SOVEREIGN SPECIALTY CHEMICALS INC - 10-Q Quarterly Report

Back to GetFilings.com

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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-Q
---------------------------

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to
---------------------------

Commission File Number 333-39373

SOVEREIGN SPECIALTY CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

DELAWARE
36-4176637
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)

225 W. Washington St. - Ste. 1450, Chicago, IL 60606
(Address of Principal Executive Offices)
(Zip Code)

Registrant's Telephone Number, Including Area Code: (312) 223-7970
Registrant's Web Address: sovereignsc.com

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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

On July 31, 2003, the registrant had 1,441,189 shares of voting common
stock outstanding and 730,182 shares of non-voting common stock outstanding.

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

SOVEREIGN SPECIALTY CHEMICALS, INC.

FORM 10-Q

TABLE OF CONTENTS

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to consolidated financial statements.

1

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements.

2

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements.

3

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The consolidated financial statements as of and for the periods ended June
30, 2003 and 2002, respectively, include the accounts of Sovereign Specialty
Chemicals, Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.

The 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.

INTERIM FINANCIAL INFORMATION

The unaudited interim consolidated financial statements of the Company, in
the opinion of management, reflect all necessary adjustments, consisting only of
normal recurring adjustments, for a fair presentation of results as of the dates
and for the interim periods covered by the financial statements. The results for
the interim periods are not necessarily indicative of the results of operations
to be expected for the entire year or any other interim period.

The unaudited interim consolidated financial statements of the Company have
been prepared in conformity with generally accepted accounting principles and
reporting practices. Certain information in footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission; however, the Company
believes the disclosures are adequate to make the information not misleading.
The unaudited interim consolidated financial statements contained herein should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to current
year presentation.

2. PLANT CLOSURE COSTS

In November 2002, the Company announced the closure of two of its
higher-cost manufacturing plants in 2003. At the time of the announcement, the
Cincinnati, Ohio plant employed 118 people, and primarily produced water-borne
adhesives sold to the industrial market. Production from this plant is being
transferred to the Company's plants in Greenville, South Carolina, and Carol
Stream and Plainfield, Illinois progressively over the first nine months of
2003. Some of the technical, sales support, customer service, and administrative
functions will be transitioned to other Company locations. Approximately 88
employees, in both manufacturing and support functions will be terminated as
part of the closure.

At the time of the November 2002 announcement, the Kapellen, Belgium plant
employed 24 people and produced water-borne and hot-melt adhesives for the
European packaging and converting market. This production has been materially
shifted to the Newark, United Kingdom plant during the first half of 2003.
Approximately 14 employees primarily in manufacturing functions will be
terminated as part of the plant closure. A separate Kapellen office will
continue to provide sales, technical and distribution support to continental
Europe.

4

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEPTEMBER 30, 2002
(Dollars in Thousands)

These closures include the termination of certain existing employees, the
abandonment or sale at a loss of certain fixed assets, the disposal of certain
inventory and the sale of certain buildings. The Company expects the closure of
both plants to be completed by the end of the third quarter of 2003. As a result
of the announced closures the Company recorded a charge of approximately $4.1
million in the fourth quarter of 2002 included in selling, general and
administrative expense, relative to the following costs: termination benefits of
$1.6 million, loss on fixed assets of $1.3 million and other exit costs of $1.2
million. These costs will be incurred over the next several quarters and beyond
the dates of the closures and $2.5 million is included in accrued liabilities on
the balance sheet.

The following provides an analysis of the changes in the plant closure
liability for the six months ended June 30, 2003:

Liability for plant closures, balance at January 1, 2003.... $4,066
Add: Adjustment to severance liability for Kapellan......... 393
Less: Plant closure costs incurred six months ended June 30,
2003...................................................... (819)
------
Total liability for plant closures, balance at June 30,
2003...................................................... $3,640
======

3. INVENTORIES

Inventories are summarized as follows:

4. COMPREHENSIVE LOSS

For the three and six months ended June 30, 2003 and 2002, respectively,
the calculation of comprehensive loss is as follows:

5. SEGMENT REPORTING

The Company has two reportable segments: the Commercial segment and the
Construction segment. Applications sold by the Commercial segment include
flexible packaging adhesives and coatings for a number of applications, high
performance, specialty adhesives and coatings for automotive, aerospace,
manufactured

5

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEPTEMBER 30, 2002
(Dollars in Thousands)

housing and textile applications. Through the Construction segment, the Company
manufactures and sells housing repair, remodeling and construction sealants and
adhesives used in exterior and interior applications.

The Company evaluates performance and defines segment profit based upon
operating income. The reportable segments' accounting policies are the same as
those of the Company as a whole. 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 $2.2
million and $4.6 million for the three and six months ended June 30, 2003,
respectively; and $2.8 million and $5.5 million for the three and six months
ended June 30, 2002.

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

A reconciliation of the reportable segments to consolidated operating
income is as follows:

6. GOODWILL

On January 1, 2002, the Company adopted SFAS No. 142. The adoption of SFAS
No. 142 eliminated the amortization of goodwill beginning January 1, 2002 and
instead required that goodwill be tested annually for impairment. In connection
with our adoption of SFAS No. 142, the transitional intangible asset impairment
test required an impairment of goodwill charge of $27.6 million ($17.1 million,
net of income tax

6

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEPTEMBER 30, 2002
(Dollars in Thousands)

benefit). The loss was recorded as a cumulative effect of change in accounting
principle. The impairment loss and write-down of goodwill was recorded relative
to the Company's European reporting unit of its Commercial Segment. Our
assessment of the goodwill impairment charge for this reporting unit was
reflective of both lower operating performance in Europe and the use of lower
market multiples. The carrying value of goodwill associated with our other
reporting units was not impaired.

7. OTHER FINANCIAL INFORMATION

The Company is a holding company with no independent assets or operations.
Certain of the Company's subsidiaries (Guarantor Subsidiaries) have guaranteed
the Company's 11 7/8% Senior Subordinated Notes. Full separate financial
statements of the Guarantor Subsidiaries have not been presented as the
guarantors are wholly owned subsidiaries of the Company and the guarantees are
full, unconditional and joint and several. Management does not believe that
inclusion of such financial statements would be material to investors. The
unaudited financial statement data as of June 30, 2003 and 2002, respectively of
the Guarantor Subsidiaries and the non-guarantor subsidiaries are below.

THE FOLLOWING SETS FORTH THE UNAUDITED FINANCIAL DATA AT JUNE 30, 2003 AND
FOR THE THREE AND SIX MONTHS THEN ENDED.

7

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEPTEMBER 30, 2002
(Dollars in Thousands)

8

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEPTEMBER 30, 2002
(Dollars in Thousands)

9

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEPTEMBER 30, 2002
(Dollars in Thousands)

THE FOLLOWING SETS FORTH THE UNAUDITED FINANCIAL DATA AT JUNE 30, 2002 AND FOR
THE THREE AND SIX MONTHS THEN ENDED.

10

SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEPTEMBER 30, 2002
(Dollars in Thousands)

11

ITEM 2. 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 2002, we increased
annual net sales through acquisitions and internal growth from $37.8 million to
$361.1 million. 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.

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

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we continually evaluate our estimates. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

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.

Goodwill. Goodwill represents the excess of acquisition cost over the fair
value of net assets acquired and was being amortized using the straight-line
method over periods ranging from 15 to 25 years through December 31, 2001.
Accumulated amortization of goodwill was $30.1 million at December 31, 2001. On
January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets,
which eliminated the amortization of goodwill and instead required that goodwill
be tested for impairment at least annually.

Reserve for Inventory Obsolescence. Our estimated reserves for
obsolescence or unmarketable inventory is 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. We periodically
review inventory and if applicable, record additional inventory write downs. If
actual market conditions are less favorable than those projected by management
and cause usage rates to vary from those estimated, additional inventory
write-downs may be required, however these would not be expected to have a
material adverse impact on our financial statements.

12

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. Applications sold by the Commercial segment include
flexible packaging adhesives and coatings for a number of applications, high
performance specialty adhesives and coatings for automotive, aerospace,
manufactured housing, and textile 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 $2.2 million and $4.6 million for
the three and six months ended June 30, 2003, respectively; and $2.8 million and
$5.5 million for the three and six months ended June 30, 2002.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002

Net Sales. Net sales were $92.6 million and $94.9 million for the three
months ended June 30, 2003 and 2002, respectively. The second quarter 2003 net
sales level represents a decrease of $2.3 million or 2.6% from the prior year.
This decrease resulted from a decrease in net sales in the Commercial segment,
which was partially offset by gains in the Construction segment. Construction
segment sales were $34.1 million in the second quarter of 2003, up $3.0 million,
or 9.5% from the prior year reflecting sales increases in building material
applications due to the continued strength in the housing market and increased
sales to the retail do-it-yourself market. Commercial segment sales were $58.4
million in the first quarter of 2003, down $5.4 million, or 8.4% from the prior
year due to declines in a number of end markets primarily industrial
specialties, paper converting and graphic arts, particularly high-end printing
applications.

Cost of Goods Sold. Cost of goods sold was $66.7 million for the three
months ended June 30, 2003, a decrease of $0.9 million, or 1.4% over second
quarter 2002 cost of sales of $67.6 million. Gross profit for the three months
ended June 30, 2003 was $25.8 million, a decrease of $1.5 million from the
second quarter of 2002 gross profit of $27.3 million. Gross profit as a
percentage of net sales decreased in the second quarter of 2003 to 27.9% from
28.8% in the second quarter of 2002. This reduction in gross profit percentage
is related to increased raw material costs year over year of greater than six
percent. We continue to try to keep margins relatively stable despite raw
material cost increases through raw material substitutions where possible and
through selling price increases where necessary. We also have partially offset
the negative impact of raw material cost increases through reductions in
manufacturing costs year over year. The manufacturing cost reductions have been
attained through the implementation of lean manufacturing initiatives at many of
our facilities over the past twelve months.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $16.8 million for the three months ended June 30,
2003, a decrease of $0.9 million, or 5.4% from the second quarter 2002 expenses
of $17.7 million. As a percentage of net sales, selling, general and
administrative expenses decreased to 18.1% for the second quarter of 2003 from
18.6% in the second quarter of 2002. This decrease is reflective of a management
focus on internal cost containment as well as an effort to reduce professional
fees and corporate overhead costs. Included in the selling, general and
administrative costs for the three months ended June 30, 2003 are $0.4 million
of additional severance related costs related to the Kapellan plant closure
which will be completed in the third quarter of 2003. Included in the selling,
general and administrative costs for the three months ended June 30, 2002 are
$0.5 million of professional fees incurred related to the investigation of
financing alternatives.

13

Operating Income. Operating income was $9.1 million and $9.6 million for
the three months ended June 30, 2003 and 2002, respectively. Operating income as
a percentage of net sales was 9.8% and 10.2% for the three months ended June 30,
2003 and 2002, respectively. The decline in operating income is due primarily to
decreases in net sales and increased raw material costs partially offset by
reductions in manufacturing and selling, general and administrative costs as
described above.

Interest Expense. Net interest expense was $6.5 million and $6.6 million
for the three months ended June 30, 2003 and 2002, respectively. The 1.1%
decrease in interest expense was due primarily to a decrease in our average
outstanding level of variable rate debt quarter over quarter offset largely by
increased non-cash interest expense due to additional amortization of deferred
financing cost and debt discounts and a slight increase in the weighted average
interest rate on our variable rate debt to 6.0% from 5.8% in the first three
months of last year. In December 2002, we refinanced $45.1 million of borrowings
under our existing term loan under our credit agreement with $47.5 million of
borrowings under a new term loan facility. The applicable margin or "spread" on
the new term loan facility is 75 basis points higher than the applicable margin
that was in effect for the existing term loan during most of 2002. As a result,
in the absence of continued decreases in the interest rates on which our
variable rate debt is based, we will expect to have an increase in the weighted
average interest rate of our variable rate debt in 2003.

Income tax expense (benefit). Income tax expense was $1.2 million for the
three months ended June 30, 2003. Income tax expense was $1.4 million for the
same period in 2002.

Net income (loss). Net income for the quarters ended June 30, 2003 and
2002 was $1.4 million and $1.7 million, respectively. The decrease in net income
from the prior year is due to items discussed above.

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:

Net sales were $58.4 million for the three months ended June 30, 2003,
representing a $5.4 million decrease from second quarter 2002. This decrease was
due primarily to declines in a number of end markets primarily industrial
specialties, paper converting and graphic arts, particularly high-end printing
applications. Sales of product assembly and transportation related applications
decreased in the quarter but remain flat for the six months ended year over
year. Domestic net sales were $47.3 million and $52.2 million for the three
months ended June 30, 2003 and 2002, respectively. The decrease in domestic net
sales for the segment was $4.9 million with international sales declining by
$0.5 million. Segment profit was $6.3 million for the second quarter, 2003
representing a $0.9 million and 12.8% decrease from the second quarter 2002.
This was reflective of decreased net sales and raw material cost increases,
partially offset through selling price increases and raw material substitution.
Manufacturing costs have decreased year over year but have increased slightly as
a percentage of net sales. This is due to temporary cost inefficiencies in the
quarter related to the transfer of production from two facilities that are
closing by September 30, 2003 and described below. We expect that manufacturing
costs will significantly decrease year over year as we complete the transfer of
production from these facilities.

In November 2002, we announced plans for the closure in 2003 of two of our
higher-cost manufacturing plants. The Cincinnati, Ohio plant employed 118 people
at the time of the announcement, and primarily

14

produces water-borne adhesives sold to the industrial market. Production from
this plant is being transferred to our plants in Greenville, South Carolina,
Carol Stream, Illinois and Plainfield, Illinois progressively during the first
nine months of 2003. Also housed in Cincinnati are technical, sales support,
customer service, and administrative functions, some of which will be
transitioned to other of our locations. As part of the closure, approximately 88
employees in both manufacturing and support functions will be terminated in
2003.

The Kapellen, Belgium plant employed 24 people at the time of the
announcement and produces water-borne and hot-melt adhesives for the European
packaging and converting market. This production has materially been shifted to
the Newark, United Kingdom plant during the first half of 2003. A separate
Kapellen office will continue to provide sales, technical and distribution
support to continental Europe. Approximately 14 employees, primarily in
manufacturing functions, will be terminated as part of the closure in 2003.

These closures include the termination of certain existing employees, the
abandonment or sale at a loss of certain fixed assets, the disposal of certain
inventory and the sale of certain buildings. We expect the closure of both
plants to be completed by end of the third quarter of 2003. The closure of these
two plants is expected to produce annual cost savings of approximately $3.0
million when the shutdowns are complete. As a result of the announced closures,
we recorded a charge of approximately $4.1 million in the fourth quarter of 2002
relative to the following costs: termination benefits of $1.6 million, loss on
fixed assets of $1.3 million and other exit costs of $1.2 million. These costs
will be incurred over the next several quarters and beyond the dates of the
closures and approximately $2.5 million was recorded in accrued liabilities. In
the three months ended June 30, 2003, we recorded an additional charge of $0.4
million in termination related benefit adjustments related to the Kapellan
closure.

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:

Net sales for the Construction segment were $34.1 million for the quarter
ended June 30, 2003, representing a $3.0 million or 9.5% increase as compared to
the second quarter 2002. This increase in sales in 2003 was primarily due to the
sustained strength of its building materials end markets and strength at major
retail accounts. Segment profit was $4.9 million and $5.3 million for the three
months ended June 30, 2003 and 2002, respectively. The decrease in segment
profit was primarily due to decreased gross profit margin due to raw material
costs increases for which we have not been able to recover at historical margins
through increased selling prices where available. Manufacturing costs decreased
as a percentage of net sales in the current quarter, but this was more than
offset by increased raw material costs. Selling, general and administrative
expenses remained constant year over year as a percent of sales but increased in
dollars primarily as a result of increased marketing and selling expenses.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002

Net Sales. Net sales were $182.4 million and $181.7 million for the six
months ended June 30, 2003 and 2002, respectively. The net sales level
represents an increase of $0.7 million or .4% over the prior year's comparable
period. The increase resulted from gains in the Construction segment, largely
offset by decreases in net sales in the Commercial segment. Construction segment
sales were $65.3 million in the first six months

15

of 2003, up $6.7 million, or 11.4% from the prior year reflecting sales
increases in building material applications as a result of continued strength in
the housing market and increased sales to the retail do-it-yourself market.
Commercial segment sales were $117.1 million in the first six months of 2003,
down $6.0 million, or 4.9% from the prior year as a result of declines in a
number of end markets primarily paper converting and graphic arts, particularly
high-end printing applications.

Cost of Goods Sold. Cost of goods sold was $132.2 million and $130.8 for
the six months ended June 30, 2003 and 2002, respectively. This represents an
increase of $1.4 million, or 1.1% over the comparable period. Gross profit as a
percentage of net sales decreased to 27.5% from 28% for the six months ended
June 30, 2003 and 2002, respectively. This reduction in gross profit percentage
is related to increased raw material costs year over year of greater than six
percent. We continue to try to keep margins relatively stable despite raw
material cost increases through raw material substitutions and selling price
increases where possible. We have partially offset the negative impact of raw
material cost increases through reductions in manufacturing costs year over
year. This is as a result of the implementation of lean manufacturing
initiatives at many of our facilities over the past twelve months.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $34.3 million and $35.4 million for the six months
ended June 30, 2003 and 2002, respectively. This represents a decrease of $1.1
million, or 3.1% from the comparable period. As a percentage of net sales,
selling, general and administrative expenses decreased to 18.8% for the second
quarter of 2003 from 19.5% in the second quarter of 2002. This decrease is
reflective of a management focus on internal cost containment as well as an
effort to reduce professional fees and corporate overhead costs. Included in the
selling, general and administrative costs for the six months ended June 30, 2003
are $0.4 million of additional severance related costs related to the Kapellan
plant closure which will be completed in the third quarter of 2003. Included in
the selling, general and administrative costs for the six months ended June 30,
2002 are $0.5 million of professional fees incurred related to financing
alternatives and $0.4 million of costs associated with the hiring of a senior
executive.

Operating Income. Operating income was $15.9 million and $15.6 million for
the six months ended June 30, 2003 and 2002, respectively. This represents an
increase of $0.3 million or 1.9% over the comparable period. Operating income as
a percentage of net sales was 8.7% and 8.6% for the six months ended June 30,
2003 and 2002, respectively.

Interest Expense. Net interest expense was $12.8 million and $13.0 million
for the six months ended June 30, 2003 and 2002, respectively. The 1.6% decrease
in interest expense was due primarily to a decrease in our average outstanding
level of variable rate debt quarter over quarter offset largely by increased
non-cash interest expense due to additional amortization of deferred financing
cost and debt discounts and an increase in the weighted average interest rate on
our variable rate debt to 6.0% from 5.8% in the first six months of last year.
In December 2002, we refinanced $45.1 million of borrowings under our existing
term loan under our credit agreement with $47.5 million of borrowings under a
new term loan facility. The applicable margin or "spread" on the new term loan
facility is 75 basis points higher than the applicable margin that was in effect
for the existing term loan during most of 2002. As a result, in the absence of
continued decreases in the interest rates on which our variable rate debt is
based, we will expect to have an increase in the weighted average interest rate
of our variable rate debt in 2003.

Income tax expense (benefit). Income tax expense was $1.6 million and $1.2
million for the six months ended June 30, 2003 and 2002, respectively.

Net income before cumulative effect of change in accounting principle. Net
income before the cumulative effect of change in accounting principle for the
six months ended June 30, 2003 and 2002 was $1.5 million and $1.4 million,
respectively.

Cumulative effect of change in accounting principle. In connection with
Company's completion of the transitional goodwill impairment test required by
SFAS No. 142 at January 1, 2002, we recorded a $27.6 million ($17.1 million, net
of income tax benefit) goodwill impairment loss and write-down of goodwill
associated with our European reporting unit. Our assessment of our goodwill
impairment for this reporting unit

16

was reflective of both lower operating performance in Europe and the use of
lower market multiples. The carrying value of goodwill associated with our other
reporting units was not impaired.

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:

Net sales were $117.1 million and $123.0 million for the six months ended
June 30, 2003 and 2002, respectively. This represents a $5.9 million decrease
from the comparable period. This decrease was primarily a result of declines in
a number of end markets primarily paper converting and graphic arts,
particularly high-end printing applications. Domestic net sales were $93.5
million and $100.2 million for the six months ended June 30, 2003 and 2002,
respectively. The decrease in domestic net sales for the segment of $6.7 million
was offset somewhat by international sales increases of $0.7 million year over
year. Segment profit was $11.4 million and $12.3 million for the six months
ended June 30, 2003 and 2002, respectively. This was reflective of decreased net
sales, raw material cost increases, partially offset through selling price
increases and raw material substitution. Manufacturing costs have decreased year
over year but have increased slightly as a percentage of net sales. This is due
to temporary cost inefficiencies in the quarter related to the transfer of
production from two facilities that are closing by September 30, 2003 and
described below. We expect that manufacturing costs will significantly decrease
year over year as we complete the transfer of production from these facilities.
Declines in gross profit were partially offset by decreases in selling, general
and administrative expenses.

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:

Net sales for the Construction segment were $65.3 million and $58.7 million
for the six months ended June 30, 2003 and 2002, respectively. The $6.7 million
and 11.4% increase in sales in 2003 was primarily a result of the sustained
strength of its building materials end markets and strength at major retail
accounts. Segment profit increased by $0.3 million or 3.8% as a result of higher
sales volume offset largely by decreased gross profit margin due to raw material
costs increases for which we have not been able to recover through increased
selling prices. Manufacturing costs decreased as a percentage of net sales for
the six months ended June 30, 2003, but this was more than offset by the raw
material margin compression. Selling, general and

17

administrative expenses remained constant year over year as a percent of sales
but increased in dollars primarily as a result of increased marketing and
selling expenses.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for the six months ended June 30,
2003 was $2.0 million. Net income, adjusted for non-cash charges, such as
depreciation and amortization, amortization of deferred financing costs,
deferred income taxes, and foreign currency gains/losses, accounted for
approximately $7.7 million and $7.9 million of positive cash flow for the six
months ended June 30, 2003 and 2002, respectively. Cash flow provided from
operations decreased as we increased inventory levels by $3.3 million and
accounts receivable balances by $6.8 from December 31, 2002 levels. While
accounts receivable and inventory balances at June 30, 2003 ($56.8 million and
$31.8 million, respectively) are greater than at December 31, 2002, they are
significantly below the levels at June 30, 2002 ($60.1 million and $36.3
million, respectively), reflecting management's focus on working capital
management.

Net cash used in investing activities was $4.6 million and $2.5 million in
the six months ended June 30, 2003 and 2002, respectively, and resulted from
additions to property, plant and equipment. The increase year over year is
primarily one of timing of capital projects.

Net cash used in financing activities was $1.5 million for the six months
ended June 30, 2003. We have reduced our total debt level by $1.4 million in the
first six months of 2003.

Credit Facilities

Our credit agreement, as amended (Credit Agreement), provides for aggregate
borrowings of $108.6 million. The Credit Agreement includes (1) a $50.0 million
revolving credit facility (Credit Facility) (including letters of credit of up
to $20 million), (2) Term Loan A with remaining outstanding balance of $11.1
million at June 30, 2003 and no capacity to borrow additional funds under that
facility and (3) Term Loan B with an aggregate principal balance of $47.5
million at June 30, 2003 and no additional capacity to borrow additional funds
under that facility.

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 June 30, 2003, we had $12.4 million outstanding and $35.5 million
in available borrowings under the Credit Facility (net of approximately $2.1
million outstanding letters of credit). Our effective interest rate for our
borrowings under the Credit Agreement was 5.9% and 5.8%, for the six months
ended June 30, 2003 and 2002, respectively.

Borrowings under the 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.

On December 20, 2002 we amended our Credit Agreement and we refinanced
$45.1 million of the $56.3 Term Loan A outstanding balance at that date with a
new six year, $47.5 million Term Loan B facility. The Term Loan B includes a
$2.4 million discount (representing a fee) which is being amortized through
interest expense over the life of the facility. The Term Loan B will mature
December 30, 2007. Scheduled principal repayment under the Term Loan B facility
for the years ending December 31, 2003 through 2006 will be $0.5 million per
year payable quarterly. The remaining balance under Term Loan B, will be repaid
in 2007. We have three scheduled quarterly payments in 2007 at the same rate of
$0.5 million per year and a final payment due for the balance outstanding at
December 30, 2007. There is no scheduled amortization for the $11.1 million
outstanding under the Term Loan A for the years ending December 31, 2003 and
2004. The remaining $11.1 million drawn under Term Loan A will be repaid in
2005.

Borrowings under the Credit Agreement bear interest at our option at a rate
per annum equal 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 varies by facility. For amounts drawn under the
Term Loan A and the Credit Facility the Eurodollar margin is 3.75% and the base
rate margin is 2.75%. For amounts drawn under the Term

18

Loan B facility, the Eurodollar margin is 4.50% and the base rate margin is
3.50%. Amounts outstanding under the Credit Facility, Term Loan A and Term Loan
B bear interest, payable quarterly in the case of base rate advances and payable
at the end of the relevant interest period of one, two, three or six months (or
quarterly in certain cases) for all Eurodollar advances. Our credit ratings do
not affect the interest rates for our borrowings under our Credit Agreement.

Our Singapore-based sales office has a facility providing for borrowings up
to approximately $1.4 million in U.S. dollars and is secured by a letter of
credit. Interest is payable at United States prime plus 1.0%. At June 30, 2003,
approximately $1.4 million was drawn on the facility.

At June 30, 2003, we had $12.4 million drawn under our Credit Facility, and
approximately $2.1 million of outstanding letters of credit. At June 30, 2003,
we had approximately $35.5 million of borrowing availability under the Credit
Facility.

Our Credit Agreement obligates 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 Agreement contains
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. In addition, we must also comply with
specified financial ratios and tests including maintenance of maximum total debt
to EBITDA, maximum senior debt to EBITDA, minimum EBITDA to interest expense,
and minimum asset coverage ratios (in each case, as defined in our credit
agreement) and other covenants at the end of each fiscal quarter. The covenant
ratio calculations in our credit agreement utilize non GAAP financial measures
that are specifically defined in the Credit Agreement. At June 30, 2003, we were
in compliance with all financial and other covenants as prescribed by the Credit
Agreement.

Each of these covenants continues for the term of the Credit Agreement
either at the latest level, or a more restrictive level. Deterioration in our
current operating performance could result in our failure to satisfy our
financial covenants. 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. The
Credit Facility, Term Loan A and Term Loan B are secured by a security interest
in substantially all of our subsidiaries' assets, including pledges of the
common stock of our subsidiaries. In addition, the Credit Facility, Term Loan A
and Term Loan B are guaranteed by our subsidiaries. Some of our guarantees and
pledges are in support of only offshore advances, if any, under the Credit
Facility.

Senior Subordinated Notes

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 members of our current management team. 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% Senior Subordinated 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% Senior Subordinated Notes for an aggregate purchase
price of approximately $127.4 million which was financed with borrowings under
the Credit Agreement. 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

19

repay amounts drawn under our Credit Facilities for the repurchase of the 9 1/2%
Senior Subordinated Notes and for general corporate purposes.

At June 30, 2003 the aggregate principal amount of 11 7/8% Senior
Subordinated Notes was $149.3 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 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 11 7/8% Senior Subordinated Notes are our general obligations,
subordinated in right of payment to all existing and future senior debt and are
guaranteed by certain of 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. under which we
receive advisory and consulting services provided by AEA Investors LLC, the
successor company to AEA Investors Inc. and sometimes referred to in this report
collectively with its successor as AEA Investors. 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 Agreement, as well
as other indebtedness and obligations, represent significant obligations for us.
Our remaining liquidity demands relate to capital expenditures and working
capital needs. Our capital expenditures were approximately $6.6 million in 2002
and management currently anticipates capital expenditures will be approximately
$8.0 million in 2003 and approximately $8.5 million in 2004. While we engage in
ongoing evaluations of, and discussions with, third parties regarding possible
acquisitions, as of the date of this report, we have no current expectations
with respect to any acquisitions. Exclusive of the impact of any future
acquisitions, joint venture arrangements or similar transactions, our 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, 2002 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.

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

(1) Represent principal amounts, but not interest.

(2) Represents minimum future payments.

Our primary sources of liquidity are cash flows from operations and
borrowings under our Credit Agreement. Based on current and anticipated
financial performance, we expect that cash flow from operations and borrowings
under our Credit Agreement 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 11 7/8% Senior
Subordinated Notes, the Credit Agreement and other indebtedness

20

through June 30, 2004. 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

After declining through early 2002, the costs of certain of our raw
materials have increased. We expect raw material costs to have largely
stabilized in the short term by mid 2003. In an attempt to offset these
increases we raised selling prices selectively and executed raw material
substitutions where possible. Historically, in aggregate, price increases have
been sufficient to recover new raw material cost increases, but not to maintain
margins. There can be no assurance as to our ability to recover additional cost
increases through price increases 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 or from plant closures.

- 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 July 31, 2003. 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
incorporated by reference into this report. We undertake no obligation to revise
or update these forward-looking statements to reflect events or circumstances
that arise after July 31, 2003 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 3. 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.

21

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 June 30, 2003 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 variable rate debt. We
utilize a combination of variable rate debt, primarily under our Credit
Agreement, and fixed rate debt, primarily under our 11 7/8% Senior Subordinated
Notes. Our Credit Agreement requires 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 June 30, 2003
approximately 69% 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 eurodollar borrowing
rate, while the fixed rate debt is primarily exposed to changes in fair value
from changes in medium term interest rates. Based on our indebtedness at June
30, 2003, we estimate that an immediate 100 basis point rise in interest rates
would result in $0.7 million increase in interest expense for the period July 1,
2003 to June 30, 2004. For purposes of this estimate, we have assumed a constant
level of variable rate debt and a constant interest rate over the period equal
to those levels existing on June 30, 2003.

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. 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 from $1.65/L1.00 to $1.48/L1.00
at June 30, 2003 would result in a decrease in our earnings before taxes of $1.7
million for the period from July 1, 2003 to June 30, 2004.

COMMODITIES RISK

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.

We use a broad variety of specialty and some commodity raw materials in our
manufacturing processes. In 2002, we purchased about $195 million of raw
materials including acrylic monomers and polymers, resins, natural and synthetic
rubbers, solvents, and urethanes. Although these raw materials are derived from
crude oil or natural gas, the raw materials are several manufacturing steps
removed (downstream) from these basic feedstocks. The price of oil and gas will
affect our costs for these raw materials both upward and downward, but the
magnitude of change is diluted.

We typically purchase strategic raw materials on a contract basis to
moderate price changes during the contract period, however, prices can change
significantly at the end of contract periods if supply shortages, feedstock cost
pressures, or other unforeseen market events occur. Commodity raw materials are
available from numerous independent suppliers, and specialty raw materials are
usually available from several suppliers.

We expect the cost of many raw materials to increase in the long term. In
aggregate, we have had some success historically in passing on raw material cost
increases through price increases to our customers over time under certain
competitive market conditions, although not always in levels adequate to
maintain margins, but we may not be able to do so in the future.

22

These sensitivity analyses are estimates and are based on certain
simplifying assumptions. These analyses 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 materially exceed the
amounts indicated above.

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to us
(including our consolidated subsidiaries) required to be included in our
periodic SEC filings.

There were no changes in our internal controls over financial reporting
that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.

23

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99.1 -- Cautionary Statements for Regarding Forward Looking
Statements incorporated by reference to Exhibit 99.1 to
the Company's Form 10-K dated March 14, 2003.
31.1 -- Certifications as required by Section 302(a) of the
Sarbanes-Oxley Act of 2002.
31.2 -- Certifications as required by Section 302(a) of the
Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On May 5, 2003, we filed a current report of Form 8-K, Item 12. Disclosure
of Results of Operations and Financial Condition, disclosing that we had issued
a press release on May 5, 2003 to provide an update on our operating results for
the quarter ended May 31, 2003.

24

SOVEREIGN SPECIALTY CHEMICALS, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

SOVEREIGN SPECIALTY CHEMICALS, INC.

/s/ NORMAN E. WELLS JR.
--------------------------------------
Norman E. Wells Jr., Chief Executive
Officer
(Principal Executive Officer)

/s/ TERRY D. SMITH
--------------------------------------
Terry D. Smith, Vice President, Chief
Financial Officer
Date: July 31, 2003 (Principal Financial Officer)

25