<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 September 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
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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 September 30, 2000
(Unaudited) and December 31, 1999......................... 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 1999 (Unaudited)...... 2
Consolidated Statements of Cash Flows for the nine months
ended September 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....................... 11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................... 15
Signatures.................................................. 16
</TABLE>
<PAGE> 3
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,195 $ 17,005
Accounts receivable, net.................................. 46,213 38,756
Inventories............................................... 27,540 26,028
Deferred income taxes..................................... 1,175 1,177
Other current assets...................................... 5,042 3,206
-------- --------
Total current assets........................................ 84,165 86,172
Property, plant, and equipment, net......................... 50,837 51,525
Goodwill, net............................................... 105,099 106,157
Deferred financing costs, net............................... 10,079 11,011
Other assets................................................ 3,263 2,974
-------- --------
Total assets................................................ $253,443 $257,839
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,460 $ 18,591
Accrued expenses.......................................... 10,929 19,814
Other current liabilities................................. 223 924
Current portion of long-term debt......................... 11,154 29,303
Current portion of capital lease obligations.............. 211 229
-------- --------
Total current liabilities................................... 43,977 68,861
Long-term debt, less current portion........................ 149,526 125,700
Capital lease obligations, less current portion............. 3,200 3,350
Deferred income taxes....................................... 2,395 2,676
Other long-term liabilities................................. 514 636
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 7
Additional paid-in capital.................................. 63,678 63,578
Accumulated deficit......................................... (9,993) (7,045)
Cumulative translation adjustments.......................... 124 61
-------- --------
Total stockholders' equity.................................. 53,831 56,616
-------- --------
Total liabilities and stockholders' equity.................. $253,443 $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>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------- ---------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
------------ ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................. $62,060 $186,803 $63,027 $181,843
Cost of goods sold.................... 43,511 128,197 43,070 124,066
------- -------- ------- --------
Gross profit.......................... 18,549 58,606 19,957 57,777
Selling, general and administrative
expenses............................ 12,830 39,626 12,304 36,054
------- -------- ------- --------
Operating income...................... 5,719 18,980 7,653 21,723
Interest expense, net................. (5,267) (14,825) (3,900) (11,232)
------- -------- ------- --------
Income before income taxes and
extraordinary loss.................. 452 4,155 3,753 10,491
Income taxes.......................... 335 2,276 1,862 5,381
------- -------- ------- --------
Income before extraordinary loss...... 117 1,879 1,891 5,110
Extraordinary loss, net of income tax
benefit............................. -- (4,828) -- --
------- -------- ------- --------
Net income (loss)..................... $ 117 $ (2,949) $ 1,891 $ 5,110
======= ======== ======= ========
</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>
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................ $ (2,949) $ 5,110
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 9,281 8,172
Deferred income taxes.................................. (279) --
Amortization of deferred financing costs............... 1,003 889
Extraordinary loss..................................... 4,828 --
Compensation expense under management incentive
plans............................................... -- 308
Changes in operating assets and liabilities(net of
acquisition):
Accounts receivable................................. (6,966) (9,291)
Inventories......................................... (1,124) (3,559)
Other assets........................................ (2,174) (112)
Accounts payable.................................... 2,870 2,252
Accrued expenses and other.......................... (7,085) (439)
--------- --------
Net cash provided by (used in) operating activities...... (2,595) 3,330
INVESTING ACTIVITIES
Acquisition of business................................ (4,299) (15,769)
Purchase of property, plant and equipment.............. (3,525) (5,280)
--------- --------
Net cash used in investing activities.................... (7,824) (21,049)
FINANCING ACTIVITIES
Payments on long-term debt............................. (127,450) (1,000)
Proceeds from issuance of long-term debt............... 148,932 --
Capital contributions.................................. 100 --
Payments of deferred financing costs................... (6,868) --
Payments on capital lease obligations.................. (168) 75
Proceeds from revolving credit facilities.............. 137,000 38,662
Payments on revolving credit facilities................ (154,000) (19,576)
--------- --------
Net cash provided by (used in) financing activities...... (2,455) 18,161
Effect of exchange rate changes on cash.................. 63 (171)
--------- --------
Net (decrease) increase in cash and cash equivalents..... (12,810) 271
Cash and cash equivalents at beginning of period......... 17,005 5,863
--------- --------
Cash and cash equivalents at end of period............... $ 4,195 $ 6,134
========= ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the periods
ended September 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. The Company operates in a single segment, the adhesives sealants and
coatings segment of the specialty chemicals industry. Management and the
Company's chief operating decision makers assess performance and make decisions
about resource allocation on a consolidated basis.
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials.................................... $10,014 $ 9,920
Work in process.................................. 756 386
Finished goods................................... 16,770 15,722
------- -------
$27,540 $26,028
======= =======
</TABLE>
4
<PAGE> 7
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000
(Dollars in Thousands)
3. COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2000 and 1999,
respectively, the calculation of comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------- ---------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss) as
reported.............. $117 $(2,949) $1,891 $5,110
Foreign currency
translation
adjustments........... 202 63 (6) (171)
---- ------- ------ ------
Comprehensive income
(loss)................ $319 $(2,886) $1,885 $4,939
==== ======= ====== ======
</TABLE>
4. EXTRAORDINARY LOSS
On March 6, 2000, the Company repurchased its $125.0 million 9 1/2% Senior
Subordinated notes (the "Notes") for an aggregate purchase price of $127.4
million. The transaction was financed through borrowings from the Company's
Credit Facility. In connection with this transaction, the Company recognized an
extraordinary loss of $4.8 million, net of an income tax benefit of $3.2
million. The extraordinary loss resulted from a 1% premium on the repurchase of
the Notes and the write-off of unamortized deferred financing costs related to
the Notes.
5
<PAGE> 8
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 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 nine
months ended September 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
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Net sales.............................. $178,453 $8,350 $ -- $ -- $ 186,803
Cost of goods sold..................... 122,653 5,544 -- -- 128,197
-------- ------ --------- --------- ---------
Gross profit........................... 55,800 2,806 -- -- 58,606
Selling, general and administrative
expense.............................. 33,253 2,007 4,366 -- 39,626
-------- ------ --------- --------- ---------
Operating income (loss)................ 22,547 799 (4,366) -- 18,980
Equity in undistributed earnings of
subsidiaries......................... -- -- 2,259 (2,259) --
Interest expense, net.................. 12,323 127 2,376 -- 14,825
-------- ------ --------- --------- ---------
Income (loss) before income taxes and
extraordinary loss................... $ 10,224 $ 672 $ (4,482) $ (2,259) $ 4,155
======== ====== ========= ========= =========
STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 2000:
Net sales.............................. $ 58,770 $3,290 $ -- $ -- $ 62,060
Cost of goods sold..................... 41,307 2,204 -- -- 43,511
-------- ------ --------- --------- ---------
Gross profit........................... 17,463 1,086 -- -- 18,549
Selling, general and administrative
expense.............................. 10,807 615 1,408 -- 12,830
-------- ------ --------- --------- ---------
Operating income (loss)................ 6,655 472 (1,408) -- 5,719
Equity in undistributed earnings of
subsidiaries......................... -- -- (1,675) 1,675 --
Interest expense, net.................. 4,711 65 492 -- 5,267
-------- ------ --------- --------- ---------
Income (loss) before income taxes...... $ 1,945 $ 407 $ (3,574) $ 1,675 $ 452
======== ====== ========= ========= =========
BALANCE SHEET DATA:
Current assets......................... $ 96,099 $7,004 $ 41,586 $ (60,524) $ 84,165
Property plant and equipment, net...... 49,454 1,157 226 -- 50,837
Goodwill, net.......................... 105,099 -- -- -- 105,099
Deferred financing costs, net.......... 10,079 -- -- -- 10,079
Other assets........................... 2,888 63 194,137 (193,825) 3,263
-------- ------ --------- --------- ---------
Total assets........................... $263,619 $8,224 $ 235,949 $(254,349) $ 253,443
======== ====== ========= ========= =========
Current liabilities.................... $ 66,962 $4,474 $ 33,203 $ (60,662) $ 43,977
Long-term liabilities.................. 156,605 -- 149,026 (149,996) 155,635
Total stockholders' equity............. 40,052 3,750 53,720 (43,691) 53,831
-------- ------ --------- --------- ---------
Total liabilities and stockholders'
equity............................... $263,619 $8,224 $ 235,949 $(254,349) $ 253,443
======== ====== ========= ========= =========
</TABLE>
6
<PAGE> 9
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 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
NINE MONTHS ENDED SEPTEMBER 30, 2000:
OPERATING ACTIVITIES
Net income (loss)...................... $ (804) $ 804 $ (2,949) $ $ (2,949)
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation and amortization........ 9,176 105 -- -- 9,281
Deferred income taxes................ -- -- (279) -- (279)
Amortization of deferred financing
costs............................. 1,003 -- -- -- 1,003
Extraordinary loss................... 4,078 -- 750 -- 4,828
Changes in operating assets and
liabilities....................... (20,980) (295) 6,796 -- (14,479)
--------- ------ --------- --------- ---------
Net cash provided by (used in)
operating activities................. (7,527) 614 4,318 (2,595)
INVESTING ACTIVITIES
Acquisition of business................ (4,299) -- -- (4,299)
Purchase of property, plant and
equipment............................ (3,358) (167) -- -- (3,525)
--------- ------ --------- --------- ---------
Net cash used in investing
activities........................... (7,657) (167) -- -- (7,824)
FINANCING ACTIVITIES
Payments on long-term debt............. (127,450) -- -- -- (127,450)
Proceeds from issuance of long-term
debt................................. 148,932 -- 13,000 -- 148,932
Capital contributions.................. 100 -- -- -- 100
Payments of deferred financing costs... (6,868) -- -- -- (6,868)
Payments on capital lease
obligations.......................... (168) -- -- -- (168)
Proceeds from revolving credit
facility............................. 124,000 -- 13,000 -- 137,000
Payments on revolving credit
facility............................. (133,820) (181) (20,000) -- (154,001)
--------- ------ --------- --------- ---------
Net cash provided by (used in)
financing activities................. 4,726 (181) (7,000) -- (2,455)
Effect of foreign currency changes on
cash................................. 50 13 -- -- 63
--------- ------ --------- --------- ---------
Net increase (decrease) in cash........ (10,407) 279 (2,682) -- (12,810)
Cash and cash equivalents, beginning of
period............................... 13,809 409 2,787 -- 17,005
--------- ------ --------- --------- ---------
Cash and cash equivalents, end of
period............................... $ 3,402 $ 688 $ 105 $ -- $ 4,195
========= ====== ========= ========= =========
</TABLE>
7
<PAGE> 10
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000
(Dollars in Thousands)
The following sets forth financial data at September 30, 1999 and for the
three and nine 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
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Net sales.............................. $175,707 $6,136 $ -- $ -- $181,843
Cost of goods sold..................... 119,855 4,211 -- -- 124,066
-------- ------ ------- ------- --------
Gross profit........................... 55,852 1,925 -- -- 57,777
Selling, general and administrative
expenses............................. 30,988 1,628 3,438 -- 36,054
-------- ------ ------- ------- --------
Operating income (loss)................ 24,864 297 (3,438) -- 21,723
Equity in undistributed earnings of
subsidiaries......................... -- -- 8,481 (8,481) --
Interest expense, net.................. 10,869 116 247 -- 11,232
-------- ------ ------- ------- --------
Income (loss) before income taxes...... $ 13,995 $ 181 $ 4,796 $(8,481) $ 10,491
======== ====== ======= ======= ========
STATEMENT OF OPERATIONS DATA FOR THE
THREE MONTHS ENDED SEPTEMBER 30,
1999:
Net sales.............................. $ 61,951 $1,076 $ -- $ -- $ 63,027
Cost of goods sold..................... 42,199 871 -- -- 43,070
-------- ------ ------- ------- --------
Gross profit........................... 19,752 205 -- -- 19,957
Selling, general and administrative
expenses............................. 11,274 236 794 -- 12,304
-------- ------ ------- ------- --------
Operating income (loss)................ 8,477 (30) (794) -- 7,653
Equity in undistributed earnings of
subsidiaries......................... -- -- 3,030 (3,030) --
Interest expense, net.................. 3,823 54 23 -- 3,900
-------- ------ ------- ------- --------
Income before income taxes............. $ 4,654 $ (84) $ 2,213 $(3,030) $ 3,753
======== ====== ======= ======= ========
</TABLE>
8
<PAGE> 11
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 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
NINE MONTHS ENDED SEPTEMBER 30, 1999:
OPERATING ACTIVITIES
Net income (loss)...................... $ (250) $ 138 $ 5,222 $ 5,110
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation and amortization.......... 8,107 65 -- -- 8,172
Stock compensation..................... 308 -- -- -- 308
Amortization of deferred financing
costs................................ 889 -- -- -- 889
Changes in operating assets and
liabilities.......................... (6,163) 159 (5,145) -- (11,149)
-------- ----- ------- ------- --------
Net cash provided by operating
activities........................... 2,891 362 77 -- 3,330
INVESTING ACTIVITIES
Acquisition of business................ (15,769) -- -- -- (15,769)
Purchase of property, plant &
equipment............................ (5,156) (124) -- -- (5,280)
-------- ----- ------- ------- --------
Net cash used in investing
activities........................... (20,925) (121) -- -- (21,049)
FINANCING ACTIVITIES
Payments on long-term debt............. (1,000) -- -- -- (1,000)
Payment on capital lease obligations... 75 -- -- -- 75
Proceeds from revolving credit
facility............................. 38,662 -- -- -- 38,662
Payments on revolving credit
facility............................. (19,576) -- -- -- (19,576)
-------- ----- ------- ------- --------
Net cash provided by financing
activities........................... 18,161 -- -- -- 18,161
Effect of foreign currency changes on
cash................................. (4) (167) -- -- (171)
-------- ----- ------- ------- --------
Net increase in cash................... 123 71 77 -- 271
Cash and cash equivalents beginning of
period............................... 5,345 443 75 -- 5,863
-------- ----- ------- ------- --------
Cash and cash equivalents end of
period............................... $ 5,468 $ 514 $ 152 $ -- $ 6,134
======== ===== ======= ======= ========
</TABLE>
6. ACQUISITION OF BUSINESS
On August 2, 2000, the Company purchased the overprint coatings product
line from Aurachem Inc., a privately owned company for $4.3 million. The
acquisition was accounted for as a purchase and as such results of operations of
the business were included in the Company's consolidated results of operations
from the date of acquisition.
7. SUBSEQUENT EVENTS
On October 11, 2000, the Company purchased 100% of the common stock of
Imperial Adhesives, Inc. a subsidiary of NS Group Inc. for $26.8 million,
excluding transaction costs. The purchase was funded through borrowings under
the Company's Term Loan A.
9
<PAGE> 12
SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000
(Dollars in Thousands)
On October 31, 2000, the Company acquired certain assets of the adhesives
business of Croda International Plc. The purchase price of the acquisition,
excluding transaction costs, was approximately $62.0 million. Additional
contingent consideration of up to approximately $4.0 million may be payable in
2001 depending on the performance of certain of the acquired operations. The
purchase was funded through borrowing under Term Loan A and the Credit Facility.
These transactions will be accounted for as purchases and as such their
results of operations will be included in the Company's consolidated results of
operations from the date of acquisition. Management is currently determining the
allocation of the purchase price.
10
<PAGE> 13
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
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net Sales. Net sales for the first nine months of 2000 were $186.8 million,
an increase of $5.0 million, or 2.7%, from 1999 net sales of $181.8 million.
Organic growth accounted for $1.0 million of the increase, with the remainder
resulting from acquisitions. Increases in sales of insulation coatings were
offset by weak aerospace orders at SIA Tanner. OSI Sealants sales were down, in
part to economic factors, and P&S sales, excluding acquisitions, were consistent
with the prior year.
Cost of Goods Sold. Cost of goods sold were $128.2 million, an increase of
$4.1 million from $124.1 million in the prior year. The increase was due
primarily to increases in certain raw material costs. These cost increases
resulted in a gross margin percentage year-to-date decline from 31.8% to 31.4%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 2000 and 1999,
respectively were $39.6 million and $36.1 million. As a percentage of net sales,
selling, general and administrative expenses increased to 21.2% from 19.8% in
1999. This increase was primarily due to additional goodwill amortization
associated with the Valspar acquisition in April 1999, additional management
fees paid to AEA Investors, Inc. and additional expenses associated with failed
acquisitions.
Interest Expense. Interest expense was $14.8 million and $11.2 million for
the first nine months of 2000 and 1999, respectively. This increase was due to
the increase in debt levels from the prior year and increased interest rate
driven by the repayment of $125.0 million 9 1/2% Senior Subordinated Notes and
the issuance of $150 million 11 7/8% Senior Subordinated Notes in March, 2000.
Income Taxes. Income tax expense was $2.3 million and $5.4 million in 2000
and 1999, respectively. The decrease in income tax expense was 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 and increased interest
expense, a net loss of $2.9 million was incurred in 2000 compared to net income
of $5.1 million in 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Net Sales. Net sales for the three months ended September 30, 2000 were
$62.1 million, which represents a $0.9 million (1.5%) decrease from $63.0
million in the comparable period in 1999. Excluding acquisitions, net sales
decreased 2.2% from the prior year. These results primarily reflect lower sales
to aerospace, manufactured housing and recreational vehicle markets.
Cost of Goods Sold. Cost of goods sold was $43.5 million and $43.1 million
in the third quarter 2000 and 1999, respectively. The 2000 level represented a
1.0% increase from the third quarter of 1999 due primarily to increases in
certain raw material costs. As a result of cost increases, gross margin, net of
acquisitions for the quarter decreased to 30.5% from 31.7% in the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000 and 1999,
respectively were $12.8 million and $12.3 million, representing a
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4.0% increase year over year. As a percentage of net sales, selling, general and
administrative expenses increased to 20.7% from 19.5% in 1999.
Interest Expense. Interest expense was $5.3 million and $3.9 million for
the third quarter of 2000 and 1999, respectively. This increase was due to the
increase in debt levels from the prior year and increased interest rate driven
by the repayment of $125.0 million 9 1/2% Senior Subordinated Notes and the
issuance of $150 million 11 7/8% Senior Subordinated Notes in March, 2000.
Income Taxes. Income tax expense was $0.3 million and $1.9 million in the
three months ended September 30, 2000 and 1999, respectively. This decrease was
due to the decrease in pretax income.
Net Income. Net income was $0.1 million and $1.9 million for the third
quarter of 2000 and 1999, respectively. This decrease was primarily the result
of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $2.5 million in the first nine
months 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 resulted in positive cash flow of
approximately $11.9 million. This cash flow from operations was offset by
increases in accounts receivable of $7.0 million, increases in other assets of
$2.2 million, and a net buildup of inventory levels of $1.1 million. In
addition, accrued expenses decreased by approximately $7.1 million from year end
1999. The increases in accounts receivable primarily reflect the 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 payment on September 15, 2000 of our
semi-annual interest payment on the 11 7/8% Notes, 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 $7.8 million in 2000 and resulted
from $3.5 million capital additions to property, plant and equipment and the
$4.3 million asset purchase of the overprint coatings product line from
Aurachem, Inc. in August, 2000.
Net cash used in financing activities was $2.5 million in 2000.
Our Credit Agreement dated December 29, 1999, as amended 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 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 Notes were subsequently registered with the
Securities and Exchange Commission. 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 September 30, 2000, we have $75.0 million of
borrowing availability under Term Loan A and $39.0 million of borrowing
availability under our $50.0 million Credit Facility.
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Debt at September 30, 2000 consisted of $149.0 million principal amount of
11 7/8% Notes, net of unamortized discount, $10.0 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 $4.1 million
outstanding of other indebtedness, including capital leases.
On October 11, 2000, we purchased the common stock of Imperial Adhesives
Inc., from NS Group Inc. for $26.8 million, excluding transaction costs. We
borrowed $28.0 million under Term Loan A relative to the acquisition.
On October 31, 2000, we acquired certain assets of the adhesives business
of Croda International Plc. The purchase price of the acquisition, excluding
transaction costs, was approximately $62.0 million. Additional contingent
consideration of up to approximately $4.0 million may be payable in 2001
depending on the performance of certain of the acquired operations. We borrowed
$47.0 million under Term Loan A and approximately $16.3 million under the Credit
Facility relative to this acquisition. On November 10, 2000 we repaid $4.0
million on our Credit Facility. At November 13, 2000, we have fully drawn under
the $75.0 million Term Loan A, and have approximately $26.7 million available
under our Credit Facility.
The loans under the Term Loan A facility, entered into the October, 2000,
mature on December 30, 2005. Scheduled repayments of amounts outstanding begin
on September 30, 2001 and are payable quarterly. We will repay an aggregate of
$7.5 million in scheduled repayments under Term Loan A in 2001.
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 $3.5 million
in the first half of 2000 and management currently anticipate capital
expenditures will be approximately $5.0 million in 2000 and approximately $8.0
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. In that regard, our
businesses announced price increase ranging from three to eight percent to
become effective in September or October, 2000 or as contracts permit. 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
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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.
You should not place undue reliance on these forward-looking statements,
which are applicable only as of November 13, 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 November 13, 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
We filed a current report on Form 8-K, dated October 26, 2000 under Item
2, acquisition of business, to report the purchase of Imperial Adhesives, Inc.
by Sovereign Specialty Chemicals, Inc.
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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: November 13, 2000 Officer
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