<PAGE>   1
 
================================================================================
 
                       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 March 31, 1998
 
                                       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. 2200, Chicago, IL 60606
                    (Address of Principal Executive Offices)
                                   (Zip Code)
 
       Registrant's Telephone Number, Including Area Code: (312) 419-7100
 
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
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                      SOVEREIGN SPECIALTY CHEMICALS, INC.
 
                                   FORM 10-Q
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                              PAGE NUMBER
                                                              -----------
<S>                                                           <C>
PART I.  FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets at March 31, 1998 and December
  31, 1997..................................................       1
Consolidated Statements of Operations for the Three Months
  Ended March 31, 1998
  and 1997..................................................       2
Consolidated Statements of Cash Flows for the Three Months
  Ended March 31, 1998
  and 1997..................................................       3
Notes to Consolidated Financial Statements for the Three
  Months Ended March 31, 1998 and 1997......................       4
ITEM 2. Management's Discussion and Analysis of Financial
  Condition and Results of Operations.......................       6
PART II.  OTHER INFORMATION
6. Exhibits and Reports on Form 8-K.........................      10
Signatures..................................................      11
</TABLE>
<PAGE>   3
 
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 MARCH 31,     DECEMBER 31,
                                                                   1998            1997
                                                                -----------    ------------
                                                                        (UNAUDITED)
<S>                                                             <C>            <C>
ASSETS
Current assets:
  Cash and Cash Equivalents.................................     $  4,130        $  6,413
  Accounts receivable, net..................................       31,115          26,824
  Inventories...............................................       22,104          21,042
  Other current assets......................................        3,452           5,483
                                                                 --------        --------
Total current assets........................................       60,801          59,762
Property, plant and equipment, net..........................       47,649          48,308
Goodwill, net...............................................      121,837         123,177
Deferred financing costs, net...............................       10,945          11,137
Other assets................................................        3,197             375
                                                                 --------        --------
Total assets................................................     $244,429        $242,759
                                                                 ========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................     $ 16,737        $ 13,008
  Accrued expenses..........................................        9,544          14,023
  Current portion of long-term debt.........................        2,400           2,400
  Current portion of capital lease obligations..............          148             120
                                                                 --------        --------
Total current liabilities...................................       28,828          29,551
Long-term debt, less current portion........................      153,249         153,193
Capital lease obligations, less current portion.............        3,499           3,564
Other long-term liabilities.................................        4,406           4,398
Stockholders' equity:
Common stock, $.01 par value, 1,000 shares authorized,
  issued and outstanding....................................           --              --
Additional paid-in capital..................................       54,787          52,479
Accumulated deficit.........................................         (447)           (522)
Cumulative translation adjustment...........................          108              96
                                                                 --------        --------
Total stockholders' equity..................................       54,448          52,035
                                                                 --------        --------
Total liabilities and stockholders' equity..................     $244,429        $242,759
                                                                 ========        ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
 
                                        1
<PAGE>   4
 
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED
                                                                --------------------------------
                                                                MARCH 31, 1998    MARCH 31, 1997
                                                                --------------    --------------
                                                                 (UNAUDITED)       (UNAUDITED)
<S>                                                             <C>               <C>
Net Sales...................................................       $51,747           $20,981
Cost of goods sold..........................................        35,360            14,878
                                                                   -------           -------
Gross Profit................................................        16,387             6,103
Selling, general and administrative expenses................        11,813             4,417
                                                                   -------           -------
Operating income............................................         4,574             1,686
Interest expense, net.......................................         4,080               944
                                                                   -------           -------
Income before income taxes..................................           494               742
Income taxes................................................           419               (25)
                                                                   -------           -------
Net income..................................................       $    75           $   767
                                                                   =======           =======
Pro forma (See Note 5):
Income before income taxes, as stated.......................                         $   742
Income taxes:
  Income taxes as stated....................................                             (25)
  Additional pro forma income taxes.........................                             322
                                                                                     -------
Net income..................................................                         $   445
                                                                                     =======
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
                                        2
<PAGE>   5
 
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED
                                                                --------------------------------
                                                                MARCH 31, 1998    MARCH 31, 1997
                                                                --------------    --------------
                                                                 (UNAUDITED)       (UNAUDITED)
<S>                                                             <C>               <C>
OPERATING ACTIVITIES
Net Income..................................................       $    75            $  767
Adjustments to reconcile net income to cash provided by
  operating activities:
  Depreciation and amortization.............................         2,482               931
  Amortization of deferred financing costs..................           315                --
  Changes in operating assets and liabilities:
     Accounts receivable....................................        (4,291)             (980)
     Inventories............................................        (1,062)             (684)
     Prepaid expenses and other current assets..............         2,032               179
     Other assets...........................................        (2,832)               --
     Accounts payable.......................................         3,729             1,845
     Accrued expenses and other.............................        (4,471)           (1,062)
                                                                   -------            ------
Net cash provided by (used in) operating activities.........        (4,014)            1,013
INVESTING ACTIVITIES
  Purchase of property, plant and equipment.................          (470)             (302)
                                                                   -------            ------
Net cash used in investing activities.......................          (470)             (302)
FINANCING ACTIVITIES
  Deferred financing costs..................................          (123)               --
  Capital contributions.....................................         2,308                --
  Payments on capital lease obligations.....................           (40)               --
  Proceeds from (payments on) revolving credit facility.....            56              (102)
  Payments on long-term debt................................            --              (257)
  Distributions to partners.................................            --              (120)
                                                                   -------            ------
Net cash provided by (used in) financing activities.........         2,201              (479)
Effect of exchange rates on cash............................            12                37
                                                                   -------            ------
Net increase (decrease) in cash and cash equivalents........        (2,283)              269
Cash and cash equivalents at beginning of period............         6,413               104
                                                                   -------            ------
Cash and cash equivalents at end of period..................       $ 4,130            $  373
                                                                   =======            ======
Supplemental cash flow information:
     Cash paid for interest.................................       $ 6,425            $1,291
     Cash paid for income taxes.............................       $   112            $   20
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
                                        3
<PAGE>   6
 
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                                 MARCH 31, 1998
                             (Dollars in Thousands)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  REORGANIZATION AND BASIS OF PRESENTATION
 
     Effective July 31, 1997, Sovereign Specialty Chemicals, L.P. (the Parent
Partnership) reorganized its corporate structure. The Parent Partnership
purchased the outstanding minority interests in its majority-owned subsidiaries
through the exchange of partnership units for the outstanding membership
interests in Sovereign Engineered Adhesives, L.L.C. (SEA) and common stock in
P&S Holdings, Inc. which were not previously owned. The acquisition of minority
interests was accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations", and goodwill in the
amount of $990 was recognized. Concurrently, SEA was merged with and into SIA
Adhesives, Inc. (SIA), a newly formed C corporation and SEA was dissolved. Also,
P&S Holdings, Inc., was merged into its wholly owned subsidiary, Pierce &
Stevens Corp. (P&S). At the same time, Sovereign Specialty Chemicals, Inc.
(Sovereign) was formed as a wholly owned subsidiary of the Parent Partnership.
The initial capitalization of Sovereign was comprised of a $33.8 million
contribution from investors through the Parent Partnership. Additionally, the
Parent Partnership contributed its wholly owned subsidiaries, SIA and P&S, to
Sovereign. The contribution of the Subsidiaries was accounted for at historical
book value (after accounting for the purchase of the minority interests) in a
manner similar to pooling of interests. Upon the consummation of the
transactions, SIA, P&S and the Acquired Companies (as defined below) became
wholly owned subsidiaries of Sovereign.
 
     On August 5, 1997, the Company purchased from Laporte plc, the net assets
of Laporte Construction Chemicals North America, Inc., Evode-Tanner Industries,
Inc., and Mercer Products Company, Inc. (the Acquired Companies). The Acquired
Companies are affiliated by common control as wholly owned subsidiaries of
Laporte plc. The purchase price of the Acquired Companies was approximately
$133.3 million including expenses relating to the purchase of $1.5 million and
net acquired cash of $707. The purchase was funded through the issuance of $125
million of subordinated notes payable, a $30 million term note, and a capital
contribution of $33.8 million. Excess of funding over the purchase price was
used to retire long-term debt.
 
     The acquisitions were accounted for as purchases and, as such; the results
of the operations of the Acquired Companies from August 5, 1997 (date of
acquisition) have been included in the consolidated results of operations of the
Company. Goodwill recognized in connection with the acquisitions was
approximately $108 million and is being amortized over a twenty-five year
period. The Acquired Companies are wholly owned subsidiaries of Sovereign
Specialty Chemicals, Inc. and operate as OSI Sealants, Inc., Tanner Chemicals,
Inc., and Mercer Products, Inc.
 
     Unless otherwise noted, all references to "the Company" herein refer to
Sovereign and its wholly owned subsidiaries.
 
  PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements as of and for the period ended March
31, 1998, include the accounts of the Company and its wholly-owned subsidiaries,
SIA, P&S, the Acquired Companies and Sovereign Specialty Chemicals, Pte. Ltd., a
Singapore-based sales office. The financial statements for the period ended
March 31, 1997 are presented on a basis "as if" the Company existed prior to
July 31, 1997 and included the operations of the subsidiaries for the period
ended. All significant intercompany balances and transactions have been
eliminated.
 
                                        4
<PAGE>   7
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                                 MARCH 31, 1998
                             (Dollars in Thousands)
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
 
  INTERIM FINANCIAL INFORMATION
 
     The unaudited interim consolidated financial statements of the Company, in
the opinion of management, reflect all necessary adjustments, consisting only of
normal recurring adjustments, for a fair presentation of results as of the dates
and for the interim periods covered by the financial statements. The results for
the interim periods are not necessarily indicative of the results of operations
to be expected for the entire year.
 
     The unaudited interim consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and reporting
practices. Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission; however the Company believes the
disclosures are adequate to make the information not misleading. The unaudited
interim consolidated financial statements contained herein should be read in
conjunction with the audited financial statements and notes thereto included in
our 1997 Annual Report on Form 10-K.
 
  RECLASSIFICATIONS
 
     Certain prior year amounts have been reclassified to conform to current
year presentation.
 
2. INVENTORIES
 
     Inventories are summarized as follows:
 
<TABLE>
<CAPTION>
                                                       MARCH 31,    DECEMBER 31,
                                                         1998           1997
                                                       ---------    ------------
<S>                                                    <C>          <C>
Raw Materials......................................     $ 9,364       $10,908
Work in process....................................         416           141
Finished Goods.....................................      12,324         9,993
                                                        -------       -------
                                                        $22,104       $21,042
</TABLE>
 
3. SUBSEQUENT EVENT
 
     On April 21, 1998, Sovereign Specialty Chemicals, Inc. consummated a stock
purchase agreement for the sale of its Mercer Products Company, Inc., subsidiary
to Burke Industries, Inc. Net proceeds from the sale were approximately $35.9
million (sales price of $36.2 million less selling expenses of $300). Proceeds
from the sale were used by the Company to pay down $30 million of senior bank
debt and for general corporate purposes.
 
                                        5
<PAGE>   8
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                                 MARCH 31, 1998
                             (Dollars in Thousands)
 
4. NEW ACCOUNTING PRONOUNCEMENT
 
     The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) in 1998. This statement establishes
standards for reporting and display of comprehensive income and requires that
all components of comprehensive income be reported in a financial statement
having the same prominence as other financial statements. For the three months
ended March 31, 1998 and 1997, respectively, the calculation of comprehensive
income is as follows:
 
<TABLE>
<CAPTION>
                                                                1998    1997
                                                                ----    ----
<S>                                                             <C>     <C>
Net income as reported......................................    $75     $767
Add: Foreign currency translation adjustment................     12      (37)
                                                                ---     ----
Comprehensive income........................................    $87     $730
</TABLE>
 
5. INCOME TAXES
 
     Prior to its restructuring on July 31, 1997, the consolidated entity was
composed of various types of entities including a limited partnership and a
limited liability company. Income tax liabilities for such entities are
generally "pass through" to their owners. Subsequent to the restructuring, the
Company and its subsidiaries will file a consolidated federal tax return. The
financial statements for the three months ended March 31, 1997, include pro
forma income taxes as if the companies had been subject to income taxes for the
period presented. Amortization of goodwill related to an acquisition structured
to be tax-free is not deductible for tax purposes. The amount of this
amortization was approximately $500 in the first quarter of 1998. This has the
effect of increasing tax expense for the three months ended March 31, 1998.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
GENERAL
 
     The Company was formed to acquire and consolidate specialty chemical
businesses in the highly fragmented adhesives, sealants and coatings industry
business segment. The Company began operations in March 1996 with the
acquisition of SIA, a manufacturer of specialty adhesives used primarily in the
automotive, aerospace and general industrial markets. In August 1996, the
Company acquired Pierce & Stevens, a developer and manufacturer of specialty
coatings and adhesives for performance-oriented niche applications. In August
1997, the Company acquired in a single transaction the net assets of Laporte
Construction Chemicals North America, Inc., Evode-Tanner Industries, Inc., and
Mercer Products Company, Inc. (Division). These businesses manufacture, market
and distribute adhesives and sealants primarily utilized in housing repair,
remodeling and construction and industrial markets. The operating results of
acquired businesses have been included in the consolidated operating results of
the Company for all periods subsequent to their respective dates of acquisition.
On April 21, 1998, the Company consummated a stock purchase agreement for the
sale of its Mercer Products Company, Inc. subsidiary to Burke Industries, Inc.
 
RESULTS OF OPERATIONS
 
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
 
     Net Sales.  Net sales for the first quarter of 1998 were $51.7 million, an
increase of $30.8 million, or 146.7%, over the comparable period in 1997,
primarily as a result of the acquisition of the Laporte businesses in August
1997. Excluding the acquisition, net sales increased $.7 million as a result of
increased sales of
 
                                        6
<PAGE>   9
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                                 MARCH 31, 1998
                             (Dollars in Thousands)
 
aerospace adhesives resulting from strong levels of commercial aircraft
production partially offset by reduced sales of automotive pressure sensitive
adhesives.
 
     Cost of Goods Sold.  Cost of goods sold was $35.4 million for the first
quarter of 1998, an increase of $20.5 million, or 137.7%, over 1997. As a
percentage of net sales, cost of goods sold decreased to 68.3% from 70.9% in the
same period of 1997 primarily as a result of the inclusion of the generally
higher gross margin Laporte businesses, acquired August 5, 1997. As a result,
gross profit margin increased to 31.7% from 29.1% in the first quarter of 1998.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses for the first quarter of 1998 were $11.8 million,
representing a $7.4 million, or 168.2%, increase from the first three months of
1997. As a percentage of net sales, selling, general and administrative expenses
increased to 22.8% for the three months ended March 31, 1998 from 21.1% in the
first quarter 1997. This increase was primarily due to increased amortization
expense related to goodwill recorded in the acquisition of the Laporte companies
in August 1997. Amortization expense as a percentage of net sales was 2.7% and
1.7% for the first quarter of 1998 and 1997, respectively. Excluding
amortization, selling, general and administrative expenses increased as a
percentage of net sales from 19.4% in first quarter 1997 to 20.1% in 1998. This
increase is due primarily to impact of higher selling expenses as a percentage
of net sales resulting from the retail sector of our housing repair, remodeling
and construction market (as a result of the Laporte acquisition).
 
     Interest Expense (net).  Interest expense was $4.1 million for the first
quarter of 1998 representing a $3.2 million, or 337.0%, increase over the
comparable period in 1997. This increase was the result of increased debt
incurred as a result of the acquisition of the Laporte businesses.
 
     Income Taxes.  Income tax expense increased by $444 to $419 in the first
quarter of 1998 over the comparable period in 1997 primarily due to the fact
that prior to its restructuring on July 31, 1997, the consolidated entity was
composed of various types of entities including a limited partnership and a
limited liability company. Income tax liabilities for such entities are
generally "pass through" to their owners. Subsequent to the restructuring, the
Company and its subsidiaries will file a consolidated federal tax return. See
Footnote 5 in the Notes to the Consolidated Financial Statements for pro forma
income taxes for the three months ended March 31, 1997, as if the companies had
been subject to income taxes for the period presented.
 
     Amortization of goodwill related to an acquisition structured to be
tax-free is not deductible for tax purposes. The amount of this amortization was
approximately $500 in the first quarter of 1998. This has the effect of
increasing tax expense for the three months ended March 31, 1998.
 
     Net Income.  Net income for the first quarter was $75 representing a $.7
million decrease from the comparable period in 1997. This decrease was primarily
the result of the factors discussed above.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Net cash required by operating activities totaled $4.0 million in the first
three months of 1998 as compared to net cash provided by operations of $1,013
for the comparable period in 1997. The decrease in net cash from operating
activities was due primarily to the $4.5 million decrease in accrued expenses in
the first quarter of 1998 resulting primarily from the payment of interest on
$125.0 million of Senior Subordinated Notes (the Notes) in February 1998; as
well as an increase in accounts receivable and other assets of $3.3 million and
$2.8 million, respectively, over the same period in 1997. The increase in other
assets was due primarily to a contribution by the Parent Partnership in 1998 of
$2.3 million in long-term notes receivable
 
                                        7
<PAGE>   10
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                                 MARCH 31, 1998
                             (Dollars in Thousands)
 
from management. These decreases in net cash were partially offset by increased
depreciation and amortization in the first quarter of 1998 of $1.4 million, due
primarily to increased goodwill associated with the Laporte acquisition in
August 1997; and an increase in accounts payable of $3.0 million.
 
     Net cash provided by financing activities increase by $2.7 million over the
first three months of 1997, primarily due to the $2.3 capital contribution by
the Parent Partnership of long-term notes receivable from management of the
Company.
 
     The Company's long term debt at March 31, 1998 consists of the $125.0
million Notes; a $30.0 million Term Loan, with twenty-five quarterly installment
payments due commencing September 30, 1998; and $649 under a $1.0 facility
obtained by its Singapore-based sales office. The Company also has a $30 million
Revolving credit facility available for working capital purposes.
 
     On April 21, 1998, Sovereign Specialty Chemicals, Inc. consummated a stock
purchase agreement for the sale of its Mercer Products Company, Inc., subsidiary
to Burke Industries, Inc. Net proceeds from the sale were approximately $35.9
million (sales price of $36.2 million less selling expenses of $300). Proceeds
from the sale were used by the Company to pay down its $30 million Term Loan and
will be used for general corporate purposes.
 
     Mercer is a leading manufacturer of extruded vinyl flooring profiles and
related products for the commercial and residential construction and renovation
markets. Mercer was acquired in August 1997, as part of Sovereign's acquisition
of the Adhesives, Sealants & Coatings -- North America Division of Laporte plc.
Mercer is located in Eustis, Florida. The sale of Mercer demonstrates the
Company's focus on the adhesives, sealants and coatings industry.
 
     Interest payments on the Notes and under the Revolving Credit Facility
represent significant obligations of the Company. The Notes require semiannual
interest payments and interest on loans under the Revolving Credit Facility are
due quarterly. The Company's remaining liquidity demands relate to capital
expenditures and working capital needs. The Company anticipates capital
expenditures totaling $7.0 million in 1998, $3 million of which relates to
environmental expenditures for which the Company expects to be indemnified
pursuant to acquisition agreements. Of this amount, $.5 million had been spent
through March 31, 1998. Exclusive of the impact of any future acquisitions, the
Company does not expect its capital expenditure requirements to increase
materially in the foreseeable future.
 
     The Company's primary sources of liquidity are cash flows from operations
and borrowings under the Revolving Credit Facility. The Revolving Credit
Facility provides the Company with $30.0 million of borrowings, subject to
availability under the borrowing base. At March 31, 1998, the Company would have
been able to borrow $29.1 million under the Revolving Credit Facility with $.9
million of letters of credit outstanding. The repayment of the $30 million Term
Loan in April 1998, triggered an additional $20 million revolving credit
commitment which is supplemental to the Revolving Credit Facility. The Company
believes that, based on current and anticipated financial performance, cash flow
from operations and borrowings under the Revolving Credit Facility will be
adequate to meet anticipated requirements for capital expenditures, working
capital and scheduled interest payments (including interest payments on the
Notes and amounts outstanding under the Revolving Credit Facility). However, the
Company's capital requirements may change, particularly if the Company should
complete any additional material acquisitions. The ability of the Company to
satisfy its capital requirements will be dependent upon the future financial
performance of the Company, which in turn will be subject to general economic
conditions and to financial, business and other factors, including factors
beyond the Company's control.
 
                                        8
<PAGE>   11
              SOVEREIGN SPECIALTY CHEMICALS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                                 MARCH 31, 1998
                             (Dollars in Thousands)
 
     The Company's future operating performance and ability to repay or
refinance the Notes will also be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control.
 
YEAR 2000 COMPLIANCE BY THE COMPANY AND OTHERS
 
     The Company is at risk both for its own Year 2000 compliance and for the
Year 2000 compliance of those with whom it does business, primarily third party
payors. The Company plans to replace or upgrade its non-compliant systems with
Year 2000 compliant software, and does not believe the cost of such will have a
material impact on the results of operations. Moreover, there can be no
assurance that the third party payors upon whom the Company relies will not
experience system difficulties as a result of the Year 2000 problem, which
difficulties could delay payment to the Company. Any such difficulties or delays
could have a material adverse effect on the Company. If the Company's plans are
not successful in making its systems Year 2000 compliant, it could have a
material adverse effect on results of operations.
 
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
 
     Some of the information presented in, or connection with, this report may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve potential risks and
uncertainties. The Company's future results could differ materially from those
discussed here. Some of the factors that could cause or contribute to such
differences include:
 
     Changes in economic and market conditions that impact the demand for the
     Company's products and services;
 
     Risks inherent in international operations, including possible economic,
     political or monetary instability;
 
     The impact of new technologies and the potential effect of delays in the
     development or deployment of such technologies; and,
 
     The potential impact of issues related to Year 2000 software compliance.
 
     You should not place undue reliance on these forward-looking statements,
which are applicable only as of May 13, 1998. The Company has no obligation to
revise or update these forward-looking statements to reflect events or
circumstances that arise after May 13, 1998 or to reflect the occurrence of
unanticipated events.
 
                                        9
<PAGE>   12
 
                          PART II -- OTHER INFORMATION
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
 
(a) Exhibits
 
     27 Financial Data Schedule
 
(b) Reports on Form 8-K
 
     The Company filed a Current Report on Form 8-K dated May 5, 1998 under Item
2, Acquisition or Disposition of Assets, to report our sale of Mercer Products
Company, Inc.
 
                                       10
<PAGE>   13
 
                      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.
 
                                          Lowell D. Johnson, Chief Financial
                                          Officer
 
Date: May 13, 1998                        Robert B. Covalt, Chief Executive
                                          Officer
 
                                       11