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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

<Table>

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</Table>

------------------------

SOVEREIGN SPECIALTY CHEMICALS, INC.
(Exact name of registrant as specified in its charter)

<Table>

DELAWARE 36-4176637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
225 WEST WASHINGTON STREET, CHICAGO, IL 60606
(Address of principal executive offices) (Zip Code)
</Table>

(Registrant's telephone number, including area code): (312) 419-7100

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

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 ___

On March 29, 2002, the registrant had 1,441,239 shares of voting common
stock outstanding and 730,182 shares of non-voting common stock outstanding.

Approximately 75% of the voting common stock and of the non-voting common
stock of the registrant is held by an affiliate of the registrant.

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference
into the part of the Form 10-K indicated:

<Table>
<Caption>
PART OF FORM 10-K INTO
DOCUMENT WHICH INCORPORATED
-------- ----------------------

None
</Table>

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ITEM 1. BUSINESS

PART I

We are a leading developer, producer and distributor of adhesives, sealants
and coatings for use in three primary end markets: industrial; packaging,
converting and graphic arts; and construction. We focus on select value-added
market niches in which we have established leadership positions and competitive
advantages in product development, manufacturing and distribution. We frequently
design our products in cooperation with our customers to meet unique
specifications and to provide critical performance attributes to their products,
resulting in a significant number of long-lived primary supplier relationships.

We are headquartered in Chicago, Illinois, and were formed as a limited
partnership by Robert B. Covalt and other investors in 1995 to acquire and
consolidate specialty chemicals businesses in the highly fragmented adhesives,
sealants and coatings segment of the specialty chemicals industry. In 1997, we
organized our business into a corporation. We have successfully expanded our
business through ten strategic acquisitions. Currently, our business is
comprised of the Commercial segment and the Construction segment. Our commercial
business manufactures a range of products for industrial markets, including
high-performance specialty adhesives and coatings for automotive, aerospace,
recreational vehicle, manufactured housing, air handling and transportation
textile applications. Our Commercial business also manufactures coating and
adhesive products for packaging, paper converting and graphic arts applications.
Our Construction segment manufactures branded caulk, sealants and adhesives for
professional contractors and do-it-yourself applications. We plan to continue
our growth through a combination of new product development, continued market
penetration, international expansion and, in the longer term, strategic
acquisitions.

DEVELOPMENTS

During 2001, we made significant strategic progress. We completed many
significant integration activities associated with three acquisitions (Croda,
Imperial and Aurachem) which were completed in late 2000, including the closure
of two facilities, integration of four remaining facilities and start up of a
green-field manufacturing site in Brazil. We completed a headcount reduction
plan to reduce indirect headcount by approximately 10% to improve our cost
position. Several of our subsidiaries were formerly independent companies or
business divisions of other companies that we have acquired. A part of our
integration activities has been directed towards incorporating these separate
businesses or divisions into Sovereign's market focused business units and
building Sovereign's corporate branding by bringing these businesses or
divisions under the Sovereign umbrella.

There were disappointments in 2001, primarily related to the economic
environment. Our financial performance fell short of management's expectations.
We experienced the most challenging specialty chemical industry conditions in
recent history, with end-market demand down and high raw material costs early in
the year. The economy in 2001 was significantly weaker than expected, and a
second-half recovery expected by management early in the year, did not come
about. The poor economic climate hurt our financial performance during 2001 by
contributing to increased bad debts and increased receivable days outstanding.

In early 2002, we bolstered our management team, hiring new heads for our
Industrial division and Packaging Converting and Graphic Arts division. The head
of Packaging Converting and Graphic Arts is also Corporate Executive Vice
President and Chief Operating Officer.

We are taking aggressive action in a number of areas. We are increasing
productivity through further manufacturing actions, improved warehouse logistics
and product line rationalization. We continue our focus on standardizing
business processes and corporate identity to reduce internal and external
complexity.

Despite the difficult economic conditions in 2001, we continued to generate
solid cash flow. During 2001, we decreased our net debt position (total debt
minus total cash) and invested in future growth through a normal level of
capital expenditures as well as the completion of a small acquisition.

We believe that the actions we have taken have positioned Sovereign to
continue its goals of top-line growth driven by the leveraging of technologies,
expanding geographic reach and utilizing existing customer relationships to
create customers for other products in the Sovereign portfolio.

INDUSTRY OVERVIEW

The adhesives, sealants and coatings segment of the specialty chemicals
industry is a large global segment, which has historically exhibited strong
stable growth. Total sales for the adhesives, sealants and coatings segment in
the United States were approximately $28.0 billion in 2001 and $34.2 billion in
2000. This was a decline of 3.7% from 2000 levels. Over the next five years its
forecast to grow at an average annual rate of 7.5% per year from the depressed
2001 level. Adhesives are replacing mechanical fasteners in many manufacturing
processes, and adhesives and sealants can reduce weight and parts requirements
and provide superior performance characteristics such as protection against
corrosion and vibration. In addition, we expect international sales of
adhesives, sealants and coatings to grow due to increased use in developing
markets.

Adhesives, sealants and coatings are used in a wide range of products with
applications in numerous categories, including

- Industrial. Typical industrial applications include corrosion
resistant industrial coatings, general assembly adhesives,
fire-retardant textile coatings, coatings for electronic components
and industrial lamination adhesives.

- Automotive. Automotive applications include primers and top coats,
body sealants, structural adhesives and interior and exterior trim
adhesives.

- Packaging. Packaging applications include portion packaging and
flexible consumer packaging films and foils, seam sealers and
container coatings.

- Aerospace. Aerospace applications include commercial, military and
general aviation coatings, composite bonding adhesives and structural
epoxies.

- Construction. Typical construction applications include
contractor-applied architectural coatings, joint sealants and flooring
and roofing adhesives.

- Consumer. Consumer applications include various consumer-applied
adhesives such as white glues, caulks and sealants, architectural
coatings and miscellaneous do-it-yourself sealing applications for
bathtub and kitchen fixtures.

The U.S. adhesives, sealants and coatings segment is highly fragmented with
over 500 companies, a significant majority of which we believe are small and
regional. While smaller companies have successfully competed in market niches,
the industry is expected to consolidate as companies seek to enhance operating
efficiencies in new product development, sales and marketing, distribution,
production and administrative overhead. Larger specialty chemicals companies
also benefit through a greater diversification of end-use applications,
customers, technologies and geography, reducing the impact of industry or
regional cyclicality.

Long term future growth for the U.S. adhesives, sealants and coatings
segment is expected to result from the following factors:

New Markets and More Stringent Demands of End-Users. Adhesives and
sealants are increasingly being used in new applications, particularly in the
transportation and construction sectors, as end-users desire simpler design and
manufacture, lower costs, improved bonding, lower weight, and reduced vibration
and corrosion. For example, in the bonding of automotive window glass to steel
body panels, high-performance adhesives provide structural reinforcement to the
adjacent steel panels, thus providing additional integrity to the car body. In
highway construction, new, long-lasting sealants are replacing traditional
bitumen, a traditional sealant used between adjacent slabs of concrete and other
materials that exhibit poor longevity.

New Materials. The growing use of nonferrous parts including aluminum and
plastics in car bodies, appliances, buildings and other fabricated goods
requires the use of adhesives that are specially formulated to bond dissimilar
materials. On these substrates, traditional mechanical fasteners are frequently
not suitable.

International Sales. International sales of adhesives, sealants and
coatings are also expected to grow due to increased use of these products
internationally. Total worldwide sales for adhesives, sealants and coatings were
approximately $91 billion in 2001. In 2001, the United States accounted for
approximately 31% of worldwide sales, while Europe accounted for approximately
33% of worldwide sales and Japan accounted for approximately 10% of worldwide
sales. Sales to the remainder of the world accounted for approximately 25% of
total segment sales. Growth is expected in developing markets, particularly in
the Far East, Eastern Europe and Latin America.

COMPETITIVE STRENGTHS

We believe we have the following competitive strengths:

Leadership Positions in Attractive Market Niches. We enjoy leadership
positions in growing, value-added market niches as a result of our
customer-driven product development, reputation for quality, high levels of
customer service and brand name recognition. Our brand and trade names are
particularly well recognized among our customers, and include OSI(R),
Pro-Series(R), PL(R), Polyseamseal(R), Miracure(R), Plastilock(R), Latiseal(TM),
Dualite(R), Hybond(R), Proxseal(TM), Bondrite(TM), NailPower(TM) and
Proxmelt(TM). We believe our leadership positions, technological expertise and
strong customer relationships provide us with significant advantages in the
development of new products and the penetration of new market niches.

Technological Expertise. We are a technology leader within the markets we
serve. Our current technology portfolio, comprising numerous customized and
proprietary formulations with unique performance characteristics, provides us
with a broad technological base to satisfy our customers' requirements. We
continually leverage our technological expertise to develop new products and
additional applications for existing product formulations. In addition, we have
enhanced our technological expertise both through cooperative research and
development efforts and joint technological alliances with world-class
suppliers, customers and universities.

Strong Customer Relationships. Our business teams work hand-in-hand with
our customers to develop innovative, high-performance solutions to satisfy
current and future needs. By directly involving customers in the product
development process, we strengthen our relationships with them and are better
able to develop products that will add value to their businesses. We sell our
products to some of the world's largest companies, including Airbus Industries,
Baxter International Inc., Bemis, The Boeing Company, General Motors
Corporation, The Home Depot, Inc., International Paper Company, Johns Manville
Corporation, Lowe's Companies, Inc. and RR Donnelly. Many of our industrial,
overprint coatings and flexible packaging products have been certified through
rigorous, customer-specific technical and regulatory approval processes. Once
our products have been approved, our customers are often unwilling to switch to
another supplier because of the significant costs involved. Our relationships
with retailers and professional distributors of our housing repair, remodeling
and construction products are strengthened by our broad product line, strong
brands and reputation for quality.

Broad Product Offerings and Diverse Customer Base. We manufacture over
7,000 products that are sold through multiple distribution channels to over
7,000 customers for a wide variety of applications. In 2001, no single customer
accounted for over 3% of our net sales, and our top 20 customers accounted for
less than 22% of our net sales. This diversity of customers, products and
distribution channels provides us with a broad base from which to increase sales
and expand customer relationships, and reduces exposure to any particular
customer, end market or geographic region.

Proven Management Team. Our strong management team, led by Robert B.
Covalt, averages over 23 years of experience in the specialty chemicals
industry. Current members of management hold approximately 15% of our equity on
a fully diluted basis. As part of our philosophy, management seeks to foster an
entrepreneurial environment, which empowers employees and encourages and rewards
individual initiative. This philosophy has been successful in generating
top-line growth. Since inception, our management team has successfully executed
and integrated ten strategic acquisitions. From 1996 to 2001 we increased our
annual net sales from $37.8 million to $356.9 million through acquisitions and
internal growth.

BUSINESS STRATEGY

Continued Focus on Niche Products in Attractive Markets. We will continue
to develop product offerings for value-added, end-use applications with
attractive growth prospects, including

- structural adhesives

- flame-retardant adhesives and coatings

- food and medical packaging adhesives and coatings

- environmentally friendly products

Pursue Strategic Acquisitions. We have successfully grown through
acquisitions and in the long-term our strategy is to continue to pursue
additional strategic acquisitions that will allow us to further increase sales
in targeted markets. We believe that the high degree of fragmentation in the
global adhesives, sealants and coatings segment will continue to provide
suitable acquisition candidates. As noted above, in 2001, we completed many
significant integration activities associated with three strategic acquisitions
completed in late 2000 and we will continue to focus on the many opportunities
that these acquisitions have presented. We also completed the purchase of the
inventory and distribution business related to our products of IMPAG, a long
standing European distributor of our products in July 2001.

Potential acquisition candidates are evaluated based upon our ability to:

- expand our product line and customer relationships

- enhance our product development capabilities

- market products through new or expanded distribution channels

- increase utilization of our available manufacturing capacity

- generate cost savings

- add to our technology portfolio

- open new market opportunities

Acquisitions continue to be a significant part of our long-term growth
plan. However, in the short-term we have put acquisition activity on hold so
that we can focus our attention on operating performance.

Achieve Significant Operating Efficiencies. We believe we can continue to
achieve operating efficiencies resulting in enhanced revenue opportunities, cost
savings and improved cash flow through:

- lowering working capital levels by optimizing SKU counts, better
managing inventory and improving customer receivable collections

- improving manufacturing and distribution operations

- cross-selling our products across the broader distribution and
customer network that we have developed through our acquisitions

- consolidating freight purchases to increase purchasing economies of
scale

Increase International Presence. We believe we have significant
opportunities in international markets to increase sales to existing
multinational customers, enter developing markets and establish new customer
relationships. While sales of adhesives, sealants and coatings outside the
United States in 2001 represented approximately $63.0 billion or 69% of the
worldwide market, our net sales outside the United States represented
approximately 15% of our net sales for 2001. In addition, international sales
are expected to benefit from the increased use of adhesives, sealants and
coatings in developing markets. We have expanded our global sales, particularly
in Europe and Latin America, as a result of our recent acquisitions. We have
manufacturing operations in Mexico, Brazil, the United Kingdom and Belgium. We
have sales and technical

offices in the U.K., Italy, Canada, Sweden, France, Switzerland and Singapore.
Our principal office for our European operation is in the UK.

SEGMENT REPORTING

We have two reportable segments: the Commercial segment and the
Construction segment. The Commercial segment consists of the Industrial and
Packaging Converting and Graphic Arts divisions. The table below sets forth
selected applications as categorized within our reportable segments:

<Table>
<Caption>
SEGMENT SELECTED APPLICATIONS
- ------- ---------------------

COMMERCIAL:
Industrial Division........................ Aerospace composite and foaming adhesives
Automotive structural, friction and trim
adhesives Commercial insulation adhesives and
coatings Flame-retardant textile adhesives
and coatings High pressure laminate bonding
adhesives Soft goods bonding adhesives
Packaging, Converting & Graphic Arts
Division................................ Blister packaging adhesives and coatings
Bookbinding adhesives
Food and product packaging adhesives and
coatings
Food packaging laminating adhesives
High gloss, scratch and abrasion resistant
coatings
Radiation cured coatings for selected
printing & packaging adhesives
CONSTRUCTION................................. Aluminum and vinyl siding sealants
Drywall and subflooring adhesives
Tub and tile sealants
Window and door sealants
</Table>

COMMERCIAL SEGMENT:

Industrial Division. Applications sold by our industrial division consist
primarily of high-performance, specialty adhesives and coatings for automotive,
aerospace, manufactured housing and textile applications. We often develop
structural adhesives in conjunction with the technical staff of our customers
and they are used in many demanding automotive applications which include brake
bonding and body panel assembly. Our aerospace bonding films are used to bond
composite structures in commercial aircraft and meet rigid performance
requirements. In addition, we manufacture and market microspheres, including
Dualite(R), a lightweight inert filler that can both reduce the weight and
enhance the strength of products to which it is added. Our industrial customers
include Airbus Industries, Baxter International Inc., The Boeing Company,
General Motors Corporation, Johns Manville Corporation, Milliken & Company and
The Stanley Works.

Packaging Converting & Graphic Arts Division. This division produces
flexible packaging adhesives including: heat-activated lidding adhesives used to
apply flexible paper or foil lids to plastic tubs used in the food industry,
including individually packaged condiments, creamers and cream cheese tubs;
film-to-film adhesives used to bond different types of plastic film, such as
metalized and moisture barrier films used in snack food bags; foil or paper
blister packaging for products such as pharmaceuticals, batteries, toys and tool
accessories; and medical packaging adhesives. We produce a variety of high
quality, high gloss, scratch and abrasion resistant coatings used on paperback
book and magazine covers, decorative packaging, annual reports, catalog covers,
and playing and trading cards. We are a leading manufacturer of coatings for
paperback book covers and trading cards. Overprint coatings customers include
printers, custom coaters and magazine manufacturers.

CONSTRUCTION SEGMENT:

Through this segment we manufacture and sell housing repair, remodeling and
construction sealants and adhesives used in exterior and interior applications.
We are a leader in aluminum and vinyl siding sealants as well as kitchen and
bath sealants, offering ease of use, durability and color match capabilities.
These products are marketed for do-it-yourself retail and professional
applications. We offer a broad range of well-established branded products
including PL(R) and Polyseamseal(R) for retail do-it-yourself applications and
Pro-Series(R) and PL(R) for professional applications.

SALES AND MARKETING

We operate an extensive sales and marketing network for our customers. This
network consists of a direct sales force of over 100 professionals, as well as
independent agents and distributors. This network works closely with customers
to satisfy existing product needs and to identify new applications and product
improvement opportunities. Our sales efforts are complemented by our product
development and technical support staff, who work together with the sales force
to develop new products based on customer needs. We augment our direct sales and
marketing coverage through a network of distributors and independent agents who
specialize in particular areas. This specialization allows our applications to
gain access to a broader range of distribution channels and end users and
further strengthens our brand names.

Our sales and marketing efforts and customer relationships are enhanced by
the numerous customer-specific technical approvals we have secured. These
approvals typically involve significant customer time and effort and result in a
strong competitive position for qualified products. Once qualified, products are
often referenced in customer specifications or qualified product lists. These
qualification processes also reinforce the partnership between us and our
customers and can lead to additional sales and marketing opportunities.

TECHNOLOGY

We maintain a strong commitment to technology, with over 100 chemists and
chemical engineers focused on the development of new products and processes. We
work hand-in-hand with our business teams and customers to develop innovative,
high-performance solutions to satisfy current and future needs. This methodology
of involving the customer throughout the product development process enhances
the creation of products that will add value to our customers' businesses.

Over recent years we have focused our research and development efforts on
the development of high performance, environmentally safe products. This effort
has led to a broad range of technologies and applications, including

- high temperature resistant, reactive hot melt used in industrial
construction applications

- reactive epoxy liquid used as structural bonding adhesive in truck bed
assembly

- acrylated epoxy ultraviolet/electron-beam curable systems used as
coatings for multi-wall bags that allow bags to be stacked without
slipping while greatly enhancing their appearance

- pre-formulated dispersions that function as medical packaging adhesives,
fiber locking binders, and food packaging lidding adhesives

- advanced toughened epoxy systems used to bond plastics, composites and
metals in both automotive and aerospace construction

Our technical activities are further enhanced through alliances with key
industry suppliers and large multi-national customers. These include BASF AG,
Baxter International Inc., The Boeing Company, The Dow Chemical Company, E.I. du
Pont de Nemours and Company, General Motors, and Johns Manville Corporation,
among others.

We hold approximately 10 patents and trademarks, primarily in the U.S. Our
products include a wide variety of technology, some of which is protected, some
of which is not. No one patent or trademark or group

of patents or trademarks is material to our business. Our patents and qualified
formulations, in combination with our customer integrated approach to product
and application design, should enhance our ability to create a sustainable,
competitive advantage in the next several years. We have several brands and
trademarks that are well recognized by customers, including OSI(R),
Pro-Series(R), PL(R), Polyseamseal(R), Miracure(R), Plastilock(R), Latiseal(R),
Dualite(R), Hybond(R), Proxseal(TM), Bondrite(TM), NailPower(TM), and
Proxmelt(TM).

COMPETITION

The adhesives, sealants and coatings segment of the specialty chemicals
industry is highly competitive. This segment is highly fragmented, with over 500
manufacturers ranging from small regional companies to large multinational
producers. No one company holds a dominant position on a national basis and very
few compete across all levels of our product line. Our competitors include Ciba
Specialty Chemicals, Cytec Industries Inc., GE Sealants and Adhesives (a unit of
General Electric Company), H.B. Fuller Company, Imperial Chemical Industries
Plc., Rohm & Haas Co. and RPM Incorporated. Competition is generally regional
and is based on product quality, technical service for specialized customer
requirements, breadth of product line, brand name recognition and price. Some of
our competitors are larger, have greater financial resources and are less
leveraged than we are. As a result, these competitors may be better able to
withstand a change in market conditions within the specialty chemical industry
and throughout the economy as a whole. These competitors may also be able to
maintain significantly greater operating and financial flexibility than we can.

EMPLOYEES

As of December 31, 2001, we had 1,007 employees, of whom 166 were members
of unions under contracts which expire between 2002 and 2004. Approximately 819
of our employees are employed in the U.S. and approximately 188 are employed
internationally. We believe that our relations with our employees are good. As
of December 31, 2000, we had 1,104 employees.

ENVIRONMENTAL MATTERS

We are subject to extensive laws and regulations pertaining to air
emissions, waste water discharges, the handling and disposal of solid and
hazardous wastes, the remediation of contamination, and otherwise relating to
health, safety and protection of the environment. Our operations and the
environmental condition of our real property could give rise to liabilities
under these laws, which could result in material costs.

In connection with our acquisitions, we have performed substantial due
diligence to assess the environmental liabilities associated with acquired
businesses and have negotiated contractual indemnifications, which, supplemented
by commercial environmental insurance coverage, is currently expected to
adequately address a substantial portion of known and foreseeable environmental
liabilities. We do not currently believe that environmental liabilities will
have a material adverse effect on our business, financial condition or results
of operations. We cannot be certain, however, that indemnitors or insurers will
in all cases meet their obligations or that the discovery of presently
unidentified environmental conditions, or other unanticipated events, will not
give rise to expenditures or liabilities that may have a material adverse
effect.

In connection with soil and groundwater contamination resulting from
historic operations under prior ownership of our Greenville, South Carolina
facility, in November 1994, the former owner of the business entered into a
consent agreement with the South Carolina Department of Health and Environmental
Control that requires the successors to complete investigation and remediation
of soil and groundwater contamination at the site. These activities are
currently projected to cost approximately $2.2 million, $1.7 million of which
had been spent by December 31, 2001. Original worst case estimates indicated
that the remediation could cost as much as $8.0 million. We are indemnified by
the former owner with respect to this matter, as well as certain other known and
unknown pre-closing environmental liabilities, subject to an overall limit well
in excess of the currently estimated cost of cleanup. The former owner has
agreed to conduct and finance the investigation and remediation of this matter.

Our facility located in Akron, Ohio is part of a larger industrial complex
formerly operated by The B.F. Goodrich Company, the prior owner of SIA
Adhesives, Inc. The B.F. Goodrich Company, as part of a voluntary cleanup
agreement with the Ohio Environmental Protection Agency, is conducting an
assessment of soil and groundwater contamination throughout the entire complex.
In connection with our 1996 acquisition of SIA Adhesives, Inc., The B.F.
Goodrich Company agreed to indemnify us with respect to this matter (as well as
other known and unknown pre-closing environmental liabilities).

In connection with the 1996 acquisition of Pierce & Stevens, our
environmental due diligence detected conditions of subsurface contamination
primarily associated with storage tank farms and at various other areas of the
Pierce & Stevens facilities. Our current estimated total cost of investigation
and remediation is in the range of approximately $3.8 to $5.0 million. This
amount could be higher, depending upon the extent of required remediation. In
connection with the acquisition, The Sherwin-Williams Company agreed to
indemnify us with respect to this and other environmental and non-environmental
pre-closing liabilities, subject to a $9.0 million overall limit. In 1998, The
Sherwin-Williams Company paid us $2.7 million as indemnification for the tank
farm replacement as well as a number of other environmental issues. Upon receipt
of the funds, we recorded an environmental reserve in other long term
liabilities and other current liabilities. To date, approximately $2.6 million
has been spent to address these issues, and we currently maintain an
environmental reserve of approximately $0.1 million. The 1998 settlement
expressly acknowledged that the settlement does not affect our right to
indemnification for matters not addressed in the settlement. In 2001, Sherwin
Williams paid an additional $0.6 million toward the remediation of the Buffalo,
New York facility. We have entered into a voluntary agreement with the New York
State Department of Environmental Conservation with regard to the Buffalo
facility remediation. Completion of this project is expected in 2002, with full
funding of the estimated additional $0.5 to $0.8 million cost by Sherwin
Williams.

As part of our Imperial Adhesives Inc. acquisition, we acquired our
Cincinnati, Ohio and Nashville facilities. At our Cincinnati facility we are
conducting a voluntary soil and groundwater remediation project over a period of
several years. This project is currently estimated to cost $1.0 million. The
former owner of the site will contribute approximately two thirds of the cost of
this project. If costs exceed $1.5 million, insurance totaling $10.0 million is
available.

At our Nashville, Tennessee facility, past operations may have contributed
to the presence of groundwater contamination. However, due to the limited
extent, and degree of the groundwater contamination, as well as favorable
groundwater flow conditions, active remediation intervention is not planned. The
state regulatory agency is aware of the presence of the contamination and has
not mandated remedial action. In the event that remediation becomes necessary,
indemnification is available from the former site owner.

As part of our acquisition of the Croda International Plc. adhesives
business, we acquired our Kapellen, Belgium and Newark on Trent, United Kingdom
facilities. Soil and groundwater at the Kapellen facility is contaminated with
various solvents. The former owner of the site had initiated an investigation,
which lead their consultant to believe that natural attenuation of this
contamination might be one of the feasible options. However, in the event that
active remediation is necessary, Sovereign's consultant has estimated a cost of
$0.7 million. Indemnification is available for this matter from Croda
International Plc., subject to certain thresholds, deductibles, caps and
cost-sharing arrangements described in the Croda acquisition agreement. In
addition, under that agreement, Croda has retained responsibility for compliance
with the applicable Flemish statute on soil clean-up and any other applicable
laws concerning the transfer of the Kapellen facility.

Regarding the Newark On Trent, facility in the United Kingdom, potential
issues related to soil and groundwater remediation, tank containment
improvements and site investigation monitoring were identified. Of these,
Sovereign is required to replace certain damaged storage tanks at an estimated
cost of $0.1 million. Indemnification from Croda International Plc. is available
for the remediation of this matter, and others (if required), subject to certain
thresholds, deductibles, caps and cost-sharing arrangements described in the
Croda acquisition agreement.

As is the case with manufacturers in general, if a release of hazardous
materials occurs at real property owned or operated by us or our predecessors or
at any off-site disposal location utilized by us or our predecessors, we may be
held strictly, jointly and severally liable for cleanup costs and natural
resource
8

damages under the federal Comprehensive Environmental Response, Compensation,
and Liability Act and similar environmental laws. Typically, liability at such
sites is shared by all of the viable responsible parties based on their relative
contribution of waste to the site. We have been named potentially responsible
parties under these laws for cleanup of approximately fifteen multi-party waste
disposal sites, the liability for several of which has been resolved, subject to
standard terms, including the ability to reopen the matter, found in these kinds
of settlements. Due to what we currently believe is our relatively minor
contribution of waste to these sites, we do not believe that our liability with
respect to these sites will have a material adverse effect on our business,
financial condition or results of operations. In addition, the agreements with
former owners of our business include indemnification for these issues.

Some of our facilities may be subject to maximum achievable control
technology requirements that are anticipated to become effective in 2003 for
surface coating manufacturing processes under Title III of the Clean Air Act
Amendments of 1990. We do not currently believe that capital expenditures
relating to achieving compliance with these requirements or other environmental
regulations will have a material adverse effect on our business, financial
condition or results of operations. However, environmental laws are constantly
evolving and we cannot predict accurately the effect they may have upon our
capital expenditures, cash flow or competitive position in the future. Should
these laws become more stringent, the cost of compliance would increase. If we
cannot pass on future costs to our customers, such increases may have an adverse
effect on our business, financial condition or results of operations.

BACKLOG

Most orders for our products are received and shipped in the same month.
Total backlog orders at December 31, 2001 were approximately $12.0 million. All
2001 backlog orders are expected to be filled within the current year. Backlog
orders at December 31, 2000 were $13.7 million.

PRODUCTION

The production of adhesives, sealants and coatings is a multi-stage process
which involves extensive formulation, mixing and, in some cases, chemical
synthesis. Following one or more of these processes, the product is packaged in
totes, drums, pails, cartridges or other delivery forms for sale based upon the
customer's requirements. Our principal manufacturing processes are blending,
polymerization, extrusion and film coating. Blending consists of dissolving or
dispersing various compounds in organic solvents, water or solvent-free systems.
In polymerization, vinyl, acrylic and urethane polymers are synthesized in
closed reactor systems. Extrusion consists of feeding formulated materials
through an extruder to compound pressure sensitive and hot melt products. Film
coating consists of transferring blended formulations onto release paper or
polyethylene liners to produce thin films of pressure sensitive, hot melt and
epoxy products. Many of our manufacturing processes can be performed at more
than one of our facilities.

ITEM 2. PROPERTIES

We operate the manufacturing plants and facilities described in the table
below. Management believes that our plants and facilities are maintained in good
condition and are adequate for its present and estimated future needs.

Listed below are the principal manufacturing facilities that we operate.

<Table>
<Caption>
OWNED/ SQUARE
LOCATION LEASED(1) FOOTAGE SEGMENT
- -------- --------- ------- ------------

Akron, Ohio............................................. Owned 214,300 Commercial
Newark on Trent, United Kingdom......................... Owned 202,400 Commercial
Mentor, Ohio............................................ Owned 175,000 Construction
Buffalo, New York....................................... Owned 165,000 Commercial
Plainfield, Illinois.................................... Leased(4) 154,600 Commercial
Kapellen, Belgium....................................... Owned 134,400 Commercial
Cincinnati, Ohio........................................ Owned 115,000 Commercial
Greenville, South Carolina.............................. Leased(2) 104,500 Commercial
Carol Stream, Illinois.................................. Owned 81,800 Commercial
LaGrange, Georgia....................................... Owned 80,500 Construction
Nashville, Tennessee.................................... Owned(5) 60,000 Commercial
Kimberton, Pennsylvania................................. Owned 55,900 Commercial
Mexico City, Mexico..................................... Leased(3) 24,400 Commercial
Seabrook, New Hampshire/Salisbury, Massachusetts........ Owned 79,100 Commercial
Vinhedo, Brazil......................................... Owned 13,800 Commercial
</Table>

- ------------------------------

(1) All of our owned facilities (other than the Nashville property) are subject
to mortgages pursuant to the credit facility. In addition, the Seabrook, New
Hampshire/Salisbury, Massachusetts property is subject to mortgages relating
to the financing of the acquisition of the property.

(2) Lease expires December 31, 2008.

(3) Lease expires December 31, 2004.

(4) Lease expires December 31, 2014.

(5) Not currently operating. We intend to sell this property.

Our executive offices are located in Chicago, Illinois. We also have sales
and technical offices in Singapore, United Kingdom, Canada, Sweden, France,
Italy and Brazil.

ITEM 3. LEGAL PROCEEDINGS

We are a party to various litigation matters incidental to the conduct of
our business. We do not believe that the outcome of any of the matters in which
we are currently involved will have a material adverse effect on our financial
condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of March 29, 2002, we had 104 holders of record of voting common stock
and 2 holders of record of non-voting common stock. There is no public trading
market for our equity securities. We have not historically declared dividends
and do not anticipate paying cash dividends on common stock in the forseeable
future. Any future determination as to the payment of dividends will be made at
the discretion of the Board of Directors and will depend upon our operating
results, financial condition, capital requirements, general business conditions
and such other factors as the Board of Directors deems relevant. Our debt
instruments include certain restrictions on the payment of cash dividends on our
common stock.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED HISTORICAL FINANCIAL DATA

The following table presents our selected historical financial data at the
dates and for the periods indicated. The data for each of the years presented
are derived from our audited financial statements. The information set forth
below should be read in conjunction with our consolidated financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information included
elsewhere herein.

<Table>
<Caption>
SOVEREIGN SPECIALTY CHEMICALS, INC.
------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)

STATEMENT OF OPERATIONS DATA:
Net sales............................... $356,701 $265,833 $243,273 $215,977 $134,771
Cost of goods sold...................... 259,253 186,393 168,415 148,681 92,889
-------- -------- -------- -------- --------
Gross profit............................ 97,448 79,440 74,858 67,296 41,882
Selling, general and administrative
expenses.............................. 78,015 57,582 48,350 46,418 30,294
Special charges......................... -- -- 14,153 -- --
-------- -------- -------- -------- --------
Operating income........................ 19,433 21,858 12,355 20,878 11,588
Interest expense, net................... 26,990 21,276 15,076 14,712 9,080
Loss on sale of business................ -- -- -- 1,025 --
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.................... (7,557) 582 (2,721) 5,141 2,508
Income tax expense (benefit)............ (1,500) 1,418 4,218 3,494 1,315
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item.................................. (6,057) (836) (6,939) 1,647 1,193
Extraordinary losses, net(1)............ -- 4,828 1,055 176 1,409
-------- -------- -------- -------- --------
Net income (loss)....................... $ (6,057) $ (5,664) $ (7,994) $ 1,471 $ (216)
======== ======== ======== ======== ========
BALANCE SHEET DATA
(END OF PERIOD):
Cash.................................... $ 15,584 $ 8,008 $ 17,005 $ 5,863 $ 6,413
Working capital......................... 52,003 52,345 44,311 29,739 29,618
Total assets............................ 350,290 355,029 257,839 225,567 242,759
Total indebtedness...................... 252,109 246,633 158,582 132,264 159,277
Stockholders' equity.................... 44,058 51,262 56,616 54,194 52,053
OTHER FINANCIAL DATA:
Capital expenditures.................... $ 8,040 $ 5,077 $ 6,280 $ 4,472 $ 1,834
</Table>

- ------------------------------

(1) Extraordinary losses relate to the write-off of deferred financing costs
associated and any associated premiums paid with the early extinguishment of
debt.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the consolidated
financial statements and accompanying notes included herein.

GENERAL

We were formed to acquire and consolidate adhesives, sealants and coatings
businesses in the highly fragmented adhesives, sealants and coatings business
segment of the specialty chemical industry. We have grown through the
acquisition and integration of businesses. From 1996 to 2001, we increased
annual net sales through acquisitions and internal growth from $37.8 million to
$356.7 million. Approximately $279.8 million of this net sales increase is
attributable to acquisitions. We plan to continue our growth through a
combination of new product development, continued market penetration,
international expansion, and in the longer term, strategic acquisitions.

This table describes the acquisitions since inception in March 1996.

<Table>
<Caption>
DATE OF
ACQUISITION ACQUISITION APPLICATION
- ----------- ------------ -----------

Adhesives Systems Division of B.F. March 1996 Specialty adhesives used primarily for
Goodrich (renamed SIA Adhesives, automotive, aerospace and general
Inc.) industrial applications
Pierce & Stevens Corp. August 1996 Specialty coatings and adhesives for
performance-oriented niche
applications
U.S. Adhesives, Sealants and Coatings August 1997 Adhesives and sealants primarily
Division of Laporte PLC(1) utilized for housing repair,
remodeling and construction and
industrial applications
Coatings and Adhesives Division of June 1998 Specialty polyurethane formulations
K.J. Quinn & Co., Inc. for adhesives and coatings
PL Adhesives & Sealants brand and August 1998 Adhesives and sealants for consumer
product line from ChemRex Inc. applications
Flexible packaging coating business of April 1999 Radiation curable, water and solvent
The Valspar Corporation products
Overprint coatings product line of August 2000 Overprint coatings applications
Aurachem, Inc.
Imperial Adhesives, Inc. October 2000 Industrial adhesives used in
furniture, shoes, transportation,
OEM construction packaging and other
applications
Specialty Adhesives and Coatings October 2000 Specialty coatings and adhesives for
business of Croda International Plc printing and publishing, flexible
packaging and paper converting
applications.
Distribution business of Sovereign June 2001 Distributor of our flexible packaging
products from IMPAG applications
</Table>

- ---------------

(1) The companies acquired from Laporte PLC comprised Laporte Construction
Chemicals North America, Inc., which was renamed OSI Sealants, Inc.,
Evode-Tanner Industries, Inc., which was renamed Tanner Chemicals, Inc.

The operating results of acquired businesses have been included in our
consolidated operating results for all periods after their respective dates of
acquisition.

COMPONENTS OF INCOME AND EXPENSE

Revenue Recognition. Revenue is recognized when products are shipped to the
customer and title transfers.

Cost of Goods Sold. Cost of goods sold represents the actual cost of
purchased raw materials, direct and indirect labor, warehousing and
manufacturing overhead costs, including depreciation, utilized directly in the
production of products for which revenue has been recognized.

Selling, General & Administrative Expenses. Selling, general &
administrative expenses generally are those costs not directly related to the
production process and include all selling, marketing, research and development
customer service expenses as well as expenses related to general management,
finance and accounting, information services, human resources, legal and
corporate overhead expense.

CRITICAL ACCOUNTING POLICIES

Reserve for Inventory Obsolescence. We provide allowances for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of the inventory and the estimated market value based upon assumptions about
market conditions, future demand and expected usage rates.

Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the failure of our customers to
make required payments. We evaluate the adequacy of our allowance for doubtful
accounts and make judgments and estimates in determining the appropriate
allowance at each reporting period. If a customer's financial condition were to
deteriorate, additional allowances may be required.

SEGMENT REPORTING

We have two reportable segments: the Commercial segment and the
Construction segment. The Commercial segment consists of the Industrial division
and Packaging, Converting & Graphic Arts division. Applications sold by the
Industrial division consist primarily of high performance, specialty adhesives
and coatings for automotive, aerospace. manufactured housing and textile
applications. The Packaging, Converting & Graphic Arts division produces
flexible packaging adhesives and coatings for a number of applications. Through
the Construction segment, we manufacture and sell housing repair, remodeling and
construction sealants and adhesives used in exterior and interior applications.

We evaluate the performance of each segment based on operating income.
Segment profit is calculated as a reportable segment's operating income. Total
segment profits exceed consolidated operating profits to the extent of
unallocated corporate expenses included in selling, general and administrative
expenses. Unallocated corporate expenses were $7.8 million, $6.8 million and
$5.1 million for the years ended December 31, 2001, 2000 and 1999, respectively.

RESULTS OF OPERATIONS

2001 COMPARED TO 2000

Net Sales. Net sales were $356.7 million in 2001, an increase of $90.9
million, or 34.2% over 2000 net sales of $265.8 million. Excluding the impact of
acquisitions, net sales decreased slightly by $2.4 million or 0.7% in 2001.
Weakness in high end printing, graphic arts and many industrial end markets more
than offset the $5.9 million gain in construction segment net sales. Sales
levels were also negatively impacted by continued general economic weakness in
the United States during the year.

Cost of Goods Sold. Cost of goods sold was $259.3 million in 2001, an
increase of $72.9 million, or 39.1% over 2000 cost of sales of $186.4 million.
Gross profit as a percentage of net sales decreased in 2001 to 27.3% from 29.9%
in 2000. The decrease in gross profit as a percentage of net sales was due
primarily to three factors. First, we experienced increases in certain raw
material costs primarily in the first half of the year that were not fully
recovered through price increases. Second, the businesses we acquired at the end
of 2000 historically have lower gross margins than our other businesses. Third,
we incurred additional manufacturing
13

expenses primarily in the first half of the year to support the transition of
manufacturing from the plants that were closed to our other facilities.
Excluding the results of acquisitions, cost of goods sold decreased by 1.1% from
the prior year.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $78.0 million in 2001, an increase of $20.4
million, or 35.5% from 2000 expenses of $57.6 million. Excluding acquisitions,
selling, general and administrative expenses increased $1.3 million in 2001. As
a percentage of net sales, selling, general and administrative expenses
increased to 21.9% for 2001 from 21.7% in 2000. This increase was due primarily
to increased goodwill amortization, and one-time expenses associated with
integration actions and bad debts related to certain customers that sought
bankruptcy protection from asbestos claims partially offset by management
actions, including selective headcount reductions.

Interest Expense. Net interest expense was $27.0 million in 2001 and $21.2
million in 2000. The increase in interest expense was due to the full year
impact of increases in debt levels from the prior year related to acquisitions
we completed in the last quarter of 2000, offset somewhat by a decrease in
interest rates on credit facility borrowings.

Income Taxes. Income tax benefit was $1.5 million in 2001. Income tax
expense was $1.4 million in 2000.

Income (loss) before extraordinary loss. Losses before extraordinary loss
for the years ended December 31, 2001 and 2000 were $6.1 million and $0.8
million, due primarily to the factors discussed above.

Extraordinary Loss (net of tax benefit). The extraordinary loss of $4.8
million in 2000 is net of the income tax benefit of $3.2 million and relates to
the write off of unamortized deferred financing costs and payment of the 1%
premium in connection with the repurchase of our 9 1/2% senior subordinated
notes.

Net Income (loss). Net loss for the year ended December 31, 2001 was $6.1
million an increase in net loss of $0.4 million from 2000. The increase resulted
primarily from increased interest and amortization expense.

COMMERCIAL SEGMENT

The following table presents net sales and segment profit expressed in
millions of dollars and segment profit margin, which is segment profit expressed
as a percentage of net sales:

<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
------------------- DOLLAR PERCENTAGE
2001 2000 CHANGE CHANGE
------ ------ ------ ----------

Net sales............................ $245.4 $160.4 $85.0 53.0%
====== ======
Segment profit....................... $ 14.9 $ 18.0 $(3.1) (17.2)%
====== ======
Segment profit margin................ 6.1% 11.2% -- (45.0)%
====== ======
</Table>

Net segment sales were $245.4 million in 2001, representing a $85.0 million
increase from 2000. This increase was due solely to acquisitions completed in
late 2000 being included in current year results for the full year. Segment
profit was $14.9 million in 2001, representing a $3.1 million decrease from
$18.0 million in 2000. We experienced higher raw material costs throughout the
year. Also, gross profit margins of the acquired businesses are less than those
of our existing businesses. Segment profit was also negatively impact by
increased goodwill amortization relative to 2000 acquisitions and significant
one-time costs relative to the integration of manufacturing to other of our
facilities.

Net of acquisitions, net sales for the Commercial segment decreased $8.2
million from prior year levels due to continued weakness in several end markets
in both the Industrial and Packaging, Converting and Graphic Arts divisions,
including high-end commercial printing, aerospace and manufactured housing. Net
of acquisitions, segment profit decreased $1.4 million from the prior year
reflecting primarily the impact of lower sales volumes and higher raw material
costs.

CONSTRUCTION SEGMENT

The following table presents net sales and segment profit expressed in
millions of dollars and segment profit margin, which is segment profit expressed
as a percentage of net sales:

<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
------------------- DOLLAR PERCENTAGE
2001 2000 CHANGE CHANGE
------ ------ ------ ----------

Net sales............................ $111.3 $105.4 $5.9 5.6%
====== ======
Segment profit....................... $ 12.3 $ 10.6 $1.7 16.0%
====== ======
Segment profit margin................ 11.0% 10.1% -- 8.9%
====== ======
</Table>

Net sales for the Construction division were $111.3 million for the year
ended December 31, 2001 and $105.4 million for the year ended December 31, 2000.
The increase in sales in 2001 was primarily due to resilience of its end markets
and strength at major retail accounts. Segment profit increased by $1.7 million
and 8.9% as a percentage of net sales in the year ended December 31, 2001
primarily as a result of (higher sales volume) management actions to reduce
costs and selective pricing increases.

2000 COMPARED TO 1999

Net Sales. Net sales were $265.8 million in 2000, an increase of $22.5
million, or 9.3% over 1999 net sales of $243.3 million. Our Commercial segment
accounted for essentially all growth in net sales, as net sales in the
Construction segment were flat. Excluding the impact of acquisitions, net sales
decreased 0.5% in 2000. Reduction of inventories by selected aerospace customers
and building materials retailers and related distributors negatively impacted
current year sales. Sales of manufactured housing and recreational vehicles
applications decreased due to significant decreases in demand of our customers
who supply those markets in the second half of 2000. These factors were
partially offset by increased international sales, principally in flexible
packaging applications. Sales levels in 2000 were also negatively impacted by
general economic weakness in the United States during the second half of the
year.

Cost of Goods Sold. Cost of goods sold was $186.4 million for 2000, an
increase of $18.0 million, or 10.7% over 1999. Gross profit as a percentage of
net sales decreased in 2000 to 30.0% from 30.8% in 1999. The decrease in gross
profit as a percentage of net sales was due primarily to increases in certain
raw material costs that were not fully recovered through price increases.
Excluding the results of acquisitions in 2000, cost of goods sold increased 0.3%
over the prior year.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses, were $57.6 million in 2000, a decrease of $4.9 million,
or 7.9% from 1999. Special charges of $14.2 million, comprised principally of
equity-based incentive compensation, were incurred in 1999 in connection with
the December 30, 1999 sale of a controlling equity interest in us. Excluding
acquisitions and compared to 1999 levels less special charges, selling, general
and administrative expenses increased $3.9 million in 2000. As a percentage of
net sales, selling, general and administrative expenses increased to 21.7% for
2000 from 20.0% in 1999. This increase was due primarily to increased goodwill
amortization, increased management fees paid to AEA Investors Inc. and
additional expenses associated with failed acquisitions.

Interest Expense. Net interest expense was $21.3 million in 2000 and $15.1
million in 1999. The increase in interest expense was due to the increase in
debt levels from the prior year related to completed acquisitions and higher
interest rates driven by the repurchase of our $125.0 million 9 1/2% Senior
Subordinated Notes and the issuance of our $150.0 million 11 7/8% Senior
Subordinated Notes in March 2000.

Income Taxes. Income tax expense was $1.4 million and $4.2 million in 2000
and 1999.

Income (loss) before extraordinary loss. Losses before extraordinary loss
for the years ended December 31, 2000 and 1999 were $0.8 million and $6.9
million, respectively due primarily to the factors discussed above.

Net Income (loss). Primarily as a result of the extraordinary loss
recognized relative to the repurchase of the 9 1/2% Senior Subordinated Notes
and increased interest expense, a net loss of $5.7 million was incurred in 2000.
Net loss for the year ended December 31, 1999 was $8.0 million due primarily to
$14.2 million of special charges relative to the change in controlling
shareholder.

COMMERCIAL SEGMENT

The following table presents net sales and segment profit expressed in
millions of dollars and segment profit margin, which is segment profit expressed
as a percentage of net sales:

<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
------------------- DOLLAR PERCENTAGE
2000 1999 CHANGE CHANGE
------ ------ ------ ----------

Net sales............................ $160.4 $137.8 $22.6 16.4%
====== ======
Segment profit....................... $ 18.0 $ 19.2 $(1.3) (6.8)%
====== ======
Segment profit margin................ 11.1% 13.9% -- (20.1)%
====== ======
</Table>

Net sales for the Commercial division were $160.4 million and $137.8
million for the years ended December 31, 2000 and 1999, respectively. The
increase of $22.6 million was due to acquisitions completed in late 2000.
Segment profit was $17.9 million and $19.2 million for the years ended December
31, 2000 and 1999, respectively. The decrease in segment profit in dollars and
as a percentage of sales was due primarily to lower sales of higher-margin
products raw material cost increases that were only partly recovered through
selling price increases.

CONSTRUCTION SEGMENT

The following table presents net sales and segment profit expressed in
millions of dollars and segment profit margin which is segment profit expressed
as a percentage of net sales:

<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
------------------- DOLLAR PERCENTAGE
2000 1999 CHANGE CHANGE
------ ------ ------ ----------

Net sales............................ $105.4 $105.4 $ -- --
====== ======
Segment profit....................... $ 10.6 $ 12.3 $(1.7) 13.8%
====== ======
Segment profit margin................ 10.1% 11.6% -- 12.9%
====== ====== ===== =====
</Table>

Net sales for the Construction division were $105.4 million for the years
ended December 31, 2000 and 1999. Net sales were approximately the same for the
two years, as market-related growth was offset by reduction of inventories by
certain customers. Segment profit was $10.6 million and $12.3 million for the
years ended December 31, 2000 and 1999, respectively. The decrease in segment
profit in dollars and as a percentage of sales was due primarily to raw material
cost increases that were only partly recovered through selling price increases
as well as a shift in sales mix to lower margin products.

PRO FORMA RESULTS OF OPERATIONS

The following discusses our unaudited pro forma consolidated results of
operations for 2000 and 1999, giving effect to our October 2000 Imperial and
Croda acquisitions as if they had occurred at January 1, 1999.

<Table>
<Caption>
2000 1999
-------- --------

Net sales............................................... $353,979 $353,827
Cost of goods sold...................................... 249,651 247,656
-------- --------
Gross profit............................................ 104,328 106,171
Selling general and administrative expenses............. 82,008 91,870
-------- --------
Operating income........................................ 22,320 14,301
Interest expense, net................................... 27,790 22,713
Income tax benefit (expense)............................ 1,024 (1,940)
-------- --------
Loss before extraordinary loss.......................... (4,446) (10,352)
Extraordinary loss, net of tax.......................... (4,828) (1,055)
-------- --------
Net loss................................................ $ (9,274) $(11,407)
======== ========
</Table>

During 2000, Croda International Plc. restructured operations prior to our
acquisition of the businesses in October 2000. They terminated certain employees
and relocated certain manufacturing activities from Italy and Belgium to the
United Kingdom and from an inefficient plant to a new leased facility in
Illinois. In connection with these activities, one-time operating costs were
expensed as incurred. These costs are included in the results above, but were
not borne by us.

In addition, since we did not purchase Croda International Plc.'s Ewing New
Jersey plant, we leased it on a short-term basis while production was
transferred to other of our plants.

In 2001, we closed Imperial's Nashville manufacturing facility and
transferred manufacturing to our existing facilities. We incurred approximately
$1.1 million in costs directly attributable to the closure of the facility. We
intend to sell the facility.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $18.6 million in 2001. Net
loss adjusted for non-cash charges, such as depreciation and amortization,
amortization of deferred financing costs and extraordinary loss accounted for
approximately $14.2 million of cash flow. Additional cash provided as inventory
decreased by $4.7 million and accounts payable and accrued expenses increased by
$1.6 million in 2001. These increases in cash flow from operations were
partially offset by an accounts receivable increase of $2.1 million.

Net cash provided by operating activities was $11.2 million in 2000. Net
loss adjusted for non-cash charges, such as depreciation and amortization,
amortization of deferred financing costs and extraordinary loss accounted for
approximately $12.9 million. Accounts payable decreased $2.0 million and prepaid
expenses and other assets decreased by $1.0 million in 2000. These increases in
cash flow from operations were offset by decreases in accounts payable and other
liabilities of $2.9 million and a net buildup of inventory levels of $1.8
million.

Net cash used in investing activities was $16.3 million in 2001 and
resulted from capital additions to property, plant and equipment of $8.0 million
and acquisition costs of $8.3 million. In February 2001, we paid $2.8 million in
additional consideration to Croda International Plc. based on the results of
operations of certain of the businesses acquired in 2000. We incurred an
additional $3.8 million of costs during 2001 related to the 2000 acquisitions of
Croda International Plc and Imperial. As part of the finalization of the
purchase price allocations, these costs were recorded as an increase to
goodwill. Effective June 30, 2001, we completed the

purchase of the distribution business related to our products of IMPAG, a long
standing European distributor of products produced by Sovereign for $1.7
million. Consideration is payable in four installments. In July, 2001, we paid
$0.5 million and in January, 2002 we paid approximately $0.3 million.
Approximately $0.5 million is due in each of January 2003 and 2004. This
acquisition was accounted for as a purchase. We recognized $1.5 million in
goodwill in connection with this acquisition.

Net cash used in investing activities was $99.6 million in 2000 and
resulted from acquisitions completed in 2000 totaling $94.8 million and capital
additions to property, plant and equipment of $4.8 million. The purchase of the
overprint coatings product line from Aurachem Inc. in August required cash of
$4.3 million. On October 11, 2000 we purchased 100% of the common stock of
Imperial Adhesives Inc. for $27.3 million including transaction costs. To
finance this acquisition, we borrowed $28.0 million under our Term Loan A
facility. On October 31, 2000, we acquired certain assets of the global
specialty adhesives and coatings business of Croda International Plc for $63.2
million, including transaction costs. We borrowed $47.0 million under our Term
Loan A facility and $14.4 million under our revolving credit facility.

Net cash provided by financing activities was $5.8 million in 2001. Net
borrowings under our credit agreement were $4.6 million in the year ended
December 31, 2001. We added $1.3 in acquisition notes payable relative to the
IMPAG purchase.

Net cash provided by financing activities was $79.6 million in 2000.
Borrowings under our credit facilities increased by a net of $65.3 million and
net cash of $20.3 million was provided by the long term debt activity described
below. We paid $7.0 million relative to financing costs associated with our
Credit Facilities and the issuance of our 11 7/8% senior subordinated notes in
2000.

Credit Facilities

On December 30, 1999, SSCI Investors LLC, an entity owned by an investor
group led by AEA Investors Inc., acquired approximately 75% of our outstanding
capital stock directly from the former majority stockholder with the balance
owned by other investors, including our current management team. In connection
with SSCI Investor LLC's acquisition of a controlling portion of our common
stock, we entered into a credit agreement, which has since been amended. As
amended to date, our credit agreement provides for aggregate borrowings of $125
million, including (1) a $50.0 million revolving credit facility, and (2) a
$75.0 million term loan facility (Term Loan A). Borrowings under the revolving
credit facility are available on a revolving basis and may be used for general
corporate purposes, excluding, however, loans, advances and investments,
including acquisitions, by us other than specified exceptions. The revolving
credit facility will mature on December 30, 2005. Scheduled quarterly repayments
of amounts outstanding under the Term Loan A facility began on September 30,
2001 and through December 31, 2003 amount to 50% of the amount outstanding under
that facility on September 30, 2001. The remaining 50% is scheduled to be repaid
in equal quarterly payments through December 30, 2005. At December 31, 2001 we
had $67.5 million outstanding under our Term Loan A facility, $29.6 million
drawn under our revolving credit facilities, including $0.9 million drawn under
a $1.1 million subfacility for our Singapore-based sales office and
approximately $2.0 million of outstanding letters of credit. At December 31,
2001, we had approximately $18.5 million of borrowing availability which, after
giving effect to the amendment discussed below, left us with $8.5 million of
effective availability.

At December 31, 2001, we were not in compliance with the financial
covenants under our credit agreement. As a result, on March 1, 2002, we and our
lenders amended our credit agreement. The most significant effects of the
amendment are:

- amendment of our financial covenants to decrease the restrictiveness of
those covenants for the quarter ended December 31, 2001 and each of the
fiscal quarters in 2002,

- a new covenant by us to maintain borrowing availability under our
revolving credit facility (a) of at least $10.0 million at all times
prior to December 31, 2002 and (b) of at least $12.5 million from
December 31, 2002 through March 31, 2003 (the practical effect of this
covenant is to reduce our

revolving credit availability by $10.0 million and $12.5 million and to
effectively increase the cost of our standby commitment fee),

- a limitation on the use of advances under the revolving credit facility
to prohibit the use of advances for, among other things, acquisitions and
investments in non-guarantor, offshore entities, other than very limited
amounts,

- an increase of 50 to 100 basis points, depending on our leverage level,
in the applicable margin included in our interest rates,

- amendment of our investment covenant to prohibit any significant
acquisitions unless only capital stock is used as the purchase
consideration and, if the acquisition is completed before April 1, 2003,
no indebtedness is assumed or acquired (the practical effect of this
amendment is to prohibit any significant acquisition prior to April 1,
2003), and

- a decrease in our permitted levels of capital expenditures and
indebtedness outside the credit facilities.

Borrowings under the credit facilities bear interest at a rate per annum
equal, at our option, to either (1) the higher of (a) the current base rate as
offered by JPMorgan Chase or (b) 1/2 of 1% per annum above the federal funds
rate plus, in either case, an applicable margin or (2) a eurodollar rate plus an
applicable margin. The applicable margin is based on our ratios of total debt to
earnings before interest taxes, depreciation and amortization, or EBITDA, (which
is more specifically defined in our credit agreement) and senior debt to EBITDA
and varies for revolving credit facility borrowings and for loans under the Term
Loan A facility, from 2.50% to 3.75% for eurodollar rate loans and from 1.50% to
2.75% for base rate loans. Our credit ratings do not affect the interest rates
for our borrowings under our credit facilities.

Our credit facilities obligate us to make mandatory prepayments in certain
circumstances with the proceeds of asset sales or issuance of capital stocks or
indebtedness and with certain excess cash flow. Our credit facilities include
covenants that restrict our and our subsidiaries' ability to incur additional
indebtedness, incur liens, dispose of assets, prepay or amend other
indebtedness, pay dividends or purchase our stock, and change the business
conducted by us or our subsidiaries. We must also comply with several financial
and other covenants, including that we maintain at the end of each fiscal
quarter, the following criteria as specifically defined in our credit agreement:

<Table>
<Caption>
LEVEL REQUIRED AT END OF FISCAL QUARTER ENDING
ACTUAL AT --------------------------------------------------------------------
DEC. 31, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
2001 2001 2002 2002 2002 2002 2003
--------- -------- -------- -------- -------- -------- --------

Total Debt to EBITDA(1)........... 6.17:1 6.25:1 6.50:1 6.50:1 6.50:1 5.75:1 5.00:1
Senior Debt to EBITDA............. 2.52:1 2.55:1 2.55:1 2.55:1 2.55:1 2.10:1 2.50:1
Interest Coverage Ratio(2)........ 1.60:1 1.55:1 1.50:1 1.50:1 1.55:1 1.65:1 2.25:1
Fixed Charge Ratio(3)............. 0.99:1 0.95:1 0.75:1 0.75:1 0.80:1 0.85:1 1.15:1
</Table>

- -------------------------
(1) EBITDA is defined in our credit agreement.

(2) A ratio of EBITDA to interest expense.

(3) A ratio of EBITDA to the sum of interest expense, principal payments on
indebtedness and capital expenditures.

Each of these covenants continues for the term of the credit agreement at
the latest level above, or a more restrictive level. A deterioration in our
current operating performance could result in our failure to satisfy our
financial covenants. In addition, unless our operating performance significantly
improves during 2002, we may not satisfy the financial covenants at March 31,
2003. A failure by us to satisfy the covenants under the credit agreement would
trigger the lenders' right to require immediate repayment of all or part of the
indebtedness; such acceleration, in turn, would also give rise to a right to
require immediate repayment by holders of our subordinated notes. Our
obligations under our credit facilities are secured by substantially all of our
assets and are guaranteed by all of our domestic subsidiaries.

Senior Subordinated Notes

SSCI Investors LLC's acquisition of our common stock constituted a change
of control under the terms of the indenture relating to our 9 1/2% senior
subordinated notes due 2007 and, as a result, we were required to make an offer
to purchase for cash any and all of the outstanding $125.0 million principal
amount of 9 1/2% notes for 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. The repurchase was completed on March
6, 2000 with the repurchase of the entire $125.0 million principal amount of
9 1/2% notes for an aggregate purchase price of approximately $127.4 million
which was financed with borrowings under the credit facilities. On March 29,
2000 we completed an issuance of $150.0 million in aggregate principal amount of
11 7/8% senior subordinated notes due 2010 in a private placement to qualified
institutional investors in accordance with Securities and Exchange Commission
Rule 144A and outside of the United States in accordance with Regulation S under
the Securities Act of 1933. The privately placed 11 7/8% Senior subordinated
notes were subsequently exchanged for notes with substantially identical terms
that were registered with the Securities and Exchange Commission. The cash
proceeds from this private placement of notes of approximately $143.8 million
were used to repay amounts drawn under our credit facilities for the repurchase
of the 9 1/2% notes and for general corporate purposes.

At December 31, 2001 the aggregate principal amount of 11 7/8% Senior
Subordinated notes was $149.1 million. The 11 7/8% senior subordinated notes
mature on March 15, 2010. Interest is payable semi-annually in arrears each
March 15 and September 15. On or after March 15, 2005, we may redeem these
notes, at our option, in whole or in part, at specified redemption prices plus
accrued and unpaid interest. The redemption price is 105.938% in 2005 and
decreases in equal annual increments to 100.000% in 2008 and thereafter. In
addition, at any time on or prior to March 15, 2003, we may redeem, in the
aggregate, up to 35% of the original aggregate principal amount of 11 7/8% notes
(calculated after giving effect to the issuance of additional notes, if any)
with the net cash proceeds of one or more public equity offerings by us, at a
redemption price in cash equal to 111.875% of the principal amount, plus accrued
and unpaid interest. In the event of a change in control, we would be required
to offer to repurchase the notes at a price equal to 101.0% of the principal
amount plus accrued and unpaid interest.

The notes are general obligations of the Company, subordinated in right of
payment to all existing and future senior debt and are guaranteed by our
subsidiaries. The indenture under which the 11 7/8% senior subordinated notes
were issued contains certain covenants that, among other things, limit our
ability to incur additional indebtedness, incur liens, dispose of assets, prepay
or amend other indebtedness, pay dividends or purchase our stock, and engage in
transactions with affiliates.

Liquidity and Capital Requirements

We have a management agreement with AEA Investors Inc. pursuant to which
AEA Investors Inc. provides us with advisory and consulting services. The
management agreement provides for an annual aggregate fee of $1.0 million plus
reasonable out-of-pocket costs and expenses.

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 $8.0 million
in 2001 and management currently anticipates capital expenditures will be
approximately $8.0 million in 2002 and approximately $9.5 million in 2003. While
we engage in ongoing evaluations of, and discussions with, third parties
regarding possible acquisitions, as of the date of this report, due to the terms
of our credit agreement we have no current expectations 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.

The following summarizes certain of our contractual obligations at December
31, 2001 and the effect of such obligations are expected to have on our
liquidity and cash flow in future periods. During the ordinary

course of business, we enter into contracts to purchase raw materials and
components for manufacture. In general, these commitments do not extend for more
than a few months.

<Table>
<Caption>
PAYMENTS DUE BY PERIOD
---------------------------------------------------
LESS THAN 1-3 4-5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----- --------- ----- ----- -------

Long-term debt(3)................................ 248,819 16,288 35,077 48,310 149,144
Operating leases(4).............................. 12,393 1,745 2,900 2,087 5,661
Capital leases(5)................................ 4,825 801 1,414 1,474 1,136
Total....................................... 266,037 18,834 39,391 51,871 155,941
</Table>

- -------------------------
(3) Represent principal amounts, but not interest. See Note 7 to the
Consolidated Financial Statements.

(4) As described in Note 11 to the Consolidated Financial Statements.

(5) Represents minimum future payments. See Note 12 to the Consolidated
Financial Statements for further discussion.

Our primary sources of liquidity are cash flows from operations and
borrowings under our 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 through December 31, 2002. As discussed above,
our operating performance will need to improve significantly in order for us to
comply with our financial covenants under our credit facilities at March 31,
2003. As a result, our ability to satisfy capital requirements will be dependent
upon our future financial performance. Additionally our ability to repay or
refinance our debt obligations will also be subject to economic conditions and
to financial, business and other factors, many of which are beyond our control.

INFLATION

In the second half of 2000, the costs of certain of our raw materials rose
sharply. To offset the impact of such increases we raised our prices where
possible. The costs of certain raw materials continued increasing during the
first half of 2001, but stabilized by mid year. To offset these increases we
raised our prices selectively. We believe that our price increases were
sufficient to recover new raw material cost increases, but without margin.
During the second half of 2001 some raw material costs decreased, however, a
portion of this relief was used to meet competitive pressures and maintain
market share. There can be no assurance, however, that our business will not
continue to be affected by inflation in the future.

FORWARD-LOOKING STATEMENTS

Some of the information presented in, or connection with, this report
include "forward-looking statements" based on our current expectations and
projections about future events and involve potential risks and uncertainties.
Our future results could differ materially from those discussed in this report.
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 businesses.

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 March 29, 2002. All written and oral
forward-looking statements attributable to us are expressly qualified in their
entirety by the foregoing factors and those identified in Exhibit 99.1 to this
report. We undertake no obligation to revise or update these forward-looking
statements to reflect events or circumstances that arise after March 29, 2002 or
to reflect the occurrence of unanticipated events. New risks emerge from time to
time and it is not possible for us to predict all such risks, nor can we assess
the impact of all such risks on our business or the extent to which any risks,
or combination of risks, may cause actual results to differ materially from
those contained in any forward-looking statement.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal market risks, which are potential losses in fair values, cash
flows or earnings due to adverse changes in market rates and prices, to which we
are exposed, as a result of our holdings of financial instrument and commodity
positions, are:

- interest rates on debt;

- foreign exchange rates; and

- commodity prices, which affect the cost of raw materials.

Our financial instruments include short-term debt and long-term debt. Trade
accounts payable and trade accounts receivable are not considered financial
instruments for purposes of this item because their carrying amount approximate
fair value. We do not maintain a trading portfolio and do not utilize derivative
financial instruments to manage our market risks. In the future, we may enter
into foreign exchange currency hedging agreements in connection with our
international operations.

MARKET RISK MANAGEMENT

We have measured our market risk related to our financial instruments based
on changes in interest rates and foreign currency rates utilizing a sensitivity
analysis. The sensitivity analysis measures the potential loss in fair values,
cash flows and earnings based on a hypothetical change (increase and decrease)
in interest rates and a decline in the U.K. pound/dollar exchange rate. We used
market rates as of March 29, 2002 on our financial instruments to perform the
sensitivity analysis. We believe that these potential changes in market rates
are reasonably possible in the near-term (one year or less). We have conducted
an analysis of the impact of a 100 basis point change in interest rates and a
10% decline in the U.K. pound/dollar exchange rate, discussed below.

INTEREST RATE EXPOSURE

Our primary interest rate exposure relates to our short-term debt and
long-term debt. We utilize a combination of variable rate debt primarily, under
our credit agreement, and fixed rate debt primarily, under our subordinated
notes. Our credit facilities require that, at least 45% of our funded
indebtedness be fixed-rate or subject to interest rate hedging agreements to
reduce the risk associated with variable-rate debt. At March 29, 2001
approximately 60% of our funded indebtedness was fixed-rate. The variable rate
debt is primarily exposed to changes in interest expense from changes in the
U.S. prime rate, the federal funds effective rate and the London interbank
borrowing rate (LIBOR), while the fixed rate debt is primarily exposed to
changes in fair value from changes in medium term interest rates. We estimate
that an immediate 100 basis point rise in interest rates and our indebtedness at
March 29, 2001, would not have a material impact on our financial position,
results of operations or cash flows.

CURRENCY RATE EXPOSURE

Our primary foreign currency exchange rate exposure relates to the U.K.
pound which results in our exposure to changes in the dollar exchange rate. Our
exposure to changes in U.S. dollar exchange rates with currencies other than the
U.K. pound are not currently material. Since changes in translation risk are
reported as adjustments to stockholders' equity, we estimate that the impact of
a 10% decline in the dollar/U.K. pound exchange rate would not be material to
our financial position, results of operations or cash flows.
22

These sensitivity analyses are estimates and are based on certain
simplifying assumptions. These analysis should not be viewed as predictive of
our future financial performance. Additionally, we cannot give any assurance
that the actual impact in any particular year will not.

COMMODITIES

We are subject to market risk with respect to commodities because our
ability to recover increased raw materials costs through higher pricing may be
limited by the competitive environment in which we operate.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company are submitted as a
separate section of this report. For a list of financial statements and
schedules filed as part of this report, see the "Index to Financial Statements"
beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to: (1)
each member of the Sovereign's Board of Directors; (2) each executive officer of
Sovereign; and (3) certain key managers of Sovereign and its subsidiaries.

<Table>
<Caption>
NAME AGE POSITION*
---- --- ---------

Robert B. Covalt............... 70 Chairman, Chief Executive Officer and Director
John R. Knox................... 36 Executive Vice President and Chief Operating Officer of
Sovereign
John R. Mellett................ 52 Vice President, Chief Financial Officer, Chief Accounting
Officer and Treasurer
Louis M. Pace.................. 30 Vice President -- Business Development and Information
Technology
Martyn Howell-Jones............ 64 Vice President -- International
Richard W. Johnston............ 55 Vice President -- Science & Technology
Paul Gavlinski................. 55 Vice President -- Manufacturing and Engineering
Karen K. Seeberg............... 49 Vice President -- Human Resources
Karl D. Loos................... 51 President -- Industrial Division, Commercial Segment
Gerard A. Loftus............... 47 President of SIA Adhesives and Tanner Chemicals
Peter Longo.................... 42 President -- OSI Sealants Inc.
Patrick W. Stanton............. 34 Principal Accounting Officer, Assistant Secretary and
Assistant Treasurer
John L. Garcia................. 45 Director
John D. Macomber............... 74 Director
Robert H. Malott............... 75 Director
Thomas P. Salice............... 42 Director
Norman E. Wells, Jr. .......... 53 Director
</Table>

- ---------------

* Positions are with Sovereign, unless otherwise noted.

Robert B. Covalt has served as our Chairman and Chief Executive Officer and
as a director of our company since its inception in 1996. Mr. Covalt was
President from inception to July 2000. Mr. Covalt is Chairman and a director of
each of our domestic subsidiaries. From 1979 to 1990, Mr. Covalt served as
President of the Specialty Chemicals Group of Morton International, Inc. During
this period, Mr. Covalt grew

Morton's specialty chemicals group from $175.0 million to $1.3 billion in sales
and he completed 13 acquisitions ranging in size from $3.0 million to $170.0
million. From 1990 to 1993, Mr. Covalt was Morton's Corporate Executive Vice
President. Prior to that time, Mr. Covalt served in various capacities in
Morton's Chemical Division which he joined in 1956. Mr. Covalt serves on the
board of directors of CFC International, Inc., a specialty chemical coating
manufacturer. Mr. Covalt has a B.S. in Chemical Engineering, an honorary
doctorate from Purdue University, and an M.B.A. from the University of Chicago.

John R. Knox has served as Executive Vice President and Chief Operating
Officer of the Company from February 2002. Prior to joining our company, Mr.
Knox was President of the European, Middle Eastern and African operations for
Valspar Corporation's packaging and industrial coatings businesses. Mr. Knox has
a B.S. in Chemical Engineering from the University of Virginia and an MBA from
Harvard University.

John R. Mellett has served as Vice President since March 1, 1999. Prior to
joining our company, Mr. Mellett was Senior Vice President & Chief Financial
Officer of USI Bath and Plumbing Products and its Zurn Industries, Inc.
operations, a diversified supplier of bath, plumbing and HVAC products and
services from 1995 to 1999. From 1992 to 1995, Mr. Mellett served as Senior Vice
President & Chief Financial Officer of LeFebure Corporation, a supplier of
equipment and services to financial institutions. Mr. Mellett is a Certified
Public Accountant and holds a B.S. in Accounting from Miami University.

Louis M. Pace has been our Vice President of Business Development since
November 2000 and Vice President of Information Technology since October 2001.
He had been Vice President -- Mergers & Acquisitions since March 1999 and has
served as our Director of Mergers & Acquisitions since January 1998. From August
1996 to December 1997, he served as our Director of Corporate Development and
Assistant Secretary. From 1995 to August 1996, Mr. Pace was an associate with
First Chicago Equity Capital. Mr. Pace holds a B.A. in Economics from Harvard
University and an M.B.A. from J.L. Kellogg Graduate School of Management at
Northwestern University.

Karl D. Loos has served as President -- Industrial Division since January
2002. Mr. Loos previously served as a director from August 1996 until December
1999 and from February 2000 until January 2001. Mr. Loos founded Garnett
Consulting in 1996. From 1977 to 1996, Mr. Loos was employed at Arthur D. Little
& Co in Boston, Massachusetts, most recently as Vice President and Managing
Director of Process Industries Consulting and Director of the Strategic Planning
practice. Mr. Loos received his undergraduate degree from Dartmouth College and
an M.B.A. from Harvard Business School.

Martyn Howell-Jones has served as our Vice President -- International since
October 1996 pursuant to a consulting arrangement. Mr. Howell-Jones is
responsible for our international sales and marketing efforts. Prior to joining
our company, Mr. Howell-Jones was engaged as a consultant to National Starch and
Chemical Company from June 1994 to September 1996, where he assisted in the
development of National Starch and Chemical Company's international adhesives
business. From 1966 to 1992, Mr. Howell-Jones was employed by Morton in its
European specialty chemicals business. Mr. Howell-Jones holds a B.S. degree from
London University.

Richard W. Johnston has served as our Vice President -- Science and
Technology since March 1997 and as Executive Vice President of Pierce & Stevens
since 1995. From 1992 to 1995, Mr. Johnston served as Vice
President -- Technology of Pierce & Stevens. Prior to that time, Mr. Johnston
served as Vice President of Pierce & Stevens' Canadian operations from 1988 to
1992. Mr. Johnston joined Pierce & Stevens in 1966 and has served in several
technical capacities with expertise in coatings and adhesives technology. Mr.
Johnston holds a B.S., M.S. and M.E.S. in Chemistry from the University of
Waterloo, Canada.

Paul Gavlinski has served as our Vice President -- Manufacturing and
Engineering since February 1998 and Vice President -- Operations of Pierce &
Stevens since September 1996. From 1995 to July 1996, Mr. Gavlinski served as
President of Catalyst Development, a management consulting firm. Prior to that
time, Mr. Gavlinski was Vice President Manufacturing of Emulsion Systems Inc., a
polymer manufacturing company. From 1969 to 1992, Mr. Gavlinski was employed by
Morton in various chemical manufacturing capacities. Mr. Gavlinski holds a B.S.
in Chemical Engineering from the University of Illinois.

Karen K. Seeberg has been our Vice President -- Human Resources since
February 1998. From January 1997 to February 1998, Ms. Seeberg was Director of
Human Resources for Pierce & Stevens. From September 1992 to January 1997, Ms.
Seeberg was Human Resources Manager for the Information System Division of Avery
Dennison. From August 1982 to August 1992, Ms. Seeberg held human resource
management positions with Federated Department Stores, Iroquois Industries, Inc.
and British Petroleum. Ms. Seeberg holds a B.A. degree from State University of
New York.

Peter Longo has been President of OSI Sealants since 1991. From 1989 to
1991, Mr. Longo was Vice President of Operations of OSI Sealants. Mr. Longo has
been employed by OSI Sealants for more than 20 years and has served in a variety
of capacities, including sales and marketing. Mr. Longo attended Lakeland
Community College.

Gerard A. Loftus has served as President of Tanner Chemicals since February
1998 and President of SIA Adhesives since April 1996. From January 1995 to March
1996, Mr. Loftus served as General Manager of the Adhesive Systems Division of
The B.F. Goodrich Company, the predecessor of SIA Adhesives. In 1994, Mr. Loftus
served as the division business manager of the Adhesives Systems Division with
responsibility for all sales, marketing and technical activities. From 1990 to
1994, Mr. Loftus was business manager of the aerospace products group of the
Adhesives Systems Division. Upon joining the Adhesives Systems Division in 1986,
Mr. Loftus served in a variety of capacities, including materials manager and
controller. Mr. Loftus, who is a Certified Public Accountant, and holds a B.B.A.
in Accounting from Ohio University and a Masters of Accountancy from Cleveland
State University.

Patrick W. Stanton has served as our Principal Accounting Officer since
September 1998. From April 1998 to August 1998, he served as our Manager of
Financial Planning and Control. From 1990 to March 1998, Mr. Stanton was with
Arthur Andersen LLP. Mr. Stanton is a Certified Public Accountant and holds a
B.S. in Accounting from Marquette University.

John L. Garcia has been a Director since December 1999. For administrative
purposes, Mr. Garcia has also served as Vice President, Assistant Treasurer, and
Assistant Secretary since December 1999. Mr. Garcia is currently a Managing
Director of AEA Investors Inc. and head of the firm's chemical practice. From
1994 to 1999, Mr. Garcia was a Managing Director with Credit Suisse First
Boston, where he served as Global Head of the Chemical Banking Group and Head of
the European Acquisition and Leveraged Finance and Financial Sponsors Group. His
previous experience was at ARCO Chemicals, in research, strategic planning and
corporate development roles. Mr. Garcia is currently a director of Acetex
Corporation and Noveon, Inc. Mr. Garcia is a graduate of the University of Kent
in England and holds a master's degree and Ph.D. in organic chemistry from
Princeton University. He also holds a master's degree in business administration
from The Wharton School of the University of Pennsylvania.

John D. Macomber has been a Director since December 1999. Mr. Macomber has
been a principal of JDM Investment Group since 1992 and is a Director of IRI
International, Lehman Brothers Holdings Inc., Mettler-Toledo International Inc.,
Rand McNally & Company and Textron Inc. Mr. Macomber is the former Chairman and
President of the Export-Import Bank of the United States, Chairman and Chief
Executive Officer of Celanese Corporation and Senior Partner of McKinsey & Co.

Robert H. Malott has been a director since December 1999. Prior to his
retirement in 1997, Mr. Malott was Chairman of the Executive Committee of FMC
Corporation from November 1991 through May 1997. Mr. Malott served as Chairman
of the Board and Chief Executive Officer of FMC Corporation from 1973 to 1991.
Mr. Malott is a former Director of FMC Corporation, Amoco Corporation and United
Technologies Corporation.

Thomas P. Salice has been a Director since December 1999. For
administrative purposes, Mr. Salice has also served as Vice President, Assistant
Treasurer, and Assistant Secretary since December 1999. He is President, Chief
Executive Officer and a Director of AEA Investors Inc. and has been associated
with AEA Investors Inc. since June 1989. Mr. Salice is also a Director of Waters
Corporation and Mettler-Toledo International Inc.

Norman E. Wells, Jr., has been a Director since December 1999. Prior to his
retirement in 1999, Mr. Wells served as President and Chief Executive Officer of
Easco Aluminum Inc. from November 1996 to December 1999. Mr. Wells was a
Director of CasTech Aluminum Group Inc. from June 1992 to September 1996 and
served as CasTech's President and Chief Executive Officer from March 1993 to
September 1996.

BOARD COMMITTEE MEMBERSHIP

Our board of directors has two standing committees: a compensation
committee and an audit committee. The compensation committee of our board of
directors is comprised of Messrs. Macomber, Salice and Wells. The audit
committee is comprised of Messrs. Malott, Garcia and Wells.

ITEM 11. EXECUTIVE COMPENSATION

The table below summarizes compensation information for our Chief Executive
Officer and each of the four other most highly compensated executive officers of
our company and/or our domestic subsidiaries for services rendered during the
years ended December 31, 2001, 2000 and 1999.

SUMMARY COMPENSATION TABLE

<Table>
<Caption>
ANNUAL COMPENSATION
----------------------------- OTHER SECURITIES ALL OTHER
FISCAL ANNUAL UNDERLYING COMPENSATION
YEAR SALARY($) BONUS($) COMPENSATION(1) OPTIONS(#) ($)(2)
------ --------- -------- --------------- ---------- ------------

Robert B. Covalt................. 2001 $311,250 $ -- $ -- -- $ --
Chairman and Chief Executive 2000 300,000 56,250 -- -- --
Officer 1999 291,644 215,880 -- 48,000 16,756,469
John R. Mellett.................. 2001 211,250 7,740 36,000(3) -- 4,447
Vice President and Chief 2000 200,000 17,100 36,000(3) -- 4,533
Financial Officer 1999 166,677 59,997 30,000(3) 15,000 2,250,862
Peter Longo...................... 2001 196,000 26,083 -- -- 4,952
President OSI Sealants Inc. 2000 196,000 11,760 -- -- 4,962
1999 193,428 69,080 -- 9,200 359,599
Gerard Loftus.................... 2001 166,875 5,658 -- -- 3,313
President 2000 150,000 12,000 -- -- 3,066
SIA Adhesives Inc., Tanner
Chemicals Inc. 1999 147,843 56,175 -- 7,500 264,728
Richard Johnston................. 2001 163,100 5,137 -- -- 4,513
Vice President -- Technology 2000 155,000 11,538 -- -- 4,515
1999 153,900 56,529 -- 4,000 421,217
</Table>

- ------------------------------

(1) Except as set forth below, the aggregate amount of perquisites and other
personal benefits for any of the executives named in the above table was
less than the lesser of $50,000 or 10% of the total annual salary and bonus
reported for the named executive officer.

(2) For fiscal year 2001, represents matching and profit sharing contributions
under the 401(K) plans in the amount of $4,447, $4,952, $3,313 and $4,513
for Messrs. Mellett, Longo, Loftus and Johnston.

(3) Reflects payments made to Mr. Mellett for living accommodations and travel
expenses.

DIRECTOR COMPENSATION

Members of our board of directors are reimbursed for traveling costs and
other out-of-pocket expenses incurred in attending board of directors and
committee meetings. Members of the board of directors who are also our officers
or employees of AEA Investors Inc. do not receive additional compensation for
being on the board of directors or its committees. Messrs. Macomber, Malott and
Wells were given a one-time opportunity to purchase units in a partnership which
owns all of the equity in SSCI Investors LLC upon their election to the board of
directors but receive no compensation for their services as directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

These directors approved various actions with respect to the current
compensation arrangements of our executive officers. Mr. Covalt is one of our
officers. Messrs. Garcia and Salice are officers of Sovereign for administrative
purposes only and are officers of AEA Investors Inc. Approximately 75% of our
capital stock is owned by SSCI Investors LLC, which is owned by an investor
group led by AEA Investors Inc. For a more detailed discussion of relationships
between AEA Investors Inc. and Sovereign see "Certain Relationships and Related
Transactions." As of March 2002, the compensation committee of our board of
directors is comprised of John D. Macomber, Thomas P. Salice and Norman E.
Wells.

STOCK OPTIONS

No additional grants of options to purchase shares of our common stock
during the year ended December 31, 2001 were made to the executives listed in
the Summary Compensation Table.

The following table sets forth information concerning the value of
unexercised in-the-money options held for each of the executives listed in the
Summary Compensation Table as of December 31, 2001.

AGGREGATE OPTION EXERCISES IN FISCAL 2001
AND FISCAL YEAR-END OPTION VALUES

<Table>
<Caption>
NUMBER
OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT
SHARES YEAR-END(#) YEAR-END($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- ----------- ----------------- ----------------

Robert B. Covalt......................... 0 0 24,000/24,000 0/0
John R. Mellett.......................... 0 0 6,000/9,000 0/0
Peter Longo.............................. 0 0 3,680/5,520 0/0
Gerard Loftus............................ 0 0 3,800/5,700 0/0
Richard Johnston......................... 0 0 1,600/2,400 0/0
</Table>

- ------------------------------

(1) There was no public trading market for our common stock at December 31,
2001. Accordingly, these values of exercisable and unexercisable
in-the-money options are based on the fair market value of our common stock
as determined by our board of directors, and the applicable exercise price
per share.

MANAGEMENT INCENTIVE COMPENSATION PLAN AND EMPLOYMENT AGREEMENTS

We believe that equity and performance-based plans and programs should
constitute a major portion of management's compensation so as to provide
significant incentives to achieve corporate goals. We have instituted the
following plans and programs for this purpose.

Management Incentive Compensation Plan

Selected members of our management and corporate staff judged to have the
greatest impact on our economic results are eligible to participate in this
plan. Participants are eligible for cash bonus awards based on our financial
performance, measured in terms of revenues and earnings before interest, taxes,
depreciation and amortization (EBITDA) and working capital targets, and on
individual role-specific goals. Participants in this program are assigned a
percentage of their base salary as their bonus target for the then current
fiscal year. Awards may be higher or lower than the target bonus as our
financial performance and/or the individual's performance is above or below the
level expected to achieve the target bonus. Target bonuses range from 25% to 75%
of base salary dependent upon position. In addition, our chief executive officer
may award participants bonuses supplemental to those earned under the plan for
producing extraordinary results. The management incentive compensation plan is
administered by our chief executive officer and vice president-human resources,
under the general direction of the compensation committee of our board of
directors.

Employment Agreements

We have employment agreements with Messrs. Covalt, Mellett, Longo, Loftus
and Johnston effective December 29, 1999, with Mr. Knox effective February 11,
2002 and with Mr. Loos effective January 7, 2002 providing for their employment
in their current capacities. Pursuant to the agreements, Messrs. Covalt,
Mellett, Knox, Loos, Longo, Loftus and Johnston are entitled to annual base
salaries of $315,000, $215,000, $250,000, $225,000, $196,000, $172,500 and
$163,000, respectively, and are eligible to receive an annual performance-based
bonus of up to 75% in the case of Mr. Covalt, 50% in the case of Messrs. Knox
and Loos and 40% for the four other named executives, of the applicable
executive's base salary determined in accordance with the terms of the bonus
plan adopted by our board of directors for the calendar year. Additionally, each
executive is eligible for a discretionary bonus as determined by the board of
directors. Under their respective employment agreements, the executives received
non-qualified stock options and are entitled to participate in all health,
welfare and other benefit plans we provide to our executives.

The employment agreements for Messrs. Covalt and Mellett each provide for a
term expiring on December 31, 2003. The agreements for Messrs. Longo, Loftus and
Johnston provides for a term expiring December 31, 2002. The employment
agreements for Messrs. Knox and Loos each provide for a term expiring on
December 31, 2004. All of these agreements are subject to automatic one-year
renewal terms in the absence of us or the officer giving notice to the other of
its election not to renew the agreement. If we terminate an executive's
employment without cause (as defined in the employment agreements), or an
executive resigns with good grounds (as defined in the employment agreements),
we are required to

(1) pay the executive any unpaid portion of his base salary earned
through the date of termination or resignation,

(2) continue to pay the executive his then current annual base salary
during the one-year period following termination or resignation,

(3) continue the executive's participation in employee benefit plans
during the one-year period following termination or resignation, and

(4) pay the executive a pro rata portion of his potential target
annual bonus for the calendar year of termination if the executive resigns
for good grounds. However, if we terminate the executive's employment
without cause, the pro rata potential target annual bonus will be paid, in
the case of Mr. Covalt, at the discretion of the compensation committee of
the board of directors, or in the case of all other executives, at the
discretion of the chief executive officer.

All severance benefits and payments are conditioned on the executive's
execution of a general release and his compliance with certain non-competition,
non-solicitation and non-disclosure covenants.

The employment agreement for Mr. Knox provides for the following payments
within twelve months of date of hire: a lump-sum of $100,000 for relocation
costs and, on the date of Mr. Knox first anniversary with the Company, a special
bonus of $275,000.

Stock Option Plan

The Sovereign Specialty Chemicals, Inc. Stock Option Plan provides for the
grant of nonqualified stock options to our key employees and directors. The
maximum number of shares of common stock underlying the options available for
award under the stock option plan is 240,713 shares. Of these shares, as of
March 29, 2002, 48,000, 30,000, 15,000, 15,000, 9,200, 9,500 and 4,000 were
granted to Messrs. Covalt, Knox, Mellett, Loos Longo, Loftus and Johnston,
respectively. Under the Plan, if any options terminate, or expire unexercised,
the shares subject to such unexercised options are again available for grant
under the stock option plan.

The stock option plan is administered by the compensation committee of the
board of directors. Generally, the committee interprets and implements the stock
option plan, grants options, exercises all powers,

authority, and discretion of the board under the stock option plan, and
determines the terms and conditions of option agreements, including the vesting
provisions, exercise price, and termination date of options.

Each option is evidenced by an agreement between us and an optionee. Unless
determined otherwise by the committee, 20% of the shares subject to the option
vest on each of the first five anniversaries of the grant date. Additionally,
the committee may accelerate the vesting of any option grant. The option price
is specified in each option agreement at an amount not less than the fair market
value on the grant date, unless determined otherwise by the committee. All
optionees are required to become parties to the management shareholders
agreement, which are described under "Certain Relationships and Related
Transactions," upon the grant of all options.

In the event of a transaction that constitutes a change in control of
Sovereign, as described in the stock option plan, unless determined otherwise by
the compensation committee, all options become fully exercisable immediately
prior to the date of the transaction, and we may cancel any options unexercised
as of the change in control upon our payment to the holders of options the
difference between the fair market value of the underlying stock and the option
exercise price. In the event of specified transactions that result in holders of
common stock receiving payments or securities in respect of, or in exchange for,
their common stock that do not result in a change in control of our company, as
described in the stock option plan, unless determined otherwise by the
compensation committee, options remain subject to the terms of the stock option
plan and the applicable option agreement, and thereafter upon exercise,
optionees will be entitled to receive in respect of any option the same per
share consideration received by holders of common stock at the time of the
transaction. Options will in no event entitle the holder of the option to
ordinary cash dividends payable upon the common stock issuable upon exercise of
the options.

In order to prevent dilution or enlargement of the rights of participants,
the stock option plan provides that the aggregate number of shares subject to
the stock option plan, any option, the purchase price to be paid upon exercise
of an option and the amount to be received in connection with the exercise of
any option will be automatically adjusted to reflect any stock splits, reverse
stock splits or dividends paid in the form of common stock, and equitably
adjusted as determined by the committee for any other increase or decrease in
the number of issued shares of common stock resulting from the subdivision or
combination of shares or other capital adjustments.

Our board of directors may amend, alter, or terminate the stock option
plan. Any board action may not adversely alter outstanding options without the
consent of the optionee. The stock option plan will terminate ten years from its
effective date, but all outstanding options will remain effective until
satisfied or terminated under the terms of the stock option plan.

Pursuant to their employment agreements, Messrs, Knox and Loos were granted
30,000 and 15,000 options in 2002 at an exercise price not less than the fair
market value of the grant dates.

Employee Stock Purchase Plan

In 2000, we adopted the Sovereign Specialty Chemicals, Inc. Employee Stock
Purchase Plan. Under the stock purchase plan eligible employees had the
opportunity to purchase up to 20,000 shares of our voting common stock. Our
employees purchased 7,045 shares at $100.00 per share. The stock purchase plan
terminated in 2000.

Common stock acquired under the stock purchase plan was purchased pursuant
to subscription agreements which define the rights and limitations of holders of
the shares. A management subscription agreement was used for grants to employees
who have entered into the management shareholders agreement, which are described
in "Certain Relationships and Related Transactions," and are governed by the
terms of the management shareholders agreement. An employee subscription
agreement will be used for grants to other employees. A summary of the employee
subscription agreement is provided below.

The employee subscription agreement provides for (1) restrictions on
transfer, (2) the right of SSCI Investors LLC, in a sale of 50% or more of its
ownership interest in the company to compel holders of shares of common stock
acquired under the stock purchase plan to sell a proportionate number of shares
and

(3) rights for holders of shares of common stock acquired under the stock
purchase plan to participate in certain sales by SSCI Investors LLC.

The agreement provides further that, if we terminate for cause the
employment of a holder of shares purchased under the stock purchase plan, then
we will have the opportunity to purchase all of the holder's shares of common
stock purchased under the stock purchase plan at the lower of (1) the price paid
for the shares and (2) the then current fair market value of the shares. If the
holder's employment is terminated other than by us for cause, then we will have
the opportunity to purchase all of his or her shares at 100% of their then
current fair market value.

ITEM 12. SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents information as of March 29, 2002 regarding the
beneficial ownership of our voting common stock by each person known by us to
beneficially own more than five percent of our voting common stock and by our
directors, certain executive officers and key managers, individually, and as a
group.

As used in this table, beneficial ownership means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from March 29, 2002 through the exercise of any
option, warrant or right. Shares of common stock subject to options, warrants or
rights that are currently exercisable or exercisable within 60 days are deemed
outstanding for the computation of the ownership percentage of the person
holding such options, warrants or rights, but are not deemed outstanding for the
computation of the ownership percentage of any other person. Our non-voting
common stock is convertible into voting common stock, unless the holder or its
affiliate is prohibited by law or regulation from holding our voting common
stock. As a result, certain holders of our non-voting common stock are deemed to
hold the voting common stock into which their non-voting common stock may be
converted.

In the table below, unless otherwise noted, the address of the person is
care of our company.

<Table>
<Caption>
NUMBER PERCENTAGE
OF SHARES OF SHARES
--------- ----------

FIVE PERCENT SECURITY HOLDERS
SSCI Investors LLC(1)....................................... 1,624,815.75 81.7%
Robert B. Covalt(2)......................................... 157,837.25 10.8%
OFFICERS AND DIRECTORS
Robert B. Covalt(2)......................................... 157,837.25
John R. Knox(3)............................................. -- *
John R. Mellett(3).......................................... 19,322.04 *
Martyn Howell-Jones(3)...................................... 9,695.02 *
Richard W. Johnston(3)...................................... 6,800.23 *
Paul Gavlinski(3)........................................... 5,926.46 *
Karen K. Seeberg(3)......................................... 3,547.50 *
Peter Longo(3).............................................. 14,331.63 *
Gerard A. Loftus(3)......................................... 4,747.50
Louis M. Pace(3)............................................ 5,769.00 *
Patrick W. Stanton(3)....................................... 1,049.61 *
John L. Garcia(4)........................................... -- *
Karl D. Loos(3)............................................. 1,801.16 *
John D. Macomber............................................ -- *
Robert H. Malott............................................ -- *
Thomas P. Salice(4)......................................... -- *
Norman E. Wells, Jr. ....................................... -- *
All executive officers, key managers, directors as a group
(18) persons)(2)(3)(4).................................... 226,079.90 15.7%
</Table>

- ------------------------------

* Represents beneficial ownership of less than one percent.

(1) Includes 547,636.50 shares of non-voting common stock. The address for SSCI
Investors LLC is c/o AEA Investors Inc., Park Avenue Tower, 65 East 55th
Street, New York, New York 10022. The general partner of a partnership that
wholly owns SSCI Investors LLC is a wholly owned subsidiary of AEA Investors
Inc. AEA Investors Inc. disclaims beneficial ownership of the shares owned
by SSCI Investors LLC, except to the extent of its pecuniary interest
therein. The address for AEA Investors Inc. is Park Avenue Tower, 65 East
55th Street, New York, New York 10022.

(2) Includes 47,544.61, 642.76, and 642.76 shares of common stock held by
Tregooden Partners, L.P., Nautical Partners, L.P. and Serendipity Partners,
L.P., respectively, which may be deemed to be beneficially owned by Mr.
Covalt. Includes 24,000 shares of common stock issuable upon exercise of
options granted to Mr. Covalt that are exercisable as of March 29, 2002 or
60 days thereafter.

(3) Includes shares in the following amounts issuable upon the exercise of stock
options that are exercisable as of March 29, 2002 or 60 days thereafter: Mr.
Mellett, 6,000 shares; Mr. Howell-Jones, 1,200 shares; Mr. Johnston, 1,600
shares; Mr. Gavlinski, 1,800 shares; Ms. Seeberg, 1,200 shares; Mr. Loftus,
3,800 shares; Mr. Longo, 3,680 shares; Mr. Pace, 3,600 shares; Mr. Stanton,
700 shares.

(4) Does not include shares beneficially owned by AEA Investors Inc. or SSCI
Investors LLC. Messrs. Garcia and Salice are each limited partners in SSCI
Investors L.P., the partnership which owns SSCI Investors LLC and are
officers and directors of AEA SSC Investors Inc., the general partner of
SSCI Investors LP. Mr. Salice is also president, chief executive officer and
a director of AEA Investors Inc. Mr. Garcia is also a managing director of
AEA Investors Inc.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the acquisition of approximately 75% of our common stock
by SSCI Investors LLC, we entered into an arrangement with our former parent
pursuant to which it agreed to indemnify us for any liability in excess of $2.5
million in the aggregate that is determined to be payable under a note we issued
in connection with an acquisition. Our obligations under this note have been
settled, for an amount less than this indemnification threshold. In addition,
our former parent has agreed to provide indemnification to us in respect of
various tax matters pursuant to an agreement with SSCI Investors LLC.

Affiliates of J.P. Morgan Securities Inc. currently own 63,330.71 shares of
our voting common stock and 182,545.5 shares of our non-voting common stock.
J.P. Morgan Securities Inc. acted as our financial advisor in connection with
SSCI Investors LLC's acquisition of our capital stock. J.P. Morgan Securities
Inc. is also the joint lead arranger, a joint book-running manager and
documentation agent for our credit facility.

See also "Executive Compensation" for a description of the arrangements
between us and our stockholders who are employees.

In connection with SSCI Investors LLC's acquisition of approximately 75% of
our common stock, we, SSCI Investors LLC and several members of our management
entered into a shareholders agreement under which SSCI Investors LLC has agreed
that, prior to the completion of an underwritten public offering of our common
stock, SSCI Investors LLC will vote all shares of common stock owned or
controlled by it, and will take all necessary or desirable actions within its
control to (1) elect Robert B. Covalt, a director of our company and to cause
Mr. Covalt to hold the position of Chairman of the Board and Chief Executive
Officer of our company and Chairman of the Board of each domestic subsidiary for
so long as the Covalt Family Group, as defined in the shareholders agreement,
owns at least 5% of the outstanding shares of our common stock and (2) cause at
least two members of the board of directors to be members of the investor group
led by AEA Investors Inc. who are not also officers or employees of AEA
Investors Inc. The obligation to elect Mr. Covalt to be a director and have the
titles described above will terminate in specified instances when Mr. Covalt is
no longer employed by the company. The management shareholders agreement also
(1) imposes certain transfer restrictions on the management parties, (2)
subjects employee parties to the right of SSCI Investors LLC, in a sale of 50%
or more of its ownership interest in our company, to compel other shareholders
to sell a proportionate number of shares, (3) provides rights to management to
participate in

sales by SSCI Investors LLC, (4) provides for a call option on employees'
options and subsequently acquired shares in specified termination events, (5)
provides that employee parties may request that we purchase some of their stock
in specified events, and (6) provides employee parties with piggyback
registration rights under specified circumstances.

We have also entered into a shareholders agreement with SSCI Investors LLC
and our remaining (non-employee) shareholders. This shareholders agreement
provides for (1) board observer rights for 10% shareholders, (2) restrictions on
transfer, (3) the right of SSCI Investors LLC, in a sale of 50% or more of its
ownership interest in our company to compel other shareholders to sell a
proportionate number of shares, (4) rights for other shareholders to participate
in sales by SSCI Investors LLC, (5) preemptive rights to 5% shareholders to
purchase new issuances, (6) information rights, and (7) piggyback registration
rights.

Our management agreement with AEA Investors Inc. pursuant to which AEA
Investors Inc. provides us with advisory and consulting services provides for an
annual aggregate fee of $1.0 million plus reasonable out-of-pocket costs and
expenses.

In connection with our employee stock purchase plan, which we terminated in
2000, we repurchased 7,045 shares of voting common stock from AEA Investors Inc.
at $100.00 per share. All shares repurchased were sold to our employees pursuant
to the stock purchase plan at the same price per share.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report:

1. The financial statements listed in the "Index to Financial
Statements" included on page F-2 of this report.

2. Financial statement schedule. Valuation and Qualifying Accounts
included on page S-1 of this report.

3. The exhibits listed in the "Exhibit Index" included on pages E-1
and E-2 of this report.

(b) Reports on Form 8-K.
None.

(d) Financial statement schedule. See Item 14(a)(2).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on March 29, 2002.

SOVEREIGN SPECIALTY CHEMICALS, INC.

By: /s/ ROBERT B. COVALT
------------------------------------
Robert B. Covalt
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 29, 2001.

<Table>
<Caption>
SIGNATURE CAPACITY
--------- --------

/s/ ROBERT B. COVALT Chairman, Chief Executive Officer and
- ----------------------------------------------------- Director (Principal Executive Officer)
Robert B. Covalt

/s/ JOHN R. MELLETT Vice President, Chief Financial Officer,
- ----------------------------------------------------- Chief Accounting Officer and Treasurer,
John R. Mellett (Principal Financial Officer)

/s/ PATRICK W. STANTON Principal Accounting Officer, Assistant
- ----------------------------------------------------- Secretary and Assistant Treasurer
Patrick W. Stanton

/s/ JOHN L. GARCIA Director
- -----------------------------------------------------
John L. Garcia

/s/ JOHN D. MACOMBER Director
- -----------------------------------------------------
John D. Macomber

/s/ ROBERT H. MALOTT Director
- -----------------------------------------------------
Robert H. Malott

/s/ THOMAS P. SALICE Director
- -----------------------------------------------------
Thomas P. Salice

/s/ NORMAN E. WELLS Director
- -----------------------------------------------------
Norman E. Wells
</Table>

ANNUAL REPORT ON FORM 10-K

ITEMS 8 AND 14(A)

INDEX TO FINANCIAL STATEMENTS

F-1

SOVEREIGN SPECIALTY CHEMICALS, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

Report of Independent Auditors.............................. F-3
Consolidated Financial Statements
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</Table>

F-2

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Sovereign Specialty Chemicals, Inc.

We have audited the accompanying consolidated balance sheets of Sovereign
Specialty Chemicals, Inc. and subsidiaries (the Company) as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. Our audits also included the financial statement schedule listed in
the index at Item 14(d). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 consolidated financial position of Sovereign
Specialty Chemicals, Inc. and subsidiaries at December 31, 2001 and 2000, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

ERNST & YOUNG LLP
Chicago, Illinois
March 15, 2002

F-3

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
DECEMBER 31,
--------------------
2001 2000
---- ----

ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,584 $ 8,008
Accounts receivable, less allowance of $1,611 and
$1,270................................................. 55,897 54,447
Inventories............................................... 37,832 42,411
Deferred income taxes..................................... 3,411 2,008
Other current assets...................................... 5,904 8,030
-------- --------
Total current assets........................................ 118,628 114,904
Property, plant, and equipment, net......................... 70,021 71,267
Goodwill, net............................................... 151,999 156,897
Deferred financing costs, net............................... 8,944 9,903
Other assets................................................ 698 2,058
-------- --------
Total assets................................................ $350,290 $355,029
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 30,586 $ 30,249
Accrued expenses.......................................... 18,986 23,012
Other current liabilities................................. 364 249
Current portion of long-term debt......................... 16,288 8,724
Current portion of capital lease obligations.............. 401 325
-------- --------
Total current liabilities................................... 66,625 62,559
Long-term debt, less current portion........................ 232,531 234,364
Capital lease obligations, less current portion............. 2,889 3,220
Deferred income taxes....................................... 2,810 2,679
Other long-term liabilities................................. 1,377 945
Stockholders' equity:
Common stock, $0.01 par value, 2,700,000 shares authorized,
1,441,239 and 1,437,239 issued and outstanding............ 15 15
Common stock, non-voting, $0.01 par value, 2,100,000 shares
authorized, 730,182 issued and outstanding................ 7 7
Additional paid-in capital.................................. 64,078 63,678
Accumulated deficit......................................... (18,766) (12,709)
Accumulated other comprehensive income (loss)............... (1,276) 271
-------- --------
Total stockholders' equity.................................. 44,058 51,262
-------- --------
Total liabilities and stockholders' equity.................. $350,290 $355,029
======== ========
</Table>

See accompanying notes to consolidated financial statements.

F-4

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

<Table>
<Caption>
DECEMBER 31,
------------------------------
2001 2000 1999
---- ---- ----

Net sales................................................... $356,701 $265,833 $243,273
Cost of goods sold.......................................... 259,253 186,393 168,415
-------- -------- --------
Gross profit................................................ 97,448 79,440 74,858
Selling, general, and administrative expenses............... 78,015 57,582 48,350
Special charges............................................. -- -- 14,153
-------- -------- --------
Operating income............................................ 19,433 21,858 12,355
Interest expense, net....................................... (26,990) (21,276) (15,076)
-------- -------- --------
Income (loss) before income taxes and extraordinary
losses.................................................... (7,557) 582 (2,721)
Income tax expense (benefit)................................ (1,500) 1,418 4,218
-------- -------- --------
Loss before extraordinary item.............................. (6,057) (836) (6,939)
Extraordinary losses, net of income tax benefits............ -- (4,828) (1,055)
-------- -------- --------
Net loss.................................................... $ (6,057) $ (5,664) $ (7,994)
======== ======== ========
</Table>

See accompanying notes to consolidated financial statements.

F-5

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<Table>
<Caption>
RETAINED ACCUMULATED
COMMON ADDITIONAL EARNINGS MANAGEMENT OTHER
COMMON STOCK, PAID-IN (ACCUMULATED NOTES COMPREHENSIVE
STOCK NON-VOTING CAPITAL DEFICIT) RECEIVABLE INCOME (LOSS) TOTAL
------ ---------- ---------- ------------ ---------- ------------- -----

Balance at January 1, 1999.... $-- $-- $55,652 $ 949 $(2,535) $ 128 $54,194
Comprehensive loss:
Net loss.................... -- -- -- (7,994) -- -- (7,994)
Translation adjustments..... -- -- -- -- -- (67) (67)
-------
Total comprehensive
loss................... (8,061)
Recapitalization of capital
stock....................... 15 7 (22) -- -- -- --
Payments received on
management notes
receivable.................. -- -- (2,480) -- 2,535 -- 55
Repurchase of common stock.... -- -- (3,318) -- -- -- (3,318)
Compensation expense under
management incentive
plans....................... -- -- 13,746 -- -- -- 13,746
--- --- ------- -------- ------- ------- -------
Balance at December 31,
1999........................ 15 7 63,578 (7,045) -- 61 56,616
Comprehensive loss:
Net loss.................... -- -- -- (5,664) -- -- (5,664)
Translation adjustments..... -- -- -- -- -- 210 210
-------
Total comprehensive
loss................... (5,454)
Sale of common stock.......... -- -- 100 -- -- -- 100
--- --- ------- -------- ------- ------- -------
Balance at December 31,
2000........................ 15 7 63,678 (12,709) -- 271 51,262
Comprehensive loss:
Net loss.................... -- -- -- (6,057) -- -- (6,057)
Minimum pension liability
adjustments.............. -- -- -- -- -- (433) (433)
Translation adjustments..... -- -- -- -- -- (1,114) (1,114)
-------
Total comprehensive
loss................... (7,604)
Sale of common stock.......... -- -- 400 -- -- -- 400
--- --- ------- -------- ------- ------- -------
Balance at December 31,
2001........................ $15 $ 7 $64,078 $(18,766) $ -- $(1,276) $44,058
=== === ======= ======== ======= ======= =======
</Table>

See accompanying notes to consolidated financial statements.

F-6

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<Table>
<Caption>
DECEMBER 31,
-------------------------------
2001 2000 1999
---- ---- ----

OPERATING ACTIVITIES
Net loss.................................................. $ (6,057) $ (5,664) $ (7,994)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 19,262 13,606 10,965
Compensation expense under management incentive
plans................................................ -- -- 13,746
Deferred income taxes.................................. (922) (828) 200
Amortization of deferred financing costs............... 1,363 1,356 1,185
Foreign exchange (gains) losses........................ 458 (495) --
Amortization of bond discount.......................... 132 80 --
Extraordinary losses................................... -- 4,828 1,055
Changes in operating assets and liabilities (net of
acquisitions and disposition):
Accounts receivable.................................. (2,159) 1,977 (4,751)
Inventories.......................................... 4,691 (1,790) (5,350)
Prepaid expenses and other assets.................... 177 937 747
Accounts payable and other liabilities............... 1,626 (2,853) 1,148
-------- --------- --------
Net cash provided by operating activities................... 18,571 11,154 10,951
INVESTING ACTIVITIES
Acquisition of businesses, net of acquired cash............. (8,261) (94,807) (15,769)
Purchase of property, plant, and equipment.................. (8,040) (4,796) (6,280)
-------- --------- --------
Net cash used in investing activities....................... (16,301) (99,603) (22,049)
FINANCING ACTIVITIES
Capital contributions....................................... 400 100 --
Payments on management notes receivable..................... -- -- 55
Proceeds from credit facilities............................. 41,840 228,352 69,861
Payments on credit facilities............................... (37,302) (163,000) (42,660)
Proceeds from issuance of long term debt.................... -- 148,932 --
Deferred financing costs.................................... (404) (7,043) (4,041)
Proceeds from acquisition notes payable..................... 1,273 -- --
Payments on acquisition notes payable....................... (200) (1,200) (900)
Payments on long-term debt.................................. -- (126,250) --
Payments on capital lease obligations....................... (255) (272) (194)
-------- --------- --------
Net cash provided by financing activities................... 5,352 79,619 22,121
Effect of exchange rate changes on cash..................... (46) (167) 119
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ 7,576 (8,997) 11,142
Cash and cash equivalents at beginning of year.............. 8,008 17,005 5,863
-------- --------- --------
Cash and cash equivalents at end of year.................... $ 15,584 $ 8,008 $ 17,005
======== ========= ========
</Table>

See accompanying notes to consolidated financial statements.

F-7

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED)

1. NATURE OF BUSINESS

The Company develops, produces and distributes adhesives, sealants and
coatings utilized in numerous industrial and commercial applications. Commercial
applications of the Company's products include industrial packaging, converting
and graphic arts and housing repair, remodeling and construction. Products are
sold and distributed throughout the United States, Europe, Latin America and
Asia.

The Company has two reportable segments: the Commercial segment and the
Construction segment. The Commercial segment consists of the Industrial and
Packaging, Converting & Graphic Arts divisions. Applications sold by the
Industrial division consist primarily of high performance, specialty adhesives
and coatings for automotive, aerospace, manufactured housing and textile
applications. The Packaging, Converting & Graphic Arts division produces
flexible packaging adhesives and coatings for a number of applications. Through
the Construction segment, the Company manufactures and sells housing repair,
remodeling and construction sealants and adhesives used in exterior and interior
applications.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts and
transactions of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

The Company 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 for financial reporting
purposes, as follows: three to fifteen years for machinery and equipment; five
to fifteen years for furniture and fixtures, and 39 to 40 years for buildings.
Leasehold improvements are amortized over the lesser of the lease term or 40
years. Accelerated depreciation methods are used for income tax purposes.
Depreciation expense was $8,159, $5,739, and $4,591, for the years ended
December 31, 2001, 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
periods ranging from 15 to 25 years. Accumulated amortization of goodwill was
$30,092 and $19,981 at December 31, 2001 and 2000, respectively.

F-8

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED FINANCING COSTS

The costs of obtaining financing are capitalized and are being amortized as
interest expense over the term of the related financing using a method which
approximates the interest method. Accumulated amortization was $2,537 and $1,170
at December 31, 2001 and 2000, respectively.

LONG-LIVED ASSETS

The Company evaluates its long-lived assets (including related goodwill and
other intangible assets) on an ongoing basis. Long-lived assets are reviewed for
impairment whenever 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 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 as determined on a discounted cash flow basis.

INCOME TAXES

Deferred taxes have been recognized for the tax consequences of temporary
differences by applying the enacted statutory income tax rates applicable to
future years of differences between the financial statement carrying amounts and
the tax bases of the existing assets and liabilities. Deferred taxes have been
recognized due to differences in timing for financial reporting and tax
reporting of depreciation, net operating loss carryforwards, goodwill, inventory
reserves and capitalization, the allowance for doubtful accounts, and various
accruals.

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 $6.4 million, $5.2 million, and $4.7 million for
the years ended December 31, 2001, 2000 and 1999, respectively.

TRANSLATION OF FOREIGN CURRENCIES

The Company's foreign subsidiaries use the local currency of each
operation's home country as their functional currency. Accordingly, assets and
liabilities are translated using the exchange rates as of the balance sheet
dates and the statement of operations account balances are translated using a
weighted-average exchange rate during the applicable period. Adjustments
resulting from such translation are included in cumulative translation
adjustments, a separate component of stockholders' equity.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, trade accounts receivable
and accounts payable approximate to their fair value at December 31, 2001 and
2000, due to the short-term nature of these instruments.

The carrying amounts reported in the Company's balance sheets for
variable-rate long term debt, including current portion, approximate fair-value,
as the underlying long-term debt instruments are comprised of notes that are
repriced on a short term basis.
F-9

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

The fair value of the Company's 11 7/8% senior subordinated notes
approximated $144.0 million at December 31, 2001 based upon trading in public
debt market.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company 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, 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.

At December 31, 2001 and 2000, the Company maintained cash deposits with
certain financial institutions which were in excess of federally insured limits.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.

RECLASSIFICATIONS

Certain prior years' amounts have been reclassified to conform to the 2001
presentation.

STOCK OPTIONS

The Company accounts for stock options granted to employees and directors
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25). In accordance with APB 25, employee and
director compensation expense is recognized based upon the excess of fair value
of the underlying stock over the option exercise price on the measurement date,
the date at which both the exercise price and the number of shares to be issued
are known. The Company has elected to continue to measure compensation expense
under the provisions of APB 25; however, in accordance with SFAS No. 123,
Accounting for Stock Based Compensation, an estimate of the fair value of the
stock options has been made by the Company to determine the pro forma effect on
earnings had the provisions of SFAS 123 been applied in the financial statements
(see Note 10).

NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.

SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001. The Company is required to adopt SFAS No. 141 effective January
1, 2002. The initial adoption of SFAS No. 141 is not expected to have a
significant effect on the Company's results of operations or its financial
position.
F-10

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with SFAS No. 142. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. Intangible assets that do not have indefinite lives
will continue to be amortized over their useful lives. The Company is required
to adopt SFAS No. 142 effective January 1, 2002. The effect of not amortizing
goodwill is expected to result in an increase to income from operations in
fiscal 2002 of approximately $10.0 million. The adoption of the impairment
provisions of SFAS No. 142 is not expected to have a significant effect on the
Company's results of operations or its financial position.

3. BUSINESS COMBINATIONS

Effective August 2000, the Company purchased the coatings business of
Aurachem Inc. a privately owned company, for $4.3 million. In connection with
the acquisition, the Company recognized goodwill of approximately $3.5 million
which is being amortized over a period of 15 years.

Effective October 2000, the Company purchased the outstanding common stock
of Imperial Adhesives, Inc. ("Imperial"), a subsidiary of NS Group, Inc., for
$27.3 million including transaction costs of $0.6 million. In connection with
the acquisition, the Company recognized goodwill in the amount of $18.2 million
which is being amortized over a period of 15 years. In 2001, the Company
incurred an additional $0.2 million in transaction costs and $0.4 million in
costs relative to income tax payments made for periods prior to date of
acquisition. These costs were recognized as additional goodwill in 2001.

Simultaneous with the acquisition of Imperial, the Company announced its
plan to exit Imperial's Nashville manufacturing facility and utilize existing
capacity, primarily at its Buffalo and Akron facilities, to manufacture Imperial
product. Management incurred approximately $1.0 million in costs directly
attributable to the closure of the facility which included $0.4 million of
severance costs for 45 employees and $0.7 million primarily for costs to restore
the land and building to saleable condition. As a result, the provision for
plant closure was recorded as part of the acquisition cost. The facility was
closed on July 31, 2001. The Company intends to sell the Nashville manufacturing
facility.

Effective October 2000, the Company acquired certain assets of the global
specialty adhesives and coatings business of Croda International Plc. The cost
of the acquisition was $66.2 million including $2.0 million of transaction
costs. Additional contingent consideration of $2.8 million was paid on February
8, 2001 based on the performance of certain of the acquired operations which was
included in the $66.2 million cost of the acquisition. The Company had recorded
a $2.8 million liability relative to this payment at December 31, 2000. In
connection with the acquisition, the Company recognized goodwill in the amount
of $35.8 million in 2000 which is being amortized over 15 years.

During 2001, the Company finalized the purchase price allocation of the
Croda acquisition and recorded an additional $2.1 million of goodwill. The
additional goodwill related to $0.9 million of additional acquisition costs and
a $1.9 million writedown to fair value of fixed assets and inventory.

Effective June 30, 2001, the Company completed the purchase of certain
distribution activities and inventory of IMPAG, a long standing European
distributor of products produced by Sovereign for $1.7 million. Consideration is
payable in four installments. In July, 2001, the Company paid $0.5 million.
Approximately $0.3 million will be paid in January, 2002 and $0.5 million is due
in January 2003 and 2004. The Company recognized $1.5 million in goodwill.

F-11

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. BUSINESS COMBINATIONS (CONTINUED)

These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the allocation of the cost of the acquired assets and
liabilities have been made on the basis of the fair value. The consolidated
financial statements include the operating results of each business from the
date of acquisition.

The unaudited pro forma consolidated statement of operations as if the
Imperial and Croda acquisitions had occurred as of the beginning of the
perspective periods, would have been as follows for the years ended December 31,
2000 and 1999:

<Table>
<Caption>
2000 1999
---- ----

Net sales................................................... $353,979 $353,827
Net loss.................................................... (9,274) (11,407)
</Table>

4. INVENTORIES

Inventories are summarized as follows:

<Table>
<Caption>
DECEMBER 31
---------------------
2001 2000
---- ----

Raw materials............................................ $13,508 $16,003
Work in process.......................................... 544 517
Finished goods........................................... 23,780 25,891
------- -------
$37,832 $42,411
======= =======
</Table>

5. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are summarized as follows:

<Table>
<Caption>
DECEMBER 31
----------------------
2001 2000
---- ----

Land.................................................... $ 5,716 $ 5,503
Building and improvements............................... 28,761 27,730
Machinery and equipment................................. 62,522 59,844
Furniture and fixtures.................................. 2,730 3,139
Construction-in-progress................................ 5,238 3,268
-------- -------
104,967 99,484
Less: Accumulated depreciation.......................... 34,946 28,217
-------- -------
$ 70,021 $71,267
======== =======
</Table>

F-12

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. ACCRUED EXPENSES

Accrued expenses are summarized as follows:

<Table>
<Caption>
DECEMBER 31
-----------------
2001 2000
---- ----

Interest................................................... $ 5,822 $ 6,213
Compensations and benefits................................. 4,371 6,071
Other...................................................... 8,793 10,728
------- -------
$18,986 $23,012
======= =======
</Table>

7. LONG-TERM DEBT

Long-term debt is summarized as follows:

<Table>
<Caption>
DECEMBER 31
-------------------
2001 2000
---- ----

11 7/8% Senior Subordinated Notes due 2010, net of
unamortized discount................................... $149,144 $149,012
Credit facilities........................................ 97,891 93,376
Acquisition notes payable................................ 1,784 700
-------- --------
248,819 243,088
Less: Current maturities................................. 16,288 8,724
-------- --------
$232,531 $234,364
======== ========
</Table>

Senior Subordinated Notes

The change of controlling stockholder of the Company, on December 30, 1999,
constituted a change of control under the terms of the indenture relating to the
Company's 9 1/2% Senior Subordinated Notes due 2007 (9 1/2% Notes) and, as a
result, the Company was required to make an offer to purchase for cash any and
all of its outstanding $125.0 million principal amount of 9 1/2% Notes for 101%
of the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. On March 6, 2000, the entire $125.0 million principal amount of
9 1/2% Notes was repurchased for an aggregate purchase price of $127.4 million
which was financed with borrowings under the Company's credit facilities. In
connection with the repurchase transaction, the Company recognized an
extraordinary loss of $4.8 million, net of tax benefit of $3.2 million resulting
from the 1% premium paid at repurchase and the write-off of approximately $3.5
million of unamortized deferred financing costs.

On March 29, 2000, the Company completed a private placement of $150.0
million in principal amount of 11 7/8% Senior Subordinated Notes (the Notes) due
2010 (the offering). The Notes were subsequently exchanged for notes with
substantially identical terms that were registered with the SEC. The Notes were
issued at a discount of $1.1 million which is being amortized to interest
expense over the life of the Notes. At December 31, 2001 the unamortized
discount is $0.9 million.

F-13

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. LONG-TERM DEBT (CONTINUED)

The Notes mature on March 15, 2010. Interest is payable semi-annually in
arrears each March 15 and September 15. On or after March 15, 2005, the Notes
may be redeemed at the option of the Company, in whole or in part, at specified
redemption prices plus accrued and unpaid interest:

<Table>
<Caption>
YEAR REDEMPTION PRICE
---- ----------------

2005 105.938%
2006 103.958%
2007 101.979%
2008 and thereafter 100.000%
</Table>

In addition, at any time on or prior to March 15, 2003, the Company may
redeem, in the aggregate, up to 35% of the original aggregate principal amount
of the Notes (calculated after giving effect to the original issuance of
additional Notes, if any) with the net cash proceeds of one or more public
equity offerings by the Company, at a redemption price in cash equal to 111.875%
of the principal amount thereof, plus accrued and unpaid interest. In the event
of a change in control, the Company would be required to offer to repurchase the
Notes at a price equal to 101.0% of the principal amount plus accrued and unpaid
interest.

The Notes are general obligations of the Company, subordinated in right of
payment to all existing and future senior debt and are guaranteed by the
Company's wholly-owned domestic subsidiaries -- (the Guarantor Subsidiaries).
Each of the Guarantor Subsidiaries' guarantees of the Notes are full,
unconditional, and joint and several.

The indenture under which the Notes were issued contains certain covenants
that, among other things, limit the Company from incurring other indebtedness,
engaging in transactions with affiliates, incurring liens, making certain
restricted payments (including dividends), and making certain asset sales.

Credit Facilities

The Company's credit agreement (Credit Agreement) provides for aggregate
borrowings of $125.0 million. The Credit Agreement includes (1) a $50.0 million
revolving credit facility (Credit Facility) (including letters of credit of up
to $20 million) and (2) a $75.0 million term loan (Term Loan A) to fund
acquisitions.

The Credit Facility matures December 30, 2005. Commitment fees on the
unused portion of the Credit Facility of 0.375% to 0.050% are payable quarterly
in arrears. At December 31, 2001, the Company had $29.6 million outstanding and
$18.4 million in available borrowings under the Credit Facility (net of
approximately $2.0 million outstanding letters of credit).

Term Loan A is payable in quarterly principal installments based on a
percentage of the aggregate principal balance outstanding, as defined in the
Credit Agreement through December 30, 2005. Scheduled quarterly repayments of
amounts outstanding under the Term Loan A facility began on September 30, 2001
and through December 31, 2003 amount to 50% of the amount outstanding under that
facility on September 30, 2001. The remaining 50% is scheduled to be repaid in
equal quarterly payments through December 30, 2005. At December 31, 2001, the
Company had $67.5 million drawn under Term Loan A. In 2002, the Company is
scheduled to repay $15.0 million under the Term Loan A. No additional borrowings
are available under Term Loan A.

The Company's effective interest rate for its borrowings under the Credit
Agreement was 7.1% for the year ended December 31, 2001.

At the Company's election, amounts outstanding under the Credit Facility
and Term Loan A bear interest, payable quarterly, at either the higher of the
bank's prime rate (4.75% at December 31, 2001) or the Federal Funds rate plus
1/2 of 1.00%, plus 1.00% to 1.75%, or LIBOR (1.9% at December 31, 2001) plus
F-14

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. LONG-TERM DEBT (CONTINUED)

2.00% to 2.75%. The variable spread to the prime rate or LIBOR is determined by
the Company's ratios of total debt to earnings before income taxes, interest,
depreciation and amortization expense (EBITDA).

The Credit Agreement contains covenants that, among other things, restrict
the ability to incur additional indebtedness, dispose of assets, repay or amend
other indebtedness, pay dividends, or make other changes in the business
conducted by the Company or its subsidiaries. In addition the Credit Agreement
requires compliance with specific financial ratios and tests, as defined in the
Credit Agreement. The Credit Facility and term loan are collateralized by
substantially all assets of the Company and pledged by the common stock of the
Company's subsidiaries.

The Company's Singapore-based sales office has a facility providing for
borrowings up to approximately $1.1 million in U.S. dollars and secured by a
letter of credit. Interest is payable at United States prime plus 1.0%. At
December 31, 2001, approximately $0.8 million was drawn on the facility.

At December 31, 2001 the Company was not in compliance with certain of its
financial covenants. On March 1, 2002 the Company completed Amendment No. 3 to
its Credit Agreement (the Amendment) which, among other things, amended certain
financial covenants beginning with the quarter ended December 31, 2001 and for
each of the next four quarters through December 31, 2002. At March 31, 2003, the
amended financial covenants return to the levels set prior to the amendment. The
Amendment includes a new covenant which requires the company to maintain
borrowing availability under the credit facility of at least $10.0 million at
all times prior to December 31, 2002 and of at least $12.5 million from December
31, 2002 through March 31, 2003. In addition, the Amendment prohibits any
significant acquisitions unless only capital stock is used as the purchase
consideration and, if the acquisition is completed before April 1, 2003, no
indebtedness is assumed or acquired. The Amendment increased the applicable
interest rate margins noted above by 50 to 100 basis points.

Acquisition Notes Payable

In connection with an acquisition, the Company had a $1.0 million note
payable to former owners that has a maturity date of June 30, 2003. The note
accrues interest at a rate of 8.5% payable on each June 30. At December 31,
2001, $0.5 million was outstanding under the note payable.

In connection with its acquisition of IMPAG, the Company will pay $1.3
million in consideration in three installments. Approximately $0.3 million was
paid in January 2002, and $0.5 million is due in January 2003 and 2004,
respectively.

Annual Maturities

Annual maturities of the Company's long-term debt are as follows at
December 31, 2001:

<Table>

2002........................................................ $ 16,288
2003........................................................ 15,800
2004........................................................ 19,277
2005........................................................ 48,310
2006........................................................ --
2007 and thereafter......................................... 149,144
--------
$248,819
========
</Table>

F-15

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES

The components of the provision for income taxes are as follows for the
years ended December 31, 2001, 2000 and 1999:

<Table>
<Caption>
2001 2000 1999
---- ---- ----

Current income taxes:
Federal........................................... $ (774) $ 1,707 $3,417
State............................................. (97) 359 601
Foreign........................................... 293 180 --
------- ------- ------
(578) 2,246 4,018
Deferred income taxes............................... (922) (828) 200
------- ------- ------
(1,500) 1,418 4,218
Extraordinary items................................. -- (3,219) (703)
------- ------- ------
Income tax expense (benefit)........................ $(1,500) $(1,801) $3,515
======= ======= ======
</Table>

The reconciliation of income tax expense computed at the U.S. federal
statutory tax rates to income tax expense (benefit), inclusive of tax benefits
on extraordinary items, is as follows for the years ended December 31, 2001,
2000 and 1999:

<Table>
<Caption>
2001 2000 1999
---- ---- ----

Income taxes at federal statutory rate............. $(2,569) $(2,538) $(1,523)
State tax expense (benefit), net of federal
benefit.......................................... (321) (230) 359
Foreign income taxes............................... 65 180 --
Non-deductible amortization of goodwill............ 866 696 487
Non-deductible stock compensation expense.......... -- -- 4,151
Other.............................................. 459 91 41
------- ------- -------
Income tax expense (benefit)....................... $(1,500) $(1,801) $ 3,515
======= ======= =======
</Table>

F-16

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:

<Table>
<Caption>
DECEMBER 31
------------------
2001 2000
---- ----

Deferred tax assets:
Allowance for doubtful accounts.......................... $ 358 $ 361
Inventory obsolescence reserve........................... 671 419
Inventory capitalization................................. 258 2
Accrued expenses......................................... 2,084 792
Deferred financing costs................................. 241 241
Minimum pension liability................................ 350 --
Amortization of non-compete agreements................... 875 566
Other.................................................... 176 435
------- -------
Deferred tax assets........................................ 5,013 2,816
Deferred tax liabilities:
Accelerated depreciation................................. (2,822) (2,486)
Amortization of goodwill................................. (1,147) (751)
Other.................................................... (443) (250)
------- -------
Deferred tax liabilities................................... (4,412) (3,487)
------- -------
Net deferred tax asset (liability)......................... $ 601 $ (671)
======= =======
</Table>

9. RETIREMENT PLANS

The Company sponsors a defined benefit pension plan covering certain
salaried employees of one subsidiary of the Company. The plan is frozen to new
participants. Participants in the plan were given credit for prior years of
service.

The Company has a pension plan covering all union employees of a different
subsidiary. The Company's funding policy has been to contribute annually at
least the minimum required by ERISA. The Plan provides monthly benefits under a
benefit formula.

F-17

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. RETIREMENT PLANS (CONTINUED)

The following tables set forth the Company's two defined benefit plans:

<Table>
<Caption>
2001 2000
---- ----

Change in projected benefit obligations
Projected benefit obligation at beginning of year........ $ 2,022 $1,892
Service cost............................................. 67 71
Interest cost............................................ 148 138
Actuarial losses......................................... 52 31
Benefits paid............................................ (121) (110)
------- ------
Projected benefit obligation at end of year.............. $ 2,168 $2,022
======= ======
Change in plan assets
Fair value of plan assets at beginning of year........... $ 2,398 $2,031
Actual return on plan assets............................. (1,055) 477
Company contributions.................................... 65 --
Benefits paid............................................ (121) (110)
------- ------
Fair value of plan assets at end of year................. $ 1,287 $2,398
======= ======
Funded status
Funded status............................................ $ (881) $ 376
Unrecognized net actuarial (gain) loss................... 875 (260)
------- ------
Prepaid (Accrued) benefit cost........................... $ (6) $ 116
======= ======
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid (Accrued) benefit liability...................... $ (789) $ 116
======= ======
Weighted-average assumptions as of December 31
Discount rate............................................ 7.5% 7.5%
Expected return on plan assets........................... 10.0% 10.0%
Rate of compensation increase............................ 4.5% 4.5%
</Table>

<Table>
<Caption>
2001 2000 1999
---- ---- ----

Components of net periodic benefit cost:
Service cost..................................... $ 67 $ 71 $ 88
Interest cost.................................... 148 138 129
Expected return on plan assets................... (254) (203) (160)
----- ----- -----
Net periodic benefit cost (benefit).............. $ (39) $ 6 $ 57
===== ===== =====
</Table>

The Company sponsored several defined contribution savings plans (IRS
qualified 401(k) plans) for employees of their U.S. based subsidiaries.
Participation in the plans is available to all salaried and hourly employees of
the Company. Participating employees contribute to the 401(k) plans based on a
percentage of their compensation which are matched, based on a percentage of
employee contributions by the Company. The Company recorded expense under these
plans of $1,583, $1,177 and $1,042 for the periods ended December 31, 2001, 2000
and 1999, respectively.

No significant Company sponsored employee savings plans were provided to
non-U.S. employees during 2001 or 2000.

F-18

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. MANAGEMENT INCENTIVE PLANS

The Company has implemented certain management incentive plans.

Stock Option Plan

The Company's Stock Option Plan (the Plan), provides incentives to key
employees and directors (including nonemployee directors) of the Company by
granting them nonqualified stock options of up to 240,713 shares of the
Company's common stock. The Plan is administered by a committee of the Board of
Directors which has the authority to determine the employees to whom options
will be granted, the number of options, and other terms and conditions of the
options. Options are granted at not less than the fair value on the date of
grant. Options granted from the Plan are subject up to a five year vesting
period and expire ten years from the date of grant. Options available for grant
are 65,163 at December 31, 2001. Options to date have been granted only to
employees. At December 31, 2001, 63,120 options were exercisable by employees.
No options have been exercised at December 31, 2001.

The Company has stock options outstanding as follows:

<Table>
<Caption>
EXERCISE
OPTIONS PRICE
------- --------

Balance at January 1, 2000................................. 153,050 $ 129.50
Granted.................................................... 24,500 $ 129.50
Forfeitures................................................ (9,500) $ 129.50
------- --------
Balance at December 31, 2000............................... 168,050 $ 129.50
Granted.................................................... 25,500 $ 129.50
Forfeitures................................................ (18,000) $ 129.50
------- --------
Balance at December 31, 2001............................... 175,550 $ 129.50
======= ========
</Table>

As permitted under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company will continue to apply APB Opinion No. 25
and related interpretations in accounting for the options under the Company's
Plan. Accordingly, compensation expense has only been recognized for options
with an exercise price below the market value at the date of grant. Had the
provisions of SFAS 123 been used in the calculation of compensation expense
(calculated using the minimum value method for non-public companies), pro forma
net loss would have been approximately $0.6 million higher than the net loss
reported in the statement of operations for the year ended December 31, 2001.

The fair value of each award is estimated on the date of award using the
Minimum Value award-pricing model with risk free interest rates ranging from
6.4% to 6.8% and expected award lives of up to ten years for 2001. The Company
has not paid and does not anticipate paying dividends; therefore, the expected
dividend yield is assumed to be zero.

Because the Company's options have characteristics significantly different
from those of traded stock options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its awards.

Employee Stock Purchase Plan

In January 2000, the Company adopted its Sovereign Specialty Chemicals,
Inc. Employee Stock Purchase Plan in order to provide incentives to salaried
employees (excluding executives who participate directly in the Sovereign
Specialty Chemicals, Inc. Stock Option Plan) by providing them the opportunity
to purchase up to 20,000 shares of common stock of the Company. The compensation
committee of the Board of

F-19

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. MANAGEMENT INCENTIVE PLANS (CONTINUED)

Directors administered the plan. The plan terminated on April 30, 2000. The
Company's employees purchased 7,045 Class A common shares.

11. OPERATING LEASES

The Company leases buildings, machinery and equipment under operating
leases which expire on various dates through 2014. Rent expense for all
operating leases was $1,849, $873 and $530 for the years ended December 31,
2001, 2000 and 1999, respectively. Future minimum lease payments under
noncancelable operating leases with terms in excess of one year are as follows:

<Table>

2002........................................................ $ 1,745
2003........................................................ 1,517
2004........................................................ 1,383
2005........................................................ 1,277
2006........................................................ 810
2007 and thereafter......................................... 5,661
-------
$12,393
=======
</Table>

12. CAPITAL LEASES

Property under capital leases included within property, plant, and
equipment are as follows:

<Table>
<Caption>
DECEMBER 31
-------------------
2001 2000
---- ----

Buildings.................................................. $1,912 $1,912
Machinery and equipment.................................... 351 416
------ ------
2,263 2,328
Less: Accumulated depreciation............................. 924 648
------ ------
$1,339 $1,680
====== ======
</Table>

Future minimum lease payments under capital leases at December 31, 2001,
together with the present value of the minimum lease payments are as follows:

<Table>

2002........................................................ $ 801
2003........................................................ 730
2004........................................................ 684
2005........................................................ 737
2006........................................................ 737
2007 and thereafter......................................... 1,136
------
Total minimum payments...................................... 4,825
Less: Amounts representing interest......................... 1,535
------
Present value of minimum payments........................... 3,290
Less: Current portion....................................... 401
------
Total long-term portion..................................... $2,889
======
</Table>

F-20

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. ENVIRONMENTAL MATTERS

The Company 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. In connection with its
acquisitions of businesses, the Company has conducted substantial investigations
to assess potential environmental liabilities. The investigations, performed by
independent consultants of all facilities, found that certain facilities have
had or may have had releases of hazardous materials that require or may require
remediation. In addition, certain subsidiaries have been named as potentially
responsible parties under the Comprehensive Environment Response, Compensation,
and Liability Act (CERCLA) and/or similar environmental laws for cleanup of
multiparty waste disposal sites.

The Company has negotiated contractual indemnifications from previous
owners of acquired businesses, which, supplemented by commercial insurance
coverage designed for each acquisition, is currently expected to adequately
address a substantial portion of known and foreseeable environmental
liabilities. The Company does not currently believe that potential additional
expenses for environmental liabilities will have a material adverse effect on
the financial condition or results of operations of the Company.

14. SEGMENT REPORTING

The Company evaluates performance and defines segment profit based upon
operating income. The reportable segments' accounting policies are the same as
those described in the summary of significant accounting policies (see Note 2.)
Segment profit is calculated as a reportable segment's operating income. Total
segment profits exceed consolidated operating profits to the extent of
unallocated corporate expenses included in selling, general and administrative
expenses. Unallocated corporate expenses were $7.8 million, $6.8 million and
$5.1 million for the years ended December 31, 2001, 2000 and 1999, respectively.

F-21

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. SEGMENT REPORTING (CONTINUED)

The reportable segments are each managed and measured separately primarily
due to the differing customers, production processes, products sold and
distribution channels. The reportable segments are as follows:

<Table>
<Caption>
COMMERCIAL CONSTRUCTION TOTALS
---------- ------------ ------

AS OF AND FOR THE YEAR ENDED DECEMBER 31,
2001:
Revenues from external customers.......... $ 245,375 $111,326 $ 356,701
Depreciation and amortization expense..... 12,453 4,891 17,344
Segment profit............................ 14,943 12,259 27,202
Segment assets............................ 208,059 100,726 308,785
Expenditures for long-lived assets........ 5,182 2,507 7,689
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
2000:
Revenues from external customers.......... $ 160,402 $105,431 $ 265,833
Depreciation and amortization expense..... 8,837 4,474 13,311
Segment profit............................ 17,990 10,618 28,608
Segment assets............................ 213,486 108,529 322,015
Expenditures for long-lived assets........ 2,892 1,646 4,538
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1999:
Revenues from external customers.......... $ 137,793 $105,480 $ 243,273
Depreciation and amortization expense..... 7,053 3,912 10,965
Segment profit............................ 19,207 12,356 31,563
Segment assets............................ 137,082 114,216 251,298
Expenditures for long-lived assets........ 2,597 3,683 6,280
</Table>

A reconciliation of the reportable segments to consolidated net sales,
operating income and consolidated assets are as follows:

<Table>
<Caption>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
---- ---- ----

NET SALES:
External revenues from reportable
segments................................. $ 356,701 $265,833 $ 243,273
========= ======== =========
PROFIT:
Total profit for reportable segments........ $ 27,202 $ 28,608 $ 31,563
Unallocated corporate expense............... (7,769) (6,750) (5,055)
Special charges............................. -- -- (14,153)
--------- -------- ---------
Operating income....................... $ 19,433 $ 21,858 $ 12,355
========= ======== =========
ASSETS:
Total assets for reportable segments........ $ 308,785 $322,015 $ 251,298
Elimination of intercompany accounts........ (1,807) (32,195) (37,894)
Unallocated corporate assets................ 43,312 65,209 44,435
--------- -------- ---------
Consolidated assets...................... $ 350,290 $355,029 $ 257,839
========= ======== =========
</Table>

F-22

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. SEGMENT REPORTING (CONTINUED)

Other significant items as disclosed within the reportable segments are
reconciled to the consolidated totals as follows:

<Table>
<Caption>
SEGMENT UNALLOCATED
TOTALS CORPORATE ITEMS CONSOLIDATED
------- --------------- ------------

OTHER SIGNIFICANT ITEMS:
FOR THE YEAR ENDED DECEMBER 31, 2001
Expenditures for long-lived assets..... $ 7,689 $ 351 $ 8,040
Depreciation and amortization.......... $17,344 $ 1,918 $19,262
FOR THE YEAR ENDED DECEMBER 31, 2000
Expenditures for long-lived assets..... $ 4,537 $ 259 $ 4,796
Depreciation and amortization.......... $13,311 $ 295 $13,606
FOR THE YEAR ENDED DECEMBER 31, 1999
Special charges........................ $ -- $14,153 $14,153
</Table>

Revenues and long-lived assets by geographic area are determined by the
location of the Company's facilities as follows:

<Table>
<Caption>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
---- ---- ----

NET SALES:
North America................................. $321,330 $256,319 $240,967
South America, Europe, Asia................... 35,371 9,514 2,311
-------- -------- --------
Consolidated net sales........................ $356,701 $265,883 $243,273
======== ======== ========
LONG-LIVED ASSETS:
North America................................. $205,060 $212,810 $156,619
South America, Europe, Asia................... 16,960 15,354 1,063
-------- -------- --------
Consolidated long lived assets................ $222,020 $228,164 $157,682
======== ======== ========
</Table>

15. SUPPLEMENTAL CASH FLOW INFORMATION

The following table provides supplemental cash flow data in addition to the
information provided in the consolidated statements of cash flows for the years
ended December 31, 2001, 2000 and 1999:

<Table>
<Caption>
2001 2000 1999
---- ---- ----

Cash paid for:
Interest.................................... $24,650 $19,120 $13,427
Income taxes................................ 303 592 3,544
Supplemental disclosure of non-cash activity:
Debt issued for capital leased assets....... -- -- 193
</Table>

16. EXTRAORDINARY LOSSES

On March 6, 2000, the Company repurchased its $125.0 million 9 1/2 senior
subordinated 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%

F-23

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. EXTRAORDINARY LOSSES (CONTINUED)

premium on the repurchase of the 9 1/2% senior subordinated notes and the
write-off of unamortized deferred financing costs related to the 9 1/2% senior
subordinated notes.

During 1999, the Company refinanced its prior credit facility and
recognized an extraordinary loss related to the write-off of unamortized
deferred financing costs of $1,055, net of tax benefit of $703.

17. SPECIAL CHARGES

As a result of the change of controlling stockholder of the Company on
December 30, 1999, the Company incurred incremental expenses totalling $14.2
million, consisting of $11.3 million in stock compensation expense related to
accelerated vesting of incentive equity awards previously issued to certain
members of management, $1.5 million in compensation expense related to a
disbursement made to employees under an Incentive Plan and $1.4 million in cash
bonuses and legal, accounting and other fees related to the transactions.

18. SELECTED QUARTERLY DATA (UNAUDITED)

<Table>
<Caption>
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------

2001
Net sales.......................................... $88,877 $91,767 $92,503 $ 83,554
Operating income................................... 4,597 6,109 7,924 803
Income (loss)...................................... (3,104) 747 (186) (3,514)
2000
Net sales.......................................... $62,089 $65,274 $63,363 $ 75,107
Operating income................................... 6,334 6,929 5,719 2,876
Income (loss) before extraordinary loss............ 937 827 117 (2,717)
Income (loss)...................................... (3,891) 827 117 (2,717)
</Table>

F-24

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. OTHER FINANCIAL INFORMATION

The Company is a holding company with no independent assets or operations.
Full separate financial statements of its 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 as of December 31, 2001,
2000 and 1999, respectively of the Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries are below.

The following sets forth the financial data at December 31, 2001 and for
the year then ended.

<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------ ------------- ------ ------------ -----

STATEMENT OF OPERATIONS DATA FOR THE
YEAR ENDED DECEMBER 31, 2001:
Net sales............................... $313,689 $43,012 $ -- $ -- $356,701
Cost of goods sold...................... 226,901 31,792 -- -- 259,253
-------- ------- -------- --------- --------
Gross profit............................ 86,228 11,220 -- -- 97,448
Selling, general, and administrative
expenses.............................. 59,180 10,941 7,894 -- 78,015
-------- ------- -------- --------- --------
Operating income........................ 27,048 279 (7,894) -- 19,433
Equity in undistributed earnings of
subsidiaries.......................... (1,656) -- (1,832) 3,488 --
Interest expense........................ (24,701) (1,174) (1,115) -- (26,990)
-------- ------- -------- --------- --------
Income (loss) before extraordinary items
and income taxes...................... $ 691 $ (895) $(10,841) $ 3,488 $ (7,557)
======== ======= ======== ========= ========
BALANCE SHEET DATA:
Assets:
Current assets.......................... $ 83,234 $20,412 $ 17,286 $ (2,304) $118,628
Property, plant and equipment, net...... 57,929 11,667 425 -- 70,021
Goodwill, net........................... 146,570 5,293 136 -- 151,999
Deferred financing costs, net........... 8,449 -- 495 -- 8,944
Other assets............................ 644 54 268,677 (268,677) 698
-------- ------- -------- --------- --------
Total assets............................ $296,826 $37,426 $287,019 $(270,981) $350,290
======== ======= ======== ========= ========
Liabilities and stockholders' equity:
Current liabilities..................... $ 41,051 $11,374 $ 16,481 $ (2,281) $ 66,625
Long-term liabilities................... 223,221 19,631 218,112 (221,357) 239,607
Total stockholders' equity.............. 32,554 6,421 52,426 (47,343) 44,058
-------- ------- -------- --------- --------
Total liabilities and stockholders'
equity................................ $296,826 $37,426 $287,019 $(270,981) $350,290
======== ======= ======== ========= ========
</Table>

F-25

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. OTHER FINANCIAL INFORMATION (CONTINUED)

<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------ ------------- ------ ------------ -----

STATEMENT OF CASH FLOWS DATA
OPERATING ACTIVITIES
Net income (loss)....................... $ 458 $(1,077) (8,925) $3,487 $ (6,057)
Depreciation and amortization........... 17,538 1,595 129 -- 19,262
Deferred income taxes................... (922) -- -- (922)
Foreign exchange losses................. -- 458 -- -- 458
Amortization of deferred financing
costs................................. 1,303 -- 60 -- 1,363
Amortization of bond discount........... -- -- 132 -- 132
Changes in operating assets and
liabilities........................... 888 1,428 2,019 -- 4,335
-------- ------- ------- ------ --------
Net cash provided by (used in) operating
activities............................ 19,265 2,404 (6,585) 3,487 18,571
INVESTING ACTIVITIES
Acquisition of business................. (6,388) (1,737) (136) (8,261)
Purchase of property, plant &
equipment............................. (5,693) (1,996) (351) -- (8,040)
-------- ------- ------- ------ --------
Net cash used in investing activities... (12,081) (3,733) (487) -- (16,301)
FINANCING ACTIVITIES
Capital contributions................... -- -- 400 -- 400
Payments on acquisition note payable.... -- -- -- -- --
Proceeds from long term debt............ -- 1,273 -- -- 1,273
Payments on long term debt.............. (200) -- -- -- (200)
Deferred financing costs................ -- -- (404) -- (404)
Payments on capital leases.............. (255) -- -- -- (255)
Net proceeds from revolving credit
facilities............................ -- (974) 5,512 -- 4,538
-------- ------- ------- ------ --------
Net cash provided by (used in) financing
activities............................ (455) 299 5,508 -- 5,352
Effect of foreign currency changes on
cash.................................. -- (46) -- -- (46)
-------- ------- ------- ------ --------
Net decrease in cash.................... 6,729 (1,076) (1,564) 3,487 7,576
Cash and cash equivalents, beginning of
period................................ 4,226 2,218 1,564 -- 8,008
-------- ------- ------- ------ --------
Cash and cash equivalents, end of
period................................ $ 10,955 $ 1,142 $ -- $3,487 $ 15,584
======== ======= ======= ====== ========
</Table>

F-26

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. OTHER FINANCIAL INFORMATION (CONTINUED)

The following sets forth the financial data at December 31, 2000 and for
the year then ended.

<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------ ------------- ------ ------------ -----

STATEMENT OF OPERATIONS DATA:
Net sales............................... $249,488 $16,345 $ -- $ -- $265,833
Cost of goods sold...................... 176,055 10,338 -- -- 186,393
-------- ------- -------- --------- --------
Gross profit............................ 73,433 6,007 -- -- 79,440
Selling, general, and administrative
expenses.............................. 46,994 4,316 6,272 -- 57,582
-------- ------- -------- --------- --------
Operating income........................ 26,439 1,691 (6,272) -- 21,858
Equity in undistributed earnings of
subsidiaries.......................... -- -- 537 (537) --
Interest expense, net................... (18,106) (346) (2,824) -- (21,276)
-------- ------- -------- --------- --------
Income (loss) before income taxes and
extraordinary loss.................... $ 8,333 $ 1,345 $ (8,559) $ (537) $ 582
======== ======= ======== ========= ========
BALANCE SHEET DATA:
Assets:
Current assets.......................... $114,308 $22,807 $ 35,797 $ (58,008) $114,904
Property, plant and equipment, net...... 59,927 11,137 203 -- 71,267
Goodwill, net........................... 152,680 4,217 -- -- 156,897
Deferred financing costs, net........... 9,752 -- 151 -- 9,903
Other assets............................ 2,537 264 267,595 (268,338) 2,058
-------- ------- -------- --------- --------
Total assets............................ $339,204 $38,425 $303,746 $(326,346) $355,029
======== ======= ======== ========= ========
Liabilities and stockholders' equity:
Current liabilities..................... $ 74,255 $25,956 $ 20,356 $ (40,656) $ 62,559
Long-term liabilities................... 222,856 -- 233,864 (232,864) 241,208
Total stockholders' equity.............. 42,093 12,469 49,526 (52,826) 51,262
-------- ------- -------- --------- --------
Total liabilities and stockholders'
equity................................ $339,204 $38,425 $303,746 $(326,346) $355,029
======== ======= ======== ========= ========
</Table>

F-27

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. OTHER FINANCIAL INFORMATION (CONTINUED)

<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------ ------------- ------ ------------ -----

STATEMENT OF CASH FLOWS DATA
OPERATING ACTIVITIES
Net income (loss)....................... $ 796 $1,104 $(7,027) $(537) $ (5,664)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 13,265 286 55 -- 13,606
Deferred income taxes................. (546) -- (282) (828)
Amortization of deferred financing
costs.............................. 1,356 -- -- -- 1356
Foreign exchange gains................ -- (495) -- -- (495)
Amortization of bond discount......... -- -- 80 -- 80
Extraordinary losses.................. 4,828 -- -- -- 4,828
Changes in operating assets and
liabilities (net of effect of
acquired companies)................ (530) (617) (583) -- (1,729)
--------- ------ ------- ----- ---------
Net cash provided by operating
activities............................ 19,169 279 (7,757) (537) 11,154
INVESTING ACTIVITIES
Acquisition of business, net of acquired
cash.................................. (96,801) 1,994 -- (94,807)
Purchase of property, plant, and
equipment............................. (4,332) (205) (259) -- (4,796)
--------- ------ ------- ----- ---------
Net cash used in investing activities... (101,133) 1,789 (259) -- (99,603)
FINANCING ACTIVITIES
Capital contributions................... -- -- 100 -- 100
Net proceeds from issuance of long term
debt.................................. 148,932 -- -- -- 148,932
Net proceeds from revolving credit
facilities............................ 66,533 (181) (1,000) -- 65,352
Deferred financing costs................ (7,043) -- -- -- (7,043)
Payments on acquisition notes payable... (1,200) -- -- -- (1,200)
Payments on capital lease obligations... (272) -- -- -- (272)
Payments on long term debt.............. (126,250) -- -- -- (126,250)
--------- ------ ------- ----- ---------
Net cash provided by financing
activities............................ 80,700 (181) (900) -- 79,619
Effect of exchange rate changes on
cash.................................. (333) 58 108 -- (167)
--------- ------ ------- ----- ---------
Net increase (decrease) in cash and cash
equivalents........................... (1,597) 1,945 (8,808) (537) (8,997)
Cash and cash equivalents at beginning
of year............................... 6,297 336 10,372 -- 17,005
--------- ------ ------- ----- ---------
Cash and cash equivalents at end of
year.................................. $ 4,700 $2,281 $ 1,564 $(537) $ 8,008
========= ====== ======= ===== =========
</Table>

F-28

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. OTHER FINANCIAL INFORMATION (CONTINUED)

The following sets forth the financial data at December 31, 1999 and for
the year then ended.

<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------ ------------- ------ ------------ -----

STATEMENT OF OPERATIONS DATA:
Net sales.............................. $233,659 $ 9,614 $ -- $ -- $243,273
Cost of goods sold..................... 160,868 6,747 800 -- 168,415
-------- ------- -------- --------- --------
Gross profit (loss).................... 72,791 2,867 (800) -- 74,858
Selling, general, and administrative
expenses............................. 42,674 2,210 17,619 -- 62,503
-------- ------- -------- --------- --------
Operating income (loss)................ 30,117 657 (18,419) -- 12,355
Equity in undistributed earnings....... -- -- 7,585 (7,585) --
Interest expense, net.................. (14,304) (149) (623) -- (15,076)
-------- ------- -------- --------- --------
Income (loss) before income taxes and
extraordinary loss................... $ 15,813 $ 508 $(11,457) $ (7,585) $ (2,721)
======== ======= ======== ========= ========
</Table>

F-29

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. OTHER FINANCIAL INFORMATION (CONTINUED)

<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES PARENT ELIMINATIONS TOTAL
------------ ------------- ------ ------------ -----

STATEMENT OF CASH FLOWS DATA
OPERATING ACTIVITIES
Net income (loss)....................... $ 7,117 $ 463 $(7,989) $(7,585) $ (7,994)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 10,836 129 -- -- 10,965
Deferred income taxes................. (557) -- 757 -- 200
Compensation expense on management
incentive plan..................... -- -- 13,746 -- 13,746
Amortization of deferred financing
costs.............................. 1,185 -- -- -- 1,185
Extraordinary losses.................. 1,055 -- -- -- 1,055
Changes in operating assets and
liabilities (net of effect of
acquired companies)................ (4,421) (323) (3,462) -- (8,206)
-------- ------- ------- ------- --------
Net cash provided by operating
activities............................ 15,215 269 3,052 (7,585) 10,951
INVESTING ACTIVITIES
Acquisition of business, net of acquired
cash.................................. -- -- (15,769) -- (15,769)
Purchase of property, plant and
equipment............................. (5,908) (372) -- -- (6,280)
-------- ------- ------- ------- --------
Net cash used in investing activities... (5,908) (372) (15,769) -- (22,049)
FINANCING ACTIVITIES
Capital contributions................... -- -- 55 -- 55
Net proceeds from revolving credit
facilities............................ -- 201 27,000 -- 27,201
Deferred financing costs................ -- -- (4,041) -- (4,041)
Payments on acquisition notes payable... (900) -- -- -- (900)
Payments on capital lease obligations... (194) -- -- -- (194)
-------- ------- ------- ------- --------
Net cash provided by (used in) financing
activities............................ (1,094) 201 23,014 -- 22,121
Effect of exchange rate changes on
cash.................................. 221 (102) -- -- 119
-------- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents........................... 8,434 (4) 10,297 (7,585) 11,142
Cash and cash equivalents at beginning
of year............................... 5,448 340 75 -- 5,863
-------- ------- ------- ------- --------
Cash and cash equivalents at end of
year.................................. $ 13,882 $ 336 $10,372 $(7,585) $ 17,005
======== ======= ======= ======= ========
</Table>

F-30

ANNUAL REPORT ON FORM 10-K

ITEMS 14(A) AND 14(C)

EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

3.1 Certificate of Incorporation Sovereign Specialty Chemicals,
Inc., incorporated by reference to the Company's
Registration Statement on Form S-8 as filed on January 28,
2000*
3.2 By-Laws of Sovereign Specialty Chemicals, Inc., incorporated
by reference to the Company's Registration Statement on Form
S-8 as filed on January 28, 2000*
4.1 Amended and Restated Credit Agreement, dated as of April 6,
2000 incorporated by reference to the Company's registration
Statement on Form S-4 as filed on May 12, 2000*
4.1A Amendment No. 1 and Waiver, dated October 30, 2000, among
Sovereign Specialty Chemicals, Inc., the Guarantors and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P.
Morgan Securities Inc. and JPMorgan Chase Bank (formerly the
Chase Manhattan Bank) as filed on Form 8-K/A as filed on
November 14, 2000 and incorporated by reference herein*
4.1B Amendment No. 2, dated January 26, 2001, among Sovereign
Specialty Chemicals, Inc., the Guarantors and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities
Inc. and JPMorgan Chase Bank (formerly the Chase Manhattan
Bank) as filed on Form 10-K/A as filed on June 20, 2001 and
incorporated by reference herein*
4.1C Amendment No. 3, dated March 1, 2002 among Sovereign
Specialty Chemicals, Inc., the Guarantors and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities
Inc. and JPMorgan Chase Bank (formerly the Chase Manhattan
Bank)
4.2 Amended and Restated Shareholders Agreement, dated May 12,
2000 between and among Sovereign Specialty Chemicals, Inc.,
SSCI Investors LLC and the Shareholders listed on Schedule I
thereto, incorporated by reference to the Company's
Registration Statement on Form S-4 as filed on May 12, 2000
(Registration No. 333-36898)*
4.3 Amended and Restated Shareholders Agreement, dated December
14, 1999, by and among Sovereign Specialty Chemicals, Inc.
SSCI Investors LLC, and Sovereign Specialty Chemicals L.P.
as filed on Form 10-K 405 as filed on March 27, 2001 and
incorporated by reference herein*
4.3A Amendment No. 1 to Amended and Restated Shareholders
Agreement dated December 14, 1999, by and among Sovereign
Specialty Chemicals, Inc., SSCI Investors LLC, and Sovereign
Specialty Chemicals, L.P. as filed on Form 10-K 405 as filed
on March 27, 2001 and incorporated by reference herein*
4.4 Indenture dated March 29, 2000 among Sovereign Specialty
Chemicals, Inc., the Guarantors and The Bank of New York, as
trustee. Incorporated by reference to exhibit 4.4 of the
Company's Registration Statement on Form S-4 filed on May
12, 2000 (Registration No. 333-36898)*
</Table>

E-1

EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

4.5 Forms of 11 7/8% Senior Subordinated Notes due 2010, Series
A and Series B Notes (contained in Exhibit 4.4 as Exhibit A
and B thereto, respectively). Incorporated by reference to
exhibit 4.5 of the Company's Registration Statement on Form
S-4 filed on May 12, 2000 (Registration No. 333-36898)*
4.6 Form of Guarantee (contained in Exhibit 4.4 as Exhibit A and
B thereto). Incorporated by reference to exhibit 4.6 of the
Company's Registration Statement on Form S-4 filed on May
12, 2000 (Registration No. 333-36898)*
4.7 Registration Rights Agreement dated March 29, 2000 among
Sovereign Specialty Chemicals, Inc., the Guarantors, J.P.
Morgan Securities Inc., Merrill Lynch, Pierce Fenner & Smith
Incorporated and Chase Securities Inc. Incorporated by
reference to exhibit 4.7 of the Company's Registration
Statement on Form S-4 filed on May 12, 2000 (Registration
No. 333-36898)*
4.8 First Supplemental Indenture dated as of March 22, 2001
among Sovereign Specialty Chemicals Inc., the Guarantor
party thereto and the Bank of New York, as trustee as filed
on Form 10-K 405 as filed on March 27, 2001 and incorporated
by reference herein*
10.1 Employment Agreement, dated December 29, 1999 between
Sovereign Specialty Chemicals, Inc. and Robert B. Covalt as
filed on Form 10-K 405 as filed on March 27, 2001 and
incorporated by reference herein*
10.1A First Amendment to Employment Agreement between Sovereign
Specialty Chemicals, Inc. and Robert B. Covalt, dated
January 2, 2000 as filed on Form 10-K 405 as filed on March
27, 2001 and incorporated by reference herein*
10.2 Employment Agreement, dated February 11, 2002 between
Sovereign Specialty Chemicals and John R. Knox
10.3 Employment Agreement, dated December 29, 1999 between
Sovereign Specialty Chemicals, Inc. and Peter Longo as filed
on Form 10-K 405 as filed on March 27, 2001 and incorporated
by reference herein*
10.4 Employment Agreement, dated January 7, 2002 between
Sovereign Specialty Chemicals and Karl D. Loos
10.5 Employment Agreement, dated December 29, 1999 between
Sovereign Specialty Chemicals, Inc. and John Mellett as
filed on Form 10-K 405 as filed on March 27, 2001 and
incorporated by reference herein*
10.6 Sovereign Specialty Chemicals, Inc. Management Incentive
Compensation Plan dated January 1, 2000 as filed on Form
10-K 405 as filed on March 27, 2001 and incorporated by
reference herein*
10.7 Sovereign Specialty Chemicals, Inc. Stock Option Plan, dated
December 29, 1999 as filed on Form 10-K 405 as filed on
March 27, 2001 and incorporated by reference herein*
10.8 Non-qualified Stock Option Agreement between Sovereign
Specialty Chemicals, Inc. and Robert B. Covalt, dated
December 31, 1999 as filed on Form 10-K 405 as filed on
March 27, 2001 and incorporated by reference herein*
10.8A First Amendment to Non-qualified Stock Option Agreement
between Sovereign Specialty Chemicals, Inc. and Robert B.
Covalt, dated January 4, 2000 as filed on Form 10-K 405 as
filed on March 27, 2001 and incorporated by reference
herein*
</Table>

E-2

EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

10.9 Sovereign Specialty Chemicals, Inc. Employee Stock Purchase
Plan, incorporated by reference to the Company's
Registration Statement on Form S-8 as filed on January 28,
2000*
10.10 Non-qualified stock option Agreement between Sovereign
Specialty Chemicals, Inc. and the individuals listed in
Schedule 1 thereto, dated December 29, 1999 as filed on Form
10-K 405 as filed on March 27, 2001 and incorporated by
reference herein*
10.14 Asset Purchase Agreement dated March 31, 1996 among The
BFGoodrich Company, Sovereign Engineered Adhesives, L.L.C.
and the Parent Partnership*+
10.15 Purchase Agreement, dated August 19, 1996 among The
Sherwin-Williams Company, Pierce & Stevens Canada, Inc., the
Parent Partnership and P&S Holdings, Inc.*+
10.16 Stock Purchase Agreement dated May 22, 1997 between Laporte
Inc. and the Parent Partnership*+
10.17 Closing Agreement dated August 5, 1997 between Laporte Inc.,
the Parent Partnership and the Company*+
10.20 Stock Purchase Agreement, dated March 5, 1998, by among
Burke Industries, Inc., Mercer and the Company+*
10.21 Stock Purchase Agreement by and among Mini Crown Funding
Corp (Buyer), Sovereign Specialty Chemicals, Inc. (Parent),
Imperial Adhesives Inc. and NS Group Inc. (Seller) as
amended dated October 11, 2000. incorporated by reference to
the Company's Form 8-K/A dated October 26, 2000*
10.22 Business and Share Agreement for the sale of a Specialty
Adhesives business dated October 31, 2000, among Croda
Holdings LLC, Croda Adhesives do Brasil Ltda, and Sovereign
Specialty Chemicals, Inc. incorporated by reference to the
Company's Form 8-K/A dated November 14, 2000*
21.1 Subsidiaries of the Company and the Guarantors
23.2 Consent of Ernst & Young LLP (independent auditors)
99.1 Cautionary Statements Regarding Forward Looking Statements
</Table>

- -------------------------
+ Incorporated by reference to the Company's Registration Statement on Form S-4,
as amended (Registration No. 333-39373)

* The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule to such agreement upon the request of the Commission in
accordance with Item 601(b)(2) of Regulation S-K.

E-3

SOVEREIGN SPECIALTY CHEMICALS, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

(DOLLARS IN THOUSANDS)

<Table>
<Caption>
ADDITIONS
BALANCE AT -----------------------
BEGINNING CHARGED TO CHARGED TO
OF COSTS AND OTHER BALANCE AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- --------------

Year ended December 31, 1999
Reserve and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts....................... $ 528 $ 556 $ -- $ 354(1) $ 730
Reserve for inventory
obsolescence................... 730 223 -- 252(1) 709
Year ended December 31, 2000
Reserve and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts....................... 730 585 616(2) 661(1) 1,270
Reserve for inventory
obsolescence................... 709 1,127 380(2) 1,019(1) 1,197
Plant closure reserves............ -- -- 852 -- 852
Year ended December 31, 2001
Reserve and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts....................... 1,270 694 -- 353(1) 1,611
Reserve for inventory
obsolescence................... 1,197 2,549 -- 1,863(1) 1,883
Plant closure reserves............ 852 -- 1,310(2) (2,102) 60
</Table>

- -------------------------
(1) Accounts written off, net of recoveries.
(2) Balances added relative to acquisitions.

S-1