<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 11, 2000
SOVEREIGN SPECIALTY CHEMICALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 333-39373 36-4176637
(STATE OR OTHER COMMISSION (IRS EMPLOYER
JURISDICTION OF INCORPORATION) FILE NUMBER) IDENTIFICATIONS NO.)
225 W. WASHINGTON ST. - STE. 2200, CHICAGO, ILLINOIS 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 419-7100
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<PAGE> 2
Item 2. Acquisition of Assets
On October 11, 2000, Sovereign Specialty Chemicals Inc. (the Company), through
its subsidiary Mini Crown Funding Corp., purchased 100% of the common stock of
Imperial Adhesives, Inc. (Imperial), a subsidiary of NS Group, Inc. The cost of
the acquisition was $26.75 million excluding transaction costs. The purchase was
funded through a borrowing under the Company's Term A portion of its Revolving
Credit Facility. A copy of the press release is attached hereto as Exhibit 99.1.
At the time of the filing of the Current Report, it was impractical for the
Company to provide financial statements and pro forma financial information for
Imperial. Pursuant to the instructions for Item 7 of the Form 8-K, the Company
hereby amends Item 7 of the Current Report to include the previously omitted
information, as follows:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
The balance sheets of Imperial Adhesives, Inc. as of September 30, 2000
and September 25, 1999, and the related statements of operations,
stockholder's equity and cash flows for each of the three years in the
period ended September 30, 2000.
(b) Pro forma Financial Information
(1) Unaudited pro forma consolidated financial information for the
Company for the year ended December 31, 1999.
(2) Unaudited pro forma consolidated financial information for the
Company at September 30, 2000 and for the nine months ended
September 30, 2000.
(c) Exhibits
Exhibit 99.1 Press Release of Sovereign Specialty Chemicals, Inc.
dated October 12, 2000, regarding its acquisition of
Imperial Adhesives, Inc.
Exhibit 99.2 Stock Purchase Agreement by and among MiniCrown Funding
Corp. (Buyer), Sovereign Specialty Chemicals Inc.
(Parent), Imperial Adhesives, Inc. and NS Group Inc.
(Seller) as amended dated October 11, 2000.
<PAGE> 3
Report of Independent Public Accountants
To the Shareholder of Imperial Adhesives, Inc.:
We have audited the accompanying balance sheets of Imperial Adhesives, Inc. (an
Ohio corporation and a wholly-owned subsidiary of NS Group, Inc. see note 11) as
of September 30, 2000 and September 25, 1999, and the related statements of
operations, stockholder's equity, and cash flows for each of the three years in
the period ended September 30, 2000. 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 financial position of Imperial Adhesives, Inc. as of
September 30, 2000 and September 25, 1999, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
2000 in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
December 21, 2000
F-1
<PAGE> 4
IMPERIAL ADHESIVES, INC.
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 25,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2 $ 2
Accounts receivable, less allowance of $315
and $227 5,913 5,899
Inventories 5,231 5,192
Future tax benefits 76 90
Other current assets 104 62
------------- -------------
Total current assets 11,326 11,245
Property, plant, and equipment, net 3,154 3,502
Other assets 213 469
------------- -------------
Total assets $ 14,693 $ 15,216
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable 3,542 4,387
Accrued expenses 1,083 1,039
Income taxes payable 23 79
Payable to parent, net 1,920 1,807
Current portion of long-term debt 383 54
------------- -------------
Total current liabilities 6,951 7,366
------------- -------------
Long-term debt, less current portion -- 512
------------- -------------
Deferred income taxes payable 21 51
------------- -------------
Stockholder's equity:
Common stock, no par or stated value, 10,000
shares authorized, 9,499 issued and
outstanding 2,074 2,074
Retained earnings 5,647 5,213
------------- -------------
Total stockholder's equity 7,721 7,287
------------- -------------
Total liabilities and stockholder's equity $ 14,693 $ 15,216
============= =============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 5
Imperial Adhesives, Inc.
Statements of Operations
(Dollars in Thousands)
SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 28,
2000 1999 1998
------------- ------------- -------------
Net Sales $ 43,143 $ 42,218 $ 39,479
Cost of goods sold 32,769 31,557 29,615
-------- -------- --------
Gross profit 10,374 10,661 9,864
Selling, general and
administrative expenses 9,659 9,290 8,328
-------- -------- --------
Operating income 715 1,371 1,536
Interest income (expense)
from Parent, net 22 (14) (41)
Interest expense (51) (50) (48)
Interest and other income 93 74 48
-------- -------- --------
64 10 (41)
-------- -------- --------
Income before
income taxes 779 1,381 1,495
Income tax provision 345 595 646
-------- -------- --------
Net income $ 434 $ 786 $ 849
======== ======== ========
See accompanying notes to financial statements.
F-3
<PAGE> 6
Imperial Adhesives, Inc.
Statements of Stockholder's Equity
(Dollars in Thousands)
COMMON RETAINED
STOCK EARNINGS TOTAL
-------------------------------------
Balance at September 27, 1997 $ 2,074 $ 3,578 $ 5,652
Net income -- 849 849
-------------------------------------
Balance at September 28, 1998 2,074 4,427 6,501
Net income -- 786 786
-------------------------------------
Balance at September 25, 1999 2,074 5,213 7,287
Net income -- 434 434
-------------------------------------
Balance at September 30, 2000 $ 2,074 $ 5,647 $ 7,721
=====================================
See accompanying notes to financial statements.
F-4
<PAGE> 7
Imperial Adhesives, Inc.
Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 28,
2000 1999 1998
-----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 434 $ 786 $ 849
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 642 613 570
Deferred income taxes (16) 1 (39)
(Gain) loss on disposal of
equipment (31) 9 --
Changes in operating assets
and liabilities:
Accounts receivable (14) 138 (950)
Inventories (39) (763) (134)
Prepaid expenses and other assets (42) 23 20
Other noncurrent assets 22 (19) 43
Accounts payable and other
liabilities (857) 139 637
-----------------------------------------------
Net cash provided by operating
activities 99 927 996
-----------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (137) (583) (573)
Proceeds from sale of equipment 108 10 --
Net cash used in investing -----------------------------------------------
activities (29) (573) (573)
-----------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in payable
to Parent 113 (303) (381)
Payments on long-term debt (183) (51) (43)
-----------------------------------------------
Net cash provided by (used in)
financing activities (70) (354) (424)
-----------------------------------------------
Net increase (decrease) in cash
and cash equivalents -- -- (1)
Cash and cash equivalents at beginning
of year 2 2 3
-----------------------------------------------
Cash and cash equivalents at end of
year $ 2 $ 2 $ 2
-----------------------------------------------
Supplemental cash flow information:
Cash paid for interest $ 51 $ 51 $ 47
Cash paid for taxes $ 141 $ 164 $ 145
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 8
IMPERIAL ADHESIVES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, SEPTEMBER 25, 1999 AND SEPTEMBER 28, 1998
(Dollars in Thousands)
1. THE COMPANY
Imperial Adhesives, Inc. (the Company) was a wholly-owned subsidiary of NS
Group, Inc. (the Parent) throughout the periods covered by the accompanying
financial statements. See Note 11 regarding the sale of the company subsequent
to the yearend.
The Company is a custom manufacturer of water-borne, solvent-borne and hot-melt
adhesives and footwear finishes, with approximately 700 active formulas. The
Company's multiple product lines are used primarily in product assembly
applications in such industries as construction, packaging, transportation,
marine, furniture, and footwear.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
CASH AND CASH EQUIVALENTS
Cash includes currency on hand and demand deposits with financial institutions.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
primarily using the first-in first-out (FIFO) method. Inventory cost include
labor, material and manufacturing overhead.
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. Machinery, furniture and
equipment are depreciated over a range of 3 to 12 years. Buildings are
depreciated over 30 years. Land improvements and leasehold improvements are
amortized over a range of 3 to 5 years. Depreciation expense was $400, $414 and
$363 for the years ended September 30, 2000, September 25, 1999 and September
28, 1998, respectively.
F-6
<PAGE> 9
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
LONG-LIVED ASSETS
The Company evaluates its long-lived assets 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 no 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.
REVENUE RECOGNITION
Revenue is recognized when products are shipped to the customer.
INCOME TAXES
The Company is included in the consolidated federal income tax return of the
Parent. The consolidated federal income tax provision of the Parent is allocated
to its subsidiaries, including the Company, on the basis of calculations as if
members of the consolidated group filed separate returns. The Company's
intercompany payables to the Parent are credited with an amount equal to the
federal income tax provision allocated to the Company. All federal deferred
taxes are maintained by the Parent.
The Company files state income tax returns on a separate company basis. The
provision for state income taxes includes both a current and deferred component.
State deferred income taxes are maintained for the estimated future state tax
effects of temporary differences between the financial reporting basis and the
state tax basis of certain assets and liabilities.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental remediation costs are accrued, except to the extent
capitalizable, when incurrence of such costs are probable and the costs can be
reasonably estimated. Environmental compliance costs include maintenance and
operating costs associated with pollution control facilities, costs of ongoing
monitoring programs, permit costs and other similar costs. Such costs are
expensed as incurred.
F-7
<PAGE> 10
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUING)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, trade accounts receivable,
payable to parent, accounts payable and accrued expenses, and other current
liabilities approximate to their fair values at September 30, 2000 and September
25, 1999, due to the short-term nature of these instruments.
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
The Company grants trade credit to its customers, which subjects the Company to
concentrations of credit risk within the industries it serves (see Note 1). 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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FISCAL YEAR-END
The Company's fiscal year for all periods shown ended on the last Saturday of
September. Fiscal year 2000 contains fifty-three weeks, while fiscal years 1999
and 1998 contain fifty-two weeks.
F-8
<PAGE> 11
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 25,
2000 1999
-------------------------------
<S> <C> <C>
Raw materials $ 1,946 $ 2,485
Finished goods 3,285 2,707
-------------------------------
$ 5,231 $ 5,192
===============================
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 25,
2000 1999
--------------------------------
<S> <C> <C>
Land and land improvements $ 426 $ 504
Buildings and improvements 1,999 2,047
Machinery, furniture, and
equipment 5,501 5,404
--------------------------------
$ 7,926 $ 7,955
Less: accumulated depreciation (4,772) (4,453)
--------------------------------
$ 3,154 $ 3,502
================================
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 25,
2000 1999
--------------------------------
<S> <C> <C>
Payroll and payroll related $ 501 $ 428
Freight 280 403
Accrued environmental
remediation costs 125 --
Commissions 102 99
Other 75 109
--------------------------------
$ 1,083 $ 1,039
--------------------------------
</TABLE>
F-9
<PAGE> 12
6. LONG-TERM DEBT
The Company's long-term debt, all of which is secured by real property,
consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 25,
2000 1999
-------------------------------
<S> <C> <C>
Prime + 1/2% commercial mortgage note
due November 2001, principle and
interest payments due monthly $ 15 $ 27
7.5% and 8.25% commercial mortgage
notes due August 2012 and June 2005,
respectively, principal and interest
due monthly 335 357
9.5% and 6% industrial development notes
due June 2003 and August 2012, respectively,
principal and interest due monthly 33 182
-------------------------------
Total 383 566
Less: current maturities (383) (54)
-------------------------------
Net long-term $ -- $ 512
-------------------------------
</TABLE>
In connection with the sale of the Company discussed in Note 11, all long-term
debt was repaid. Accordingly, all amounts are classified as current in the
September 30, 2000 Balance Sheet.
F-10
<PAGE> 13
7. RELATED PARTY TRANSACTIONS
The Company utilizes certain corporate-wide services of the Parent, the more
significant of which relate to general management, compensation and benefits
administration, and treasury services. The Parent allocates cost for such
services to the Company based on a percentage of sales dollars. Such
allocations for fiscal years 2000, 1999, and 1998 were $900, $602, and $373,
respectively, and are included in selling and administrative expenses in the
accompanying Statements of Operations. Additionally, the Parent procures
certain outside services, such as legal, accounting and insurance, on a
corporate-wide basis and allocates cost for such services on the basis of
specific identification to the extent practicable. In the opinion of
management, such allocations have been made on a reasonable basis and do not
differ materially from the actual costs which would have been incurred had the
Company actually operated as a separate stand-alone entity.
In addition, the Company participates in the Parent's corporate cash management
system. Under this system, the Company's cash receipts and disbursements are
automatically cleared or funded through the Parent's centralized cash accounts
and/or line of credit. Accordingly, the Company has no short-term investments,
maintains minimal cash balances and has no separate line of credit facility.
However, the Company is charged or credited for interest expense or income on
its balances in the corporate cash management system. Such intercompany charges
are reflected as interest income (expense) from Parent in the accompanying
Statements of Operations.
The Company, together with certain other subsidiaries of the Parent, jointly
and severally guarantees senior secured notes issued by the Parent with an
outstanding balance of $72,355 at September 30, 2000.
8. INCOME TAXES
The components of the provision for income taxes, are as follows for the years
ended September 30, 2000 and September 25, 1999 and September 28, 1998:
September 30, September 25, September 28,
2000 1999 1998
---------------------------------------------
Current income taxes:
Federal $282 $449 $498
State 79 145 189
---------------------------------------------
361 594 687
---------------------------------------------
Deferred (16) 1 (41)
---------------------------------------------
Income taxes $345 $595 $646
---------------------------------------------
F-11
<PAGE> 14
The income tax provision differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes due to the
following reasons:
September 30, September 25, September 28,
2000 1999 1998
-------------------------------------------
Income tax provision at statutory
tax rate of 35% $ 273 $ 483 $ 523
State taxes, net of federal benefit 41 95 96
Nondeductible expenses and other 31 17 27
-------------------------------------------
Income taxes at the effective rate $ 345 $ 595 $ 646
-------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the state deferred tax assets and deferred tax liabilities are as follows:
September 30, September 25
2000 1999
------------------------------
Deferred tax assets relating to expenses
not currently deductible for tax purposes $ 76 $ 90
Deferred tax liabilities relating to
accelerated depreciation and
amortization of long-term assets (21) (51)
------------------------------
Net deferred tax asset (liability) $ 55 $ 39
------------------------------
8. EMPLOYEE BENEFIT PLANS
The Parent has established various profit sharing plans at the operating
companies which are based on the earnings of the respective subsidiaries.
The Parent also has defined contribution plans covering substantially all of
its employees and a non-qualified deferred compensation plan covering certain
employees. The expense for these plans was approximately $454, $379, and $403
in fiscal years 2000, 1999, and 1998, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company has various commitments for the purchase of materials and supplies
arising in the ordinary course of business.
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business with respect to workers'
compensation, health care and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and other matters. The
Company accrues for the cost of such matters when the incurrence of such
costs is probable and can be reasonably estimated. Based
F-12
<PAGE> 15
upon its evaluation of available information, management does not believe that
any such matters are likely, individually or in the aggregate, to have a
material adverse effect upon the Company's financial position, results of
operations or cash flows.
10. ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, and local 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. The Company has been named as a potentially
responsible party under the Comprehensive Environment Response, Compensation,
and Liability Act (CERCLA) for cleanup of a multiparty waste disposal site.
The Company believes that it will be partially indemnified with respect to this
claim by the prior owners of one of the Company's facilities. Additionally, the
Company has identified certain other instances of potential contamination that
may require remediation. The Company had remediation reserves of $125 at
September 30, 2000.
Based upon its evaluation of available information, management does not believe
that any of the environmental contingency matters discussed above are likely,
individually or in the aggregate, to have a material adverse effect upon the
Company's financial position, results of operations or cash flows. However, the
Company cannot predict with certainty that new information or developments with
respect to its environmental contingency matters, individually or in the
aggregate, will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
11. SUBSEQUENT EVENT
On October 11, 2000, subsequent to the date of the accompanying financial
statements, the common stock of the Company was sold by the Parent to a
subsidiary of Sovereign Specialty Chemicals, Inc. in a cash transaction. The
accompanying financial statements give no effect to this transaction.
F-13
<PAGE> 16
Sovereign Specialty Chemicals, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
Nine Months ended September 30, 2000
(In Thousands)
<TABLE>
<CAPTION>
Dr (cr)
Sovereign Special Imperial Pro forma Pro forma Pro Forma
Chemicals Inc Adhesives Adjustments Adj. Ref. Consolidated
--------------- ---------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 186,803 $ 32,390 $ - $ 219,193
Cost of Sales 128,197 24,517 (125) (6) 152,589
--------- --------- --------- ---------
Gross Profit 58,606 7,873 125 66,604
Selling, general and administrative expense 39,626 7,208 173 (1) (3) 47,007
--------- --------- --------- ---------
Income from operations 18,980 665 (48) 19,597
Other income,(expense) - 33 33
Interest Expense, net (14,825) (21) (1,734) (2) (4) (16,580)
--------- --------- --------- ---------
Income before income taxes and extraordinary items 4,155 677 (1,782) 3,050
Income taxes 2,276 285 (748) (5) 1,813
--------- --------- --------- ---------
Income before extraordinary loss 1,879 392 (1,034) 1,237
Extraordinary loss,net of income tax benefit (4,828) - - (4,828)
--------- --------- --------- ---------
Net loss $ (2,949) $ 392 $ (1,034) $ (3,591)
</TABLE>
See Accompanying Notes for Pro forma Adjustments
Sovereign Specialty Chemicals, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
Year ended December 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
Dr (cr)
Sovereign Special Imperial Pro forma Pro forma Pro Forma
Chemicals Inc Adhesives Adjustments Adj. Ref. Consolidated
--------------- ---------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 237,408 $ 42,395 $ - $ 279,803
Cost of Sales 162,550 31,955 - 194,505
--------- --------- --------- ---------
Gross Profit 74,858 10,440 - 85,298
Selling, general and administrative expense 48,350 9,363 562 (1) (3) 58,275
Special charges 14,153 - - 14,153
--------- --------- --------- ---------
Income from operations 12,355 1,076 (562) 12,869
Other income, (expense) - 134 - 134
Interest Expense, net (15,076) (58) (2,283) (2) (4) (17,417)
--------- --------- --------- ---------
Income before income taxes and extraordinary items (2,721) 1,152 (2,845) (4,414)
Income taxes 4,218 516 (1,195) 3,539
--------- --------- --------- (5) ---------
Income before extraordinary loss (6,939) 636 (1,650) (7,953)
Extraordinary loss,net of income tax benefit (1,055) - - (1,055)
--------- --------- --------- ---------
Net loss $ (7,994) $ 636 $ (1,650) $ (9,008)
</TABLE>
See Accompanying Notes for Pro forma Adjustments
F-14
<PAGE> 17
Sovereign Specialty Chemicals, Inc. and Subsidiaries
Notes to Consolidated Pro forma
Statements of Operations
The accompanying consolidated pro forma statements of operations reflect the
acquisition of Imperial Adhesives, Inc. (Imperial) as if the acquisition had
occurred January 1, 1999. The adjustments reflect the acquisition as follows:
(1) Reflects additional amortization expense from the goodwill recorded. Pro
forma amortization expense is $890 and $1,187 for the nine months ended
September 30, 2000 and the year ended December 31, 1999, respectively.
(2) Eliminates interest expense on assets and liabilities not assumed in the
acquisition.
(3) Eliminates management fees charged Imperial by NS Group.
(4) Reflects additional interest expense on debt incurred in connection with
the acquisition.
(5) Reflects the adjustment to income taxes as a result of the pro forma
adjustments described in these Notes.
(6) Reflects the elimination of the provision for environmental remediation as
the liability was not assumed by Sovereign.
F-15
<PAGE> 18
Sovereign Specialty Chemicals, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Balance Sheet
September 30, 2000
(In Thousands)
<TABLE>
<CAPTION>
Dr (cr)
Sovereign Special Imperial Pro forma Pro forma Pro Forma
Chemicals Inc Adhesives Adjustments Adj. Ref. Consolidated
----------------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,195 $ 2 $ (2) (1) $ 4,195
Accounts receivable, net 46,213 5,913 - 52,126
Inventories 27,540 5,231 - 32,771
Deferred income taxes 1,175 75 - 1,250
Other current assets 5,042 105 - 5,147
--------- --------- --------- ---------
Total current assets 84,165 11,326 (2) 95,489
Property, plant, and equipment, net 50,837 3,154 - 53,991
Goodwill, net 105,099 - 17,805 (2) 122,904
Deferred financing costs, net 10,079 - - 10,079
Other assets 3,263 213 (202) (1) 3,274
--------- --------- --------- ---------
Total assets $ 253,443 $ 14,693 $ 17,601 $ 285,737
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 21,460 $ 3,542 $ - $ 25,002
Accrued expenses 10,929 1,106 875 (1)(5) 12,123
Other current liabilities 223 1,920 (1,920) (1) 223
Current portion of long-term debt 11,154 383 955 (1)(3) 12,492
Current portion of capital lease obligations 211 - - 211
--------- --------- --------- ---------
Total current liabilities 43,977 6,951 (91) 50,838
Long-term debt, less current portion 149,526 - 25,413 (3) 174,939
Capital lease obligations, less current portion 3,200 - - 3,200
Deferred income taxes 2,395 21 - 2,416
Other long-term liabilities 514 - - 514
Stockholders' equity:
Common stock, $0.01 par value, 2,700,000 shares
authorized, 1,437,239 issued and outstanding 15 - - 15
Common stock, non-voting, $0.01 par value,
2,100,000 shares authorized, 731,182 issued
and outstanding 7 2,074 (2,074) (4) 7
Additional paid-in-capital 63,678 - - 63,678
Accumulated deficit (9,993) 5,647 (5,647) (4) (9,993)
Cumulative translation adjustments 124 - - 124
--------- --------- --------- ---------
Total stockholders' equity 53,831 7,721 (7,721) 53,831
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 253,443 $ 14,693 $ 17,601 $ 285,737
</TABLE>
See Accompanying Notes for Pro forma Adjustments
F-16
<PAGE> 19
Sovereign Specialty Chemicals Inc. and Subsidiaries
Notes to Consolidated Pro forma Balance Sheet
The accompanying consolidated pro forma balance sheet reflects the acquisition
of Imperial Adhesives Inc. (Imperial) as if the acquisition had occurred on
September 30, 2000. The adjustments to reflect the acquisition are as follows:
(1) Per the terms of the stock purchase agreement, certain Imperial assets and
liabilities were specifically excluded and not acquired by the Company.
(2) Records the preliminary goodwill arising from the acquisition of Imperial.
(3) Reflects amount drawn on credit facility to finance the acquisition of
Imperial.
(4) Reflects the reclassification and elimination of purchased equity within
the consolidation.
(5) The Company has announced its plans to close Imperial's Nashville
manufacturing facility. The Company will utilize existing capacity,
primarily at its Buffalo and Akron facilities, to manufacture Imperial
product. Management expects to incur approximately $1.0 million in costs
directly attributable to the closure of the facility. As a result, a
provision for plant closure has been recorded under purchase accounting
and included as part of the pro forma adjustments at September 30, 2000.
Once vacated, the Company intends to sell the Nashville Manufacturing
facility.
In addition, Imperial's operating results will benefit from lower freight
and raw material costs as a result of leveraging Sovereign's purchasing
volume. When fully implemented, management expects cost savings from the
activities noted above to approximate $2.0 million which have not been
included as a proforma adjustment.
F-17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SOVEREIGN SPECIALTY CHEMICALS, INC.
(registrant)
By: /s/ John R. Mellett
---------------------------------------
John R. Mellett
Vice President and Chief Financial Officer
Dated: December 22, 2000
