SOVEREIGN SPECIALTY CHEMICALS INC
EXHIBIT 10.25
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>exh10-25.txt
<DESCRIPTION>EXHIBIT 10.25
<TEXT>

                                                              EXHIBIT 10.25

                            EMPLOYMENT AGREEMENT

     THIS AGREEMENT  ("AGREEMENT")  is made and entered into as of the 31st
day of October, 2002, by and between SOVEREIGN SPECIALTY CHEMICALS, INC., a
Delaware corporation (the "COMPANY"),  and TERRY D. SMITH (the "EMPLOYEE").
The  Company  and  the  Employee  are  sometimes  hereinafter  collectively
referred  to as  the  "PARTIES"  and  individually  as a  "PARTY."  Certain
capitalized terms used in this Agreement are defined in Article VII hereof.

                                  RECITALS
                                  --------

     A. The  Company  is and will be engaged  in the  manufacture  of
adhesives,  sealants  and  coatings.  The  Company  wishes  to  employ  the
Employee,  and the Employee  wishes to be employed by the  Company,  as the
Company's Vice  President and Chief  Financial  Officer.  As a condition of
that  employment,  the Company  requires  that an  employment  agreement be
entered into  pursuant to which the Employee  furnishes  the Company  with,
among other  things,  certain  covenants  of the  Employee,  including  his
covenant  not  to  compete  with  the   businesses  of  the  Company,   its
Subsidiaries and their Affiliates.

     B. In order to induce the Employee to enter into this Agreement,
and to  incentivize  and reward his effort,  loyalty and  commitment to the
Company,  concurrent  with the execution and delivery of this Agreement the
Company has granted to the Employee a certain  stock option (the  "OPTION")
to  purchase  shares of Common  Stock of the Company  ("SHARES")  under and
pursuant to the terms of the  "Sovereign  Specialty  Chemicals,  Inc. Stock
Option  Plan" (the  "PLAN")  and a Stock  Option  Agreement  in the form of
Exhibit C attached  hereto and by this  reference  made a part  hereof (the
"STOCK OPTION AGREEMENT").

     C. The  Employee  acknowledges that as a member of the Company's
management,  he is one of the persons  charged with primary  responsibility
for the  implementation  of the Company's  business plans, and that he will
have regular access to various confidential and/or proprietary  information
relating to the  Company,  its  Subsidiaries,  their  Affiliates  and their
businesses.  Further,  the Employee  acknowledges that his covenants to the
Company  hereinafter set forth,  specifically  including but not limited to
the Employee's covenant not to engage in competition with the Company,  its
Subsidiaries,  their  Affiliates  and their  businesses,  are being made in
partial consideration of the Company's grant of the Option to the Employee.

                                 AGREEMENT
                                 ---------

     NOW, THEREFORE,  in consideration of the foregoing  recitals,  and the
mutual   agreements   herein   contained   and  other  good  and   valuable
consideration,  the receipt and  sufficiency  of which are hereby  mutually
acknowledged, the parties hereby agree as follows:

                                 ARTICLE I
                                 ---------
                          EMPLOYMENT RELATIONSHIP
                          -----------------------

     1.1 EMPLOYMENT.  Subject  to the  terms  and  conditions  of this
Agreement, the Company hereby agrees to employ the Employee to serve as the
Company's  Vice  President and Chief  Financial  Officer,  and the Employee
hereby  accepts  such  employment,  and  agrees to  perform  his duties and
responsibilities  to the best of his abilities in a diligent,  trustworthy,
businesslike  and efficient  manner,  in accordance  with the provisions of
Exhibit D attached hereto and by this reference made a part hereof.

     1.2 DUTIES.  The  Employee  shall have the  normal and  customary
duties,  responsibilities  and  authority  of a Vice  President  and  Chief
Financial  Officer  and shall  perform  such other  duties on behalf of the
Company, its Subsidiaries and their Affiliates as may be assigned to him by
the Chief  Executive  Officer of the Company.  The Employee shall report to
the  Chief  Executive  Officer  of  the  Company  in  connection  with  the
Employee's performance of his duties.

     1.3 EXCLUSIVE  EMPLOYMENT.  While he is  employed  by the Company
hereunder,  the  Employee  covenants to the Company that he will devote his
entire  business  time,  energy,  attention  and skill to the Company,  its
Subsidiaries  and their Affiliates  (except for permitted  vacation periods
and reasonable  periods of illness or other  incapacity),  and use his good
faith  best  efforts  to  promote  the   interests  of  the  Company,   its
Subsidiaries and their Affiliates.  The foregoing shall not be construed as
prohibiting  the  Employee  from  spending  such time as may be  reasonably
necessary to attend to his personal affairs and investments so long as such
activities  do not conflict or interfere  with the  Employee's  obligations
and\or timely  performance of his duties to the Company,  its  Subsidiaries
and their Affiliates hereunder.

     1.4 EMPLOYEE REPRESENTATIONS.  The Employee hereby represents and
warrants to the Company that:


     (a) the  execution,  delivery and  performance by the Employee of this
Agreement  and any  other  agreements  contemplated  hereby  to  which  the
Employee is a party do not and shall not conflict with, breach,  violate or
cause a default under any contract, agreement,  instrument, order, judgment
or decree to which the Employee is a party or by which he is bound;

     (b)  the  Employee  is not a  party  to or  bound  by  any  employment
agreement,  non-competition agreement or confidentiality agreement with any
other  person or entity (or if a party to such an  agreement,  the Employee
has  disclosed  the  material  terms  thereof  to the  Board  prior  to the
execution hereof and promptly after the date hereof shall deliver a copy of
such agreement to the Board); and

     (c) upon the execution and delivery of this  Agreement by the Company,
this Agreement  shall be the valid and binding  obligation of the Employee,
enforceable in accordance with its terms.

The Employee hereby  acknowledges and represents that he has consulted with
independent  legal counsel  regarding his rights and obligations under this
Agreement and that he fully understands the terms and conditions  contained
herein.

                                 ARTICLE II
                                 ----------
                            PERIOD OF EMPLOYMENT
                            --------------------

     2.1 EMPLOYMENT  PERIOD.  The  Employee's  employment  hereunder  shall
commence on the date  hereof and shall  continue  hereunder  until the date
fixed by the  provisions  of  Section  2.2  hereof,  subject  to the  early
termination  provisions of Article V hereof (the "EMPLOYMENT  PERIOD"),  it
being  acknowledged that the Company's fiscal year ends on December 31, and
that the  Employment  Period  shall  therefore be  denominated  in calendar
years.

     2.2  INITIAL  TERM OF  EMPLOYMENT  PERIOD  AND  EXTENSION  TERMS.  The
Employment  Period shall  initially  continue for a term  commencing on the
date  hereof and ending on  December  31, 2005 (the  "INITIAL  TERM").  The
Employment Period shall be automatically  extended for successive  calendar
years of the Company  following  the  expiration  of the Initial Term (each
such one year period being hereinafter  referred to as an "EXTENSION TERM")
upon the same terms and conditions  provided for herein unless either party
provides  the  other  party  with  advance  written  notice  of  its or his
intention not to extend the Employment Period; provided, however, that such
notice must be delivered by the non-extending  party to the other party not
later than ninety (90) days prior to the  expiration of the Initial Term or
any Extension Term, as the case may be.

                                ARTICLE III
                                -----------
                                COMPENSATION
                                ------------

     3.1 ANNUAL BASE COMPENSATION. During the Employment Period the Company
shall  pay  to the  Employee  an  annual  base  salary  (the  "ANNUAL  BASE
COMPENSATION")  in the amount of $240,000.00.  The Annual Base Compensation
shall be paid in regular  installments  in  accordance  with the  Company's
general payroll  practices,  and shall be subject to all required  federal,
state and local withholding  taxes. The Employee's Annual Base Compensation
shall be reviewed by the Board annually,  and may, in the discretion of the
Board be increased,  provided that there shall be no obligation on the part
of the Company to increase the Employee's Annual Base Compensation, further
provided that in no event shall the Employee's  Annual Base Compensation be
less than the greater of (i) the amount  indicated in the first sentence of
this Section 3.1 or (ii) the highest  amount such Annual Base  Compensation
may have  been  increased  to by the Board  subsequent  to the date of this
Agreement in its discretion.

     3.2 POTENTIAL ANNUAL TARGET BONUSES.  In respect of each calendar year
falling within the Employment  Period after December 31, 2002, the Employee
shall be eligible to earn an annual  bonus,  depending  upon the results of
operation of the Company,  its  Subsidiaries  and their  Affiliates and the
personal  performance of the Employee,  of up to fifty-eight  and one-third
percent  (58.333%)  of the  Employee's  Annual Base  Compensation  for that
calendar year (the "POTENTIAL  ANNUAL TARGET BONUS") in accordance with the
terms of a bonus plan which  shall be adopted and  maintained  in effect by
the Board for that calendar year. The amount of the Potential Annual Target
Bonus,  if any,  which is earned by the Employee (the  "BONUSABLE  AMOUNT")
shall be paid by the  Company to the  Employee  no later than  seventy-five
(75) days following the close of the Company's calendar year, provided that
unless  expressly  provided  otherwise  herein,  it  shall  be a  condition
precedent to the Employee's  right to receive any Bonusable Amount that the
Employee be employed by the Company on the last day of that calendar year.

     3.3  DISCRETIONARY  BONUSES.  In respect of each calendar year falling
within the Employment  Period,  the Company may pay a discretionary  annual
bonus to the Employee (a  "DISCRETIONARY  BONUS") to be  determined  by the
Board, in its sole discretion. Any Discretionary Bonus shall be paid by the
Company to the Employee within  seventy-five  (75) days following the close
of the Company's  calendar year,  provided that unless  expressly  provided
otherwise herein, it shall be a condition precedent to the Employee's right
to receive  any  Discretionary  Bonus that the  Employee be employed by the
Company on the last day of that calendar year.

     3.4 EXPENSES.  During the  Employment  Period,  the Employee  shall be
entitled to reimbursement of all travel,  entertainment  and other business
expenses  reasonably  incurred  in the  performance  of his  duties for the
Company, upon submission of all receipts and accounts with respect thereto,
and  approval by the  Company  thereof,  in  accordance  with the  business
expense reimbursement  policies of the Company from time to time adopted by
the  Board.  In  addition,  in  recognition  of the fact that the  Employee
resides in Ohio, and will, like several other executives of the Company, be
required  to commute to the  Company's  corporate  offices,  the  following
arrangements shall govern travel and living costs incurred by the Employee:
(i) as the  Company  determines  useful,  the  Company  may secure  housing
accommodations to be used by its officers, in which case the Employee shall
use such accommodations; (ii) the Employee's ordinary and reasonable travel
costs and other expenses related to the Employee's  travel and residence in
the Chicagoland area not otherwise covered pursuant to clause (i), shall be
reimbursed  to the  Employee by the Company;  (iii) the  Employee  shall be
entitled to a "gross-up"  payment on all amounts paid or deemed paid to the
Employee  pursuant to clauses (i) and (ii) such that there is no  after-tax
cost  to the  employee  in  connection  with  the  receipt  of the  amounts
described in clauses (i), (ii) and this clause (iii);  and (iv) none of the
foregoing  amounts shall be considered  part of the Employee's  Annual Base
Compensation,  and shall, in any event, be paid in regular  installments in
accordance  with the  Company's  regular  payroll  practices,  and shall be
subject to all required federal, state and local income taxes.

     3.5  VACATION.  In respect of each  calendar  year falling  within the
Employment  Period, the Employee shall be entitled to such vacation time as
the Company customarily provides to its senior executives holding positions
with the Company  comparable  to the  Employee's  position,  provided  that
unused vacation may be used by the Employee in the following  calendar year
only in  accordance  with and as  permitted by the  Company's  then current
vacation policies in effect from time to time.

     3.6 OTHER FRINGE BENEFITS.  During the Employment Period, the Employee
shall be entitled to receive such of the Company's other fringe benefits as
are being  provided to other  employees  of the Company  holding  positions
comparable to the Employee's position,  including but not limited to health
insurance benefits, disability benefits and retirement benefits.

     3.7 GRANT OF STOCK OPTION.  Concurrently  with the parties'  execution
and delivery of this  Agreement the Company has granted to the Employee the
Option to purchase an aggregate of 25,000  Shares  pursuant to the terms of
the  Stock  Option  Agreement  as part  consideration  for  the  Employee's
execution and delivery of this Agreement to the Company.

     3.8 SPECIAL  BONUS.  The Company  shall pay to the Employee a bonus in
the  amount of  $50,000  (the  "SPECIAL  BONUS"),  less any  employment  or
withholding  taxes,  if any,  required by law to be withheld by the Company
thereon,  on or before  March 15, 2003.  If,  prior to that  Special  Bonus
payment date, the Employee's employment shall have terminated,  the Company
shall  nonetheless  pay the Special  Bonus to the Employee when due without
regard to the reason for the Employee's  termination of employment,  unless
the  Employee  shall have  breached  any of his  covenants  to the  Company
created by the provisions of Article IV hereof,  in which case, the Company
shall have no liability to pay the Special Bonus to the Employee.

                                 ARTICLE IV
                                 ----------
                         COVENANTS OF THE EMPLOYEE
                         -------------------------

     4.1 PROPRIETARY  RIGHTS. The Employee hereby expressly agrees that all
research,  discoveries,  inventions and innovations (whether or not reduced
to practice or documented),  improvements,  developments, methods, designs,
analyses, drawings, reports and all similar or related information (whether
patentable or unpatentable,  and whether or not reduced to writing),  trade
secrets  (being  information  about  the  business  of  the  Company,   its
Subsidiaries and their Affiliates which is considered by the Company or any
such Subsidiary or Affiliate to be  confidential  and is proprietary to the
Company or any such Subsidiary or Affiliate) and confidential  information,
copyrightable  works, and similar and related information (in whatever form
or medium), which (x) either (i) relate to the Company's, its Subsidiaries'
or  their  Affiliates'  actual  or  anticipated   business,   research  and
development or existing or future  products or services or (ii) result from
any work performed by the Employee for the Company, its Subsidiaries or any
of their Affiliates and (y) are conceived,  developed,  made or contributed
to in whole or in part by the Employee during the Employment  Period ("WORK
PRODUCT")  shall  be and  remain  the sole and  exclusive  property  of the
Company, such Subsidiary or such Affiliate.  The Employee shall communicate
promptly and fully all Work Product to the Company.

          (A) WORK MADE FOR HIRE. The Employee  acknowledges  that,  unless
     otherwise agreed in writing by the Company,  all Work Product eligible
     for any form of copyright  protection  made or contributed to in whole
     or in  part  by the  Employee  within  the  scope  of  the  Employee's
     employment by the Company during the Employment Period shall be deemed
     a "work made for hire" under the copyright  laws and shall be owned by
     the Company, its Subsidiaries or their Affiliates, as applicable.

          (B)  ASSIGNMENT  OF  PROPRIETARY   RIGHTS.  The  Employee  hereby
     assigns,  transfers  and  conveys to the  Company,  and shall  assign,
     transfer and convey to the Company,  all right,  title and interest in
     and  to  all  inventions,  ideas,  improvements,  designs,  processes,
     trademarks,  service marks, trade names,  trade secrets,  trade dress,
     data,  discoveries and other proprietary assets and proprietary rights
     in and  of  the  Work  Product  (the  "PROPRIETARY  RIGHTS")  for  the
     Company's exclusive ownership and use, together with all rights to sue
     and  recover  for past and  future  infringement  or  misappropriation
     thereof,  provided that if a Subsidiary or Affiliate of the Company is
     the owner thereof,  such assignment,  transfer and conveyance shall be
     made to such  Subsidiary  or  Affiliate,  which shall enjoy  exclusive
     ownership  and use,  together  with all rights to sue and  recover for
     past and future infringement or misappropriation thereof.

          (C)  FURTHER  INSTRUMENTS.  At the  request of the  Company  (its
     Subsidiaries  or their  Affiliates,  as the case may be), at all times
     during  the  Employment  Period  and  thereafter,  the  Employee  will
     promptly  and fully  assist the  Company  (its  Subsidiaries  or their
     Affiliates,  as the  case  may be) in  effecting  the  purpose  of the
     foregoing assignment, including but not limited to the further acts of
     executing  any and all  documents  necessary to secure for the Company
     (its  Subsidiaries  or  their  Affiliates,  as the  case  may be) such
     Proprietary  Rights  and  other  rights  to all Work  Product  and all
     confidential  information related thereto,  providing  cooperation and
     giving testimony.

          (D) INAPPLICABILITY OF SECTION 4.1 IN CERTAIN CIRCUMSTANCES.  The
     Company  expressly  acknowledges  and agrees that, and the Employee is
     hereby advised that,  this Section 4.1 does not apply to any invention
     for  which  no  equipment,   supplies,   facilities  or  trade  secret
     information  of  the  Company,   its  Subsidiaries  or  any  of  their
     Affiliates was used and which was developed entirely on the Employee's
     own time,  unless (i) the  invention  relates to the  business  of the
     Company,  its  Subsidiaries  or  any  of  their  Affiliates  or to the
     Company's,  its  Subsidiaries' or any of their  Affiliates'  actual or
     demonstrably anticipated research or development or (ii) the invention
     results from any work  performed by the Employee for the Company,  its
     Subsidiaries or any of their Affiliates.

     4.2  OWNERSHIP  AND  COVENANT TO RETURN  DOCUMENTS,  ETC. The Employee
agrees that all Work Product and all documents or other tangible  materials
(whether  originals,  copies or abstracts),  including without  limitation,
price lists,  quotation guides,  outstanding  quotations,  books,  records,
manuals,  files, sales literature,  training  materials,  customer records,
correspondence,  computer disks or print-out documents,  contracts, orders,
messages,  phone and address lists, invoices and receipts,  and all objects
associated therewith, which in any way relate to the business or affairs of
the Company,  its Subsidiaries and their Affiliates either furnished to the
Employee by the Company, its Subsidiaries or any of their Affiliates or are
prepared,  compiled  or  otherwise  acquired  by the  Employee  during  the
Employment Period, shall be the sole and exclusive property of the Company,
such  Subsidiaries or such  Affiliates.  The Employee shall not, except for
the use of the Company,  its Subsidiaries or any of their Affiliates,  use,
copy or  duplicate  any of the  aforementioned  documents  or objects,  nor
remove them from the facilities of the Company or such Subsidiaries or such
Affiliates,  nor use any information concerning them except for the benefit
of the Company,  its Subsidiaries and their  Affiliates,  either during the
Employment  Period or thereafter.  The Employee agrees that he will deliver
all  of  the  aforementioned  documents  and  objects  that  may  be in his
possession to the Company on the  termination  of his  employment  with the
Company, or at any other time upon the Company's request, together with his
written certification of compliance with the provisions of this Section 4.2
in the  form  of  Exhibit  A to  this  Agreement  in  accordance  with  the
provisions of Section 5.3 hereof.

     4.3 NON-DISCLOSURE  COVENANT.  During the Employment Period and at all
times  thereafter,  the Employee shall not,  either directly or indirectly,
disclose  to any  "unauthorized  person"  or use  for  the  benefit  of the
Employee or any person or entity other than the Company,  its  Subsidiaries
or their Affiliates any Work Product or any knowledge or information  which
the Employee may acquire while employed by the Company  (whether  before or
after the date of this Agreement) relating to (i) the financial, marketing,
sales and  business  plans and  affairs,  financial  statements,  analyses,
forecasts and projections,  books, accounts,  records,  operating costs and
expenses and other financial  information of the Company,  its Subsidiaries
and their Affiliates,  (ii) internal management tools and systems,  costing
policies and  methods,  pricing  policies and methods and other  methods of
doing business,  of the Company,  its  Subsidiaries  and their  Affiliates,
(iii)  customers,  sales,  customer  requirements  and usages,  distributor
lists,  of  the  Company,  its  Subsidiaries  and  their  Affiliates,  (iv)
agreements with customers, vendors, independent contractors,  employees and
others, of the Company, its Subsidiaries and their Affiliates, (v) existing
and future  products or services and product  development  plans,  designs,
analyses  and  reports,   of  the  Company,   its  Subsidiaries  and  their
Affiliates,  (vi)  computer  software  and  data  bases  developed  for the
Company,  its Subsidiaries or their  Affiliates,  trade secrets,  research,
records of research, models, designs, drawings,  technical data and reports
of  the  Company,   its   Subsidiaries   and  their  Affiliates  and  (vii)
correspondence  or other private or  confidential  matters,  information or
data whether  written,  oral or  electronic,  which is  proprietary  to the
Company,  its  Subsidiaries and their Affiliates and not generally known to
the public  (individually  and  collectively  "CONFIDENTIAL  INFORMATION"),
without  the  Company's  prior  written  permission.  For  purposes of this
Section 4.3, the term  "UNAUTHORIZED  PERSON"  shall mean any person who is
not (i) an officer or director of the Company or an employee of the Company
for whom the disclosure of the knowledge or information  referred to herein
is  necessary  for  his  performance  of his  assigned  duties,  or (ii) an
employee,  officer or director of a Subsidiary  or Affiliate of the Company
for whom the disclosure of the knowledge or information  referred to herein
is necessary for his performance of his assigned duties,  or (iii) a person
expressly authorized by the Company to receive disclosure of such knowledge
or information. The Company expressly acknowledges and agrees that the term
"Confidential  Information" excludes information which is (A) in the public
domain or otherwise generally known to the trade, or (B) disclosed to third
parties   other   than  by   reason  of  the   Employee's   breach  of  his
confidentiality  obligation  hereunder  or (C)  learned of by the  Employee
subsequent to the  termination of his  employment  hereunder from any other
party not then under an obligation of confidentiality  to the Company,  its
Subsidiaries and their Affiliates.  Further,  the Employee covenants to the
Company that in the  Employee's  performance of his duties  hereunder,  the
Employee  will violate no  confidentiality  obligations  he may have to any
third persons.

     4.4  ANTI-PIRATING  AND  NON-INTERFERENCE   COVENANTS.   The  Employee
covenants to the Company that while the Employee is employed by the Company
hereunder and for the two (2) year period thereafter (the "NON-SOLICITATION
PERIOD"), he will not, for any reason, directly or indirectly: (a) solicit,
hire, or otherwise do any act or thing which may induce any other  employee
of the Company, its Subsidiaries or their Affiliates to leave the employ or
otherwise interfere with or adversely affect the relationship  (contractual
or otherwise) of the Company,  its  Subsidiaries  and their Affiliates with
any person who is then or  thereafter  becomes an employee of the  Company,
its Subsidiaries and their Affiliates; or (b) do any act or thing which may
interfere  with  or  adversely  affect  the  relationship  (contractual  or
otherwise) of the Company,  its  Subsidiaries and their Affiliates with any
customer or vendor of the Company, its Subsidiaries and their Affiliates or
induce  any such  customer  or  vendor  to cease  doing  business  with the
Company, its Subsidiaries and their Affiliates.

     4.5 COVENANT NOT TO COMPETE. The Employee expressly  acknowledges that
(i) the  Company is and will be engaged in the  manufacture  of  adhesives,
sealants  and  coatings;  (ii) the  Employee is one of a limited  number of
persons  who  has  extensive   knowledge  and  expertise  relevant  to  the
businesses of the Company, its Subsidiaries and their Affiliates; (iii) the
Employee's  performance  of his  services  for the Company  hereunder  will
afford  him full and  complete  access to and  cause  him to become  highly
knowledgeable about the Company's,  its Subsidiaries' and their Affiliates'
Confidential  Information;  (iv) the agreements and covenants  contained in
this Section 4.5 are  essential to protect the business and goodwill of the
Company,  its Subsidiaries and their  Affiliates  because,  if the Employee
enters into any activities  competitive with the businesses of the Company,
its Subsidiaries and their  Affiliates,  he will cause  substantial harm to
the Company or its  Subsidiaries  and Affiliates;  and (v) his covenants to
the  Company,  its  Subsidiaries  and  their  Affiliates  set forth in this
Section 4.5 are being made in partial  consideration of the Company's grant
of the Option to him. Accordingly, the Employee hereby agrees that while he
is  employed  by the  Company  hereunder  and for the one (1)  year  period
thereafter  (the  "NON-COMPETITION  PERIOD"),  he  shall  not  directly  or
indirectly  own any interest in, invest in, lend to,  borrow from,  manage,
control,  participate in, consult with, become employed by, render services
to, or in any other  manner  whatsoever  engage in, any  business  which is
competitive with any business actively being engaged in by the Company, its
Subsidiaries  and their  Affiliates  or actively (and  demonstrably)  being
considered by the Company,  its Subsidiaries and their Affiliates for entry
into on the date of the  termination of the Employment  Period,  within any
states  or  geographical  regions  in  which  any  such  business  is being
conducted or in which the Company, its Subsidiaries and their Affiliates is
or are actively (and demonstrably)  considering  engaging in on the date of
the  termination  of the Employment  Period.  The preceding to the contrary
notwithstanding,  the  Employee  shall be free to make  investments  in the
publicly  traded   securities  of  any  corporation,   provided  that  such
investments do not amount to more than 1% of the outstanding  securities of
any class of such corporation.

     4.6  REMEDIES  FOR  BREACH.  If the  Employee  commits  a  breach,  or
threatens to commit a breach,  of any of the provisions of this Article IV,
the  Company  and its  Subsidiaries  shall  have the right and  remedy,  in
addition to any other remedy that may be available at law or in equity,  to
have the provisions of this Article IV  specifically  enforced by any court
having equity jurisdiction,  together with an accounting therefor, it being
expressly  acknowledged  and agreed by the Employee that any such breach or
threatened  breach  will cause  irreparable  injury to the  Company and its
Subsidiaries  and that money damages will not provide an adequate remedy to
the  Company  and its  Subsidiaries.  Such  injunction  shall be  available
without the posting of any bond or other security,  and the Employee hereby
consents to the issuance of such  injunction.  The Employee  further agrees
that any such injunctive relief obtained by the Company or its Subsidiaries
shall be in addition to, and not in lieu of, monetary damages and any other
remedies to which the Company or its Subsidiaries may be entitled. Further,
in the event of an alleged  breach or  violation  by the Employee of any of
the provisions of Sections 4.4 or 4.5 hereof, the  Non-Solicitation  Period
and\or  the  Non-Competition  Period,  as the case may be,  shall be tolled
until such breach or violation  has been cured.  The parties  agree that in
the event of the  institution  of any  action at law or in equity by either
party to enforce the  provisions of this Article IV, the losing party shall
pay all of the  costs  and  expenses  of the  prevailing  party,  including
reasonable legal fees,  incurred in connection  therewith.  If any covenant
contained in this Article IV or any part thereof is hereafter  construed to
be invalid or  unenforceable,  the same shall not affect the  remainder  of
such  covenant or any other  covenants,  which shall be given full  effect,
without regard to the invalid portions,  and any court having  jurisdiction
shall have the power to modify such covenant to the least extent  necessary
to render it  enforceable  and, in its modified  form,  said covenant shall
then be enforceable.

                                 ARTICLE V
                                 ---------
                         TERMINATION OF EMPLOYMENT
                         -------------------------

     5.1 TERMINATION AND TRIGGERING EVENTS. Notwithstanding anything to the
contrary elsewhere contained in this Agreement, the Employment Period shall
terminate at the  expiration of the Initial Term or any Extension  Term, or
prior to the  expiration of the Initial Term or any Extension Term upon the
occurrence  of any of the  following  events  (hereinafter  referred  to as
"TRIGGERING  Events"):  (a) the Employee's  death; (b) the Employee's Total
Disability; (c) the Employee's Resignation;  (d) the Employee's Resignation
with Good  Grounds;  (e) a Termination  by the Company for Cause;  or (f) a
Termination by the Company Without Cause.

     5.2 RIGHTS  UPON  OCCURRENCE  OF A  TRIGGERING  EVENT.  Subject to the
provisions  of  Section  5.3  hereof,  the rights of the  parties  upon the
occurrence  of a Triggering  Event prior to the  expiration  of the Initial
Term or any Extension Term shall be as follows:

          (A)  RESIGNATION AND TERMINATION BY THE COMPANY FOR CAUSE: If the
     Triggering  Event was the  Employee's  Resignation or a Termination by
     the Company for Cause,  the Employee  shall be entitled to receive his
     Annual Base  Compensation  and accrued but unpaid vacation through the
     date  thereof in  accordance  with the policy of the  Company,  and to
     continue  to  participate  in  the  Company's  health,  insurance  and
     disability plans and programs  through that date and thereafter,  only
     to the extent permitted under the terms of such plans and programs.

          (B) DEATH OR TOTAL  DISABILITY:  If the Triggering  Event was the
     Employee's death or Total Disability,  the Employee (or the Employee's
     designated  beneficiary)  shall be entitled to receive the  Employee's
     Annual Base  Compensation  and accrued but unpaid vacation through the
     date  thereof  plus a pro rata  portion  of the  Employee's  Potential
     Annual Target Bonus for the calendar year in which such death or Total
     Disability  occurred  (based on the  number of days the  Employee  was
     employed during the applicable  calendar year), in accordance with the
     policy of the Company, and to continue to participate in the Company's
     health,  insurance and disability  plans and programs through the date
     of termination and thereafter  only to the extent  permitted under the
     terms of such plans and programs.

          (C)  TERMINATION  BY  COMPANY  WITHOUT  CAUSE OR  RESIGNATION  BY
     EMPLOYEE WITH GOOD GROUNDS:  If the Triggering Event was a Termination
     by the Company  Without  Cause or a  Resignation  by the Employee With
     Good  Grounds,  the  Employee  shall be entitled to receive his Annual
     Base  Compensation  and accrued but unpaid  vacation  through the date
     thereof  plus, in the case of either (i)  Resignation  by the Employee
     with Good Grounds or (ii) a Termination  By the Company  Without Cause
     in the discretion of the Chief Executive Officer of the Company, a pro
     rata portion of the Employee's  Potential  Annual Target Bonus for the
     calendar year in which such  Triggering  Event occurred  (based on the
     number  of days  the  Employee  was  employed  during  the  applicable
     calendar  year),  payable  in  accordance  with the  Company's  normal
     payroll practices,  provided that in addition, the Employee shall also
     be paid, in equal monthly  installments  over the  "Severance  Period"
     hereinafter referred to, an aggregate amount equal to his then current
     Annual Base  Compensation,  payable in  accordance  with the Company's
     normal  payroll  practices,  and to  continue  to  participate  in the
     Company's  health,  insurance and disability plans and programs to the
     extent such coverage is available  thereunder  ("ADDITIONAL  SEVERANCE
     BENEFITS")  during the one (1) year period  immediately  following the
     date of the  termination  of the  Employment  Period  (the  "SEVERANCE
     PERIOD"); provided that the Employee shall be entitled to receive such
     Additional  Severance Benefits during the Severance Period if and only
     if the Employee has executed and  delivered to the Company the General
     Release  substantially in form and substance as set forth in Exhibit B
     to this  Agreement  and only so long as the  Employee has not breached
     any of his  covenants  to the  Company set forth in Article IV of this
     Agreement.

          (D) CESSATION OF ENTITLEMENTS AND COMPANY RIGHT OF OFFSET. Except
     as otherwise  expressly  provided herein, all of the Employee's rights
     to salary,  employee  benefits,  fringe benefits and bonuses hereunder
     (if any) which would  otherwise  accrue after the  termination  of the
     Employment Period shall cease upon the date of such  termination.  The
     Company may offset any loans, cash advances or fixed amounts which the
     Employee owes the Company or its Affiliate against any amounts it owes
     the Employee under this Agreement.

     5.3 SURVIVAL OF CERTAIN OBLIGATIONS AND TERMINATION  CERTIFICATE.  The
provisions of Articles IV, VI and VIII shall survive any termination of the
Employment  Period,  whether by reason of the  occurrence  of a  Triggering
Event  or the  expiration  of the  Initial  Term  or  any  Extension  Term.
Immediately  following  the  termination  of  the  Employment  Period,  the
Employee shall promptly  return to the Company all property  required to be
returned to the Company  pursuant to the  provisions  of Section 4.2 hereof
and execute and deliver to the Company the Termination Certificate attached
hereto as Exhibit A and by this reference made a part hereof.

                                 ARTICLE VI
                                 ----------
                                 ASSIGNMENT
                                 ----------

     6.1  PROHIBITION  OF  ASSIGNMENT BY EMPLOYEE.  The Employee  expressly
agrees  for  herself  and on behalf of his  executors,  administrators  and
heirs,  that this  Agreement  and his  obligations,  rights,  interests and
benefits  hereunder  shall  not  be  assigned,   transferred,   pledged  or
hypothecated in any way by the Employee,  his executors,  administrators or
heirs,  and  shall not be  subject  to  execution,  attachment  or  similar
process. Any attempt to assign, transfer,  pledge, hypothecate or otherwise
dispose  of this  Agreement  or any such  rights,  interests  and  benefits
thereunder  contrary  to  the  foregoing  provisions,  or the  levy  of any
attachment or similar process  thereupon shall be null and void and without
effect and shall relieve the Company of any and all liability hereunder.

     6.2 RIGHT OF COMPANY TO ASSIGN. This Agreement shall be assignable and
transferable  by the  Company  to  any  successor-in-interest  without  the
consent of the Employee.

                                 ARTICLE VI
                                 ----------
                                DEFINITIONS
                                -----------

     "AFFILIATE" means each of the Company's Subsidiaries.

     "BOARD" means the Board of Directors of the Company.

     "RESIGNATION" means the voluntary  termination of employment hereunder
by the Employee  which is not a  Resignation  with Good Grounds  (except if
made in contemplation of a Termination by the Company for Cause),  provided
that if such action is taken by the Employee without the giving of at least
ninety (90) days prior written notice, such termination of employment shall
not be a  "Resignation,"  but instead shall  constitute a  Termination  for
Cause.

     "RESIGNATION  WITH GOOD GROUNDS" means a voluntary  termination of the
Employee's  employment  hereunder on account of, and within sixty (60) days
after, the occurrence of one or more of the following events:

          (i) the assignment to the Employee of any duties  inconsistent in
     any material respect with the Employee's  position  (including status,
     offices  and  titles),   authority,   duties  or  responsibilities  as
     contemplated  by Section 1.2 hereof which  results in a diminution  of
     the  Employee's  position,  excluding  for this  purpose an  isolated,
     insubstantial  or inadvertent  action not taken in bad faith and which
     is remedied by the Company  promptly  after receipt of written  notice
     thereof given by the Employee;

          (ii) the Employee's  Annual Base  Compensation  and\or  Potential
     Annual  Target  Bonus  is\are  decreased  below the amount of his then
     Annual Base Compensation and\or Potential Annual Target Bonus fixed by
     the  applicable  provisions  of Sections 3.1 and 3.2 hereof  (provided
     that  so long  as the  aggregate  sum of the  Employee's  Annual  Base
     Compensation  and  Potential  Annual  Target  Bonus in  respect of any
     calendar  year  during  the  Employment  Term are not  decreased,  the
     Company  shall be free to decrease the  Potential  Annual Target Bonus
     for that year and commensurately increase the Annual Base Compensation
     for that year  without  any  affect on the  subsequent  calendar  year
     Annual Base  Compensation  and Potential Annual Target Bonus, it being
     expressly  acknowledged  by the  Employee  that the  operating  result
     achievement  criteria for the payment of any of the  Potential  Annual
     Target Bonus by the Company,  its  Subsidiaries  and their  Affiliates
     shall be determined by the Board,  in its absolute  discretion) or the
     Employee's  benefits under any material employee benefit plan, program
     or  arrangement  of the Company  (other than a change that affects all
     Employees  of the Company)  are  materially  reduced from the level in
     effect upon the Employee's commencement of participation therein; or

          (iii)  the  failure  of the  Company  to  comply  with any of the
     provisions of this Agreement, other than an isolated, insubstantial or
     inadvertent action not taken in bad faith and which is remedied by the
     Company  promptly after receipt of written notice thereof given by the
     Employee.

     "SUBSIDIARY"  means,  with  respect to any  person,  any  corporation,
limited  liability  company,  partnership,  association  or other  business
entity of which (i) if a corporation,  a majority of the total voting power
of shares  of stock  entitled  (without  regard  to the  occurrence  of any
contingency)  to vote in the  election of  directors,  managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
person or entity or one or more of the other Subsidiaries of such person or
entity or a combination  thereof,  or (ii) if a limited liability  company,
partnership,  association  or other  business  entity,  a  majority  of the
partnership  or other  similar  ownership  interest  thereof is at the time
owned or controlled, directly or indirectly, by any person or entity or one
or more Subsidiaries of such person or entity or a combination  thereof For
purposes  hereof,  a person or  persons  shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association
or other  business  entity if such person or persons  shall be  allocated a
majority of limited liability  company,  partnership,  association or other
business  entity  gains  or  losses  or shall be or  control  any  managing
director or general partner of such limited liability company, partnership,
association or other business entity.

     "TERMINATION  BY THE  COMPANY  FOR  CAUSE"  means  termination  by the
Company of the Employee's employment for:

          (i)  misappropriation  of any  significant  monies or significant
     assets or properties of the Company;

          (ii) conviction of a felony or a crime involving moral turpitude;

          (iii)  substantial and repeated failure to comply with directions
     of the Chief Executive Officer of the Company;

          (iv) gross negligence or willful misconduct;

          (v)  chronic  alcoholism  or drug  addiction  together  with  the
     Employee's  refusal to cooperate  with or  participate  in  counseling
     and/or treatment of same; or

          (vi) any willful action or inaction of the Employee which, in the
     reasonable  opinion of the  Board,  constitutes  dereliction  (willful
     neglect or willful  abandonment  of  assigned  duties),  or a material
     breach of Company  policy or rules which,  if  susceptible to cure, is
     not  cured  by  the  Employee  within  five  (5)  days  following  the
     Employee's  receipt of written  notice from the Company  advising  the
     Employee  with  reasonable  specificity  as to the action or  inaction
     viewed by the Board to be dereliction or a material  breach of Company
     policy or rules;

provided that the termination of the Employee's employment hereunder by the
Company shall not be deemed a  Termination  by the Company for Cause unless
and until there shall have been  delivered to the Employee a written notice
from the Chief Executive Officer of the Company (after reasonable notice to
and an opportunity for the Employee (alone and in person) to have a meeting
with the Chief Executive  Officer of the Company)  finding that in the good
faith opinion of the Chief Executive  Officer of the Company,  the Employee
was guilty of the conduct set forth in one or more of such clauses.

     "TERMINATION  BY THE COMPANY WITHOUT CAUSE" means a termination of the
Employee's  employment  by the Company  which is not a  Termination  by the
Company for Cause,  provided that the termination of the Employment  Period
on account of the failure of the Company to extend the Employment Period in
accordance  with the  provisions  of Section 2.2 hereof shall  constitute a
Termination by the Company Without Cause.

     "TOTAL DISABILITY" means the Employee's inability, because of illness,
injury or other  physical  or mental  incapacity,  to  perform  his  duties
hereunder  (as  determined  by the Board in good  faith)  for a  continuous
period of one hundred eighty (180)  consecutive days, or for a total of one
hundred eighty (180) days within any three hundred sixty (360)  consecutive
day  period,  in which case such Total  Disability  shall be deemed to have
occurred  on the last day of such one  hundred  eighty  (180)  day or three
hundred sixty (360) day period, as applicable.

                                ARTICLE VIII
                                ------------
                                  GENERAL
                                  -------

     8.1 NOTICES.  All notices under this Agreement shall be in writing and
shall be deemed properly sent, (i) when delivered,  if by personal  service
or reputable overnight courier service, or (ii) when received,  if sent (x)
by certified or registered mail, postage prepaid, return receipt requested,
or (y) via facsimile transmission (provided that a hard copy of such notice
is sent to the  addressee via one of the methods of delivery or mailing set
forth above on the same day the  facsimile  transmission  is sent);  to the
recipient at the address indicated below:

        Notices to Employee:

        Terry D. Smith

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

        Notices to Company:
        ------------------

        Sovereign Specialty Chemicals, Inc.
        C/O Chief Executive Officer

        Suite 2200
        225 West Washington Street
        Chicago, Illinois 60606
        Facsimile (312) 419-7151

        With Copies to:
        --------------

        Robert I. Schwimmer, Esq.
        Jenkens & Gilcrhist
        225 West Washington, Suite 2600
        Chicago, Illinois 60606
        Facsimile (312) 425-3909

        Timothy E. Peterson, Esq.
        Fried, Frank, Harris, Shriver & Jacobson
        4 Chriswell Street
        London EC1Y 4UP
        Facsimile (0207) 972-9602

        Christine J. Smith, Esq.
        AEA Investors Inc.
        65 East 55th Street
        New York, New York 10022
        Facsimile (212) 888-1459

     8.2 GOVERNING LAW. This Agreement  shall be subject to and governed by
the laws of the State of  Illinois  without  regard to any choice of law or
conflicts of law rules or  provisions  (whether of the State of Illinois or
any other  jurisdiction),  irrespective  of the fact that the  Employee may
become a resident of a different state.

     8.3 BINDING  EFFECT.  The Agreement shall be binding upon and inure to
the benefit of the Company,  its successors  and assigns,  and the Employee
and his executors, administrators, personal representatives and heirs.

     8.4 COMPLETE  UNDERSTANDING.  This Agreement  constitutes the complete
understanding  among the parties  hereto with regard to the subject  matter
hereof,  and  supersedes any and all prior  agreements  and  understandings
relating to the employment of the Employee by the Company.

     8.5 AMENDMENTS. No change,  modification or amendment of any provision
of this  Agreement  shall be valid unless made in writing and signed by all
of the parties hereto.

     8.6 WAIVER.  The waiver by the Company of a breach of any provision of
this  Agreement  by the  Employee  shall not operate or be  construed  as a
waiver of any subsequent breach by the Employee. The waiver by the Employee
of a breach of any  provision of this  Agreement  by the Company  shall not
operate as a waiver of any subsequent breach by the Company.

     8.7 VENUE,  JURISDICTION,  ETC.  The Employee  hereby  agrees that any
suit,  action or  proceeding  relating in any way to this  Agreement may be
brought and  enforced  in the Circuit  Court of Cook County of the State of
Illinois or in the District  Court of the United  States of America for the
Northern  District of Illinois,  Eastern  Division,  and in either case the
Employee  hereby  submits  to the  jurisdiction  of each  such  court.  The
Employee  hereby  waives  and  agrees  not to  assert,  by way of motion or
otherwise,  in any such  suit,  action or  proceeding,  any claim  that the
Employee is not personally  subject to the  jurisdiction of the above-named
courts,  that the suit,  action or proceeding is brought in an inconvenient
forum or that the venue of the suit, action or proceeding is improper.  The
Employee  consents and agrees to service of process or other legal  summons
for  purpose of any such suit,  action or  proceeding  by  registered  mail
addressed to the Employee at his address listed in the business  records of
the  Company.  Nothing  contained  herein  shall  affect  the rights of the
Company  to bring  suit,  action or  proceeding  in any  other  appropriate
jurisdiction.  The  Employee and the Company do each hereby waive any right
to trial by jury, she or it may have concerning any matter relating to this
Agreement.

     8.8  SEVERABILITY.  If any portion of this Agreement  shall be for any
reason,  invalid or unenforceable,  the remaining portion or portions shall
nevertheless be valid, enforceable and carried into effect.

     8.9  HEADINGS.  The  headings  of  this  Agreement  are  inserted  for
convenience  only and are not to be considered in the  construction  of the
provisions hereof.

     8.10  COUNTERPARTS.  This  Agreement  may be  executed  in one or more
counterparts,  all of which,  taken together,  shall constitute one and the
same agreement.

     IN WITNESS WHEREOF, the Company has caused this Agreement to be signed
by its duly  authorized  officers  and its  corporate  seal to be  hereunto
affixed,  and the  Employee  has  hereunto set his hand on the day and year
first above written.

COMPANY:                                                      EMPLOYEE:
-------                                                       --------





SOVEREIGN SPECIALTY CHEMICALS, INC.,
a Delaware Corporation                            /s/ Terry D.Smith
                                                  -----------------------
By /s/ Norman E. Wells, Jr.                           Terry D. Smith
   ----------------------------------
   Chief Executive Officer




</TEXT>
</DOCUMENT>
