<PAGE> 1
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM 8-K
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 31, 2000
SOVEREIGN SPECIALTY CHEMICALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 333-39373 36-4176637
(STATE OR OTHER (COMMISSION (IRS EMPLOYER
JURISDICTION OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
225 W. WASHINGTON ST. - STE. 2200, CHICAGO, ILLINOIS 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 419-7100
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<PAGE> 2
Item 2. Acquisition of Assets
On October 31, 2000, Sovereign Specialty Chemicals Inc. 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 our Secured Credit
Facility.
This transaction will be accounted for as a purchase and as such its 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. A copy of the press release is attached hereto as Exhibit
99.1.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
The combined balance sheets of Croda Adhesives as of October 31, 2000
and December 31, 1999, and the related statements of income,
stockholders' equity and cash flows for the period from January 1, 2000
to October 31, 2000 and for the two years ended December 31, 1999.
(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 2 Business and Share Agreement for the sale of a Specialty
Adhesives business dated October 31, 2000, among Croda
International Plc, Croda do Brasil Ltda, Sovereign
Holdings, LLC, Croda Adhesives do Brasil Ltda, and
Sovereign Specialty Chemicals, Inc. (filed herewith)
Exhibit 3 Amendment No. 1 and waiver dated October 30, 2000 to the
Amended and Restated Credit Agreement dated as of
April 6, 2000 (filed herewith)
Exhibit 99.1 Press Release of Sovereign Specialty Chemicals, Inc,
dated October 31, 2000, regarding its acquisition of the
adhesives business of Croda International Plc (previously
filed)
<PAGE> 3
Combined Financial Statements
Croda Adhesives Inc., Croda Adhesives Europe NV, Croda Adhesives Ltd.,
Croda Italiana Spa., Croda do Brasil Ltda., Croda Nordica AB, and
Croda Canada Ltd. (Croda Adhesives)
Period from January 1, 2000 to October 31, 2000 and the years ended December 31,
1999 and 1998 with Report of Independent Auditors
<PAGE> 4
Croda Adhesives
Combined Financial Statements
Period from January 1, 2000 to October 31, 2000 and
the years ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors...............................................1
Audited Combined Financial Statements
Combined Balance Sheets......................................................2
Combined Statements of Income................................................3
Combined Statements of Stockholders' Equity..................................4
Combined Statements of Cash Flows............................................5
Notes to Combined Financial Statements.......................................6
<PAGE> 5
Report of Independent Auditors
The Board of Directors
Sovereign Specialty Chemicals, Inc.
We have audited the accompanying combined balance sheets of Croda Adhesives
Inc., Croda Adhesives Europe NV, Croda Adhesives Ltd., Croda Italiana Spa.,
Croda do Brasil Ltda., Croda Nordica AB., and Croda Canada Ltd. as of October
31, 2000 and December 31, 1999, and the related combined statements of income,
stockholders' equity, and cash flows for the 10 months ended October 31, 2000,
and the years ended December 31, 1999 and 1998. These financial statements are
the responsibility of the respective companies' 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Croda
Adhesives Inc., Croda Adhesives Europe NV, Croda Adhesives Ltd., Croda Italiana
Spa., Croda do Brasil Ltda., Croda Nordica AB., and Croda Canada Ltd. at
October 31, 2000 and December 31, 1999, and the combined results of their
operations and cash flows for the 10 months ended October 31, 2000, and the
years ended December 31, 1999 and 1998, in conformity with accounting
principles generally accepted in the United States.
Chicago, Illinois
December 16, 2000
1
<PAGE> 6
Croda Adhesives
Combined Balance Sheets
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
OCTOBER 31 DECEMBER 31
2000 1999
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 496 $ 1,181
Accounts receivable, less allowance of $196 and $303 12,889 11,631
Inventories 9,070 9,230
Other current assets 888 789
-----------------------------
Total current assets 23,343 22,831
Property, plant, and equipment, net 18,097 18,152
Goodwill, net 4,225 4,581
-----------------------------
Total assets $45,665 $45,564
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,443 $ 8,563
Accrued expenses 1,517 1,019
Current portion of capital lease obligations 108 79
Revolving credit facility 840 997
-----------------------------
Total current liabilities 10,908 10,658
Capital lease obligations, less current portion 130 67
Long-term payable - Parent company 26,175 25,742
Stockholders' equity:
Common stock - Croda Adhesives, Inc., no par value,
1,500 shares authorized, issued and outstanding - -
Common stock - Croda Adhesives Europe NV, no par
value, 478 shares authorized, issued and outstanding - -
Additional paid-in capital 2,385 2,385
Retained earnings 7,218 6,970
Accumulated other comprehensive loss (1,151) (258)
-----------------------------
Total stockholders' equity 8,452 9,097
-----------------------------
Total liabilities and stockholders' equity $45,665 $45,564
=============================
</TABLE>
See accompanying notes to combined financial statements.
2
<PAGE> 7
Croda Adhesives
Combined Statements of Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
2000 TO YEAR ENDED
OCTOBER 31, DECEMBER 31,
2000 1999 1998
------------------------------------------------
<S> <C> <C> <C>
Net sales $55,756 $68,159 $68,883
Cost of goods sold 38,866 47,286 46,797
------------------------------------------------
Gross profit 16,890 20,873 22,086
Selling, general, and administrative expenses 15,357 17,417 17,941
------------------------------------------------
Operating income 1,533 3,456 4,145
Interest expense, net 880 1,044 1,203
Loss (gain) on sale of property, plant, and
equipment 240 (32) (14)
-----------------------------------------------
Income before income taxes 413 2,444 2,956
Income taxes 165 978 1,182
-----------------------------------------------
Net income $ 248 $ 1,466 $ 1,774
===============================================
</TABLE>
See accompanying notes to combined financial statements.
3
<PAGE> 8
Croda Adhesives
Combined Statements of Stockholders' Equity
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
COMMON
COMMON STOCK - ACCUMULATED
STOCK- CRODA ADDITIONAL OTHER
CRODA ADHESIVES PAID-IN RETAINED COMPREHENSIVE
ADHESIVES INC. EUROPE NV CAPITAL EARNINGS INCOME (LOSS) TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ - $ - $2,385 $3,730 $ 73 $6,188
Comprehensive income: - - - - - -
Net income - - - 1,774 - 1,774
Translation adjustment - - - - 87 87
Total comprehensive income - - - - - 1,861
Balance at December 31, 1998 - - 2,385 5,504 160 8,049
Comprehensive income: - - - - - -
Net income - - - 1,466 - 1,466
Translation adjustment - - - - (418) (418)
Total comprehensive income - - - - - 1,048
Balance at December 31, 1999 - - 2,385 6,970 (258) 9,097
Comprehensive loss: - - - - - -
Net income - - - 248 - 248
Translation adjustment - - - - (893) (893)
Total comprehensive loss - - - - - (645)
Balance at October 31, 2000 $ - $ - $2,385 $7,218 $(1,151) $8,452
=====================================================================================
</TABLE>
See accompanying notes to combined financial statements.
4
<PAGE> 9
Croda Adhesives
Combined Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
2000 TO
OCTOBER 31, YEAR ENDED DECEMBER 31,
2000 1999 1998
----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 248 $ 1,466 $ 1,774
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,710 2,631 2,225
Loss (gain) on sale of equipment 240 (32) (14)
Provision for losses on accounts receivable 6 199 180
Changes in operating assets and liabilities:
Accounts receivable (2,213) (2,111) (207)
Inventories (391) (837) 1,085
Prepaid expenses and other assets (119) (411) 214
Accounts payable and other liabilities 1,364 2,251 1,125
----------------------------------------
Net cash provided by operating activities 845 3,156 6,382
INVESTING ACTIVITIES
Proceeds from sale of plant equipment 1,682 178 665
Purchase of property, plant, and equipment (4,146) (2,362) (5,039)
----------------------------------------
Net cash used in investing activities (2,464) (2,184) (4,374)
FINANCING ACTIVITIES
Net transfers (to) from parent company on
intercompany notes 1,049 (876) 1,623
Payments on credit facility (3) (9) (549)
Payments on capital lease obligations (86) (134) (139)
----------------------------------------
Net cash provided by (used in) financing activities 960 (1,019) 935
Effect of exchange rate changes on cash (26) (990) (913)
----------------------------------------
Net increase (decrease) in cash and cash equivalents (685) (1,037) 2,030
Cash and cash equivalents at beginning of period 1,181 2,218 188
----------------------------------------
Cash and cash equivalents at end of period $ 496 $ 1,181 $ 2,218
========================================
</TABLE>
See accompanying notes to combined financial statements.
5
<PAGE> 10
Croda Adhesives
Notes to Combined Financial Statements
Period from January 1, 2000 to October 31, 2000
and years ended December 31, 1999 and 1998
(Dollars in Thousands)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
On October 31, 2000, Croda International plc (Parent Company) entered into an
agreement with Sovereign Specialty Chemicals, Inc. for the sale of certain
assets and liabilities of its adhesives business (Croda Adhesives). The acquired
business is conducted through various legal entities and divisions controlled by
the Parent Company. These legal entities and divisions are as follows:
ENTITY COUNTRY OWNERSHIP
--------------------------------------------------------------------------------
Croda Adhesives Inc. United States Wholly owned subsidiary of Croda
Inc.
Croda Adhesives Europe NV Belgium Wholly owned subsidiary of Croda
Investments BV
Croda Adhesives Ltd United Kingdom Division of Croda Polymers
International Ltd.
Croda Italiana Spa Italy Division of Croda Investments BV
Croda do Brasil Ltda Brazil Division of Croda Investments BV
Croda Nordica AB Sweden Division of Croda Chemicals
International Ltd
Croda Canada Ltd Canada Division of Croda Chemicals
International Ltd
Unless otherwise noted, all references to Croda Adhesives herein refer to the
business acquired by Sovereign Specialty Chemicals, Inc as described above. The
accompanying financial statements give no effect to this transaction.
Croda Adhesives develops, produces, and distributes adhesives utilized in
numerous industrial and commercial applications, such as, overprint coatings,
flexible packaging, and printing and publishing. Products are sold and
distributed primarily throughout the United States, Belgium, and the United
Kingdom.
6
<PAGE> 11
Croda Adhesives
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts and
transactions of Croda Adhesives. All significant intercompany balances and
transactions have been eliminated in combination.
CASH AND CASH EQUIVALENTS
Croda Adhesives considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
primarily using the first in first out (FIFO) method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
respective estimated useful lives of the assets. Machinery and equipment and
furniture and fixtures are depreciated over 10 to 15 years. Buildings are
depreciated over 40 years. Leasehold improvements are amortized over the lesser
of the lease term or 40 years. Depreciation expense was $1,354, $2,201, and
$1,797 for the 10 months ended October 31, 2000, and the years ended December
31, 2000 and 1999, respectively.
GOODWILL
Goodwill represents the excess of acquisition cost over the fair value of net
assets acquired, and is being amortized using the straight-line method over 30
years. Accumulated amortization of goodwill was $2,194 and $1,828 at October 31,
2000 and December 31, 1999, respectively.
7
<PAGE> 12
Croda Adhesives
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
LONG-LIVED ASSETS AND GOODWILL IMPAIRMENT
Long-lived assets and goodwill are reviewed for impairment wherever events or
changes in circumstances indicate that the carrying amount of the related asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the asset to future undiscounted cash
flows expected to be generated by the asset. If the assets' carrying value is
not recoverable, an impairment loss is recognized and is measured by the amount
by which the carrying value of the asset exceeds its fair value.
INCOME TAXES
Croda Adhesives, as described in Note 1, is a collection of divisions or
separate entities formerly all filing as part of the worldwide tax filings of
Croda International, plc. The entities included in this report were a part of
the filings in many jurisdictions as part of this structure. For purposes of
these combined financial statements, income tax expense has been estimated at an
effective rate of 40%. Deferred income taxes are based upon the net tax effects
of temporary differences between the financial statement carrying amounts and
the tax bases of the existing assets and liabilities for financial statement
reporting purposes and the amounts used for income tax purposes. Deferred taxes
on the non-United States operations are not reflected in the financial
statements due to, the amounts not being significant. Management believes that
the effective tax rate of 40% appropriately approximates the current and
deferred tax position of Croda Adhesives on a stand-alone basis.
REVENUE RECOGNITION
Revenue is recognized when products are shipped to the customer and title
transfers.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Research and
development expenses were $864, $1,215, and $1,131 for the 10 months ended
October 31, 2000, and years ended December 31, 1999 and 1998, respectively.
8
<PAGE> 13
Croda Adhesives
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
There is no historical "reporting currency" for the combined Croda Adhesives
business, although the Parent Company reported in British pounds. Each of the
entities and divisions in Croda Adhesives uses the local currency of each
operation's home country as their functional currency. For purposes of these
combined financial statements, each operating unit's functional currency
balances were translated into U.S. dollars in accordance with FASB Statement No.
52. Accordingly, assets and liabilities are translated using the exchange rates
as of the balance sheet dates and the income statement balances are translated
using a weighted-average exchange rate during the applicable period. Adjustments
resulting from such translation are included in cumulative translation
adjustment, a separate component of stockholders' equity.
SEGMENT INFORMATION
Croda Adhesives operates in one business segment, the adhesives and coatings
segment of the specialty chemicals industry. Products are sold worldwide.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, trade accounts receivable, accounts payable and
accrued expenses, and other current liabilities approximate to their fair value
at October 31, 2000 and December 31, 1999, due to the short-term nature of these
instruments.
It is not practical to determine the fair value of long-term payable - parent
company because such amounts have no maturity, which makes it difficult to
estimate fair value with precision. Amounts in excess of $10.0 million of the
long-term note payable - parent company accrues interest at 6.5%. The amounts
due to and due from the Parent Company were not acquired by Sovereign Specialty
Chemicals, Inc.
Croda Adhesives Europe NV has a month to month revolving credit facility with an
effective interest rate that approximates the London Interbank offered rate,
which was 6.62% at October 31, 2000. The amounts due under the facility were not
assumed by Sovereign Specialty Chemicals, Inc.
9
<PAGE> 14
Croda Adhesives
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Croda Adhesives to significant
concentrations of credit risk consist principally of trade accounts receivable.
To minimize this risk, ongoing credit evaluations of customers' financial
condition are performed, although collateral is not required. In addition, Croda
Adhesives maintains an allowance for potential credit losses. Croda Adhesives
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 Croda Adhesives' estimate of its allowance
for doubtful accounts.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (as amended by
Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement 133," issued June 1999, and
amended by Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - An Amendment to FASB Statement 133," issued June
2000), effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated a part of a hedge and, if it is, the type of hedge
transaction. Management of the Croda Adhesives is unsure of the effects, if any,
SFAS No. 133 will have on Croda Adhesives operations or its financial position.
Croda Adhesives is required to adopt SFAS No. 133 on January 1, 2001.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
10
<PAGE> 15
Croda Adhesives
Notes to Combined Financial Statements (continued)
3. INVENTORIES
Inventories are summarized as follows:
OCTOBER 31 DECEMBER 31
2000 1999
------------------------------------
Raw materials $4,303 $3,742
Finished goods 4,767 5,488
------------------------------------
$9,070 $9,230
====================================
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
OCTOBER 31 DECEMBER 31
2000 1999
------------------------------------
Land $ 903 $ 1,160
Buildings and improvements 5,120 6,893
Machinery and equipment 19,958 19,017
Furniture and fixtures 2,683 2,378
------------------------------------
28,664 29,448
Less: Accumulated depreciation 10,567 11,296
------------------------------------
$18,097 $18,152
====================================
5. RETIREMENT PLANS
PENSION PLAN
Substantially all salaried and hourly employees of Croda Adhesives were
participants in various Parent sponsored defined-benefit pension plans. The
Parent Company allocates pension costs to Croda Adhesives based on actuarial
valuations. For the 10 months ended October 31, 2000, and the years ended
December 31, 1999 and 1998, pension plan expenses included in cost of goods sold
and selling, general, and administrative expenses were approximately $261, $84,
and $64, respectively. Pension plan assets and liabilities are retained by the
Parent Company and accordingly not reflected in the accompanying balance sheets.
11
<PAGE> 16
Croda Adhesives
Notes to Combined Financial Statements (continued)
5. RETIREMENT PLANS (CONTINUED)
SAVINGS PLAN
Croda Adhesives Inc. sponsors a defined-contribution plan, which is available to
all salaried and hourly employees. The plan does not provide for company
matching contributions. Amounts expensed under these plans relate primarily to
third party administrative costs, which are immaterial during the periods
presented.
Croda Adhesive Europe NV sponsors a defined-contribution plan, which is
available to all salaried employees. Participating employees contribute to the
plan based on a percentage of their compensation which is matched, based on a
percentage by Croda Adhesives Europe NV. Amounts expensed under these plans are
immaterial during the periods presented.
6. CAPITAL LEASES
Machinery and equipment under capital leases included within property, plant,
and equipment are as follows:
OCTOBER 31 DECEMBER 31
2000 1999
------------------------------------
Machinery and equipment $483 $426
Less: Accumulated depreciation 252 282
------------------------------------
$231 $144
====================================
Future minimum lease payments under capital leases at October 31, 2000, together
with the present value of the annual minimum lease payments are as follows:
Remaining through December 31, 2000 $ 22
2001 117
2002 89
2003 33
-------
Total minimum payments 261
Less: Amounts representing interest 23
-------
Present value of minimum payments 238
Less: Current portion 108
-------
Total long-term portion $ 130
=======
12
<PAGE> 17
Croda Adhesives
Notes to Combined Financial Statements (continued)
7. OPERATING LEASES
Croda Adhesives leases certain machinery and equipment under noncancelable
operating lease agreements. Rent expense was $417, $203, and $234 for the 10
months ended October 31, 2000, and the years ended December 31, 1999 and 1988,
respectively. Future minimum annual lease payments under operating leases with
initial noncancelable terms extending beyond one year are as follows:
Remaining through December 31, 2000 $ 116
2001 711
2002 729
2003 725
2004 653
2005 672
2006 and thereafter 6434
-----------
$10,040
===========
8. ENVIRONMENTAL MATTERS
Croda Adhesives is subject to various federal, state, local, and foreign
environmental laws and regulations pertaining to the discharge of materials into
the environment, the handling and disposal of solid and hazardous wastes, the
remediation of contamination, and otherwise relating to health, safety, and
protection of the environment. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of clean up, and for certain damages resulting from past spills,
disposals, or other releases of hazardous substances. Although there can be no
assurance, Croda Adhesives believes that, based in part on investigations
conducted, Croda Adhesives will not incur any material liabilities relating to
these matters.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental cash flow data in addition to the
information provided in the combined statements of cash flows for the 10 months
ended October 31, 2000, and years ended December 31, 1999 and 1998:
OCTOBER 31 DECEMBER 31
2000 1999 1998
-------------------------------
Cash paid for:
Interest $850 $1022 $1,054
Income taxes - 212 40
Supplemental disclosure of noncash activity:
Obligation incurred in connection with
capital leased assets 117 117 18
13
<PAGE> 18
Croda Adhesives
Notes to Combined Financial Statements (continued)
10. INCOME TAXES
The components of the provision for income taxes are as follows for the 10
months ended October 31, 2000, and the years ended December 31,1999 and 1998:
2000 1999 1998
-------------------------------------------------
Current income taxes:
Federal $ 89 $248 $ (137)
State 20 150 180
Foreign 3 618 1,099
-------------------------------------------------
Deferred income taxes 53 (38) 40
-------------------------------------------------
Income taxes $165 $978 $1,182
=================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax asset and deferred tax liabilities at October 31, 2000 and
December 31, 1999, are as follows:
2000 1999
------------------------------------
Deferred tax asset:
Allowance for doubtful accounts $ 8 $ 14
Deferred tax liabilities:
Accelerated depreciation (218) (180)
Inventory capitalization (29) (20)
------------------------------------
Deferred tax liabilities (247) (200)
------------------------------------
Net deferred tax liability $(239) $(186)
====================================
<PAGE> 19
Sovereign Specialty Chemicals, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
Nine Months ended September 30, 2000
(In Thousands)
<TABLE>
<CAPTION>
Sovereign Dr (cr)
Specialty Croda Pro forma Pro forma Pro Forma
Chemicals Inc Adhesives(1) Adjustments Adj. Ref. Consolidated
------------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 186,803 $ 55,756 $ - $ 242,559
Cost of Sales 128,197 38,866 - 167,063
--------- --------- --------- ---------
Gross Profit 58,606 16,890 - 75,496
Selling, general and administrative expense 39,626 15,357 1,688 (2)(4) 56,671
--------- --------- --------- ---------
Income from operations 18,980 1,533 (1,688) 18,825
Other income, (expense) - (240) (240)
Interest Expense, net (14,825) (880) (3,672) (3)(5) (19,377)
--------- --------- --------- ---------
Income before income taxes and extraordinary items 4,155 413 (5,359) (791)
Income taxes 2,276 165 (2,144) (6) 297
--------- --------- --------- ---------
Income before extraordinary loss 1,879 248 (3,216) (1,089)
Extraordinary loss, net of income tax benefit 4,828 - - (4,828)
--------- --------- --------- ---------
Net loss $ (2,949) $ 248 $ (3,216) $ (5,917)
</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>
Sovereign Dr (cr)
Specialty Croda Pro forma Pro forma Pro Forma
Chemicals Inc Adhesives Adjustments Adj. Ref. Consolidated
------------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 237,408 $ 68,159 $ - $ 305,567
Cost of Sales 162,550 47,286 - 209,836
--------- --------- --------- ---------
Gross Profit 74,858 20,873 - 95,731
Selling, general and administrative expense 48,350 17,417 2,025 (2) 67,792
Special charges 14,153 - - 14,153
--------- --------- --------- ---------
Income from operations 12,355 3,456 (2,025) 13,786
Other income, (expense) - 32 - 32
Interest Expense, net (15,076) (1,044) (4,418) (3)(5) (20,538)
--------- --------- --------- ---------
Income before income taxes and extraordinary items (2,721) 2,444 (6,443) (6,720)
Income taxes 4,218 978 (2,577) (6) 2,619
--------- --------- --------- ---------
Income before extraordinary loss (6,939) 1,466 (3,866) (9,339)
Extraordinary loss, net of income tax benefit (1,055) - - (1,055)
--------- --------- --------- ---------
Net loss $ (7,994) $ 1,466 $ (3,866) $ (10,394)
</TABLE>
See accompanying Notes for Pro forma adjustments.
<PAGE> 20
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 Croda Adhesives as if the acquisition had occurred January 1,
1999. The adjustments reflect the acquisition as follows:
(1) Reflects Croda Adhesives results of operations for ten months ended October
31, 2000.
(2) Reflects additional amortization expense from the goodwill recorded.
Goodwill is being amortized over 15 years. Pro forma amortization expense is
$1,688 and $2,025 for the ten months ended October 31, 2000 and the year
ended December 31, 1999, respectively.
(3) Eliminates historical interest expense on debt not assumed in the
acquisition.
(4) No pro forma adjustment was made to eliminate approximately $600 in salary
costs and severance costs of personnel terminated by the Parent Company
prior to the acquisition.
(5) Reflects additional interest expense on debt incurred in connection with the
acquisition.
(6) Reflects the adjustment to income taxes as a result of the pro forma
adjustments described in these Notes using an effective interest rate of
40%.
<PAGE> 21
Sovereign Specialty Chemicals, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Balance Sheet
September 30, 2000
(In Thousands)
<TABLE>
<CAPTION>
Sovereign Dr (cr)
Specialty Croda Pro forma Pro forma Pro Forma
Chemicals Inc Adhesives(1) Adjustments Adj. Ref. Consolidated
------------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,195 $ 496 $ 1,469 (2)(4) $ 6,160
Accounts receivable, net 46,213 12,889 - 59,102
Inventories 27,540 9,070 - 36,610
Deferred income taxes 1,175 - - 1,175
Other current assets 5,042 888 1,843 (5) 7,773
--------- --------- --------- ---------
Total current assets 84,165 23,343 3,312 110,820
Property, plant, and equipment, net 50,837 18,097 (1,463) (2) 67,471
Goodwill, net 105,099 4,225 30,375 (3) 139,699
Deferred financing costs, net 10,079 - - 10,079
Other assets 3,263 - - 3,263
--------- --------- --------- ---------
Total assets $ 253,443 $ 45,665 $ 32,225 $ 331,333
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 21,460 $ 8,443 $ - $ 29,903
Accrued expenses 10,929 1,517 3,500 (6) 15,946
Other current liabilities 223 - - (2) 223
Current portion of long-term debt 11,154 840 2,350 (4) 14,344
Current portion of capital lease obligations 211 108 - 319
--------- --------- --------- ---------
Total current liabilities 43,977 13,920 5,850 60,735
Long-term debt, less current portion 149,526 - 61,001 (4) 210,527
Capital lease obligations, less current portion 3,200 130 - 3,330
Deferred income taxes 2,395 - - 2,395
Other long-term liabilities 514 26,175 (26,175) (2) 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 - - 7
Additional paid-in-capital 63,678 2,385 (2,385) (2) 63,678
Retained Earnings (accumulated deficit) (9,993) 7,218 (7,218) (2) (9,993)
Cumulative translation adjustments 124 (1,151) 1,151 (2) 124
--------- --------- --------- ---------
Total stockholders' equity 53,831 8,452 (8,452) 53,831
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 253,443 $ 45,665 $ 32,225 $ 331,333
</TABLE>
See accompanying Notes for Pro forma adjustments.
<PAGE> 22
SOVEREIGN SPECIALTY CHEMICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED PRO FORMA BALANCE SHEET
The accompanying consolidated pro forma balance sheet reflects the acquisition
of Croda Adhesives as if the acquisition had occurred on September 30, 2000.
The adjustments to reflect the acquisition are as follows:
(1) Reflects Croda Adhesives balance sheet at October 31, 2000.
(2) Per the terms of the sale agreement, certain Croda assets and
liabilities were specifically excluded and not acquired by the Company.
(3) Records the preliminary goodwill arising from the acquisition of
Croda Adhesives.
(4) Reflects amount drawn under the Company's credit facility to finance
the acquisition of Croda Adhesives including $1,965 in temporary
working capital requirements.
(5) Reflects the prepayment in connection with the acquisition of value
added taxes in the U.K. that will be refunded to the Company.
(6) Reflects $3 million estimated earn-out and working capital payment
relative to Brazilian operations and additional obligations.
(7) During 2000, the Parent Company restructured Croda Adhesives operations
involving the termination of certain employees (see note 4 to unaudited
pro forma consolidated statement of operations for the period ended
September 30, 2000) and the relocation of certain manufacturing
activities from Italy and Belgium to the UK and from an inefficient
plant to a new leased facility in Illinois. In connection with these
activities, extra operating costs were expensed as incurred.
In addition, the Company did not purchase Croda Adhesive's real
property at its New Jersey plant. This plant is being leased on a
short-term basis while production is transferred to another of the
Company's plants.
<PAGE> 23
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 January 16, 2001. All written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the foregoing factors. We have no obligation to revise or
update these forward-looking statements to reflect events or circumstances that
arise after January 16, 2001 or to reflect the occurrence of anticipated events.
15
<PAGE> 24
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 hereunto duly authorized.
SOVEREIGN SPECIALTY CHEMICALS, INC.
(registrant)
By: /s/ John R. Mellett
------------------------------------------
John R. Mellett
Vice President and Chief Financial Officer
Dated: November 15, 2000
