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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number 333-39373
SOVEREIGN SPECIALTY CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE
36-4176637
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
225 W. Washington St. - Ste. 2200, Chicago, IL 60606
(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code: (312) 419-7100
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
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SOVEREIGN SPECIALTY CHEMICALS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets at March 31, 2000 (Unaudited)
and December 31, 1999..................................... 1
Consolidated Statements of Operations for the three months
ended March 31, 2000
and 1999 (Unaudited)...................................... 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (Unaudited)................. 3
Notes to Consolidated Financial Statements.................. 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................... 11
Signatures.................................................. 12
</TABLE>
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SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,483 $ 17,005
Accounts receivable, net.................................. 42,673 38,756
Inventories............................................... 27,109 26,028
Deferred income taxes..................................... 1,177 1,177
Other current assets...................................... 5,517 3,206
-------- --------
Total current assets........................................ 85,959 86,172
Property, plant, and equipment, net......................... 50,518 51,525
Goodwill, net............................................... 104,687 106,157
Deferred financing costs, net............................... 9,714 11,011
Other assets................................................ 3,887 2,974
-------- --------
Total assets................................................ $254,765 $257,839
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,498 $ 18,591
Accrued expenses.......................................... 10,123 19,814
Other current liabilities................................. 777 924
Current portion of long-term debt......................... 16,298 29,303
Current portion of capital lease obligations.............. 229 229
-------- --------
Total current liabilities................................... 45,925 68,861
Long-term debt, less current portion........................ 149,632 125,700
Capital lease obligations, less current portion............. 3,291 3,350
Deferred income taxes....................................... 2,676 2,676
Other long-term liabilities................................. 626 636
Stockholders' equity:
Common stock, $0.01 par value, 2,700,000 shares authorized,
1,436,239 issued and outstanding.......................... 15 15
Common stock, non-voting, $0.01 par value, 2,100,000 shares
authorized, 730,182 issued and outstanding................ 7 7
Additional paid-in capital.................................. 63,578 63,578
Accumulated Deficit......................................... (10,936) (7,045)
Cumulative translation adjustments.......................... (49) 61
-------- --------
Total stockholders' equity.................................. 52,615 56,616
-------- --------
Total liabilities and stockholders' equity.................. $254,765 $257,839
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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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
2
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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
3
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SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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 thereto included in
our 1999 Annual Report on Form 10-K.
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 due 2007
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SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2000
(Dollars in Thousands)
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.
5
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SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2000
(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
its principal stockholder at fair market value. All shares repurchased were sold
to employees at fair market value.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
GENERAL
We exist to acquire and consolidate adhesives, sealants and coatings
businesses in the highly fragmented adhesives, sealants and coatings business
segment of the specialty chemicals industry. 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. We
plan to continue growth through a combination of new product development,
continued market penetration, strategic acquisitions and international
expansion.
This table describes the acquisitions since 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, automobile, 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 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 operating results of acquired businesses have been included in the
consolidated operating results of the Company for all periods after their
respective dates of acquisition.
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 a new credit agreement and repaid all outstanding amounts under our
former credit facility. Amounts drawn under the new credit agreement 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 the Company was accounted for as a recapitalization. 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, we continue to carry assets and
liabilities at their historical carrying value.
SSCI Investors LLC's acquisition of 75% of the Company's capital 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 the 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 was
completed on March 6, 2000 with the repurchase of the entire $125.0 million
7
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principle amount of 9 1/2% notes for an aggregate purchase price of
approximately $127.4 million which was financed with borrowings under the credit
facilities. On March 29, 2000 we completed an issuance of $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. We used proceeds from this
offering to repay amounts drawn under our credit facilities for the repurchase
of the 9 1/2% notes and for general corporate purposes.
RESULTS OF OPERATIONS
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.
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 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.
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 increases 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.
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We have a management agreement with AEA Investors, Inc. pursuant to which
we receive advisory and consulting services. The management agreement provides
for an annual aggregate fee of $999,999 plus reasonable out-of-pocket costs and
expenses.
Net cash used in investing activities was $0.7 million in 2000 and resulted
from capital additions to property, plant and equipment.
Net cash provided by financing activities was $3.8 million in 2000.
We entered into a new Credit Agreement on December 29, 1999, which provided
for aggregate borrowings of $200 million, including a (1) $50.0 million
revolving credit facility (Credit Facility), (2) a $75.0 million term loan (Term
Loan A), (3) a $75.0 million term loan (Term Loan B). Borrowings under the
Credit Facility are available on a fully revolving basis and may be used for
general corporate purposes, including to a limited extent acquisitions. The
Credit Facility will mature on December 30, 2005. Borrowings under Term Loan A
may be used for general corporate purposes, including acquisitions, and
commitments to lend under this facility terminate to the extent not then drawn.
Borrowings under the Term Loan B were available for general corporate purposes
and were fully drawn on March 6, 2000, as part of the $127.4 million which was
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 Term Loan A, $75.0 million principal amount under the Term Loan B
and $20.0 million principal amount under the Credit Facility. On March 29, 2000
we completed an issuance of $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 cash proceeds from this offering of approximately
$143.8 million were used to repay all amounts outstanding under Term Loan A and
Term Loan B, $6.0 million outstanding under the Credit Facility and for general
corporate purposes. Upon repayment, Term Loan B was terminated and the aggregate
borrowings under the Credit Agreement were reduced from $200 million to $125
million. As of March 31, 2000, we have $75.0 million of borrowing availability
under Term Loan A and $34.9 million of borrowing availability under our $50.0
million Credit Facility. We may incur additional indebtedness to the extent that
we complete any acquisitions.
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 the 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.
Interest payments on the amounts drawn under the credit facilities, as well
as other indebtedness and obligations, represent significant obligations for the
Company. Our remaining liquidity demands relate to capital expenditures and
working capital needs. Our capital expenditures were approximately $0.8 million
in the first quarter of 2000 and management currently anticipate 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
offering memorandum, 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, Management does not expect capital
expenditure requirements to increase materially in the foreseeable future.
Our primary sources of liquidity are cash flows from operations and
borrowings under the credit facilities. Based on current and anticipated
financial performance, we expect cash flow from operations and borrowings under
the credit facilities 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, the credit
facilities and other indebtedness. However, capital requirements may change,
particularly if we should complete any additional material acquisition. Our
ability to satisfy capital requirements will be dependent upon its future
financial performance and ability to repay or refinance its 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.
9
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INFLATION
We do not believe that inflation has had a material impact on net sales or
income during any of the periods presented above. There can be no assurance,
however, that our business will not be affected by inflation in the future.
YEAR 2000 DISCLOSURE
To date, we have not experienced any significant functional problems
related to the Year 2000 issue. In addition, to date, the Company has not
experienced any significant Year 2000 issue with respect to vendors and/or third
parties with whom the Company conducts 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.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Some of the information presented in, or connection with, this report may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve potential risks and
uncertainties. Our future results could differ materially from those discussed
here. Some of the factors that could cause or contribute to such differences
include:
Changes in economic and market conditions that impact the demand for our
products and services;
Risks inherent in international operations, including possible economic,
political or monetary instability;
Uncertainties relating to our ability to consummate our business
strategy, including realizing synergies and cost savings from the
integration of acquired business.
The impact of new technologies and the potential effect of delays in the
development or deployment of such technologies; and,
The potential impact of issues related to Year 2000 software compliance.
You should not place undue reliance on these forward-looking statements,
which are applicable only as of May 15, 2000. All written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the foregoing factors and those identified in Exhibit 99.1
to this report. We have no obligation to revise or update these forward-looking
statements to reflect events or circumstances that arise after May 15, 2000 or
to reflect the occurrence of unanticipated events.
10
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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, incorporated by
reference to Exhibit 4.2 of the Company's Registration Statement on
Form S-4 as filed May 12, 2000.
27 Financial Data Schedule
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.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K/A, dated January 13, 2000 under Item
1, Changes in Control of Registrant, to report the sale of approximately 75% of
our outstanding stock by Sovereign Specialty Chemicals, L.P. We filed a Current
Report on Form 8-K, dated March 13, 2000 under Item 5, Other Information, to
report our proposal to issue $150.0 million in aggregate principal amount of
senior subordinated notes due 2010 in a private placement.
11
<PAGE> 14
SOVEREIGN SPECIALTY CHEMICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOVEREIGN SPECIALTY CHEMICALS, INC.
/s/ ROBERT B. COVALT
--------------------------------------
Robert B. Covalt, Chief Executive
Officer
/s/ JOHN R. MELLETT
--------------------------------------
John R. Mellett, Chief Financial
Date: May 15, 2000 Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED SOVEREIGN
SPECIALTY CHEMICALS INC.'S MARCH 31, 2000 FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,483
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 254,765
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