepted only in principal amounts equal to $1,000 or integral multiples
thereof. The undersigned also understands that tenders of the outstanding notes
pursuant to the exchange offer may be withdrawn at any time prior to the
expiration date. For a withdrawal of a tender of notes to be effective, it must
be made in accordance with the procedures set forth in the prospectus under "The
Exchange Offer -- Withdrawal Rights."
The undersigned understands that the exchange of any exchange notes for
outstanding notes will be made only after timely receipt by the exchange agent
of (i) the certificates of the tendered notes, in proper form for transfer (or a
book-entry confirmation of the transfer of such notes into the exchange agent's
account at The Depository Trust Company), and (ii) a letter of transmittal (or a
manually signed facsimile thereof) properly completed and duly executed with any
required signature guarantees, together with any other documents required by the
letter of transmittal (or a properly transmitted agent's message), within three
New York Stock Exchange, Inc. trading days after the execution hereof.
The undersigned hereby represents and warrants that the undersigned (1)
accepts the terms and conditions of exchange offer as set forth in the
prospectus and the letter of transmittal, (2) is entitled to tender such notes,
and (3) has full power and authority to tender, sell, exchange, assign and
transfer the outstanding notes and to acquire exchange notes issuable upon
exchange of such tendered notes, and that when the same are accepted for
exchange, Sovereign will acquire good and marketable title thereto, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim or right or restriction of any kind. The undersigned will,
upon request, execute and deliver any additional documents deemed by the
exchange agent or Sovereign to be necessary or desirable to complete the
exchange, assignment and transfer of the notes tendered.
All authority herein conferred or agreed to be conferred by this notice of
guaranteed delivery shall not be affected by, and shall survive, the death or
incapacity of the undersigned, and every obligation of the undersigned under
this notice of guaranteed delivery shall be binding upon the heirs, personal
representatives, executors, administrators, successors, assigns, trustees in
bankruptcy and other legal representatives of the undersigned.
In the event of a termination of the exchange offer, the notes tendered
pursuant to the exchange offer will be returned to the tendering holders
promptly (or, in the case of notes tendered by book-entry transfer, such notes
will be credited to the account maintained at The Depository Trust Company from
which such notes were delivered).
2
<PAGE> 3
PLEASE SIGN AND COMPLETE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Signature(s) of Registered Holder(s) or Date:
Authorized Signatory: --------------------------------------------
------------------------------ Address:
-----------------------------------------
- --------------------------------------------------- -------------------------------------------------
- --------------------------------------------------- Area Code and Telephone No.
Name(s) of Registered Holder(s): ----------------------
-------------------
If Notes will be delivered by book-entry transfer,
- --------------------------------------------------- provide information below:
------------------------
Principal Amount of Notes Tendered: Name of Tendering
---------------- Institution:
--------------------------------------
Certificate No.(s) of Notes Depositary
(if available) Account No. with DTC:
------------------------------------ -----------------------------
Transaction Code Number
----------------------------
</TABLE>
This notice of guaranteed delivery must be signed by the holder(s) exactly as
their name(s) appear(s) on certificate(s) for notes or on a security position
listing as the owner of notes, or by person(s) authorized to become holder(s) by
endorsements and documents transmitted with this notice of guaranteed delivery.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information:
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capacity:
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DO NOT SEND NOTES WITH THIS FORM. NOTES SHOULD BE SENT TO THE EXCHANGE
AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL
OR PROPERLY TRANSMITTED AGENT'S MESSAGE.
3
<PAGE> 4
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as amended,
hereby guarantees that the notes to be tendered hereby are in proper form for
transfer (pursuant to the procedures set forth in the prospectus under "The
Exchange Offer -- Guaranteed Delivery Procedures"), and that the exchange agent
will receive (a) such notes, or a book-entry confirmation of the transfer of
such notes into the exchange agent's account at The Depository Trust Company,
and (b) a properly completed and duly executed letter of transmittal (or
facsimile thereof) with any required signature guarantees and any other
documents required by the letter of transmittal, or a properly transmitted
agent's message, within three New York Stock Exchange, Inc. trading days after
the date of execution hereof.
The eligible guarantor institution that completes this form must
communicate the guarantee to the exchange agent and must deliver the letter of
transmittal, or a properly transmitted agent's message, and notes, or a
book-entry confirmation in the case of a book-entry transfer, to the exchange
agent within the time period described above. Failure to do so could result in a
financial loss to such eligible guarantor institution.
<TABLE>
<S> <C>
Name of Firm:
-------------------------------- ---------------------------------------------
AUTHORIZED SIGNATURE
Address:
------------------------------------- Name:
-----------------------------------------
- ---------------------------------------------
Title:
---------------------------------------
(Zip Code)
Area Code and Telephone Number:
-------------- Dated: --------- , 2000
</TABLE>
4
<PAGE> 1
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT
FROM BENEFICIAL OWNER
OF
SOVEREIGN SPECIALTY CHEMICALS, INC.
11 7/8% SENIOR SUBORDINATED NOTES DUE 2010
To Registered Holders and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the prospectus, dated May
26, 2000, of Sovereign Specialty Chemicals, Inc. and accompanying letter of
transmittal, that together constitute Sovereign's offer to exchange $1,000
principal amount of 11 7/8% Senior Subordinated Notes due 2010, Series B, which
have been registered under the Securities Act of 1933, as amended, of Sovereign
for each $1,000 principal amount of outstanding 11 7/8% Senior Subordinated
Notes due 2010, Series A, of Sovereign, of which $150,000,000 aggregate
principal amount is outstanding.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
exchange offer with respect to the outstanding notes held by you for the account
of the undersigned.
The aggregate face amount of the outstanding notes held by you for the
account of the undersigned is (FILL IN AMOUNT):
$ of 11 7/8% Senior Subordinated Notes due 2010.
With respect to the exchange offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
[ ] To TENDER ALL of the outstanding notes held by you for the account of
the undersigned.
[ ] To TENDER the following outstanding notes held by you for the account
of the undersigned (INSERT PRINCIPAL AMOUNT OF OUTSTANDING NOTES TO BE
TENDERED (IF ANY)): $ of 11 7/8% Senior Subordinated Notes due
2010.
[ ] NOT to TENDER any outstanding notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender outstanding notes held by you
for the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the letter
of transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations, that (1) the
exchange notes acquired pursuant to the exchange offer are being acquired in the
ordinary course of business of the undersigned, (2) the undersigned is not
engaging in and does not intend to engage in a distribution of the exchange
notes, (3) the undersigned does not have an arrangement or understanding with
any person to participate in the distribution of such exchange notes, (4) the
undersigned is not an "affiliate" of Sovereign or the guarantors within the
meaning of Rule 405 under the Securities Act of 1933, as amended, and (5) the
undersigned is not acting on behalf of any person who could not truthfully make
the foregoing representations. If the undersigned is a broker-dealer that will
receive exchange notes for its own account in exchange for outstanding notes
that were acquired as a result of market-making activities or other trading
activities, it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
exchange notes. By acknowledging that it will deliver and by delivering a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such exchange notes, the undersigned is not deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
<PAGE> 2
The undersigned acknowledges that if an executed copy of this letter of
transmittal is returned, the entire principal amount of outstanding notes held
for the undersigned's account will be tendered unless otherwise specified above.
The undersigned hereby represents and warrants that the undersigned (1)
owns the notes tendered and is entitled to tender such notes, and (2) has full
power and authority to tender, sell, exchange, assign and transfer the
outstanding notes and to acquire exchange notes issuable upon the exchange of
such tendered notes, and that, when the same are accepted for exchange,
Sovereign will acquire good and marketable title to the tendered notes, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim or right or restriction of any kind.
SIGN HERE
Name of beneficial owner(s)(please print):
--------------------------------------
Signature(s):
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Address:
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Telephone Number:
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Taxpayer Identification Number or Social Security Number:
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Date:
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2
