<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
---------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
---------------------------
Commission File Number 333-39373
SOVEREIGN SPECIALTY CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
---------------------------
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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<PAGE> 2
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 June 30, 2000 (Unaudited) and
December 31, 1999......................................... 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2000
and 1999 (Unaudited)...................................... 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 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>
<PAGE> 3
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,630 $ 17,005
Accounts receivable, net.................................. 45,440 38,756
Inventories............................................... 26,990 26,028
Deferred income taxes..................................... 1,177 1,177
Other current assets...................................... 4,501 3,206
-------- --------
Total current assets........................................ 84,738 86,172
Property, plant, and equipment, net......................... 50,247 51,525
Goodwill, net............................................... 103,215 106,157
Deferred financing costs, net............................... 10,301 11,011
Other assets................................................ 2,865 2,974
-------- --------
Total assets................................................ $251,366 $257,839
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 19,027 $ 18,591
Accrued expenses.......................................... 14,663 19,814
Other current liabilities................................. 218 924
Current portion of long-term debt......................... 8,094 29,303
Current portion of capital lease obligations.............. 229 229
-------- --------
Total current liabilities................................... 42,231 68,861
Long-term debt, less current portion........................ 149,479 125,700
Capital lease obligations, less current portion............. 3,244 3,350
Deferred income taxes....................................... 2,393 2,676
Other long-term liabilities................................. 607 636
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......................................... (10,110) (7,045)
Cumulative translation adjustments.......................... (78) 61
-------- --------
Total stockholders' equity.................................. 53,412 56,616
-------- --------
Total liabilities and stockholders' equity.................. $251,366 $257,839
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
--------------------------- ---------------------------
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
------------ ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................... $63,932 $124,743 $63,184 $118,816
Cost of goods sold...................... 43,383 84,686 43,116 80,996
------- -------- ------- --------
Gross profit............................ 20,549 40,057 20,068 37,820
Selling, general and administrative
expenses.............................. 13,620 26,796 11,946 23,750
------- -------- ------- --------
Operating income........................ 6,929 13,261 8,122 14,070
Interest expense, net................... (5,382) (9,558) (3,870) (7,332)
------- -------- ------- --------
Income before income taxes and
extraordinary loss.................... 1,547 3,703 4,252 6,738
Income taxes............................ 720 1,940 2,413 3,519
------- -------- ------- --------
Income before extraordinary loss........ 827 1,763 1,839 3,219
Extraordinary loss, net of income tax
benefit............................... -- (4,828) -- --
------- -------- ------- --------
Net income (loss)....................... $ 827 $ (3,065) $ 1,839 $ 3,219
======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 5
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (3,065) $ 3,219
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization............................. 6,151 5,278
Deferred income taxes..................................... (281) --
Amortization of deferred financing costs.................. 674 590
Extraordinary loss........................................ 4,828 --
Compensation expense under management incentive plans..... -- 180
Changes in operating assets and liabilities(net of
acquisition):
Accounts receivable.................................... (6,684) (9,214)
Inventories............................................ (962) (2,491)
Other assets........................................... (820) (22)
Accounts payable....................................... 437 3,219
Accrued expenses and other............................. (3,423) 2,150
--------- ---------
Net cash provided by (used in) operating activities......... (3,145) 2,909
INVESTING ACTIVITIES
Acquisition of business................................... -- (15,809)
Purchase of property, plant and equipment................. (1,693) (3,505)
--------- ---------
Net cash used in investing activities....................... (1,693) (19,314)
FINANCING ACTIVITIES
Payments on long-term debt................................ (127,450) (1,000)
Proceeds from issuance of long-term debt.................. 148,932 --
Payments of deferred financing costs...................... (6,765) --
Payments on capital lease obligations..................... (106) (77)
Proceeds from revolving credit facilities................. 134,000 21,723
Payments on revolving credit facilities................... (154,009) (5,000)
--------- ---------
Net cash provided by (used in) financing activities......... (5,398) 15,646
Effect of exchange rate changes on cash..................... (139) (160)
--------- ---------
Net decrease in cash and cash equivalents................... (10,375) (919)
Cash and cash equivalents at beginning of period............ 17,005 5,863
--------- ---------
Cash and cash equivalents at end of period.................. $ 6,630 $ 4,944
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June
30, 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>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials....................................... $10,491 $ 9,920
Work in process..................................... 834 386
Finished goods...................................... 15,665 15,722
------- -------
$26,990 $26,028
======= =======
</TABLE>
4
<PAGE> 7
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(Dollars in Thousands)
3. COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2000 and 1999, respectively,
the calculation of comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
-------------------------- --------------------------
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net income (loss) as
reported................ $827 $(3,065) $1,839 $3,219
Foreign currency
translation
adjustments............. (29) (139) (81) (165)
---- ------- ------ ------
Comprehensive income
(loss).................. $798 $(3,204) $1,758 $3,054
==== ======= ====== ======
</TABLE>
4. EXTRAORDINARY LOSS
On March 6, 2000, the Company repurchased the entire $125.0 million
principal amount of its 9 1/2% notes 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.
5
<PAGE> 8
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(Dollars in Thousands)
5. 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 for the three and six months
ended June 30, 2000 and 1999, respectively of Sovereign Specialty Chemicals,
Inc., "the Parent Company", 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 Guarantor
Subsidiaries."
<TABLE>
<CAPTION>
THE GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------- ------------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA FOR THE
SIX MONTHS ENDED JUNE 30, 2000:
Net sales.............................. $119,683 $5,060 $ -- $ -- $ 124,743
Cost of goods sold..................... 81,346 3,340 -- -- 84,686
-------- ------ --------- --------- ---------
Gross profit........................... 38,337 1,720 -- -- 40,057
Selling, general and administrative
expenses............................. 22,446 1,392 2,958 -- 26,796
-------- ------ --------- --------- ---------
Operating income....................... 15,891 328 (2,958) -- 13,261
Equity in undistributed earnings....... -- 3,934 (3,934)
Interest expense, net.................. 7,612 (62) 1,884 -- (9,558)
-------- ------ --------- --------- ---------
Income before income taxes and
extraordinary items.................. $ 8,279 $ 266 $ (908) $ (3,934) $ 3,703
======== ====== ========= ========= =========
STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 2000:
Net sales.............................. $ 61,171 $2,761 $ -- $ -- $ 63,932
Cost of goods sold..................... 41,587 1,796 -- -- 43,383
-------- ------ --------- --------- ---------
Gross profit........................... 19,584 965 -- -- 20,549
Selling, general and administrative
expenses............................. 11,017 939 1,664 -- 13,620
-------- ------ --------- --------- ---------
Operating income....................... 8,567 26 (1,664) -- 6,929
Equity in undistributed earnings....... -- -- 5,005 (5,005) --
Interest expense, net.................. (4,985) (23) (394) -- (5,382)
-------- ------ --------- --------- ---------
Income before income taxes............. $ 3,602 $ 3 $ 2,947 $ (5,005) $ 1,547
======== ====== ========= ========= =========
BALANCE SHEET DATA:
Current assets......................... $ 95,181 $5,711 $ 39,442 $ (55,596) $ 84,738
Property plant and equipment, net...... 49,101 1,146 -- -- 50,247
Goodwill, net.......................... 103,215 -- -- -- 103,215
Deferred financing costs, net.......... 10,301 -- -- -- 10,301
Other assets........................... 3,096 66 194,591 (194,888) 2,865
-------- ------ --------- --------- ---------
Total assets........................... $260,894 $6,923 $ 234,033 $(250,484) $ 251,366
======== ====== ========= ========= =========
Current liabilities.................... $ 62,338 $3,926 $ 31,642 $ (55,675) $ 42,231
Long-term liabilities.................. 155,723 -- 148,979 (148,979) 155,723
Total stockholders' equity............. 42,833 2,997 53,412 (45,830) 53,412
-------- ------ --------- --------- ---------
Total liabilities and stockholders'
equity............................... $260,894 $6,923 $ 234,033 $(250,484) $ 251,366
======== ====== ========= ========= =========
</TABLE>
6
<PAGE> 9
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
THE GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------- ------------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA FOR THE
SIX MONTHS ENDED JUNE 30, 2000:
OPERATING ACTIVITIES
Net income (loss)...................... $ (2,730) $ 266 $ (601) $ -- $ (3,065)
Depreciation and amortization........ 6,076 75 -- -- 6,151
Deferred income taxes................ -- -- (281) -- (281)
Amortization of deferred financing
costs............................. 674 -- -- -- 674
Extraordinary loss................... 3,578 -- 1,250 -- 4,828
Changes in operating assets and
liabilities....................... (18,252) (240) 7,040 -- (11,452)
--------- ------ --------- --------- ---------
Net cash provided by (used in)
operating activities................. (10,654) 101 7,406 -- (3,145)
INVESTING ACTIVITIES
Purchase of property, plant and
equipment............................ (1,610) (83) -- -- (1,693)
--------- ------ --------- --------- ---------
Net cash used in investing
activities........................... (1,610) (83) -- -- (1,693)
FINANCING ACTIVITIES
Payments on long-term debt............. (127,450) -- -- -- (127,450)
Proceeds from long-term debt........... 138,932 -- 10,000 -- 148,932
Payments of deferred financing costs... (6,765) -- -- -- (6,765)
Payments on capital leases............. (106) -- -- -- (106)
Proceeds from revolving credit
facility............................. 134,000 -- -- -- 134,000
Payments on revolving credit
facility............................. (133,813) (196) (20,000) -- (154,009)
--------- ------ --------- --------- ---------
Net cash used in financing
activities........................... 4,798 (196) (10,000) -- (5,398)
Effect of foreign currency changes on
cash................................. (143) 4 -- -- (139)
--------- ------ --------- --------- ---------
Net decrease in cash................... (7,609) (174) (2,592) -- (10,375)
Cash and cash equivalents, beginning of
period............................... 13,809 409 2,787 -- 17,005
--------- ------ --------- --------- ---------
Cash and cash equivalents, end of
period............................... $ 6,200 $ 235 $ 195 $ -- $ 6,630
========= ====== ========= ========= =========
</TABLE>
7
<PAGE> 10
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(Dollars in Thousands)
The following sets forth financial data at June 30, 1999 and for the three
and six months then ended.
<TABLE>
<CAPTION>
THE GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------- ------------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA FOR THE
SIX MONTHS ENDED JUNE 30, 1999:
Net sales.............................. $115,117 $3,699 $ -- $ -- $118,816
Cost of goods sold..................... 78,397 2,599 -- -- 80,996
-------- ------ ------- ------- --------
Gross profit........................... 36,720 1,100 -- -- 37,820
Selling, general and administrative
expenses............................. 20,257 849 2,644 -- 23,750
-------- ------ ------- ------- --------
Operating income....................... 16,463 251 (2,644) -- 14,070
Equity undistributed earnings.......... -- 5,451 (5,451)
Interest expense, net.................. (6,995) (113) (224) -- (7,332)
-------- ------ ------- ------- --------
Income before income taxes............. $ 9,468 $ 138 $ 2,583 $(5,451) $ 6,738
======== ====== ======= ======= ========
STATEMENT OF OPERATIONS DATA FOR THE
THREE MONTHS ENDED JUNE 30, 1999:
Net sales.............................. $ 61,127 $2,057 $ -- $ -- $ 63,184
Cost of goods sold..................... 41,712 1,404 -- -- 43,116
-------- ------ ------- ------- --------
Gross profit........................... 19,415 653 -- -- 20,068
Selling, general and administrative
expenses............................. 9,925 524 -- -- 11,946
-------- ------ ------- ------- --------
Operating income....................... 9,490 129 1,497 -- 8,122
-- 3,338 (3,338)
Interest expense, net.................. (3,661) (74) (135) -- (3,870)
-------- ------ ------- ------- --------
Income before income taxes............. $ 5,829 $ 55 $ 1,706 $(3,338) $ 4,252
======== ====== ======= ======= ========
</TABLE>
8
<PAGE> 11
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
THE GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------- ------------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA FOR THE
SIX MONTHS ENDED JUNE 30, 1999:
OPERATING ACTIVITIES
Net income (loss)...................... $ (113) $ 138 $ 3,194 $ -- $ 3,219
Depreciation and amortization.......... 5,213 65 -- -- 5,278
Stock compensation..................... 180 -- -- -- 180
Amortization of deferred financing
costs................................ 590 -- -- -- 590
Changes in operating assets and
liabilities.......................... (3,382) 159 (3,135) -- (6,358)
-------- ----- ------- ---- --------
Net cash provided by operating
activities........................... 2,488 362 59 -- 2,909
INVESTING ACTIVITIES
Acquisition of business................ (15,809) -- -- -- (15,809)
Purchase of property, plant &
equipment............................ (3,381) (124) -- -- (3,505)
-------- ----- ------- ---- --------
Net cash used in investing
activities........................... (19,231) (124) -- -- (19,314)
FINANCING ACTIVITIES
Payments on long-term debt............. (1,000) -- -- -- (1,000)
Payment on capital leases.............. (77) -- -- -- (77)
Proceeds from revolving credit
facility............................. 21,723 -- -- -- 21,723
Payments on revolving credit
facility............................. (5,000) -- -- -- (5,000)
-------- ----- ------- ---- --------
Net cash provided by financing
activities........................... 15,646 -- -- -- 15,646
Effect of foreign currency changes on
cash................................. 7 (167) -- -- (160)
-------- ----- ------- ---- --------
Net increase in cash................... (1,049) 71 59 -- (919)
Cash and cash equivalents beginning of
period............................... 5,379 443 75 -- 5,863
-------- ----- ------- ---- --------
Cash and cash equivalents end of
period............................... $ 4,296 $ 514 $ 134 -- $ 4,944
======== ===== ======= ==== ========
</TABLE>
6. SUBSEQUENT EVENT
On August 2, 2000, the Company completed an asset purchase of an overprint
coatings product line which generates approximately $3.5 million in annual sales
from Aurachem Inc., a privately owned company. The allocation of the purchase
price is currently being determined by the Company.
9
<PAGE> 12
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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net Sales. Net sales for the first six months of 2000 were $124.7 million,
an increase of $5.9 million, or 5.0%, over the comparable period in 1999. Net
sales increased due to organic growth (approximately 2.0%) and growth through
acquisition (approximately 3.0%). Most of the organic growth came from SIA
Tanner, primarily in increased sales of insulation coatings. OSI Sealants sales
were up slightly year over year and Pierce & Stevens sales from its existing
business were flat for the six months ended June 30, 2000.
Cost of Goods Sold. Cost of goods sold increased 4.6% from the first six
months of 1999 to $84.7 million. Gross margin percentage year to date improved
to 32.1% compared with 31.8% in the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 2000 and 1999,
respectively were $26.8 million and $23.8 million. As a percentage of net sales,
selling, general and administrative expenses increased 7.5% to 21.5% from 20.0%
in 1999. This increase was due to additional goodwill amortization expense
associated with the Valspar acquisition in April, 1999, additional management
fees paid and additional expenses associated with nonconsummatable acquisitions.
Interest Expense. Interest expense was $9.6 million for the first six
months of 2000 representing a 30.4% increase from the comparable period in 1999
due primarily to increased debt levels and higher interest rates.
Income Taxes. Income tax expense decreased by $1.6 million to $1.9 million
in 2000, due to the decrease in pretax income.
Extraordinary loss (net of tax benefit). The extraordinary loss of $4.8
million, net of 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 (loss) Income. Primarily as a result of the extraordinary loss
recognized relative to the repurchase of the 9 1/2% Notes, a net loss of $3.1
million was incurred in the first half of 2000 compared to net income of $3.2
million in 1999.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net Sales. Net sales for the three months increased 1.2% over the
comparable period in 1999 to $63.9 million. All of the growth in the quarter
came from SIA Tanner which achieved solid growth despite weakness in certain
industrial markets. OSI Sealants sales were on par with the prior year, while
Pierce & Stevens sales were down slightly.
Cost of Goods Sold. Cost of goods sold increased slightly at 0.6% from the
second quarter of 1999 to $43.4 million. Gross margin for the quarter increased
slightly to 32.1% relative to the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2000 and 1999,
respectively were $13.6 million and $11.9 million. As a percentage of net sales,
selling, general and administrative expenses increased 12.7% to 21.3% from 18.9%
in 1999. A portion of this increased expense relates to increased management
fees, additional goodwill amortization expense associated with prior year
acquisition and additional expenses associated with nonconsummatable
acquisitions.
10
<PAGE> 13
Interest Expense. Interest expense was $5.4 million for the third quarter
of 2000 representing a 39.1% increase from the comparable period in 1999 due
primarily to increased debt levels and higher interest rates.
Income Taxes. Income tax expense decreased by $1.7 million from second
quarter 1999 to $0.7 million in 2000, due to the decrease in pretax income.
Net Income. Net income was $0.8 million, representing a $1.0 million
decrease from 1999. This decrease was primarily the result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $3.1 million in the first half of
2000. Adjusting the net loss for non-cash charges, such as depreciation and
amortization, deferred income taxes, amortization of deferred financing costs
and extraordinary loss results in positive cash flow of approximately $8.3
million. This cash flow from operations was offset by increases in accounts
receivable of $6.7 million, increases in other assets of $0.8 million, and a net
buildup of inventory levels of $1.0 million. In addition, accrued expenses
decreased by approximately $3.4 million from year end 1999. The increases in
accounts receivable are consistent with increases in net sales in the comparable
periods. The increase in other assets is due primarily to increases in income
taxes receivable. The decreases in accrued expenses relate primarily to the
payments in 2000 of approximately $2.3 million relative to the December 28, 1999
stock repurchase and $1.5 million in Long Term Incentive Plan payable.
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 $1.7 million in 2000 and resulted
from capital additions to property, plant and equipment.
Net cash used in financing activities was $5.4 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 June 30, 2000, we have $75.0 million of borrowing availability
under Term Loan A and $42.0 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 June 30, 2000 consisted of $149.0 million principal amount of
11 7/8% Notes, net of unamortized discount, $7.0 million drawn under the Credit
Facility and $1.0 million drawn under a $1.5 million sub-facility obtained by
our Singapore-based sales office. We also had approximately $4.0 million
outstanding of other indebtedness, including capital leases.
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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 $1.7 million
in the first half of 2000 and management currently anticipate capital
expenditures will be approximately $6.0 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
report, 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.
INFLATION
We do not believe that inflation has had a material impact on net sales or
income during any of the periods presented above. In recent months, the costs of
certain of our raw materials have risen sharply. To offset the impact of such
increases we are raising our prices where possible. There can be no assurance,
however, that our business will not be affected by inflation in the future.
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. We do not currently anticipate that 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.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Some of the information presented in, or connected 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,
Changes in raw material costs and our ability to adjust selling prices.
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You should not place undue reliance on these forward-looking statements,
which are applicable only as of August 14, 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 August 14, 2000
or to reflect the occurrence of unanticipated events.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
None.
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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: August 14, 2000 Officer
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