FORM 10-K DATED 9/30/02
Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the Fiscal year ended September 30, 2002
 
or
 
o
  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 1-5667

Cabot Corporation

(Exact name of Registrant as specified in its charter)
     
Delaware
  04-2271897
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
 
Two Seaport Lane, Suite 1300
Boston, Massachusetts
(Address of Principal Executive Offices)
  02210
(Zip Code)

(617) 345-0100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common stock, $1.00 par value per share:
     
61,556,953 Shares Outstanding
  Boston Stock Exchange
At November 29, 2002
  New York Stock Exchange
Pacific Exchange

Preferred Stock Purchase Rights

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes o

      The aggregate market value of the Registrant’s common stock held beneficially or of record by shareholders who are not directors or executive officers of the Registrant at November 29, 2002, was approximately $1,461,000,000, based on the closing price on that date of $25.33, on the New York Stock Exchange, Inc.

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes þ No o

      The aggregate market value of the Registrant’s common stock held beneficially or of record by shareholders who were not directors or executive officers of the Registrant at March 31, 2002 was approximately $2,157,000,000, based on the closing price on that date of $36.85, on the New York Stock Exchange, Inc.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s definitive Proxy Statement for its 2003 Annual Meeting of Shareholders are incorporated by reference in Part III of this annual report on Form 10-K.




TABLE OF CONTENTS

PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Part II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants and Accounting and Financial Disclosure
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Ex-10(m) Loan Agreement, dated October 15, 2002
Ex-12 Statement Re: Computation of Ratios
Ex-21 List of Significant Subsidiaries
Ex-23 Consent of PricewaterhouseCoopers LLP
Ex-99.1 Certification pursuant to Sarbanes-Oxley


Table of Contents

PART I

Item 1.     Business

General

      Cabot’s business was founded in 1882 and incorporated in the State of Delaware in 1960. The Company has businesses in specialty chemicals, performance materials, and specialty fluids. The Company and its affiliates have manufacturing facilities in the United States and more than 20 other countries.

      The terms “Cabot” and “Company” as used in this Report refer to Cabot Corporation and its consolidated subsidiaries.

      The description of the Company’s businesses is as of September 30, 2002, unless otherwise noted. Financial information about the Company’s business segments and geographic areas appears in the Overview and Continuing Operations sections of Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below, and in Note S of the Notes to the Company’s Consolidated Financial Statements in Item 8 below.

      In February 2002, the Company purchased the remaining 50% of the shares in Showa Cabot Supermetals KK (“SCSM”) in Japan from its joint venture partner, Showa Denko KK. The acquisition of SCSM expanded the capacity of Cabot’s tantalum business.

      During the fiscal year ended September 30, 2002, Cabot repurchased approximately 2.6 million shares of its common stock, $1.00 par value per share (the “Common Stock”), for the purpose of reducing the total number of shares outstanding as well as offsetting shares issued under the Company’s employee incentive compensation programs.

      Additional information regarding significant events affecting the Company during its fiscal year ended September 30, 2002 is set forth in Item 7 below under Management’s Discussion and Analysis of Financial Condition and Results of Operation.

      The Company’s internet address is www.cabot-corp.com. The Company makes available free of charge on or through its internet website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission (the “Commission”).

Chemical Businesses

     Carbon Black

      The Company manufactures and sells carbon black. Carbon black is a form of elemental carbon, which is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications. Carbon black is used to enhance the physical, electrical and optical properties of the systems and applications in which it is incorporated. The Company’s carbon black products are used in tires, industrial products and high performance applications. Carbon blacks are used in the tire industry as a rubber reinforcing agent and a performance additive. These products are marketed globally and are used in all types of tires. Carbon blacks are used in industrial products in applications such as hoses, belts, extruded profiles and molded goods. In fiscal year 2000, the Company combined its plastics business with its special blacks business to form its performance products business group (“PPB Group”). The PPB Group manufactures specialized grades of carbon black which are used as pigments, to enhance conductivity and static charge control, to provide UV protection, to enhance mechanical properties, and to provide chemical flexibility through surface treatment. These products are used in many industries such as inks, coatings, cables, pipes, toners and electronics. The PPB Group also markets carbon black, and produces and markets black and white thermoplastic concentrates and specialty compounds to the plastics industry.

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      Cabot sells products under various trademarks, a large number of which are registered or for which the Company is seeking registration in one or more countries. (See “Other” below.) Sales are made in Europe (concentrates, compounds and carbon black), North America (carbon black), South America (concentrates, compounds and carbon black), and Asia (concentrates, compounds and carbon black) through Company employees, and through distributors and sales representatives.

      The Company believes that it is the leading manufacturer of carbon black in the world, with an estimated one-quarter of the worldwide production capacity and market share of carbon black. The Company competes in the manufacture of carbon black primarily with two companies having a global presence and with at least 20 other companies in various regional markets in which it operates. (See “Other” below.)

      The Company owns and operates carbon black production plants in Argentina, Australia, Brazil, Canada, China, Colombia, England, France, India, Indonesia, Italy, The Netherlands, Spain and the United States. Affiliates of the Company own carbon black plants in the Czech Republic, Japan, Malaysia, Mexico and Venezuela. Headquarters for the Company’s carbon black business are located in Boston, Massachusetts, with regional headquarters in Billerica, Massachusetts (North America), São Paulo, Brazil (South America), Leuven, Belgium (Europe) and Kuala Lumpur, Malaysia (Asia Pacific). Some of the plants listed above are built on leased land. (See “Properties” below.)

      The principal raw material used in the manufacture of carbon black is a portion of the residual heavy oils derived from petroleum refining operations and from the distillation of coal tars and the production of ethylene throughout the world. Natural gas also goes into the production of carbon black. While the availability of raw materials has not been a significant factor for the Company’s carbon black business, the Company may experience some difficulty obtaining low sulfur feedstock at an acceptable cost for its European operations in the event the proposed Best Available Techniques (“BAT”) Reference Documents, so-called BREF Notes, for the European carbon black industry, which are described more fully under “Safety, Health and Environment” below, calling for a reduction in annual average sulfur content in carbon black feedstock to 0.5%, is adopted. Raw material costs are influenced by the cost and availability of oil worldwide and the availability of various types of carbon black oils.

      The thermoplastic concentrates and specialty compounds sold by the Company are produced in facilities in Belgium, Italy, the United Kingdom and Hong Kong. In Europe, the Company is one of the five leading producers of thermoplastic concentrates. Other than carbon black feedstock, the primary raw materials used in this business are titanium dioxide, thermoplastic resins and mineral fillers. Raw materials for these concentrates and components are, in general, readily available.

      Management continues to support carbon black new product development initiatives that have significant customer involvement or sponsorship. Management also supports process research and development initiatives that can lead to production optimization.

     Fumed Metal Oxides

      The Company manufactures and sells fumed metal oxides, including fumed silica and fumed alumina and dispersions thereof under various trademarks. Fumed silica is an ultra-fine, high-purity particle used as a reinforcing, thickening, abrasive, thixotropic, suspending or anti-caking agent in a wide variety of products produced for the automotive, construction, microelectronics, and consumer products industries, including adhesives, sealants, cosmetics, inks, silicone rubber, coatings, polishing and pharmaceuticals. The headquarters for the Company’s fumed metal oxides business are located in Billerica, Massachusetts. This business has two North American fumed metal oxides manufacturing plants, which are located in Tuscola, Illinois and Midland, Michigan. The Midland plant was completed in September 1999, began operations in November 1999 and achieved full output and qualification in fiscal year 2001. The Company also owns manufacturing plants in Wales and Germany. In addition, a joint venture owned 50% by the Company and 50% by an Indian entity owns a plant in India, which began operations in the spring of 1998. Raw materials for the production of fumed silica are various chlorosilane feedstocks. The feedstocks are either purchased or converted to product on a fee-basis (so-called “toll conversion”) for owners of the feedstock. The Company also purchases aluminum chloride as feedstock for the production of fumed alumina. The Company has long-term

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procurement contracts or arrangements in place for the purchase of feedstock for this business, which it believes will enable it to meet its raw material requirements for the foreseeable future. In addition, the Company buys some materials in the spot market in order to help ensure flexibility and minimize costs. Sales of fumed metal oxides products are made by Company employees and through distributors and sales representatives. There are four principal producers of fumed silica in the world. The Company believes it is the leading producer and seller of this chemical in the United States and second worldwide.

     Inkjet Colorants

      Inkjet colorants are pigment-based black and other colorants, which are designed to replace traditional pigment dispersions and dyes used in inkjet printing applications. Products produced by the Company’s inkjet colorants business target various printing markets, including home and office printers, wide format printers, and commercial and industrial printing applications. The Company’s black colorants have become integral components in several inkjet printing systems introduced to the market since 1998. The Company commercialized color pigments during fiscal year 2002. Sales are made by Company employees and through distributors and sales representatives. The headquarters of the Company’s inkjet colorants business are located in Billerica, Massachusetts. Raw materials for the inkjet colorants business include carbon black, as well as other products, from various sources. The Company believes that all raw materials for this business are in adequate supply.

     Aerogels

      Cabot’s aerogels, which are marketed under the NanogelTM trademark, are hydrophobic silica particles with potential uses in a variety of thermal and sound insulation applications. During the fiscal year, the aerogels business completed construction of a new semi-works facility located in Frankfurt, Germany, which is in the start-up phase. The headquarters for the business are located in Boston, Massachusetts. The principal raw materials for the production of aerogels are silicic acid and sodium silicate, which the Company believes are in adequate supply.

      The first commercial shipment of the Company’s NanogelTM product occurred in December 2002. The product shipped was used in the manufacture of translucent panels for the construction industry. Because this business and its products represent a new business for the Company utilizing a new chemical process, its operations are subject to several risks, including the risk that expected capacity output at the business’s newly constructed semi-works facility is delayed or not achieved, and that the business’s products do not achieve market acceptance.

Performance Materials

      The Company produces tantalum, niobium (columbium) and their alloys. Tantalum, which accounts for substantially all of this business’ sales, is produced in various forms including powder and wire for electronic capacitors. Tantalum and niobium and their alloys are also produced in wrought form for non-electronic applications such as chemical process equipment and the production of superalloys, and for various other industrial and aerospace applications. The headquarters for this business are currently being relocated to Boston, Massachusetts. In February 2002, the Company purchased the remaining 50% of the shares of Showa Cabot Supermetals in Japan from its joint venture partner, Showa Denko KK. The Company operates manufacturing facilities for this business in Boyertown, Pennsylvania, and in Higashi-Nagahara, Japan. Raw materials are obtained by the Company from ores mined principally in Australia, Brazil and Canada and from by-product tin slags from tin smelting mainly in Malaysia and Thailand. Raw materials are currently in adequate supply. Sales in the United States are made by Company employees, with export sales to Europe handled by Company employees, independent European sales representatives and an affiliated company. Sales in Japan and other parts of Asia are handled primarily through Company employees. There are currently two principal competitors producing tantalum and niobium. The Company believes that it is the leading producer of electronic grade tantalum powder products, with competitors having greater production in some other product lines. (See “Other” below.)

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Specialty Fluids

      The Company’s specialty fluids business produces and markets cesium formate as a drilling and completion fluid for use primarily in high pressure and high temperature oil and gas well operations. Cesium formate products are solids-free, high-density fluids that have a low viscosity, permitting them to flow readily in oil and gas wells. The fluid is resistant to high temperatures, does not damage producing reservoirs and is readily biodegradable. The Company has been shipping the fluid to facilities in Aberdeen, Scotland, and Bergen, Norway, for application in its target market, the North Sea, and to facilities in The Woodlands, Texas for application in the Gulf of Mexico. During fiscal year 2002, cesium formate was used successfully in 13 oil and gas well completions and 4 drill-in applications. The specialty fluids business has its headquarters in The Woodlands, Texas, and has a mine and a cesium formate manufacturing facility in Manitoba, Canada. The Company makes cesium formate sales directly to oil and gas operating companies and through existing oil field service companies. Customers principally rent cesium formate from the Company but are required to purchase any of the product that is not returned to the Company after the job is completed. The principal raw material used in this business is pollucite ore, which the Company obtains from its mine. The Company has an adequate supply of this cesium-rich ore, with approximately 82% of the world’s known cesium reserves. Because each job for which cesium formate is used requires a large volume of the product, the specialty fluids business must carry a large inventory. The Company reclaims between 60% and 90% of the cesium formate used in each job, which is returned to inventory for use in subsequent well operations. The Company’s specialty fluids business also markets fine cesium chemicals to various industrial chemical companies, and mined spodumene to the pyroceramics industry. Sales of those products are made by Company employees and through sales representatives. The specialty fluids business also mines and processes tantalum ore for shipment to Cabot Performance Materials.

Discontinued Businesses

      As reported in the Company’s Form 8-K filed with the Commission on October 3, 2000, in September 2000 the Company sold all of its liquefied natural gas (LNG) business, which is being reported as a discontinued operation in the Financial Information being filed as a part of this annual report on Form 10-K. The Company also completed the initial public offering of approximately 20% of its microelectronics materials business, conducted by Cabot Microelectronics Corporation, in the third quarter of fiscal year 2000. The offering was followed by a distribution of the Company’s remaining shares of Cabot Microelectronics Corporation common stock to Cabot shareholders which was completed on September 29, 2000, which was also reported in the Company’s Form 8-K filed with the Commission on October 3, 2000. This business is also being reported as a discontinued operation in the Financial Information being filed as a part of this annual report on Form 10-K. See Note D of the Notes to the Company’s Consolidated Financial Statements which appear in Item 8 of this annual report on Form 10-K for the fiscal year ended September 30, 2002.

Other

      The Company owns and is a licensee of various patents, which expire at various times, covering many of its products, as well as processes and product uses. Although the products made and sold under these patents and licenses are important to the Company, the loss of any particular patent or license would not materially affect the Company’s business, taken as a whole. The Company sells its products under a variety of trademarks, the loss of any one of which would not materially affect the Company’s businesses, taken as a whole.

      With the exception of the Company’s former LNG business referred to above, the Company’s businesses are generally not seasonal in nature, although they experience some decline in European sales in the fourth fiscal quarter due to summer plant shutdowns. The Company believes that as of September 30, 2002, approximately $201 million of backlog orders for its businesses were firm, compared to firm backlog orders as of September 30, 2001 of approximately $209 million. Backlog consists of firm purchase orders for which a delivery date has been scheduled. Because customers may generally cancel purchase orders with little or no notice without any significant penalty, and because most orders are typically shipped within 30 days of receipt,

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backlog at any particular time is not typically a good indicator of future revenues. All of the 2002 backlog orders are expected to be filled during fiscal year 2003.

      Many of the Company’s chemicals and materials are used in products associated with the automotive industry such as tires, extruded profiles, hoses, molded goods, capacitors and paints. The Company’s financial results are affected by the cyclical nature of the automotive industry, although a large portion of the market is for replacement tires and other parts which are less subject to automobile industry cycles. The Company has long-term carbon black supply contracts with two of its North American tire customers, one of which expires at the end of calendar year 2003, and expects in the future to pursue a similar strategy under appropriate circumstances. Those contracts are designed to provide such customers with a secure supply of carbon black and reduce the volatility in the Company’s carbon black volumes and margins caused, in part, by automobile industry cycles.

      Five major tire and rubber customers, one silicones customer, three capacitor materials customers and one microelectronics customer represent a material portion of the total net sales and operating revenues of the Company’s businesses; the loss of one or more of these customers could materially adversely affect the Company’s businesses taken as a whole. In fiscal year 2002, sales to Goodyear Tire and Rubber Company by the Company’s Chemical Businesses amounted to 11% of the Company’s consolidated revenues.

      Competition in the Company’s businesses is based on price, service, quality, product performance and technical innovation. Competitive conditions also necessitate carrying an inventory of raw materials and finished goods in order to meet customers’ needs for prompt delivery of products. On behalf of certain carbon black producers, including the Company, an industry group has filed an antidumping petition with authorities in the European Union in response to rubber black imports from Egypt and Russia. The Company has also sought antidumping relief in other jurisdictions, including Indonesia and Malaysia.

Employees

      As of September 30, 2002, the Company had approximately 4,500 employees. Approximately 440 employees in the United States are covered by collective bargaining agreements. The Company believes that its relations with its employees are satisfactory.

Research and Development

      The Company develops new and improved products and processes and greater operating efficiencies through Company-sponsored research and technical service activities, including those initiated in response to customer requests. Expenditures by the Company for such activities are shown in the Consolidated Statements of Income which appears in Item 8 of this annual report on Form 10-K for the fiscal year ended September 30, 2002.

Safety, Health and Environment

      The Company has been named as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (the “Superfund law”) and comparable state statutes with respect to several sites. (See “Legal Proceedings” below.) During the next several years, as remediation of various environmental sites is carried out, the Company expects to spend a significant portion of its $29 million environmental reserve for costs associated with such remediation. The Company anticipates that the expenditures at these sites will be made over a number of years, and will not be concentrated in any one year. Adjustments are made to the reserve based on the Company’s continuing analysis of its share of costs likely to be incurred at each site. Inherent uncertainties exist in these estimates due to unknown conditions at the various sites, changing governmental regulations and legal standards regarding liability, and changing technologies for handling site investigation and remediation. No assurance can be given that the actual costs to investigate and remediate these sites will not exceed the accrued amounts in the environmental reserve. The sites are primarily associated with divested businesses. It is possible that the Company may also incur future costs relating to sites that are not currently known to the Company or as to which it is currently not possible to make an estimate. While it is always possible that an unusual event may occur with respect to a given site

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and have a material adverse effect on the results of operations in a particular period, in light of the environmental reserve, the Company does not believe that the cost relating to these sites, in the aggregate, are likely to have a material adverse effect on the Company’s financial condition.

      The Company’s ongoing operations are subject to extensive federal, state, local, and foreign laws, regulations, rules, and ordinances relating to safety, health, and environmental matters (“SH&E Requirements”). The Company has expended considerable sums to construct, maintain, operate, and improve facilities for safety, health and environmental protection and to comply with SH&E Requirements. In recognition of the importance of these matters to the Company, in February 1990, the Company’s Board of Directors established a Safety, Health, and Environmental Affairs Committee. The Committee, which is comprised of six non-employee directors and generally meets three times a year, is charged with reviewing the Company’s safety and environmental management programs and major hazard analyses, reviewing the Company’s environmental capital spending and consulting with the Company’s outside and internal advisors regarding management of the Company’s safety, health and environmental programs.

      The operation of any chemical manufacturing business as well as the sale and distribution of chemical products involve risks under SH&E Requirements, many of which provide for substantial monetary fines and criminal sanctions for violations. The production and/or processing of carbon black, fumed metal oxides, tantalum, niobium and other chemicals involves the handling, manufacture or use of certain substances or components that may be considered toxic or hazardous within the meaning of applicable SH&E Requirements, and certain operations have the potential to cause environmental or other damage as well as injury or death to employees or third parties. The Company could incur significant expenditures in connection with such operational risks. The Company believes that its ongoing operations comply with current SH&E Requirements in a manner that should not materially affect the earnings or cash flow of the Company in an adverse manner. There can be no assurance, however, that significant costs or liabilities will not be incurred with respect to SH&E Requirements and the Company’s operations. Moreover, the Company is not able to predict whether future changes or developments in SH&E Requirements will affect its earnings or cash flow in a materially adverse manner.

      In 1996, the International Agency for Research on Cancer (“IARC”) revised its evaluation of carbon black from Group 3 (insufficient evidence to make a determination regarding carcinogenicity) to Group 2B (known animal carcinogen, possible human carcinogen), based solely on results of studies of female rat responses to the inhalation of carbon black. The Company has communicated this change in IARC’s evaluation of carbon black to its customers and employees and has made changes to its material safety data sheets and elsewhere, as appropriate. The Company continues to believe that available evidence, taken as a whole, indicates that carbon black is not carcinogenic to humans, and does not present a health hazard when handled in accordance with good housekeeping and safe workplace practices as described in the Company’s material safety data sheets.

      In October 1999, the California Office of Environmental Health Hazard Assessment (“OEHHA”) published a Notice of Intent to add “carbon black (airborne particles of respirable size)” to its list of chemicals known to the state to cause cancer promulgated pursuant to the California Safe Drinking Water and Toxic Enforcement Act, commonly referred to as Proposition 65. OEHHA stated it was taking this action in light of IARC’s 1996 reclassification of carbon black. Proposition 65 requires businesses to give warnings to individuals before they knowingly or intentionally expose them to chemicals subject to its requirements, and it prohibits businesses from knowingly discharging or releasing the chemicals into water or onto land where they could contaminate drinking water. The Company is working with the International Carbon Black Association (“ICBA”) and various customers and carbon black user groups to respond to the proposal by OEHHA to add carbon black to the list of chemicals subject to Proposition 65.

      In April 2002, The Netherlands published the “Dutch Notes on BAT for the Carbon Black Industry” to support the identification of Best Available Techniques (“BAT”) for the European carbon black industry pursuant to European Union (“EU”) Directive 96/61/EEC. BAT Reference Documents, so-called BREF Notes, are being prepared by various EU member countries under supervision of the Integrated Pollution Prevention and Control Bureau (the “IPPC Bureau”). The Netherlands has taken initial responsibility for

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preparing a BREF Note for the carbon black manufacturing industry. The proposed BREF Note for the carbon black industry calls for an annual average sulfur content in carbon black feedstock of 0.5% to control sulfur dioxide emissions and, if adopted, could have serious financial effects on the carbon black industry, including the Company. ICBA has proposed a 1.5% annual average. The Dutch BREF Note proposal will be taken up for review in 2003 by the IPPC Bureau’s Technical Working Group. The Company is not able to estimate the magnitude of the possible financial impact of this regulatory development in the EU, should it be adopted.

      On May 15, 2002, the United States Environmental Protection Agency (“EPA”) signed the final rule amending the Generic Maximum Achievable Control Technology (“MACT”) standards to add National Emissions Standards for Hazardous Air Pollutants (“NESHAP”) for the carbon black production source category (“Carbon Black MACT”) as required under Title III of the Clean Air Act Amendments of 1990. This new rule was published in the Federal Register on July 12, 2002 and will become effective for carbon black plants located in the United States on July 12, 2005. EPA has identified hazardous air pollutants (“HAPs”) associated with the production of carbon black. The Carbon Black MACT requires 98% elimination of HAPs emissions from process vents on facility main unit filters. This is generally accomplished by combusting the tail gas vented from these filters. The Company estimates that it will be required to expend approximately $15 million in capital improvements by July 12, 2005 to comply with the Carbon Black MACT in connection with three of the Company’s carbon black facilities located in the United States.

Financial Information About Segments, Foreign and Domestic Operations and Export Sales

      Segment financial data are set forth in the Continuing Operations section of Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7, and in Note S of the Notes to the Company’s Consolidated Financial Statements, which appear in Item 8 of this annual report on Form 10-K for the fiscal year ended September 30, 2002. The Company’s former LNG business and microelectronics materials business are being reported as discontinued operations in the Financial Information being filed as a part of this annual report on Form 10-K. A significant portion of the Company’s revenues and operating profits is derived from overseas operations. The profitability of the Company’s segments is affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. (See the Geographic Information portion of Note S of the Notes to the Company’s Consolidated Financial Statements for further information relating to sales and long-lived assets by geographic area and Management’s Discussion and Analysis of Financial Condition and Results of Operation.) Currency fluctuations and nationalization and expropriation of assets are risks inherent in international operations. The Company has taken steps it deems prudent in its international operations to diversify and otherwise to protect against these risks, including the use of foreign currency financial instruments to reduce the risk associated with changes in the value of certain foreign currencies compared to the U.S. dollar. (See the Risk Management discussion contained in Quantitative and Qualitative Disclosures About Market Risk in Item 7A below, and Note R of the Notes to the Company’s Consolidated Financial Statements, which appears in Item 8 of this annual report on Form 10-K for the fiscal year ended September 30, 2002.)

Item 2.     Properties

      The Company owns or leases and operates office, production, storage, distribution, marketing and research and development facilities in the United States and in foreign countries.

      The Company’s corporate headquarters are in leased office space in Boston, Massachusetts. The Company also leases or owns other principal facilities that are used by its business segments, as set forth in the table below. In addition, the Company holds mining rights in Canada.

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Chemical Businesses

     Carbon Black:

     Owned — Administrative Offices and/or Manufacturing Plants:

         
• Ville Platte, Louisiana
• Centerville, Louisiana
• Billerica, Massachusetts
• Pampa, Texas
• Waverly, West Virginia
• Campana, Argentina
• Altona, Australia
• Loncin, Belgium
• Pepinster, Belgium
• Maua, Brazil
• Sarnia, Canada
  • Hong Kong, China *
• Cali, Columbia
• Cartagena, Columbia
• Dukinfield, England
• Stanlow, England
• Berre, France
• Port Jerome, France *
• Hanau, Germany
• Maharashtra, India *
  • Cilegon, Indonesia *
• Merak, Indonesia
• Grigno, Italy
• Ravenna, Italy
• Zierbena, Spain *
• Botlek, The Netherlands*
• Leiden, The Netherlands*

     Leased — Administrative Offices and/or Manufacturing Plants:

         
• Alpharetta, Georgia
• Leuven, Belgium
• São Paulo, Brazil
• Shanghai, China
  • Stanlow, England
• Suresnes, France
• Mumbai, India
  • Kuala Lumpur, Malaysia
• Barcelona, Spain

     Owned — Research and Development Facilities:

         
• Billerica, Massachusetts
• Pampa, Texas
• Pepinster, Belgium
  • Hong Kong, China *
• Port Dickson, Malaysia
   

     Leased — Research and Development Facilities:

         
• Port Dickson, Malaysia        

     Fumed Metal Oxides:

     Owned — Administrative Offices and/or Manufacturing Plants:

         
• Tuscola, Illinois
• Billerica, Massachusetts
• Midland, Michigan
• Stanlow, England
  • Hanau, Germany
• Rheinfelden, Germany
• Zierbena, Spain *
   

     Leased — Administrative Offices and/or Manufacturing Plants:

         
• Antwerp Belgium
• São Paulo, Brazil
  • Tokyo, Japan
• Kuala Lumpur, Malaysia
  • Barry, Wales
         
• Shanghai, China   • Barcelona, Spain    

     Inkjet Colorants:

     Owned — Administrative Offices and/or Manufacturing Plants:

         
• Billerica, Massachusetts
• Haverhill, Massachusetts
  • Stanlow, England    

     Leased — Administrative Offices and/or Manufacturing Plants:

         
• Woburn, Massachusetts   • Tokyo, Japan    

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     Aerogels:

     Owned — Manufacturing Plants and/or Research and Development Facilities:

         
• Hanau, Germany        

     Leased — Administrative Offices and/or Manufacturing Plants:

         
• Frankfurt, Germany        

Performance Materials

     Owned — Administrative Offices and/or Manufacturing Plants:

         
• Boyertown, Pennsylvania
• Higashi-Nagahara, Japan
  • Tokyo, Japan    

     Leased — Administrative Offices and/or Manufacturing Plants:

         
• Boyertown, Pennsylvania        

Specialty Fluids

     Owned — Administrative Offices and/or Manufacturing Plants:

         
• Manitoba, Canada *        

     Leased — Administrative Offices and/or Manufacturing Plants:

         
• The Woodlands, Texas
• Bergen, Norway
  • Aberdeen, Scotland    


  * On leased land.

      The Company’s administrative offices are generally suitable and adequate for their intended purposes. Existing and currently planned manufacturing and other facilities of the Company are sufficient to meet the Company’s anticipated requirements for the foreseeable future.

Item 3.     Legal Proceedings

      The Company is a defendant in various lawsuits and environmental proceedings wherein substantial amounts are claimed. The following is a description of the significant proceedings pending as of September 30, 2002, unless otherwise specified.

Environmental Proceedings

      In November 1997, Cabot was sued in the District Court of Potter County, Texas by K N Energy, Inc. (“KNE”) and various related entities for environmental remediation costs at approximately 45 gas plants and compressor stations located in New Mexico, Oklahoma and Texas. In July 1998, an arbitration panel ordered Cabot to pay $3.38 million for past response costs incurred by KNE as well as up to 80% of future groundwater remediation costs at six of the sites as such costs are incurred by KNE. In April 2002, Cabot and Kinder Morgan, Inc. (KNE’s successor), settled all remaining issues with Cabot paying an additional $942,000 and taking remedial responsibility directly at three of the remaining disputed sites.

      Beginning in May 1986, the New Jersey Department of Environmental Protection (“NJDEP”) issued directives under New Jersey’s cleanup law to Cabot and a number of other potentially responsible parties (“PRPs”) to fund an investigation for the cleanup of a six-acre site known as the Evor Phillips Site in Old Bridge Township near Perth Amboy, New Jersey (“Site”). Cabot and other PRPs subsequently entered into various Administrative Consent Orders (“ACOs”) with NJDEP to fund and perform various investigations of the Site. Cabot and certain other PRPs also initiated litigation against the current site owner and other parties in the United States District Court for the District of New Jersey to obtain monetary contribution and deed

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restrictions on the Site. The District Court has approved the imposition of such deed restrictions. Two PRPs, Union Carbide Corp. and Oakite Products, filed separate contribution actions against Cabot and other PRPs. The PRPs have settled with Union Carbide. In addition, in April 2002, the PRPs entered into an ACO with the NJDEP to perform further investigation and the final remedy for the Site.

      In 1986, Cabot sold a manufacturing facility in Reading, Pennsylvania to NGK Metals, Inc. (“NGK”). In doing so, Cabot agreed to share with NGK the costs of certain environmental remediation of the Reading plant site. After the sale, the EPA issued an order to NGK requiring it to address soil and groundwater contamination at the site. Remediation activities at the Reading property are ongoing and the Company is contributing to the costs associated with certain of those activities pursuant to the cost-sharing agreement with NGK.

      Cabot is one of approximately 25 parties identified by EPA as PRPs under the Superfund law with respect to the cleanup of Fields Brook (the “Brook”), a tributary of the Ashtabula River in northeast Ohio. From 1963 to 1972, Cabot owned two manufacturing facilities located beside the Brook. Pursuant to an EPA administrative order, 13 companies, including Cabot, are performing the design and other preliminary work relating to remediation of sediment in the Brook and soil in the floodplain and wetlands areas adjacent to the Brook. In 1997, EPA and the companies reached agreement on the remedy for these areas. EPA made certain changes to that remedy in response to its finding low levels of previously undetected radioactive material in the Brook. In addition, EPA’s cost recovery claims have been settled, and the companies have negotiated consent decrees with EPA, the State of Ohio and the Natural Resource Trustees that settle the governments’ claims for past costs and natural resource damages and obligates the companies to implement the agreed remedy. Those consent decrees were entered by the United States District Court for the Northern District of Ohio on July 7, 1999. As of September 30, 2002 remediation efforts at the site are nearly complete.

      During the summer of 1998, Cabot joined a group of companies in forming the Ashtabula River Cooperative Group (“ARCG”), which collectively agreed on an allocation for funding private party shares of a public/private partnership (the Ashtabula River Partnership (the “ARP”)), established to conduct navigational dredging and environmental restoration of the Ashtabula River (the “River”) in Ashtabula, Ohio. The ARP expects to obtain additional funding from both the federal and state governments for the project under the Federal Water Resources Development Act (“WRDA”). In September 1999, the ARP issued a Comprehensive Management Plan which placed an initial estimate of $42 million on the project. An updated cost estimate for the project of approximately $48 million was recently released by the U.S. Army Corps of Engineers as part of the WRDA process. Under the statutory formula available for funding this project under WRDA, approximately 68% of the project’s cost is to be borne by the federal government, leaving 32% of the cost for non-federal participants. The State of Ohio has pledged a contribution of $7 million to the project. The ARCG expects to be asked to bear a substantial percentage of the remaining costs. In addition, the ARCG has received a notice of claim for natural resource damages related to the River and the amount of that claim remains to be negotiated with the Natural Resource Trustees.

      In September 2002, EPA Region III filed three administrative complaints against Cabot under various federal environmental statutes in connection with the Company’s Boyertown, Pennsylvania facility. The complaints relate to alleged violations of reporting obligations in connection with two accidental releases of hazardous substances at the Boyertown facility in February and March 2000, and alleged violations of hazardous waste training and storage requirements. EPA is seeking a total of approximately $170,000 in proposed penalties under those three administrative complaints. Cabot has filed answers to the complaints and has entered into settlement discussions with EPA in an effort to resolve the allegations raised in the complaints.

      In 1994, Detrex Chemical Industries, Inc. filed third-party complaints against eight companies, including Cabot, in connection with material allegedly sent to the Koski/ Reserve Environmental Services (“RES”) landfill in Ashtabula, Ohio. Cabot and other third-party defendants filed complaints against five additional companies that sent waste to the site. In May 1998, Cabot and certain other defendants agreed to settle their liability for this matter by agreeing to fund and conduct a portion of the remedy at the landfill site and to loan RES $1.2 million to fund cleanup activities of RES on other portions of the site. Cabot is one of five of the

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settling defendants that agreed to conduct the work; the others made one-time cash payments to resolve their liabilities at the site.

      Cabot is the holder of a Nuclear Regulatory Commission (“NRC”) license for certain slag waste material deposited on industrial property on Tulpehocken Street in Reading, Pennsylvania in the late 1960s by a predecessor of Cabot that had leased a portion of the site to process tin slags. The slag material contains low levels of uranium and thorium, thus subjecting it to NRC jurisdiction. A consultant for Cabot has prepared a site decommissioning plan for the slag material which concludes that the levels of radioactivity in the slag are low enough that the material can be safely left in place and still meet NRC requirements for license termination without restrictions. Cabot’s decommissioning plan proposing this in-place remedy was filed with the NRC in August 1998. The City of Reading and the Reading Redevelopment Authority (the “RRA”) filed requests for a hearing with the NRC concerning Cabot’s decommissioning plan, alleging various deficiencies with the plan. In October 2000, Cabot reached an agreement with the City of Reading and the RRA to settle their claims. In July 2002, the Pennsylvania Department of Environmental Protection (“DEP”) submitted comments to the NRC opposing Cabot’s proposed decommissioning plan. Cabot continues to work with the NRC to obtain approval of the decommissioning plan.

      In July 1991, EPA instituted litigation against a number of parties, not including Cabot, seeking to recover its costs incurred in connection with an investigation of the Berks Associates Superfund Site in Douglassville, Pennsylvania. Cabot was joined in this litigation as a third-party defendant. In April 1996, EPA proposed that ten companies, including Cabot, undertake the remaining remediation required at the site and indicated it would be willing to reconsider, to some extent, the remediation technology to be used. After further study, EPA agreed that the alternative remedy is feasible. The companies’ consultant estimates the cost to implement the alternative remedy at the site is approximately $13 million to $18 million. The companies, including Cabot, have entered into a Consent Decree concerning implementation of the alternative remedy and payment of certain EPA past costs. As of September 30, 2002, the companies are in the process of implementing the alternative remedy.

      In 1994, EPA issued a Unilateral Administrative Order to Cabot and 11 other respondents pursuant to the Superfund law with respect to the Revere Chemical Site (a/k/a Echo Site) in Nockamixon Township, Bucks County, Pennsylvania (the “Revere Chemical Site”). The order required the respondents to design and implement several remedial measures at the Revere Chemical Site. Cabot responded to EPA’s order by indicating that it should not have been named as a respondent and by raising several objections to the order. Certain other recipients of the order proceeded to conduct the work required by EPA, and Cabot understands that the remedial work has been completed. Cabot entered into a settlement agreement with the performing parties in October 2001 covering response costs at the site. In addition, Cabot has a final agreement with the U.S. Department of Justice (“DOJ”), and EPA relating to EPA’s claim that Cabot failed to comply with the EPA order. Pursuant to that agreement, Cabot will pay a $75,000 civil penalty to the United States once the agreement is approved in federal court.

      The EPA has completed an investigation of certain areas surrounding the Company’s Boyertown, Pennsylvania facility. The investigation was prompted by media reports of complaints by area farmers of health impacts and damage to livestock and crops allegedly associated with emissions from the Boyertown facility. In a report dated November 2000, EPA stated that increased concentrations of some elements in environmental media at locations near the Boyertown site did not pose a health threat to the broad community necessitating a cleanup action by the EPA. The EPA report concluded that EPA could find no relationship between industrial emissions and reported poor farm production and animal health concerns. In November 1999, Cabot received a letter from an attorney representing certain farmers in the area threatening litigation concerning contamination alleged to be caused by the Boyertown plant. In September of 2001, two of the farmers filed suit in Pennsylvania state court alleging damage to their herds. Cabot removed the case to federal court. Cabot has filed a motion for summary judgment, which is pending. The Company believes that it has strong defenses against plaintiffs’ claims.

      In May 2000, the Direction Regionale de L’Industrie, de la Réchérche et de L’Environment (“DRIRE”) and the Préfecture de la Seine-Maritime (the “Préfecture”) issued an order to United Chemical France S.A.

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(“UCF”), a French subsidiary of Cabot, requiring UCF to undertake a simplified risk assessment (“SRA”) of a former waste dump operated by UCF from the mid-1960s to the early 1980s in the Town of Notre Dame de Gravenchon. The SRA was completed at the end of November 2000. It concluded that the site does not pose a major risk of groundwater contamination, and that no further investigation is necessary. The report has been submitted to the authorities in France but has not yet been formally approved by them. When Cabot purchased UCF in 1985, the seller indemnified Cabot for matters relating to events occurring prior to the sale, including environmental matters. Cabot has notified the seller that Cabot believes that the indemnification would cover costs related to the Final Order. The seller has cooperated with Cabot in the preparation of the SRA.

      In January 1999, DRIRE notified Cabot France S.A., a French subsidiary of Cabot, that the DRIRE was investigating groundwater pollution in the Montée des Pins area where Cabot France S.A.’s carbon black plant in Berre l’Etang, France is located. The DRIRE convened meetings of various industries in the area and asked them to work together on a study of area groundwater conditions. Ten companies, including Cabot France S.A., worked together to fund and undertake the initial study requested by the DRIRE. Based on the results of that study, a neighboring company, Shell Oil, appears to be responsible for the existing groundwater contamination, including groundwater contamination under Cabot’s Berre facility. Cabot and the other companies are expecting Shell Oil to assume responsibility for remediating the groundwater conditions in the area. To date, Shell Oil has only assumed partial responsibility for the groundwater contamination.

      Cabot, along with a number of other companies, is a PRP under the Superfund law with respect to the King of Prussia Technical Corp. site in Winslow Township, New Jersey. Work on site remediation was completed several years ago except for ongoing operation and maintenance of groundwater treatment facilities. Cabot and four other companies involved have agreed on the portions of the costs to be borne by each company. In a December 1998 letter to Cabot and the other four companies, EPA demanded approximately $4.1 million in past costs at the site. This dispute has been resolved through settlement negotiations between the group of companies and EPA for $1.7 million. In addition, in May 2001, the NJDEP informed Cabot, along with the other named parties, that NJDEP has incurred certain unreimbursed response costs at the site. The PRPs are continuing negotiations with the NJDEP concerning past costs. The NJDEP has indicated that they may seek natural resource damage costs in the future.

      On June 5, 1999, there was a break in the pipeline used to transport carbon black feedstock from a nearby port to a Ravenna, Italy carbon black facility owned by Cabot Italiana S.p.A., a wholly-owned subsidiary of Cabot. The break was in a portion of the pipeline adjacent to a neighboring industrial facility. As a result, a substantial amount of carbon black feedstock was released at the neighboring facility. An expert for the public prosecutor in Ravenna has completed an initial investigation of the facts of the spill. He has concluded that the pipeline was damaged from drilling activity conducted by a third party, and that Cabot is not responsible for causing the spill. In the interim, the Company undertook emergency remediation efforts immediately following the spill. Claims have been asserted against the Company by the owner of the facility where the spill occurred and by the owners of a sewer system into which some of the oil flowed. In addition, the Company has asserted a claim against the third parties that caused the spill. The municipal environmental authorities issued an order to the Company and the parties who damaged the pipeline ordering them to undertake further activities to address conditions caused by the spill. The Company and the other parties have challenged issuance of the order, and the administrative courts in Italy are hearing the matter. The parties, including the Company, have entered into an agreement to fund most of the activities required by the administrative order, and work under that agreement is proceeding. As of September 2002, the Company has spent approximately $6 million in connection with this spill. The Company has notified its insurers about the spill and has received reimbursement from them for a substantial portion of those costs. At this point, the Company does not know the likely course that legal proceedings will take, and does not have an estimate of additional costs, if any, that the Company will ultimately bear.

      The Louisiana Department of Environmental Quality (“LADEQ”) notified Cabot in a January 1995 letter of its potential liability with respect to the Great National Oil/ Ida Gas site in Ida, Louisiana (the “Ida Site”) and requested information regarding Cabot’s activities related to the Ida Site or involvement with the Hartsell Oil Company of Rodessa, Louisiana. Cabot responded in February 1995 by indicating that during the

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1982 to 1984 time period, Cabot’s Arcadia, Louisiana facility sold used oil to Hartsell for reprocessing. Cabot’s Arcadia facility was sold to Haynes International, Inc. (“Haynes”) in December 1986. Cabot believes that it is entitled to indemnity from Haynes pursuant to the acquisition agreement by which Haynes acquired the facility. Haynes has denied Cabot’s request for indemnification but also requested additional information concerning this claim. In 1997, Cabot and eight other parties received a demand letter from LADEQ for oversight costs incurred in connection with the site from July 1989 to December 1996. Cabot paid its pro-rata share of those costs in April 1997, the amount of which was immaterial. In May 2000, Cabot learned that the LADEQ intends to require the parties it has previously notified, including the Company, to perform investigation and cleanup activities at the site. The potential costs of those activities are unknown at this time.

      In May 2002, Cabot was identified by the EPA as a PRP at the Sutton Brook Disposal Area Superfund Site in Tewksbury, Massachusetts (“Sutton Brook Site”). Approximately 42 PRPs have been identified to date. Cabot also responded to an EPA information request concerning its potential connection with the Sutton Brook Site. Cabot responded to the information request stating that if any of its materials were disposed of at the Sutton Brook Site, they would have been non-hazardous substances and that it should therefore be removed from the list of PRPs. Cabot is continuing to discuss these issues with EPA. Certain of the previously identified PRPs have funded a removal action and limited investigation of the Sutton Brook Site. As of September 30, 2002, it is not possible to determine what, if any, liability Cabot may have at the Sutton Brook Site.

      Cabot has received various requests for information and notifications that it may be a PRP at several other Superfund sites.

      As of September 30, 2002, approximately $29 million was reserved for environmental matters by the Company. This amount represents the Company’s current best estimate of costs likely to be incurred based on its analysis of the extent of cleanup required, alternative cleanup methods available, abilities of other responsible parties to contribute and its interpretation of laws and regulations applicable to each site.

Other Proceedings

      The Company has exposure to a safety respiratory products business that it acquired, through a subsidiary, in April 1990. It disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, after an initial period during which responsibility was shared, to indemnify the seller, American Optical Corporation (“American Optical”), for costs, including legal costs, settlements and judgments, in connection with a number of lawsuits and claims relating to the respirators (in exchange for which the subsidiary received the benefit of the seller’s insurance and other indemnities). These lawsuits and claims typically involve allegations that the plaintiffs suffer from asbestosis or silicosis as a result, in part, from respirators that were negligently designed or labeled. The defendants in these lawsuits are often numerous and include, in addition to respirator manufacturers, makers of asbestos and sand used in sand blasting.

      Neither the Company, nor its past or present subsidiaries, at any time manufactured asbestos or asbestos-containing products. Moreover, not every person with exposure to asbestos giving rise to an asbestos claim used a form of respiratory protection. At no time did the business for which the Company is financially responsible for legal costs represent a significant portion of the respirator market. In addition, as a result of the arrangements involving these lawsuits and claims, the Company has only a portion of the liability in any given case.

      When the Company’s subsidiary disposed of the business in 1995 to Aearo Corporation (“Aearo”), it agreed with Aearo that for an annual fee of $400,000, the subsidiary would retain responsibility for, and indemnify Aearo against, claims asserted after July 11, 1995 to the extent they are attributable to the use of respirators sold before that date. Aearo can discontinue payment of the fee at any time, in which case it will assume the responsibility for and indemnify the Company with respect to these claims. Between the date of divestiture and fiscal 2001, the Company had never spent more than the $400,000 that it collects from Aearo each year.

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      As of the beginning of calendar year 2002, there were approximately 28,000 claimants in pending cases asserting claims against American Optical in connection with respirators. As of September 30, 2002 there were approximately 43,000 claimants. Under the present allocation arrangements, as claims are settled, Cabot would expect to contribute toward settlement of a significant percentage, but not all, of these claims.

      During the third quarter of fiscal year 2002, the Company agreed to pay up to $2 million as its contribution toward a settlement involving up to 13,000 claimants in Mississippi. The Company, at the time, expected to pay this amount over a period of approximately eighteen months. Due to complications in the funding mechanism of the overall settlement of these Mississippi claims, a shortfall of $5.5 million in the initial amount to be paid to the plaintiff group resulted. In December 2002, the Company agreed to fund this shortfall in exchange for an undertaking from the representatives of the payor group (consisting of the various insurers and other parties) to exercise their best efforts to seek a global settlement with the payor group. While the Company’s ability to negotiate an acceptable global settlement and its specific terms are uncertain at this time, the global settlement discussed with the representatives of the payor group would provide that as long as the payor group continues to pay all costs and liabilities in connection with the respirator litigation, the Company’s liability under a global settlement would be limited to a specified amount.

      As a result of the Mississippi settlement and the rate of new claims which have been filed during the calendar year, the Company recorded a charge of $5 million during the third quarter bringing its total reserve for respirator matters to $6 million as of September 30, 2002. In estimating its liability, the Company made the following assumptions: (i) that future settlements would continue at the historical rate of $320 per claimant; (ii) while the actual number of claims for which Cabot contributes depends upon a number of factors, that Cabot will continue to be responsible for well over half of the total claims; and (iii) that a significant number of the outstanding claims are included in the Mississippi settlement. This amount represents Cabot’s best estimate of the liability it will incur in connection with the settlement of pending respirator claims. Cabot is unable to reasonably estimate a range of possible loss for pending respirator claims given the current status of litigation and uncertainty involving the outcome of the numerous cases.

      In addition, because this is a very unpredictable area, Cabot is also unable to estimate the number of future claims or the range of liability that may be incurred as a result of such claims on any reasonable basis. As a result, the Company has not recorded a reserve for future claims at this time. While the Company’s liability associated with these future claims could have a material effect on the results of operations in a particular quarter or fiscal year as these matters develop or as a result of the Company’s initiative to seek a global settlement, Cabot continues to believe that this issue will not have a material adverse effect on the Company’s consolidated financial position or liquidity.

      In April 2002, the Company commenced an action in Suffolk Superior Court in the Commonwealth of Massachusetts against Kemet Electronics Corporation (“Kemet”) with respect to a tantalum supply contract entered into by the parties in 2000. In December 2002, the parties resolved the dispute and all claims relating to the dispute that were the subject of litigation were resolved. In connection therewith, Kemet extended through 2006 the term of its contract. The extended contract calls for reduced prices and higher volumes and relates to both tantalum powder and tantalum wire products. In addition, the Company has the option to sell additional product to Kemet on certain conditions throughout the contract term.

      On July 29, 2002, AVX Corporation commenced an action against the Company in the United States District Court for the District of Massachusetts. The complaint involves a tantalum supply agreement between the Company and AVX, one of the Company’s tantalum customers, and alleges unfair and deceptive trade practices, breach of contract and other related matters. The plaintiff seeks declaratory relief and unspecified damages. A hearing on the Company’s motion to dismiss the action is scheduled for February 2003. Cabot believes that AVX’s complaint is not meritorious and that Cabot has valid defenses, which it intends to assert vigorously. AVX has continued to purchase product in accordance with the terms of its contract during the dispute.

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      In November 2002, United States and European antitrust authorities initiated a joint investigation into possible price-fixing within the carbon black industry. As part of this investigation, European antitrust authorities have reviewed documents at the Company’s offices in Suresnes, France, and United States authorities have contacted Cabot’s Boston, Massachusetts headquarters. Neither the Company nor any of its employees has been charged with any wrongdoing. Because these types of proceedings are typically lengthy, there may be no resolution of this matter for more than a year.

      Several additional lawsuits were filed in 2002 in connection with Cabot’s discontinued beryllium operations. Cabot entered the beryllium industry through an acquisition in 1978. It ceased manufacturing beryllium products at one of the acquired facilities in 1979, and the balance of Cabot’s former beryllium business was sold to NGK Metals, Inc. in 1986. Several individuals who have resided for many years in the immediate vicinity of Cabot’s former beryllium facility located in Reading, Pennsylvania have brought suits against Cabot and NGK for personal injury allegedly caused by beryllium particle emissions produced at that facility over the course of many decades. Two of these cases were settled in 2002. Currently there are eight personal injury cases pending, four of which are on appeal in the Third Circuit Court of Appeals and four of which are in discovery (two in the United States District Court for the Eastern District of Pennsylvania (with trials scheduled in early 2003) and two in the Court of Common Pleas of Philadelphia County.) There are also beryllium product liability cases pending against Cabot. During the course of fiscal year 2002, the Company was granted summary judgment in one such case, nine cases were voluntarily dismissed by the plaintiffs, and the Company settled seven cases. There are currently six beryllium product liability cases pending in state courts in California and federal court in New York. Settlement was reached in two of these six cases in December 2002. In addition, in 2000, four purported class action suits were filed against Cabot, one of which was voluntarily dismissed by the plaintiffs in 2001 and two of which were voluntarily dismissed by the plaintiffs in 2002. In the one remaining action, individuals who reside within a 6-mile zone surrounding the Reading facility have filed a purported class action in Pennsylvania state court seeking the creation of a trust fund to pay for the medical monitoring of the surrounding resident population. Hearings in this case for class certification are underway. The Company believes it has valid defenses to each of these actions and will assert them vigorously in the various venues in which claims have been asserted. In addition, there is a contractual indemnification obligation running from NGK to Cabot in connection with many of these matters. Moreover, recent federal legislation creating a federally funded compensation scheme for beryllium workers injured or otherwise requiring medical screening or testing may well affect certain of these pending beryllium cases.

      The Company was a defendant in two patent infringement cases, both called Rodel v. Cabot, and both in the federal court in Delaware. In connection with the Company’s spin-off of Cabot Microelectronics Corporation (“CMC”) in 2000, CMC assumed all of the Company’s liabilities in connection with both of these cases. In February 2002, CMC and Cabot settled both of these actions and they were dismissed.

      The Company has various other lawsuits, claims and contingent liabilities arising in the ordinary course of its business, including a number of claims asserting premises liability for asbestos exposure. In the opinion of the Company, although final disposition of all of its suits and claims may impact the Company’s financial statements in a particular period, they should not, in the aggregate, have a material adverse effect on the Company’s financial position. (See Note Q of the Notes to the Company’s Consolidated Financial Statements, which appears in Item 8 of this annual report on Form 10-K for the fiscal year ended September 30, 2002.)

 
Item 4.      Submission of Matters to a Vote of Security Holders

      None.

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Executive Officers of the Registrant

      Set forth below for each person who was an executive officer of Cabot at the end of the 2002 fiscal year, is information, as of November 30, 2002, regarding his age, position(s) with Cabot, the periods during which he served as an officer and his business experience during at least the past five years:

                 
Name Age Offices Held/ Business Experience Dates Held




William J. Brady
    41     Cabot Corporation    
            Vice President   March 1997 to present
            General Manager, Fumed Metal Oxides   January 2000 to present
            General Manager, Special Blacks   July 1996 to January 2000
Kennett F. Burnes
    59     Cabot Corporation    
            Chairman of the Board   May 2001 to present
            President   February 1995 to present
            Chief Executive Officer   March 2001 to present
            Chief Operating Officer   March 1996 to March 2001
            Executive Vice President   October 1988 to February 1995
Eduardo E. Cordeiro
    35     Cabot Corporation    
            Corporate Controller   March 2002 to present
            Director, Finance and Investor Relations   January 2000 to March 2002
            Manager, Corporate Planning and Development   July 1998 to January 2000
            The Boston Consulting Group    
            Consultant   October 1994 to July 1998
Ho-il Kim
    44     Cabot Corporation    
            Vice President and General Counsel   July 2000 to present
            Counsel   August 1992 to July 2000
William P. Noglows
    44     Cabot Corporation    
            General Manager, Carbon Black   January 2000 to present
            Executive Vice President   March 1998 to present
            Vice President   February 1994 to March 1998
            Director of Global Manufacturing   November 1997 to present
            General Manager, Cab-O-Sil Division   November 1992 to November 1997
Thomas H. Odle
    44     Cabot Corporation    
            Vice President   March 1997 to present
            General Manager, Cabot Performance Materials   October 1996 to present
John A. Shaw
    54     Cabot Corporation    
            Executive Vice President and Chief Financial Officer   January 2002 to present
            Dominion Resources    
            Senior Vice President Financial Management,    
            Dominion Energy   June 1999 to December 2001
            Senior Vice President and Chief Financial Officer,    
            Virginia Power   March 1998 to June 1999
            ARCO Chemical Company    
            Vice President, Financial Services   1997 to 1998
            Vice President and Controller   1995 to 1996
Roland R. Silverio
    55     Cabot Corporation    
            Vice President of Organizational Design   November 2001 to present
            Director of Human Resources/ Vice President of    
            Organizational Effectiveness   May 1998 to November 2001
            Director of Organizational Development   January 1998 to May 1998
October 1992 to October 1995
            Manager of Training and Development   July 1990 to October 1992
            The Franklin Group    
            Managing Partner   October 1995 to January 1998
Robby D. Sisco
    46     Cabot Corporation    
            Vice President of Human Resources   November 2001 to present
            Director of Organizational Effectiveness, Cabot    
            Performance Materials   September 1999 to November 2001
            DuPont Company    
            Human Resources Manager   May 1997 to August 1999
            Leveraged Operations Manager   November 1995 to April 1997

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Part II

 
Item 5.      Market for Registrant’s Common Equity and Related Stockholder Matters

      Cabot’s Common Stock is listed for trading (symbol CBT) on the New York, Boston, and Pacific stock exchanges and the Chicago Board Options Exchange. As of September 30, 2002, there were approximately 1,600 holders of record of Cabot’s Common Stock. The price range in which the stock has traded, as reported on the composite tape, and the quarterly cash dividends for the past two years are shown below.

Stock Price and Dividend Data

                                           
December March June September Year





Fiscal 2002
                                       
Cash dividends per share
  $ 0.13     $ 0.13     $ 0.13     $ 0.13     $ 0.52  
Price range of common stock:
                                       
 
High
  $ 42.24     $ 37.22     $ 36.75     $ 28.74     $ 42.24  
 
Low
  $ 31.00     $ 30.60     $ 22.95     $ 20.50     $ 20.50  
 
Close
  $ 35.70     $ 36.85     $ 28.65     $ 21.00     $ 21.00  
                                           
December March June September Year





Fiscal 2001
                                       
Cash dividends per share
  $ 0.11     $ 0.11     $ 0.13     $ 0.13     $ 0.48  
Price range of common stock:
                                       
 
High
  $ 26.75     $ 39.40     $ 38.74     $ 41.35     $ 41.35  
 
Low
  $ 18.56     $ 25.13     $ 31.40     $ 34.87     $ 18.56  
 
Close
  $ 26.38     $ 31.50     $ 36.02     $ 39.90     $ 39.90  
 
Item 6.      Selected Financial Data

Cabot Corporation Selected Financial Data

                                             
Years Ended September 30,

2002 2001 2000 1999 1998





(Dollars in millions, except per share amounts)
Financial Highlights
                                       
 
Net sales and other operating revenues
  $ 1,557     $ 1,670     $ 1,574     $ 1,405     $ 1,443  
     
     
     
     
     
 
 
Income from continuing operations
  $ 105     $ 121     $ 108     $ 82     $ 116  
     
     
     
     
     
 
 
Long-term debt
  $ 495     $ 419     $ 329     $ 419     $ 316  
 
Minority interest
    35       27       31       32       25  
 
Stockholders’ equity
    977       950       1,047       706       706  
     
     
     
     
     
 
   
Total capitalization
  $ 1,507     $ 1,396     $ 1,407     $ 1,157     $ 1,047  
     
     
     
     
     
 
   
Total assets
  $ 2,067     $ 1,919     $ 2,134     $ 1,842     $ 1,805  
     
     
     
     
     
 

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Years Ended September 30,

2002 2001 2000 1999 1998





(Dollars in millions, except per share amounts)
Income from continuing operations per common share:
                                       
 
Basic
  $ 1.74     $ 1.89     $ 1.65     $ 1.24     $ 1.72  
 
Diluted
  $ 1.48     $ 1.62     $ 1.46     $ 1.11     $ 1.53  
 
Cash dividends (declared and paid)
  $ 0.52     $ 0.48     $ 0.44     $ 0.44     $ 0.42  
     
     
     
     
     
 
Weighted average common shares outstanding in millions (diluted)
    71       74       73       73       75  
     
     
     
     
     
 

      Information regarding the sale of Cabot’s LNG business and the spin-off of Cabot Microelectronics Corporation common stock can be found in Note D of the Notes to the Company’s Consolidated Financial Statements, which appears in Item 8 of this annual report on Form 10-K for the fiscal year ended September 30, 2002.

 
Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
I. Critical Accounting Policies

      The preparation of the Company’s financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results of operations and that require management to make estimates about matters that are highly uncertain. On an on-going basis, the Company evaluates its policies and estimates. The Company bases its estimates on historical experience, current conditions 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 under different assumptions or conditions.

 
      Revenue Recognition and Accounts Receivable

      The Company primarily derives its revenue from the sale of chemical products, performance materials and specialty fluids products. Other operating revenues include tolling, services and royalties received for licensed technology. The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), which establishes the criteria that must be satisfied before revenue is realized or realizable and earned. Revenue from product sales is recognized when the product is shipped and title and risk of loss have passed to the customer. The Company generally is able to ensure that products meet customer specification prior to shipment. The Company prepares its estimates for sales returns and allowances, discounts, and rebates quarterly based primarily on historical experience updated for changes in facts and circumstances, as appropriate. If actual future results vary, the Company may need to adjust its estimates, which could have an impact on earnings in the period of adjustment.

      The Company maintains allowances for doubtful accounts for estimated losses resulting from the potential inability of its customers to make required payments. If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required, which could affect future earnings. As of September 30, 2002, the allowance for doubtful accounts was $4 million.

 
      Inventory Valuation

      The cost of most raw materials, work in process, and finished goods inventories in the U.S. is determined by the last-in, first-out (“LIFO”) method. Inventory valued under the LIFO method comprised 29% of total inventory at September 30, 2002. Had the Company used the first-in, first-out (“FIFO”) method instead of

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the LIFO method for such inventories the value of those inventories would have been $85 million higher as of September 30, 2002. The cost of other U.S. and all non-U.S. inventories is determined using the average cost method or the FIFO method.

      In cases where the market value of inventories is below cost, the inventory is stated at market value. The Company writes down its inventories for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Such write-downs have not historically been significant. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 
      Valuation of Long-Lived Assets

      The Company’s long-lived assets include property, plant, equipment, long-term investments, goodwill and other intangible assets. The Company reviews the carrying values of long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the fair value of the asset is less than the carrying value of the asset. The fair value of long-lived assets, other than goodwill, is based on undiscounted estimated cash flows at the lowest level determinable. The Company’s estimates reflect management’s assumptions about selling prices, production and sales volume, costs, and market conditions over an estimate of the remaining operating period. If an impairment is indicated, the asset is written down to the estimated fair value.

      Cabot may decide to abandon a fixed asset project, plant expansion or other long-lived asset initiative in which case an impairment loss is recognized if the carrying value of the asset exceeds its salvage value. An impairment charge is recorded in the period in which Cabot commits to a plan to abandon the asset.

      The Company performs an annual impairment test for goodwill in accordance with Statement of Financial Accounting Standard (FAS) No. 142. The fair value of the assets including goodwill balances is based on discounted estimated cash flows. The assumptions used to estimate fair value include management’s best estimates of future growth rates, capital expenditures, discount rates, and market conditions over an estimate of the remaining operating period. If an impairment exists, a loss to write down the value of goodwill is recorded. Cabot performed the fiscal 2002 impairment test and determined that no impairment loss should be recognized.

 
      Environmental Costs

      The Company accrues environmental costs when it is probable that the Company has incurred a liability and the amount can be reasonably estimated. When a single liability amount cannot be reasonably estimated, but a range can be reasonably estimated, the Company accrues the amount that reflects its best estimate within that range or the low end of the range if no estimate within the range is better. The amount accrued reflects the Company’s assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. The availability of new information, changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in applicable government laws and regulations could result in higher or lower costs. The Company does not reduce its estimated liability for possible recoveries from insurance carriers. Proceeds from insurance carriers are recorded when realized by the receipt of cash or a contractual agreement. As of September 30, 2002, the Company had $29 million reserved for environmental matters.

 
      Pensions and Other Postretirement Benefits

      The Company maintains both defined benefit and defined contribution plans for its employees. In addition, the Company provides certain health care and life insurance benefits for retired employees. The costs and obligations related to these benefits reflect the Company’s assumptions related to general economic conditions, including interest rates, expected return on plan assets, and the rate of compensation increases for

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employees. Projected health care benefits reflect the Company’s assumptions about health care cost trends. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease. Actual results that differ from the assumptions are generally accumulated and amortized over future periods and therefore affect the recognized expense and recorded obligation in such future periods. At September 30, 2002, Cabot has recorded $7 million for its pension obligation and $87 million for its postretirement benefit obligations.
 
      Litigation and Contingencies

      The Company accrues a liability for litigation when it is probable that a liability will be incurred and the amount can be reasonably estimated. The estimated reserves are recorded based on the Company’s best estimate of the liability associated with such matters or the low end of the estimated range of liability if the Company is unable to identify a better estimate within that range. Litigation is highly uncertain and there is always the possibility of an unusual result in any particular case that may have an adverse effect on the results of operations.

 
II. Results of Operation

      Cabot Corporation and its subsidiaries (the “Company” or “Cabot”) are organized into three reportable segments: Chemical Businesses, Cabot Performance Materials (“CPM”), and Cabot Specialty Fluids (“CSF”). The Chemical Businesses are primarily comprised of carbon black, fumed metal oxides, inkjet colorants, and aerogels. Due to the disposition of the Liquefied Natural Gas (“LNG”) business and the spin-off of Cabot Microelectronics, earnings related to those segments are reported as “discontinued”.

      The following discussion of results includes diluted earnings per share, segment sales, and segment operating profit before taxes (“PBT”). Segment PBT is used by Cabot to measure the Company’s consolidated operating results and assess segment performance. The following discussion has been prepared on a basis consistent with segment reporting as outlined in Note S of the consolidated financial statements. (Refer to Note S of the consolidated financial statements for a definition of segment PBT and additional segment information.)

      The following analysis of financial condition and operating results should be read in conjunction with Cabot’s consolidated financial statements and accompanying notes. Unless a calendar year is specified, all references to years in this discussion are to Cabot’s fiscal years ended September 30.

      Net sales and operating profit before taxes by segment are shown in Note S of the consolidated financial statements.

Overview

      Cabot reported earnings per share of $1.50, $1.66, and $6.20 in 2002, 2001, and 2000, respectively. In 2000, earnings included the net gain of $4.25 per share from the sale of the LNG business. Earnings from continuing operations totaled $1.48 in 2002 versus $1.62 and $1.46 in 2001 and 2000, respectively. For 2002, the $1.48 amount included a net $17 million charge for special items. For 2001, the $1.62 amount included a net $21 million charge for special items. For 2000, $1.46 in earnings from continuing operations included a net $10 million charge for special items. Special items are detailed in the Company Summary section below.

      Weak economic conditions persisted through much of 2002, resulting in flat volumes, lower pricing, and compressed margins in the Chemical Businesses compared to 2001. The Chemical Businesses did however receive some benefit from decreased feedstock costs and approximately $7 million of positive currency translations to US dollars. In total, however, pricing declines exceeded raw material cost reductions by almost $20 million. As a result of contract disagreements with certain tantalum customers, CPM experienced 39% lower volumes in 2002. CPM was also negatively impacted by reduced volumes and profits at Cabot Supermetals (“CSM”), which became a wholly owned subsidiary of Cabot in February, 2002. These negative impacts were offset by improved contract related pricing and reduced tantalum ore costs. CSF continued to

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gain market acceptance and experienced slightly higher volumes and an approximately 30% increase in pricing.

      In 2001, weakened economic conditions compared to those in 2000 resulted in lower demand in the Chemical Businesses. In addition, higher feedstock costs, higher administrative costs, and negative currency translations adversely impacted results in the Chemical Businesses. CPM experienced increased pricing and greater volumes due to new customer contracts entered into in the first quarter of fiscal 2001. CSF continued to gain market acceptance and experienced significantly higher volumes and improved pricing.

      In 2000, Cabot completed several initiatives focused on improving shareholder value. These initiatives included the realization of approximately $50 million in cost reductions, the initial public offering (“IPO”) and subsequent spin-off of Cabot Microelectronics and the sale of the LNG business for $688 million.

      Cabot’s sales for 2002, 2001 and 2000 were $1,557 million, $1,670 million and $1,574 million, respectively. In 2002, decreased pricing for the carbon black business and decreased volumes for CPM contributed to a $113 million decline in sales. In 2001, improved pricing and increased volumes in CPM offset lower volumes and negative currency exchange effects in the Chemical Businesses resulting in a $96 million improvement in sales over 2000.

Percentage of Total Sales

Segment Sales

                         
2002 2001 2000



Chemical Businesses
    79 %     79 %     85 %
Performance Materials
    19 %     20 %     14 %
Specialty Fluids
    2 %     1 %     1 %

Sales by Geographic Region

                         
2002 2001 2000



North America
    48 %     47 %     43 %
Europe
    29 %     29 %     32 %
South America
    7 %     9 %     10 %
Asia Pacific
    16 %     15 %     15 %

Continuing Operations

 
Chemical Businesses: carbon black, fumed metal oxides, inkjet colorants, and aerogels
                 
Segment Sales Segment PBT


(Dollars in millions)
2002
  $ 1,252     $ 101  
2001
    1,335       121  
2000
    1,360       180  

      Sales for the Chemical Businesses were $1,252 million in 2002, compared with $1,335 million in 2001 and $1,360 million in 2000. In 2002, sales decreased 6%, primarily as a result of reduced pricing on flat year over year volumes. PBT decreased 17%, from $121 million in 2001 to $101 million in 2002, primarily as a result of reduced pricing of almost $70 million which was partly offset by $50 million of lower raw material costs. In addition, higher operating costs were offset by favorable foreign exchange impacts. In 2001, sales decreased 2%, primarily as a result of lower volumes. PBT decreased 33%, from $180 million in 2000 to $121 million in 2001, largely as the result of lower volumes ($41 million), a strong US dollar ($35 million) and higher administrative and business development costs ($31 million) offset partly by approximately $48 million of higher margins.

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      Carbon black sales, which comprise the majority of the sales in the Chemical Businesses segment, were down 13% from 2001 due to decreased pricing. Globally, carbon black sales volumes were flat year over year. Volumes increased slightly in North and South America but declined 5% in Europe due to weak economic conditions and pressure from imports. Strengthened demand in Asia Pacific, particularly in China, resulted in an 8% improvement in volumes for the region. Carbon black PBT decreased by 26% compared to 2001 due primarily to price decreases of approximately 8%, which in dollar terms were in excess of raw material cost declines of approximately 12%, and to a lesser degree, increases in operating expenses. These were partly offset by favorable foreign exchange impacts.

      In 2002, the fumed metal oxides business experienced a steady recovery in all of its markets (traditional silicone rubber, composites, adhesives, and electronics) with overall sales and volumes up 2% and 3%, respectively. Improved pricing and lower feedstock and administrative costs, partially offset by unfavorable product mix, contributed to a 103% improvement in the profitability of the fumed metal oxides business.

      The inkjet colorants business continues to gain market acceptance, with both sales and volumes growing in 2002 (27% and 32%, respectively) due to higher market penetration. Sales increased to both OEM and after-market customers, and incorporated both black and color pigments.

      In the fourth quarter of fiscal 2002, Cabot’s aerogels business entered the start-up phase of its newly constructed semi-works facility in Frankfurt, Germany. The first commercial product shipments occurred in the first quarter of fiscal 2003.

Outlook for 2003

      The Chemical Businesses have shown signs of recovery with improved year over year volumes in the second half of fiscal 2002, with volumes 7% higher than the comparable period of 2001. The Chemical Businesses experienced improved demand in the fourth fiscal quarter though it is typically a soft quarter due to vacations and plant shutdowns. Despite these positive indications, given the uncertainty in the automotive, electronic, and construction end use markets, the Company remains cautious concerning the short-term outlook for the Chemical Businesses. High oil prices, volatility in the financial markets, and the political situation in the Middle East and South America further add to that uncertainty. Carbon black has experienced erosion in margins over the past several years as the economic climate has softened. It is unclear whether this trend will reverse as the economy recovers. In addition, by July 12, 2005 the Chemical Businesses will incur additional expenses of approximately $15 million for capital improvements of the Company’s carbon black facilities located in the United States that will be required in order to reduce emissions of hazardous air pollutants as required by the USEPA’s final rule amending the Generic Maximum Achievable Control Technology standards. In an effort to mitigate the impact of these issues, the Chemical Businesses will continue to search for operating efficiencies and will focus on cost savings initiatives.

 
      Performance Materials
                 
Segment Sales Segment PBT


(Dollars in millions)
2002
  $ 301     $ 79  
2001
    329       78  
2000
    215       38  

      CPM sales were $301 million in 2002, compared with $329 million in 2001 and $215 million in 2000. Results of operations for the CPM business were adversely impacted in fiscal 2002 by disputes relating to tantalum supply contracts the Company entered into in 2001 with two customers. As a result of these disputes, one customer failed to purchase any tantalum in accordance with the terms of its contracts with the Company until late in the third quarter of fiscal 2002, and one customer did not purchase any tantalum in accordance with the terms of its contract during the second, third and fourth fiscal quarters. Each of these disputes has been resolved and claims relating to the disputes that were the subject of litigation have been settled. In connection with the resolution of the dispute between the Company and Vishay Intertechnology Inc.

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(“Vishay”), Vishay extended by one year the term of one of its contracts with the Company and agreed to purchase tantalum products at regular intervals throughout the terms of both of its contracts beginning late in the third quarter of fiscal 2002, in exchange for volume and price concessions. In connection with the resolution of the dispute between the Company and Kemet Electronics Corporation (“Kemet”), Kemet extended through 2006 the term of its contract. The extended contract calls for reduced prices and higher volumes and relates to both tantalum powder and tantalum wire products. In addition, the Company has the option to sell additional product to Kemet on certain conditions throughout the contract term. A third customer, AVX Corporation (“AVX”), has commenced legal action against the Company in connection with its tantalum supply agreement with the Company. AVX, however, has continued to purchase product in accordance with the terms of its contract. As a result of these tantalum supply contract disagreements, volumes declined 39% in fiscal 2002 compared to fiscal 2001. CPM was also negatively impacted by reduced volumes and profits at CSM, which became a wholly-owned subsidiary of Cabot in February, 2002. However, lower average ore costs and higher contract prices offset the impact of the volume declines in both CPM and CSM, resulting in a $1 million increase in PBT. The 105% increase in PBT in 2001 versus 2000 was the result of a 14% volume increase in fiscal 2001 and higher average selling prices, somewhat offset by higher ore costs.

Outlook for 2003

      The short-term outlook for CPM remains uncertain due to the depressed state of the electronics industry. Tantalum supply contracts together with the purchase in 2002 of the remaining 50% stake in Cabot Supermetals position Cabot to benefit from a long-term turnaround in the electronics sector.

 
      Specialty Fluids
                 
Segment Sales Segment PBT


(Dollars in millions)
2002
  $ 28     $ 2  
2001
    27       0  
2000
    20       (3 )

      Specialty Fluids sales in 2002 were $28 million versus $27 million in 2001 and $20 million in 2000. Slightly higher sales results were primarily driven by improved pricing in cesium formate, which increased by approximately 30% during the year, offset by reduced pricing levels for tantalum and lower volumes in spodumene. Cesium formate volumes remained steady with a 2% increase in 2002. Increased net revenue per barrel resulted in $2 million in PBT for fiscal 2002, making it the first profitable year for CSF. Since CSF’s formation, cesium formate has been successfully used in 53 oil and gas well completions and seven drill-in applications. The $7 million increase in sales in 2001 versus 2000 was the result of increased volumes.

Outlook for 2003

      The political situation in the Middle East, proposed new taxes on oil and gas profits in the UK North Sea, and the pace of recovery in world economies have resulted in a cautious near-term outlook for CSF. The Company continues to be encouraged by the fluid’s performance in drill-in and completion applications.

Discontinued Operations

      In 2002, Cabot received additional income of $1 million, net of tax, or $0.02 per diluted common share from insurance recoveries related to its disposed LNG business and other discontinued businesses. In 2001, Cabot received additional proceeds of $3 million, or $0.04 per diluted common share, net of tax, from the sale of its LNG business. Cabot sold its LNG business and spun-off its Cabot Microelectronics business in 2000. Cabot reported earnings from discontinued operations of $0.49 per diluted common share and income from operations of discontinued businesses, net of tax, of $36 million. In 2000, Cabot also reported a gain on the sale of its LNG business of $309 million, net of tax, or $4.25 per diluted common share.

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Company Summary
 
Income from Continuing Operations

      Income before income taxes was $134 million in 2002, an 11% decline from $150 million in 2001. In 2000, income before income taxes was $157 million. Income in 2002 was negatively impacted by lower volumes in CPM and lower margins in the Chemical Businesses. In 2002, special items consisted of an $8 million asset impairment charge to discontinue an energy project in the Chemical Businesses, a $3 million increase in environmental reserves due to updated cost estimates, $2 million of additional currency translation charges related to a closed plant and a $5 million charge to increase the reserve for claims related to a disposed safety respirator business. In addition, special items for fiscal year 2002 included a $5 million asset impairment charge for the cancellation of expansion projects in CPM, a $1 million charge for non-capitalizable foreign currency transaction costs and $1 million in severance costs, all associated with the acquisition of CSM. In 2002, special items also included an $8 million benefit from insurance recoveries. Special items for fiscal 2001 included a $21 million charge related to the retirement of the Chief Executive Officer and the resignation of the Chief Financial Officer, $13 million of which related to the acceleration of vesting of shares issued under Cabot’s Long Term Incentive Compensation Plan and $8 million of which was for cash payments. In addition to the $21 million charge in 2001, special items included a $2 million charge related to the discontinuance of a toll manufacturing agreement as well as benefits of a $1 million insurance recovery and a $1 million recovery of costs related to a closed plant. In 2000, special items consisted of a $10 million insurance recovery benefit, a $2 million charge to increase the environmental reserve, and an $18 million charge to close two plants. Included in the $18 million charge were accruals of $2 million for severance and termination benefits for approximately 38 employees of the Chemical and Performance Materials Businesses, $7 million for facility closing costs, and a $9 million charge for the impairment of long-lived plant assets. One of the plant closures was completed during fiscal 2001 and the second plant closure was completed during the second quarter of fiscal 2002. As of September 30, 2002, all severance and termination benefits had been paid and $2 million remained accrued for the required monitoring costs at the second site. All special items are included in the consolidated statements of income.

      In addition to special items, the Company incurred non-recurring adjustments to its operating results in fiscal 2002. During the fourth quarter, the Company concluded an extensive review of its pension and postretirement benefit plans, resulting in a charge of $8 million related primarily to pension and postretirement benefits which should have been recorded in prior periods. Also during the fourth quarter, the Company had an effective tax rate of (3%) which reduced the overall effective tax rate for the full fiscal year to 22%, down from 28% in fiscal 2001. The reduction in the tax rate was primarily due to: (1) an increased benefit associated with the favorable settlement of a customer dispute that resulted in additional export sales; (2) lower earnings; and (3) the fact that actual tax return liabilities were lower than expected. The reduction in the Company’s overall effective tax rate resulted in a tax benefit of approximately $6 million in the fourth quarter. Despite these adjustments which impacted the operating results for the fiscal year, the Company believes that the earnings per diluted common share from continuing operations before special items reasonably reflect the operating performance of the businesses during fiscal 2002.

      Gross profit declined by $4 million in 2002 due to a 10% decrease in margins in the Chemical Businesses and 39% lower volume in CPM. These declines were partially offset by improved pricing and lower raw material costs in CPM and, to a lesser degree, positive foreign exchange translations in the Chemical Businesses. In 2001, gross margin improved $23 million from 2000 due to price increases in excess of raw material cost increases in all businesses, totaling approximately $65 million, as well as higher volumes in CPM of approximately $32 million, partly offset by unfavorable foreign exchange impacts of approximately $30 million related to the weak Euro.

      Operating expenses include research and technical service, and selling and administrative expenses. The allocation of research and technical service spending remained relatively constant among the businesses, with overall spending of approximately $48 million in both 2002 and 2001. In 2001, increased spending in CPM as well as inkjet colorants and other developing businesses resulted in a $5 million increase, from $43 million in 2000 to $48 million in 2001, in research and technical service spending. Selling and administrative expenses

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for 2002, 2001, and 2000 were $219 million, $208 million, and $173 million, respectively. The $11 million increase in 2002 is primarily due to the consolidation of Cabot Supermetals selling and administration costs since the acquisition. In 2001, selling and administrative expenses increased $35 million, primarily due to administrative costs relating to our Enterprise-wide Resource Planning (ERP) initiative and stock based compensation. The ERP system has been successfully designed and implemented in many of our businesses and locations over the last two years, with most of the remaining implementations scheduled for completion in 2003. The Company is now in the process of formulating detailed plans to capture operational efficiencies made possible by the ERP system.

      Interest expense from continuing operations was $4 million lower in 2002 compared to 2001 and $1 million lower in 2001 compared to 2000 due to the benefit of lower interest rates on the Company’s variable rate debt and the retirement of high coupon debt. Interest expense was $28 million, $32 million, and $33 million in 2002, 2001, and 2000, respectively.

      In 2002, Cabot’s share of earnings from equity affiliates decreased to $5 million from $20 million in 2001 as a result of the depressed state of the electronics industry impacting the CSM joint venture and the purchase of the remaining 50% interest in CSM on February 8, 2002. Cabot’s share of earnings from equity affiliates was $13 million in fiscal year 2000.

Net Income

      Net income was $106 million ($1.50 per diluted common share) in 2002 compared to $124 million ($1.66 per diluted common share) in 2001 and $453 million ($6.20 per diluted common share) in 2000.

      The Company has chosen to separately disclose special items because it feels that they are non-recurring in nature and that the results excluding special items are an appropriate measurement of the Company’s ongoing operating earnings. The following table summarizes the impact of special items:

                           
2002 2001 2000



(Dollars in millions)
Special Items (before income taxes)
                       
Insurance recoveries
  $ 8     $ 1     $ 10  
Asset impairment charges
    (13 )     (2 )     (9 )
Severance charges and other cost reduction initiatives
    (1 )           (9 )
Litigation reserve and environmental charges
    (8 )           (2 )
Retirement of Chief Executive Officer and
                       
 
Resignation of Chief Financial Officer
          (21 )      
Non-operating special items
    (3 )     1        
     
     
     
 
Special Items
  $ (17 )   $ (21 )   $ (10 )

      Excluding special items and the results of discontinued operations, net income from continuing operations would have been $118 million in 2002, $136 million in 2001 and $114 million in 2000.

III.     Cash Flow and Liquidity

      Cash generated in 2002 from operating activities was $192 million, compared with $29 million in 2001 and $267 million in 2000. The increase in operating cash in 2002 is largely attributable to a $178 million tax payment made in fiscal 2001 which was related to the sale of the LNG business in fiscal 2000. The increase in operating cash was somewhat offset by an increase in working capital related to inventory build at CPM as the result of the failure of two customers in the business to buy regularly under their contracts. The change in 2001 versus 2000 was also primarily related to the large tax payment in 2001.

      Capital spending from continuing operations on property, plant and equipment, and investments and acquisitions for 2002, 2001 and 2000 was $254 million, $133 million and $108 million, respectively. The 2000 amount excluded capital spending from discontinued operations of $45 million. The increase in spending in 2002 was largely attributed to the acquisition of the remaining 50% of CSM and to the construction of a semi-works facility for the aerogels business. A significant portion of the acquired CSM assets was $82 million of

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inventory. The major components of the 2001 and 2000 capital programs included new business expansion, normal plant operating capital projects, and capacity expansion in Cabot’s tantalum, fumed metal oxides and inkjet businesses. Capital expenditures for 2003 are expected to be approximately $150 million and include replacement projects, plant expansions, and the completion of projects started in fiscal 2002.

      Cash used in 2002 for financing activities was $164 million, compared with $179 million in 2001 and $187 million in 2000. In 2002, cash was used primarily to repurchase approximately 2.6 million shares of Cabot’s common stock. In addition, cash was used to pay dividends to shareholders and to paydown long-term debt. In 2001, the Company used cash for the repurchase of its common stock, which was partially offset by net proceeds from long-term debt. In 2000, the Company used cash for the repayment of debt and repurchase of common stock, partially offset by dividends received from Cabot Microelectronics as a result of its IPO.

      As a result of lower cash balances and the assumption of debt, both related to the CSM acquisition, Cabot’s ratio of total debt (including short-term debt, net of cash) to capital increased from 9% at September 30, 2001 to 28% at September 30, 2002.

      In January 2002, the Securities and Exchange Commission released a “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“FR-61”). The release details the requirements for the Management’s Discussion and Analysis section of the year-end and interim financial reports as they relate to liquidity, certain trading activities involving non-exchange traded contracts accounted for at fair value, and related party transactions. The Company is not involved in any transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. The Company is not involved in any trading activities involving commodity contracts that are accounted for at fair value.

      The following table sets forth Cabot’s long-term contractual obligations.

                                                         
Payments due by fiscal year

Total 2003 2004 2005 2006 2007 Thereafter







(Dollars in millions)
Contractual Obligations
                                                       
Long-term debt
  $ 500     $ 5     $ 187     $ 8     $ 96     $ 39     $ 165  
Fixed interest on long-term debt
    198       22       20       18       17       14       107  
Operating leases
    66       10       9       8       7       7       25  
Purchase commitments
    593       122       127       86       16       17       225  
     
     
     
     
     
     
     
 
Total
  $ 1,357     $ 159     $ 343     $ 120     $ 136     $ 77     $ 522  

      At September 2002, the Company’s obligations related to long-term debt totaled $500 million to be paid over a period extending 20 years. Included in this amount is $67 million of Japanese yen based long-term debt assumed with the fiscal 2002 acquisition of the remaining 50% of CSM, which was formerly a joint venture. The CSM debt was to mature on various dates through 2006. Also included in the long-term debt obligation is $147 million of EURO based long-term notes maturing in fiscal 2004. All other long-term debt is denominated in US dollars. The weighted-average interest rate related to the long-term debt is 5.6%.

      The Company also has notes payable to banks totaling $40 million. Included in this amount is $36 million of Japanese yen based bank notes assumed with the acquisition of CSM. The bank notes are classified as current because they have renewable one-year terms, or due to their short-term nature. Cabot refinanced its yen denominated debt in October 2002.

      After the acquisition of CSM in 2002, Cabot refinanced its yen based borrowings related to that entity. In September 2002, Cabot repaid $10 million of CSM’s variable rate bank notes. This repayment was not included in the fiscal 2002 consolidated results due to the one-month lag in CSM reporting. In October 2002, Cabot repaid all $26 million of the remaining CSM bank notes and $47 million of the CSM long-term debt. In association with the refinancing, Cabot entered into a new three year, 9.3 billion yen ($75 million) term loan

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agreement with a group of banks, which matures in fiscal 2006. Interest rates on the new loan are variable and are based on short-term Japanese market rates.

      In September 1998, the Company filed with the Securities and Exchange Commission (SEC) a shelf registration statement covering $500 million of debt securities which may be offered by the Company from time to time. As of September 2002, there was $100 million issued and outstanding under the registration statement. The Company has no immediate plans to offer additional securities under the registration statement.

      In July 2001, Cabot entered into a revolving credit facility with Fleet National Bank (and other banks) pursuant to which Cabot may, under certain conditions, borrow up to $250 million at floating interest rates from time to time until July 13, 2006. As of September 30, 2002, Cabot had no borrowings outstanding under this arrangement.

      In addition to the new 9.3 billion yen term loan and the revolving credit facility, Cabot borrowed 150 million EURO in November 2000 which matures in November 2003. All three loan agreements contain specific covenants, including certain maximum indebtedness limitations and minimum cash flow requirements, which would limit the amount available for future borrowings. As of September 30, 2002, Cabot was in compliance with all of its covenants.

      Management expects cash on hand, cash from operations and present financing arrangements, including Cabot’s unused line of credit, to be sufficient to meet Cabot’s cash requirements for the foreseeable future. A downgrade of one level in the Company’s credit rating is not anticipated, but should it occur, it would not cause a significant impact on the commitments or sources of capital described above and would not have a material impact on the Company’s results of operations.

      The Company has operating leases primarily comprised of leases for transportation vehicles, warehouse facilities, office space, and machinery and equipment, most of which expire within ten years.

      The Company has long-term purchase commitments for raw materials with various key suppliers in the CPM and Chemical Businesses.

      The Company provides defined benefit plans for U.S. and foreign employees. The U.S. defined benefit plans comprise approximately 51% of the consolidated fair value of plan assets of $244 million. No contributions are currently made to the U.S. plans since the fair value of plan assets exceeds the projected benefit obligation by approximately $8 million. If there is a zero percent return on assets for the U.S. plans in fiscal 2003, Cabot would expect to resume annual contributions to the plans of approximately $4 million in fiscal 2004. In addition, a zero percent return on assets for the U.S. plans would change the current pension expense, which is income of approximately $2 million in fiscal 2002, to approximately $1 million of expense in fiscal 2004 with a gradual increase in expense in future years.

      At September 30, 2002, the Company had provided standby letters of credit totaling $13 million, of which $7 million expire in fiscal 2003 and $6 million expire in fiscal 2004.

      On September 8, 2000, Cabot’s Board of Directors authorized the repurchase of up to 10 million shares of Cabot’s common stock. On May 10, 2002, Cabot’s Board of Directors increased the number of shares of the Company’s common stock authorized for repurchase from time to time from 10 million shares to up to 12.6 million shares. Approximately 11 million shares have been purchased pursuant to these and prior authorizations during the three fiscal years ended September 30, 2002. Specifically, Cabot repurchased approximately 2.6 million, 6.7 million, and 1.5 million shares of its common stock for $86 million, $218 million, and $40 million in 2002, 2001, and 2000, respectively. Approximately 3.2 million shares remain available to be purchased under the current share repurchase authorization.

      During 2002, 2001, and 2000, Cabot paid cash dividends of $0.52, $0.48, and $0.44, respectively, per share of common stock. On November 8, 2002, the Board of Directors approved a $0.13 per share dividend on its common stock payable in the first fiscal quarter of 2003.

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      On an ongoing basis, Cabot reviews its outstanding insurance claims, some of which relate to disposed and discontinued businesses, for potential recovery. Various amounts have been recovered in prior periods and Cabot anticipates receiving additional amounts in future periods.

      Cabot is a defendant, or potentially responsible party, in various lawsuits and environmental proceedings wherein substantial amounts are claimed or are at issue. During the next few years, Cabot expects to spend a significant portion of its $29 million environmental reserve in connection with remediation at various environmental sites. These sites are primarily associated with divested businesses.

New Accounting Pronouncements

      Cabot has adopted in fiscal 2003 or is assessing the impact of the following standards:

      The Financial Accounting Standards Board (FASB) issued FAS No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets”, in June 2001. The objective of FAS No. 143 is to establish an accounting standard for the recognition and measurement of an asset retirement obligation on certain long-lived assets. The retirement obligation must be one that results from the acquisition, construction or normal operation of a long-lived asset. FAS No. 143 requires the legal obligation associated with the retirement of a tangible long-lived asset to be recognized at fair value as a liability when incurred, and the cost to be capitalized by increasing the carrying amount of the related long-lived asset. Cabot adopted FAS No. 143 on October 1, 2002 and such adoption will not have a significant effect on the financial statements.

      In October 2001, the FASB issued FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS No. 144), which supersedes FAS No. 121, “Accounting for the Impairment of Long lived Assets and for Long lived Assets to be Disposed of” and certain of the provisions of APB No. 30 “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of segments of a business. The statement creates one accounting model, based on the framework established in FAS No. 121, to be applied to all long-lived assets including discontinued operations. Cabot adopted FAS No. 144 on October 1, 2002 and will perform impairment tests for long-lived assets in accordance with this standard.

      The FASB issued FAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, in April 2002. This statement updates, clarifies and simplifies existing accounting pronouncements. Specifically, the statement rescinds FAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, FAS No. 64, “Extinguishment of Debt Made to Satisfy Sinking Fund Requirements” and FAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” This statement amends FAS No. 13, “Accounting for Leases” and certain other existing authoritative pronouncements to make technical corrections or clarifications. Cabot adopted FAS No. 145 on October 1, 2002 and such adoption will not have a significant effect on the financial statements.

      In July 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” FAS 146 requires a liability for a cost associated with an exit or disposal activity to be recognized and measured initially at its fair value in the period in which the liability is incurred. If fair value cannot be reasonably estimated, the liability shall be recognized initially in the period in which fair value can be reasonably estimated. In periods subsequent to the initial measurement, changes to the liability resulting from revisions to either the timing or the amount of estimated cash flows must be recognized as adjustments to the liability in the period of the change. The provisions of FAS 146 will be effective for Cabot prospectively for exit or disposal activities initiated after December 31, 2002. Cabot is in the process of assessing the impact of FAS 146 on its consolidated financial statements.

      In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements

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are also required in the interim and annual financial statements. The disclosure provisions of FIN 45 are effective for Cabot on December 31, 2002. The provisions for initial recognition and measurement of guarantee agreements are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Cabot is in the process of assessing the impact of FIN 45 on its consolidated financial statements.

      Forward-Looking Information: Included herein are statements relating to management’s projections of future profits, the possible achievement of Cabot’s financial goals and objectives, and management’s expectations for Cabot’s product development program. Actual results may differ materially from the results anticipated in the forward looking statements included herein due to a variety of factors, including but not limited to the following: market supply and demand conditions, fluctuations in currency exchange rates, the outcome of pending litigation, changes in the rate of economic growth in the United States and other major international economies, changes in regulatory environments, changes in trade, monetary and fiscal policies throughout the world, acts of war and terrorist activities, future litigation, cost of raw materials, patent rights of Cabot and others, demand for Cabot’s customers’ products, and competitors’ reactions to market conditions. Timely commercialization of products under development by Cabot may be disrupted or delayed by technical difficulties, market acceptance, or competitors’ new products, as well as difficulties in moving from the experimental stage to the production stage. The risk management discussion and the estimated amounts generated from the analyses are forward-looking statements of market risk, assuming certain adverse market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The methods used by Cabot to assess and mitigate risks should not be considered projections of future events or losses. The Company undertakes no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

Risk Management

     Market Risk

      Cabot’s principal risk management objective is to identify and monitor its exposure to changes in interest rates, foreign currency rates, commodity prices and Cabot’s share price, in order to assess the impact that changes in each could have on future cash flow and earnings. Cabot manages these risks through normal operating and financial activities and, when deemed appropriate, through the use of derivative financial instruments. Gains or losses associated with financial instruments are generally offset by the changes in value of the underlying transactions. Market risk exposure to other financial instruments is not material to earnings, cash flow, or fair values.

      Cabot’s risk management policy prohibits entering into financial instruments for speculative purposes. All instruments entered into by Cabot are reviewed and approved by Cabot’s Risk Management Committee, which is charged with enforcing Cabot’s risk management policy.

      Cabot has formally documented the relationships between hedging instruments and hedged items, as well as its risk management objectives. All derivative instruments are recognized on the balance sheet at fair value. Hedge accounting is followed for derivatives that have been designated and qualify as fair value and cash flow hedges. For derivatives that have been designated and qualify as fair value hedges, the changes in the fair value of highly effective derivatives, along with changes in the fair value of the hedged liabilities that are attributable to the hedged risks, are recorded in current period earnings. For derivatives that have been designated and qualify as cash flow hedges, changes in the fair value of the effective portion of the derivatives’ gains or losses are reported in other comprehensive income, and the ineffective portion is reported in earnings.

      By using derivative instruments, Cabot is subject to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, Cabot’s credit risk will equal the fair value gain on the derivative. Generally, when the fair value of a derivative contract is positive, the counterparty owes Cabot, thus creating a repayment risk for Cabot. When the fair value of a derivative contract is negative, Cabot owes the counterparty and, therefore, assumes no repayment risk. Cabot minimizes the credit (or repayment) risk

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in derivative instruments by entering into transactions with highly-rated counterparties that are reviewed periodically by Cabot.

     Interest Rates

      Cabot’s objective in managing its exposure to interest rate changes is to maintain an appropriate balance of fixed and variable rate debt and to match borrowing costs with the economics of Cabot’s business cycles. Cabot may use interest rate swaps to adjust fixed and variable rate debt positions. In October 2001, Cabot entered into four fixed to variable interest rate swaps in an aggregate notional amount of $97 million of its US dollar denominated debt. The swaps are derivative instruments as defined by FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and have been designated as fair value hedges. The swaps hedge the change in the fair value of $97 million of Cabot’s fixed rate medium term notes due to changes in interest rates. The interest rate swaps and the medium term notes they hedge mature on various dates through February 2007. The fair values of the derivative instruments are recorded as other assets in the consolidated balance sheet. A corresponding increase to long-term debt of $5 million was recorded for the change in the fair value of the debt at September 30, 2002. The interest rate swaps were determined to be highly effective and no amount of ineffectiveness needed to be recorded in earnings during the period ended September 30, 2002. The variable interest rates on the swaps reset every six months in June and December.

      As part of the CSM acquisition, Cabot assumed interest rate swaps related to the variable rate debt. The swaps economically hedged the risk of change in market interest rates associated with the variable interest on the debt. The swaps are derivative instruments as defined by FAS No. 133. The interest rate swaps were recorded as other liabilities at their fair value of $1 million on the acquisition date. Subsequent changes in the fair value of these derivative instruments were immaterial. In October 2002, Cabot refinanced the underlying variable rate debt and the swaps were terminated.

      On October 29, 2002, Cabot entered into two new interest rate swaps related to the October 2002 debt agreement with an aggregate notional amount of 9.3 billion yen ($75 million). The swaps are variable-for-fixed swaps of the quarterly interest payments, mature in fiscal year 2008, and lock in a fixed yen interest rate of 1.3%. The swaps are derivative instruments as defined by FAS No. 133 and have been designated as cash flow hedges.

      Cabot has the equivalent of $147 million of Euro debt and $39 million of yen denominated debt at variable rates. A change in rates of 10% on Cabot’s aggregate variable rate debt could cause interest expense to change by $1 million per year.

      Cabot did not enter into financial instruments to hedge interest rates during 2001 or 2000. Cabot settled its remaining interest rate swaps in January 2000. For 2000, the gains or losses in interest income or expense associated with interest rate swaps were immaterial.

      As of September 30, 2002, Cabot had $159 million in cash and short-term investments. It is the Company’s practice to invest excess cash in instruments that will earn a high rate of return consistent with the protection of principal. Interest income earned may vary as a result of changes in interest rates and average cash balances, which could fluctuate over time.

     Foreign Currency

      Cabot’s international operations are subject to certain risks, including currency fluctuations and government actions. Operations in each country are closely monitored so Cabot can respond to changing economic and political environments and to fluctuations in foreign currencies. Specifically, during the year ended September 30, 2002, economic and political instability in Argentina and Brazil has led to larger than expected fluctuations in the exchange rates of those countries. The Argentina peso was devalued by more than 70% after the Government was forced to abandon its fixed exchange rate policy that pegged the value of the peso to the US dollar. The Brazilian real has recently weakened to record lows due to concerns related to the possible impact that the October 2002 presidential election could have on the economy. The current depressed state of these functional currencies has resulted in a devaluation of the translated income statements for the

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year ended September 30, 2002. However, this was partly offset by the benefit of a net US dollar receivable position in these entities. Accordingly, Cabot utilizes short-term forward contracts to hedge receivables and payables denominated in currencies other than its foreign entities’ functional currencies. In 2002, 2001 and 2000, none of Cabot’s forward contracts were designated as hedging instruments under FAS No. 133. Cabot monitors its foreign exchange exposures and adjusts its hedge position accordingly. Cabot’s forward foreign exchange contracts are denominated primarily in the EURO, Japanese yen, British pound sterling, Canadian dollar, Australian dollar, and Czech Republic koruna. The Company’s Treasury function, under the guidance of the Company’s Risk Management Committee, continuously monitors foreign exchange exposures so that Cabot can respond to changing economic and political environments and attempt to minimize the impact of adverse currency movements.

      Subsequent to the 2002 fiscal year end, on October 24, 2002, Cabot entered into a 9.3 billion yen ($75 million) three year variable rate term loan agreement with a group of banks to refinance existing debt at CSM. This loan has been designated as a foreign currency hedge of Cabot’s net investments in Japanese yen denominated subsidiaries and gains or losses for the effective portion of the hedge will be recorded in the Accumulated Other Comprehensive Income (Loss) line in Stockholders’ Equity.

      Also subsequent to the 2002 fiscal year end, on November 20, 2002, Cabot entered into two cross currency swaps for an aggregate amount of $41 million. Upon maturity of the agreement which is scheduled to be October 24, 2005, Cabot is entitled to receive $41 million and is obligated to pay 5 billion Japanese yen. Cabot is also entitled to receive semi-annual interest payments on $41 million at 3 month US Dollar LIBOR interest rates and is obligated to make semi-annual interest payments on 5 billion Japanese yen at 3 month Japanese yen LIBOR interest rates. This swap has been designated as a foreign currency hedge of Cabot’s net investment in Japanese yen denominated subsidiaries and gains or losses for the effective portion of the hedge will be recorded in the Accumulated Other Comprehensive Income (Loss) line in Stockholders’ Equity.

     Political Risk

      In addition to foreign currency exposure, Cabot is also exposed to political or country risks inherent in doing business in some countries. These risks may include actions of governments (especially those newly appointed), importing and exporting issues, contract loss, and asset abandonment. The Company actively monitors these risks to reduce any potential adverse effects.

     Share Repurchases

      Cabot repurchases its shares in order to offset dilution caused by issuing shares under its various employee stock plans. In addition, Cabot may repurchase its shares as a preferred method of returning excess cash to shareholders. From time to time, Cabot enters into derivative instruments in its stock in order to fix the price of stock for delivery at a future date. These agreements provide Cabot with the right to settle forward contracts in cash or an equivalent value of Cabot Corporation common stock. In 2001 Cabot purchased 100,000 shares of its common stock under share repurchase contracts, at an average price of $35 per share. There were no open share repurchase contracts at September 30, 2001 and no share repurchase contracts were executed in fiscal 2002.

     Commodities

      Cabot is exposed to price fluctuations in certain commodities, such as feedstock and natural gas. When it owned the LNG segment, from time to time, Cabot entered into commodity futures contracts, commodity price swaps, and/or option contracts to hedge a portion of firmly committed and anticipated transactions against natural gas price fluctuations. Cabot monitored its exposure to ensure the overall effectiveness of its hedge positions. In 2000, Cabot realized a $1 million loss on LNG futures contracts. In fiscal 2002 and 2001, no futures contracts were entered into by Cabot.

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     Value-at-Risk

      Cabot utilizes a Value-at-Risk (“VAR”) model to determine the maximum potential loss in the fair value of its foreign exchange, share repurchases and commodity sensitive derivative financial instruments within a 95% confidence interval. Cabot’s computation is based on the interrelationships between movements in interest rates, foreign currencies, share repurchases and commodities. These interrelationships are determined by observing historical interest rates, foreign currency, share price and commodity market changes over corresponding periods. The assets and liabilities, firm commitments and anticipated transactions, which are hedged by derivative financial instruments, are excluded from the model. The VAR model estimates were made assuming normal market conditions. There are various modeling techniques that can be used in the VAR computation. Cabot’s computations are based on a Monte Carlo simulation method. The VAR model is a risk analysis tool and does not purport to represent actual gains or losses in fair value that will be incurred by Cabot. The VAR model estimated a maximum loss in market value of $8 million for the twelve month period following September 30, 2002 for derivative instruments held as of that date.

      At no time during 2002 or 2001 did actual changes in market value exceed the VAR amounts during the reporting period.

      In 2001, the VAR model estimated a maximum loss in market value of $2 million from October 1, 2001 through November 30, 2001 for derivative instruments held as of September 30, 2001.

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Item 8.     Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

             
Page
Description
(1)
  Consolidated Balance Sheets at September 30, 2002 and 2001     34  
(2)
  Consolidated Statements of Income for each of the three fiscal years in the period ended September 30, 2002     36  
(3)
  Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended September 30, 2002     37  
(4)
  Consolidated Statements of Changes in Stockholders’ Equity     38  
(5)
  Notes to Consolidated Financial Statements     40-80  
(6)
  Report of Independent Accountants relating to the Consolidated Financial Statements listed above     81  

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CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

                       
September 30

2002 2001
(Dollars in millions, except per share amounts)

ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 159     $ 364  
 
Accounts and notes receivable, net of reserve for doubtful accounts of $4 and $4
    304       267  
 
Inventories
    435       285  
 
Prepaid expenses and other current assets
    41       33  
 
Deferred income taxes
    20       19  
     
     
 
   
Total current assets
    959       968  
     
     
 
Investments:
               
 
Equity
    48       76  
 
Other
    32       29  
     
     
 
     
Total investments
    80       105  
     
     
 
Property, plant and equipment
    2,019       1,856  
Accumulated depreciation and amortization
    (1,134 )     (1,049 )
     
     
 
 
Net property, plant and equipment
    885       807  
     
     
 
Other assets:
               
 
Goodwill
    105       19  
 
Intangible assets, net of accumulated amortization of $5 and $4
    8       2  
 
Deferred income taxes
    4       2  
 
Other assets
    26       16  
     
     
 
   
Total other assets
    143       39  
     
     
 
   
Total assets
  $ 2,067     $ 1,919  
     
     
 

The accompanying notes are an integral part of these financial statements.

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CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS—(Continued)

                     
September 30

2002 2001
(Dollars in millions, except per share amounts)

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Notes payable to banks
  $ 40     $ 13  
 
Current portion of long-term debt
    5       30  
 
Accounts payable and accrued liabilities
    238       243  
 
Deferred income taxes
    3       5  
     
     
 
   
Total current liabilities
    286       291  
     
     
 
Long-term debt
    495       419  
Deferred income taxes
    104       94  
Other liabilities
    170       138  
Commitments and contingencies (Note Q)
               
Minority interest
    35       27  
Stockholders’ equity:
               
Preferred stock:
               
 
Authorized: 2,000,000 shares of $1 par value
               
   
Series A Junior Participating Preferred Stock issued and outstanding: none
               
   
Series B ESOP Convertible Preferred Stock 7.75% Cumulative issued: 75,336 shares, outstanding: 56,273 and 59,148 shares (aggregate redemption value of $56 and $59)
    75       75  
 
Less cost of shares of preferred treasury stock
    (40 )     (33 )
Common stock:
               
 
Authorized: 200,000,000 shares of $1 par value
Issued and outstanding: 61,615,503 and 62,633,252 shares
    62       63  
 
Less cost of shares of common treasury stock
    (6 )      
Additional paid-in capital
    5       9  
Retained earnings
    1,120       1,078  
Unearned compensation
    (38 )     (40 )
Deferred employee benefits
    (51 )     (54 )
Notes receivable for restricted stock
    (23 )     (23 )
Accumulated other comprehensive loss
    (127 )     (125 )
     
     
 
   
Total stockholders’ equity
    977       950  
     
     
 
   
Total liabilities and stockholders’ equity
  $ 2,067     $ 1,919  
     
     
 

The accompanying notes are an integral part of these financial statements.

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CABOT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

                                 
Years Ended September 30

2002 2001 2000
(Dollars in millions, except per share amounts)


Net sales and other operating revenues
  $ 1,557     $ 1,670     $ 1,574  
Cost of sales
    1,128       1,237       1,164  
     
     
     
 
   
Gross profit
    429       433       410  
     
     
     
 
Selling and administrative expenses
    219       208       173  
Research and technical service
    48       48       43  
Special charges
    14       22       10  
     
     
     
 
   
Income from operations
    148       155       184  
Interest and dividend income
    9       28       6  
Interest expense
    (28 )     (32 )     (33 )
Special (charges) income
    (3 )     1        
Other (charges) income
    8       (2 )      
     
     
     
 
   
Income from continuing operations before taxes
    134       150       157  
Provision for income taxes
    (30 )     (42 )     (57 )
Equity in net income of affiliated companies, net of tax of $3, $13 and $9
    5       20       13  
Minority interest in net income, net of tax of $1, $2 and $5
    (4 )     (7 )     (5 )
     
     
     
 
   
Net income from continuing operations
    105       121       108  
Discontinued operations:
                       
 
Income from operations of discontinued businesses, net of income taxes
    1             36  
 
Gain on sale of business, net of income taxes
          3       309  
     
     
     
 
   
Net Income
    106       124       453  
     
     
     
 
Dividends on preferred stock, net of tax benefit of $2, $2 and $2
    (3 )     (3 )     (3 )
     
     
     
 
   
Income available to common shares
  $ 103     $ 121     $ 450  
     
     
     
 
Weighted-average common shares outstanding, in millions:
                       
 
Basic
    59       62       64  
     
     
     
 
 
Diluted
    71       74       73  
     
     
     
 
Income per common share:
                       
 
Basic:
                       
   
Continuing operations
  $ 1.74     $ 1.89     $ 1.65  
   
Discontinued operations:
                       
     
Income from operations of discontinued businesses
    0.02             0.56  
     
Gain on sale of business
          0.05       4.83  
     
     
     
 
       
Net Income
  $ 1.76     $ 1.94     $ 7.04  
     
     
     
 
Diluted:
                       
 
Continuing operations
  $ 1.48     $ 1.62     $ 1.46  
 
Discontinued operations:
                       
   
Income from operations of discontinued businesses
    0.02             0.49  
   
Gain on sale of business
          0.04       4.25  
     
     
     
 
       
Net Income
  $ 1.50     $ 1.66     $ 6.20  
     
     
     
 

The accompanying notes are an integral part of these financial statements.

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CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 
Years Ended September 30

2002 2001 2000
(Dollars in millions)


Cash Flows from Operating Activities:
                       
 
Net income
  $ 106     $ 124     $ 453  
 
Adjustments to reconcile net income to cash provided by operating activities:
                       
   
Depreciation and amortization
    109       115       129  
   
Deferred tax expense (benefit)
    (4 )     6       20  
   
Equity in net income of affiliated companies
    (5 )     (20 )     (13 )
   
Asset impairment charges and non-cash special items
    16       14       20  
   
Gain on sale of business, net of income taxes
          (3 )     (309 )
   
Non-cash compensation
    22       22       17  
   
Other non-cash charges, net
    6       23       7  
   
Changes in assets and liabilities, net of the effect of the consolidation of equity affiliates:
                       
     
Decrease (increase) in accounts and notes receivable
    (1 )     13       (73 )
     
Decrease (increase) in inventories
    (64 )     (55 )     1  
     
Increase (decrease) in accounts payable and accrued liabilities
    (4 )     (35 )     44  
     
Decrease in income taxes payable
    (1 )     (175 )     (10 )
     
Increase (decrease) in other liabilities
    14       (6 )     (22 )
     
Other, net
    (2 )     6       3  
     
     
     
 
       
Cash provided by operating activities
    192       29       267  
     
     
     
 
Cash Flows from Investing Activities:
                       
 
Additions to property, plant and equipment
    (146 )     (122 )     (137 )
 
Proceeds from sales of property, plant and equipment
    2       4       7  
 
Purchases of equity securities
    (9 )     (5 )     (2 )
 
Acquisition of affiliate, net of cash acquired
    (89 )     (6 )     (14 )
 
Proceeds from sale of business
          5       688  
 
Cash retained by discontinued operations
                (14 )
 
Cash from consolidation of equity affiliates
    10              
     
     
     
 
       
Cash provided by (used in) investing activities
    (232 )     (124 )     528  
     
     
     
 
Cash Flows from Financing Activities:
                       
 
Proceeds from long-term debt
          129       17  
 
Repayments of long-term debt
    (28 )     (63 )     (62 )
 
Decrease in short-term debt, net
    (27 )     (7 )     (165 )
 
Proceeds from initial public offering of Cabot Microelectronics Corporation
                83  
 
Purchases of preferred and common stock
    (82 )     (229 )     (47 )
 
Sales and issuances of preferred and common stock
    6       13       15  
 
Cash dividends paid to stockholders
    (35 )     (34 )     (32 )
 
Cash dividends paid to minority interest stockholders
    (5 )     (3 )     (3 )
 
Employee loan repayments
    7       15       7  
     
     
     
 
       
Cash used in financing activities
    (164 )     (179 )     (187 )
     
     
     
 
Effect of exchange rate changes on cash
    (1 )           (5 )
     
     
     
 
Increase (decrease) in cash and cash equivalents
    (205 )     (274 )     603  
Cash and cash equivalents at beginning of year
    364       638       35  
     
     
     
 
Cash and cash equivalents at end of year
  $ 159     $ 364     $ 638  
     
     
     
 

The accompanying notes are an integral part of these financial statements.

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CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

                                                                                 
Preferred Accumulated
Stock, Other Notes
Net of Additional Comprehensive Deferred Receivable Total Total
Treasury Common Paid-in Retained Income Unearned Employee for Restricted Stockholders’ Comprehensive
Stock Stock Capital Earnings (Loss) Compensation Benefits Stock Equity Income










(Dollars in millions)
Years Ended September 30
                                                                               
2000
                                                                               
Balance at September 30, 1999
  $ 58     $ 67     $ 5     $ 734     $ (44 )   $ (30 )   $ (59 )   $ (25 )   $ 706          
     
     
     
     
     
     
     
     
     
         
Net income
                            453                                             $ 453  
Foreign currency translation adjustments
                                    (58 )                                     (58 )
Change in unrealized gain on available-for-sale securities
                                    1                                       1  
                                                                             
 
Total comprehensive income
                                                                          $ 396  
                                                                             
 
Common dividends paid
                            (30 )                                                
Issuance of stock under employee compensation plans, net of forfeitures, including a tax benefit of $5
            3       51                       (26 )             (10 )                
Purchase and retirement of common stock
            (2 )     (15 )     (23 )                                                
Purchase of treasury stock — preferred
    (7 )                                                                        
Preferred dividends paid to Employee Stock Ownership Plan, net of tax benefit of $2
                            (3 )                                                
Principal payment by Employee Stock Ownership Plan under guaranteed loan
                                                    3                          
Amortization of unearned compensation
                                            17                                  
Notes receivable — payments and forfeitures
                                                            8                  
Proceeds from Initial Public Offering — Cabot Microelectronics Corporation
                    83                                                          
Minority interest recorded related to Cabot Microelectronics Corporation
                    (13 )                                                        
Cabot Microelectronics Corporation-dividend
                            (91 )                                                
     
     
     
     
     
     
     
     
     
         
Balance at September 30, 2000
  $ 51     $ 68     $ 111     $ 1,040     $ (101 )   $ (39 )   $ (56 )   $ (27 )   $ 1,047          
     
     
     
     
     
     
     
     
     
         
 
2001
                                                                               
Net income
                            124                                             $ 124  
Foreign currency translation adjustments
                                    (26 )                                     (26 )
Change in unrealized gain on available-for-sale securities
                                    2                                       2  
                                                                             
 
Total comprehensive income
                                                                          $ 100  
                                                                             
 
Common dividends paid
                            (31 )                                                
Issuance of stock under employee compensation plans, net of forfeitures, including a tax benefit of $4
            2       49                       (27 )             (11 )                
Purchase and retirement of common stock
            (7 )     (161 )     (52 )                                                
Purchase of treasury stock — preferred
    (9 )                                                                        
Preferred dividends paid to Employee Stock Ownership Plan, net of tax benefit of $2
                            (3 )                                                
Principal payment by Employee Stock Ownership Plan under guaranteed loan
                                                    2                          
Amortization and acceleration of unearned compensation
                    10                       26                                  
Notes receivable — payments and forfeitures
                                                            15                  
     
     
     
     
     
     
     
     
     
         
Balance at September 30, 2001
  $ 42     $ 63     $ 9     $ 1,078     $ (125 )   $ (40 )   $ (54 )   $ (23 )   $ 950          
     
     
     
     
     
     
     
     
     
         
The accompanying notes are an integral part of these financial statements.

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CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)

                                                                                 
Preferred Accumulated
Stock, Other Notes
Net of Additional Comprehensive Deferred Receivable Total Total
Treasury Common Paid-in Retained Income Unearned Employee for Restricted Stockholders’ Comprehensive
Stock Stock Capital Earnings (Loss) Compensation Benefits Stock Equity Income










(Dollars in millions)
2002
                                                                               
Net income
                            106                                             $ 106  
Foreign currency translation adjustments
                                    11                                       11  
Change in unrealized loss on available-for-sale securities
                                    (6 )                                     (6 )
Minimum pension liability adjustment
                                    (7 )                                     (7 )
                                                                             
 
Total comprehensive income
                                                                          $ 104  
                                                                             
 
Common dividends paid
                            (32 )                                                
Issuance of stock under employee compensation plans, net of forfeitures, including a tax benefit of $4
            1       34                       (20 )             (7 )                
Purchase and retirement of common stock
            (3 )     (40 )     (29 )                                                
Purchase of treasury stock — common
            (6 )                                                                
Purchase of treasury stock — preferred
    (5 )                                                                        
Preferred stock conversion
    (2 )     1       2                                                          
Preferred dividends paid to Employee Stock Ownership Plan, net of tax benefit of $2
                            (3 )                                                
Principal payment by Employee Stock Ownership Plan under guaranteed loan
                                                    3                          
Amortization of unearned compensation
                                            22                                  
Notes receivable — payments and forfeitures
                                                            7                  
     
     
     
     
     
     
     
     
     
         
Balance at September 30, 2002
  $ 35     $ 56     $ 5     $ 1,120     $ (127 )   $ (38 )   $ (51 )   $ (23 )   $ 977          
     
     
     
     
     
     
     
     
     
         

The accompanying notes are an integral part of these financial statements.

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Note A.     Significant Accounting Policies

      The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. The significant accounting policies of Cabot Corporation (Cabot) are described below.

 
Principles of Consolidation

      The consolidated financial statements include the accounts of Cabot and majority-owned and controlled U.S. and non-U.S. subsidiaries. Investments in 20% to 50% owned affiliates are accounted for using the equity method. Cabot reports the results of one Japanese subsidiary on a one-month lag due to the availability of information. Intercompany transactions have been eliminated.

 
Cash and Cash Equivalents

      Cash equivalents include all highly liquid investments with a maturity of three months or less at date of acquisition. Cash overdrafts are included with notes payable to banks on the consolidated balance sheet.

 
Inventories

      Inventories are stated at the lower of cost or market. The cost of most U.S. inventories is determined using the last-in, first-out (LIFO) method. The cost of other U.S. and all non-U.S. inventories is determined using the average cost method or the first-in, first-out (FIFO) method.

 
Investments

      Investments include investments in equity affiliates, investments in equity securities and investments accounted for under the cost method. All investments are subject to impairment reviews. All investments in marketable equity securities are classified as available-for-sale and are recorded at their fair market values. Accordingly, any unrealized holding gains or losses, net of taxes, are excluded from income and recognized as a separate component of other comprehensive income within stockholders’ equity. Unrealized losses that are other than temporary are recognized in net income. The fair value of marketable equity securities is determined based on market prices at the balance sheet dates. The cost of equity securities sold is determined by the specific identification method.

 
Property, Plant and Equipment

      Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is generally calculated on the straight-line method for financial reporting purposes. The depreciable lives for buildings, machinery and equipment, and other fixed assets are 20 to 25 years, 10 to 20 years, and 3 to 20 years, respectively. The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in income.

      Cabot capitalizes internal use software costs in accordance with Statement of Position (SOP) 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use.” This SOP provides the guidance to determine if internal use computer software costs are expensed as incurred or capitalized.

 
Goodwill and Other Intangible Assets

      Effective October 1, 2001, Cabot adopted Statement of Financial Accounting Standard (FAS) No. 142, “Goodwill and Other Intangible Assets.” Goodwill is comprised of the cost of business acquisitions in excess of the fair value assigned to the net tangible assets and identifiable intangible assets acquired including technology, licenses and patents.

      Cabot’s intangible assets are primarily comprised of patented and unpatented technology. Finite lived intangibles are amortized over their estimated useful lives. Amortization expense of $1 million, $4 million and $4 million was recorded in 2002, 2001 and 2000, respectively.

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Impairment of Long-Lived Assets

      Cabot’s long-lived assets include property, plant, equipment, long-term investments, goodwill and other intangible assets. The carrying values of long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. An asset impairment is recognized when the fair value of the asset is less than the carrying value of the asset. The fair value of long-lived assets, other than goodwill, is based on undiscounted estimated cash flows at the lowest level determinable. Cabot’s estimates reflect management’s assumptions about selling prices, production and sales volumes, costs, and market conditions over an estimate of the remaining operating period. If an impairment is indicated, the asset is written down to fair value.

      Cabot may decide to abandon a fixed asset project, plant expansion or other long-lived asset initiative, in which case an impairment loss is recognized if the carrying value of the asset exceeds its salvage value. An impairment charge is recorded in the period that Cabot commits to a plan to abandon the asset.

 
Foreign Currency Translation

      The functional currency of the majority of Cabot’s foreign subsidiaries is the local currency. Substantially all assets and liabilities of foreign operations are translated into U.S. dollars at exchange rates in effect at the balance sheet dates. Income and expense items are translated at average exchange rates during the year. Unrealized currency translation adjustments are accumulated as a separate component of other comprehensive income within stockholders’ equity. Foreign currency gains and losses arising from transactions are reflected in net income. Included in other charges for 2002, 2001 and 2000 are net foreign currency transaction losses of zero, $3 million and $1 million, respectively. Cabot included in income a loss of $2 million in 2002 and a $1 million gain in 2001 related to currency translation adjustments from plant closings.

 
Financial Instruments

      Derivative financial instruments are used by Cabot to manage some of its foreign currency exposures. Cabot may also use financial instruments to manage other exposures, such as commodity prices, share repurchases and interest rates. Cabot does not enter into financial instruments for speculative purposes. Derivative financial instruments are accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and are measured at fair value and recorded on the balance sheet. Cabot formally documents the relationships between hedging instruments and hedged items, as well as its risk management objective. Hedge accounting is followed for derivatives that have been designated and qualify as fair value, cash flow and net investment hedges. For fair value hedges, changes in the fair value of highly effective derivatives, along with changes in the fair value of the hedged liabilities that are attributable to the hedged risks, are recorded in current period earnings. For cash flow hedges, changes in the fair value of the effective portion of the derivatives’ gains or losses are reported in other comprehensive income, and the ineffective portion is reported in earnings. If the derivative instrument is not designated as a hedge, the gain or loss from changes in the fair value is recognized in earnings in the period of change.

 
Revenue Recognition

      The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101), which establishes criteria which must be satisfied before revenue is realized or realizable and earned.

      The Company primarily derives its revenues from the sale of chemical products, performance materials and specialty fluids products. Other operating revenues which represent less than ten percent of total revenues, include tolling, services and royalties for licensed technology. Cabot recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Revenue from product sales is recognized when the product is shipped and title and risk of loss have passed to the customer. Cabot generally is able to ensure that products meet customer specifications prior to shipment. Cabot prepares its estimates for sales returns and allowances, discounts and volume rebates quarterly based primarily on historical experience updated for changes in facts and

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circumstances, as appropriate. If actual future results vary, Cabot may need to adjust its estimates, which could have an impact on earnings in the period of adjustment.

      Shipping and handling charges related to sales transactions are recorded as sales revenue when billed to customers or included in the sales price in accordance with Emerging Issues Task Force (EITF) 00-01, “Accounting for Shipping and Handling Fees and Costs.” Shipping and handling costs that were previously netted against revenues are now included in cost of sales. Shipping and handling costs reclassified from revenue to cost of sales to conform with this presentation in fiscal 2000 amounted to $57 million.

 
Research and Development

      Research and development costs are expensed as incurred in accordance with FAS No. 2, “Accounting for Research and Development Costs.” The majority of Cabot’s research and technical service expense recorded on the consolidated statement of income relates to research and development costs.

 
Income Taxes

      Deferred income taxes are determined based on the estimated future tax effects of differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. Provisions are made for the U.S. income tax liability and additional non-U.S. taxes on the undistributed earnings of non-U.S. subsidiaries, except for amounts Cabot has designated to be indefinitely reinvested.

 
Equity Incentive Plans

      In accordance with the provisions of FAS No. 123, “Accounting for Stock-Based Compensation”, Cabot has elected to account for stock-based compensation plans consistent with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations in accounting. Cabot discloses the summary of pro forma effects to reported net income and earnings per share, as if Cabot had elected to recognize compensation cost based on the fair value of the options granted at grant date, as prescribed by FAS No. 123.

      Under Cabot’s Equity Incentive Plans, common stock may be granted at a discount to certain key employees. Generally, restricted stock awards cannot be sold or otherwise encumbered during the three years following the grant. Upon issuance of stock under the plan, unearned compensation, calculated as the difference between the market value on the measurement date of the grant and the discounted price, is charged to a separate component of stockholders’ equity and subsequently amortized as compensation expense over the vesting period.

 
Comprehensive Income

      Accumulated other comprehensive income (loss), which is disclosed in the stockholders’ equity section of the consolidated balance sheet, includes unrealized gains or losses on available-for-sale securities, translation adjustments on investments in foreign subsidiaries, translation adjustments on foreign securities and minimum pension liability adjustments.

 
Environmental Costs

      Cabot accrues environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single liability amount cannot be reasonably estimated, but a range can be reasonably estimated, Cabot accrues the amount that reflects the best estimate within that range or the low end of the range if no estimate within the range is better. The amount accrued reflects Cabot’s assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. The availability of new information, changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in applicable government laws and regulations could result in higher or lower costs. Cabot does not

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reduce its estimated liability for possible recoveries from insurance carriers. Proceeds from insurance carriers are recorded when realized by the receipt of cash or a contractual agreement.
 
Use of Estimates

      The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

 
Reclassification

      Certain amounts in 2001 and 2000 have been reclassified to conform to the 2002 presentation. These reclassifications had no effect on the consolidated balance sheets or net income.

 
New Accounting Pronouncements

      Cabot has adopted in fiscal 2003 or is assessing the impact of the following standards:

  •  The Financial Accounting Standards Board (FASB) issued FAS No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets”, in June 2001. The objective of FAS No. 143 is to establish an accounting standard for the recognition and measurement of an asset retirement obligation on certain long-lived assets. The retirement obligation must be one that results from the acquisition, construction or normal operation of a long-lived asset. FAS No. 143 requires the legal obligation associated with the retirement of a tangible long-lived asset to be recognized at fair value as a liability when incurred, and the cost to be capitalized by increasing the carrying amount of the related long-lived asset. Cabot adopted FAS No. 143 on October 1, 2002 and such adoption will not have a significant effect on the financial statements.
 
  •  In October 2001, the FASB issued FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes FAS No. 121, “Accounting for the Impairment of Long-lived Assets and for Long- lived Assets to be Disposed of” and certain of the provisions of APB No. 30 “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (APB No. 30), for the disposal of segments of a business. The statement creates one accounting model, based on the framework established in FAS No. 121, to be applied to all long-lived assets, including discontinued operations. Cabot adopted FAS No. 144 on October 1, 2002 and will perform future impairment tests for long-lived assets in accordance with this standard.
 
  •  The FASB issued FAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, in April 2002. This statement updates, clarifies and simplifies existing accounting pronouncements. Specifically, the statement rescinds FAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, FAS No. 64, “Extinguishment of Debt Made to Satisfy Sinking Fund Requirements” and FAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” This statement amends FAS No. 13, “Accounting for Leases” and certain other existing authoritative pronouncements to make technical corrections or clarifications. Cabot adopted FAS No. 145 on October 1, 2002 and such adoption will not have a significant effect on the financial statements.
 
  •  In July 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” FAS No. 146 requires a liability for a cost associated with an exit or disposal activity to be recognized and measured initially at its fair value in the period in which the liability is incurred. If fair value cannot be reasonably estimated, the liability shall be recognized initially in the period in

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  which fair value can be reasonably estimated. In periods subsequent to the initial measurement, changes to the liability resulting from revisions to either the timing or the amount of estimated cash flows must be recognized as adjustments to the liability in the period of the change. The provisions of FAS No. 146 will be effective for Cabot prospectively for exit or disposal activities initiated after December 31, 2002. Cabot is in the process of assessing the impact of FAS No. 146 on its consolidated financial statements.
 
  •  In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements are also required in the interim and annual financial statements. The disclosure provisions of FIN 45 are effective for Cabot on December 31, 2002. The provisions for initial recognition and measurement of guarantee agreements are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Cabot is in the process of assessing the impact of FIN 45 on its consolidated financial statements.

Note B.     Special Items

      Cabot has chosen to separately disclose special items because the items are non-recurring in nature and the results excluding special items are an appropriate measurement of Cabot’s on-going operating results. The following is a summary of the special income and charges recorded:

                         
Years Ended
September 30

2002 2001 2000
(Dollars in millions)


Insurance recoveries
  $ 8     $ 1     $ 10  
Asset impairment charges
    (13 )     (2 )     (9 )
Severance charges and other cost reduction initiatives/programs
    (1 )           (9 )
Litigation reserve and environmental charges
    (8 )           (2 )
Retirement of Chief Executive Officer and resignation of Chief Financial Officer
          (21 )      
Non-operating special items
    (3 )     1        
     
     
     
 
Total special income (charges)
  $ (17 )   $ (21 )   $ (10 )
     
     
     
 

      Special items from operations for fiscal 2002 include an $8 million impairment charge to discontinue an energy project in the Chemical Businesses, a $5 million charge for respirator claims derived from a disposed safety products business and a $3 million environmental charge due to updated cost estimates. In addition, associated with the acquisition of Showa Cabot Supermetals KK, now known as Cabot Supermetals (CSM), the Company recorded a $5 million asset impairment charge for the cancellation of expansion projects at the Performance Materials plant in Boyertown, Pennsylvania, and a $1 million severance charge. The $1 million severance charge was for severance and termination benefits for approximately 24 employees of the Performance Materials business. Cabot also recorded an $8 million benefit from insurance recoveries. Non-operating special items for fiscal 2002 include a $2 million charge related to a translation adjustment at a closed plant and a $1 million charge for non-capitalizable currency transaction costs associated with the acquisition of CSM.

      Special items from operations for fiscal 2001 include a $21 million charge related to the retirement of the Chief Executive Officer and the resignation of the Chief Financial Officer. The charge consisted of $13 million to accelerate the vesting of shares issued under Cabot’s Long Term Incentive Compensation Plan and $8 million of cash payments. Special charges for 2001 also include a $2 million charge from the discontinuance of a toll manufacturing agreement and the benefits of a $1 million insurance recovery. Non-

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operating special items for fiscal 2001 include a $1 million recovery of costs from a translation adjustment at a closed plant.

      Special items from operations for fiscal 2000 include the benefit of a $10 million insurance recovery, a $2 million charge to increase the environmental reserve and an $18 million charge to close two plants. Included in the $18 million charge were accruals of $2 million for severance and termination benefits for approximately 38 employees of the Chemical and Performance Materials Businesses, $7 million for facility closing costs, and a $9 million charge for the impairment of long-lived plant assets. These expenses are included as special items in the consolidated statements of income. During 2001, $1 million of severance and termination benefits and $3 million of facility closing costs were paid. It was determined during fiscal 2001 that the recovery value of fixed assets was overvalued by $2 million and the required facility closing costs would be $2 million less than originally accrued. At September 30, 2002, all severance and termination benefits have been paid and $2 million of facility closing costs remained accrued for the required monitoring costs at the second site.

 
Note C. Acquisitions

      On February 8, 2002, Cabot purchased the remaining 50% of the shares in CSM in Japan from its joint venture partner, Showa Denko KK. CSM is a supplier of tantalum powders and metal products to the global electronics, aerospace and chemical processing industries. The acquisition of CSM expands the capacity and the capabilities of Cabot’s existing tantalum business in the Performance Materials segment.

      The aggregate purchase price was $89 million in cash, net of cash acquired. In addition to the cash paid, Cabot also assumed $54 million of long-term debt and bank notes, as well as other assets and liabilities detailed in the table below. This acquisition has been accounted for as a purchase and the results of operations of CSM have been included in the consolidated financial statements since the date of acquisition on a one-month lag due to a delay in the availability of financial information. Prior to the acquisition, Cabot’s investment in CSM was accounted for as an equity investment and the results were reported on a three-month lag. The equity investment income recorded to change from a three-month lag to a one-month lag was not material to the consolidated results of operations.

      Included in Cabot’s consolidated results for the year ended September 30, 2002 are 50% of the operating results of CSM for the months of July 2001 through January 2002 and 100% of the operating results of CSM for the months of February through August 2002.

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      The fair value of the assets acquired and liabilities assumed represents the 50% of CSM purchased. The following table summarizes the purchased half of the fair values of the assets acquired and liabilities assumed at the date of acquisition:

         
Cash Paid
  $ 99  
Cash and cash equivalents
  $ 10  
Accounts and notes receivable
    14  
Inventory
    42  
Other current assets
    1  
Property, plant and equipment
    23  
Other long term assets
    12  
     
 
Fair value of assets acquired
  $ 102  
     
 
 
Notes payable to banks
  $ 24  
Accounts payable and accruals
    8  
Long-term debt
    30  
Other long-term liabilities
    12  
     
 
Fair value of liabilities assumed
  $ 74  
     
 
 
Fair value of net assets acquired
  $ 28  
     
 
 
Recorded goodwill
  $ 71  
     
 

      In accordance with FAS No. 142, goodwill recorded as a result of the acquisition will not be amortized, but will be tested for impairment at least annually. The Company recorded $6 million of identifiable intangible assets primarily comprised of patented and unpatented technology. These intangible assets are being amortized on a straight-line basis over useful lives ranging from 2 to 10 years. The weighted average amortization period for the intangible assets recognized as a result of the acquisition is 9 years. No residual value is estimated for the assets.

      Assuming Cabot owned 100% of CSM for all periods presented, the following table would be the unaudited pro forma consolidated operating results for the years ended September 30, 2002 and 2001:

                   
September 30

2002 2001
(Dollars in millions, except per share amounts)

Total Revenues
  $ 1,584     $ 1,791  
Net Income
    104       130  
Net Income per share
               
 
Basic
  $ 1.73     $ 2.04  
 
Diluted
  $ 1.47     $ 1.74  

      The goodwill recorded in the CSM acquisition was not deductible for tax purposes.

      The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place in the prior year or the results that may occur in the future. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs which may occur as a result of the integration and consolidation of CSM.

      On March 16, 2001, Cabot announced an open offer for approximately 4 million shares of Cabot India Limited, at 100 Rupees per share. Cabot India Limited was a majority-owned subsidiary of Cabot Corporation and its shares were traded on Indian stock exchanges. The tender offer was for the 40% ownership of Cabot India Limited held by minority interest shareholders. The offer closed on June 16, 2001 and the share transfer

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procedures occurred in July 2001. Approximately 3 million of the outstanding shares were acquired for $6 million, raising Cabot’s total ownership to approximately 92% as of September 30, 2001. Cabot made a follow-on offer at the same price for the remaining shares. During fiscal 2002, under the follow-on offer, Cabot acquired an additional 3% ownership for a nominal amount. The excess of the purchase price over the fair value of the minority interest acquired of approximately $2 million was recorded as goodwill. Cabot India Limited’s shares were de-listed from the Indian stock exchanges when Cabot’s ownership percentage exceeded the 90% threshold.

      In March 2001, Cabot exercised an option to purchase 1 million shares of Angus & Ross Plc common stock. In May 2001, Cabot purchased an additional 4 million shares of Angus & Ross Plc common stock. The total purchase price of the 5 million shares was $1 million. The purchase of the additional 4 million shares increased Cabot’s ownership in Angus & Ross Plc to approximately 21%. In August 2002, Cabot purchased an additional 850,000 shares for a nominal amount.

      On March 17, 2000, Cabot signed an agreement to acquire the remaining interest in a joint venture in the carbon black business for approximately $14 million. The acquisition closed in the third quarter of fiscal 2000 and was accounted for using the purchase method. Accordingly, the purchase price was allocated to the net assets acquired based on their estimated fair values. The excess of the purchase price over fair value of net assets acquired of approximately $7 million was recorded as goodwill.

 
Note D. Discontinued Operations

      In 2002, Cabot recorded insurance recovery proceeds of $2 million from various discontinued businesses, including $1 million from the disposed Liquefied Natural Gas (LNG) business. The receipt, net of taxes, is classified as income from operations of a discontinued business in the consolidated statements of income.

      In February 2001, Cabot received additional cash proceeds of $5 million from the LNG sale. The receipt, net of taxes, is classified as a gain on sale of business in the discontinued operations section of the fiscal 2001 consolidated statement of income.

      On September 19, 2000, Cabot completed a transaction to sell its LNG business for $688 million in cash. The sale included Cabot’s LNG terminal in Everett, Massachusetts, its LNG tanker, The Matthew, and its equity interest in the Atlantic LNG liquefaction plant in Trinidad. The gain on the sale of the LNG segment was approximately $309 million, net of taxes of $178 million.

      On April 4, 2000, Cabot Microelectronics Corporation, then a subsidiary of Cabot, sold 4.6 million shares of its common stock in an initial public offering (IPO). The 4.6 million shares represented approximately 19.5% of Cabot Microelectronics. The net proceeds from the IPO were approximately $83 million. Cabot received an aggregate of approximately $81 million in dividends from Cabot Microelectronics. On July 25, 2000, a committee of Cabot’s Board of Directors voted to spin off its remaining 80.5% equity interest in Cabot Microelectronics by distributing a special dividend of its remaining interest in Cabot Microelectronics to its common stockholders of record as of the close of regular trading on the New York Stock Exchange on September 13, 2000. The tax-free distribution took place on September 29, 2000.

      For fiscal 2000, the operating results of the LNG and Cabot Microelectronics segments have been segregated from continuing operations and reported as a separate item on the consolidated statements of

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income. Interest expense was allocated to discontinued operations proportionally based upon total assets in accordance with APB No. 30. Condensed operating results of the discontinued operations are as follows:
         
September 30

2000
(Dollars in millions)
Net sales and other operating revenues
  $ 579  
Income before income taxes and minority interest
    62  
Provision for income taxes
    22  
Minority interests
    4  
Income from operations, net of income taxes
    36  
 
Note E. Inventories

      Inventories, net of LIFO reserves, were as follows:

                   
September 30

2002 2001
(Dollars in millions)

Raw materials
  $ 120     $ 76  
Work in process
    156       70  
Finished goods
    124       106  
Other
    35       33  
     
     
 
 
Total
  $ 435     $ 285  
     
     
 

      Inventories valued under the LIFO method comprised approximately 29% and 26% of 2002 and 2001 total inventory, respectively. At September 30, 2002 and 2001, the LIFO reserve recorded was $85 million and $94 million, respectively. There were no significant liquidations of LIFO inventories in 2002 or 2001. In 2000, LIFO inventory quantities were reduced, which resulted in a liquidation of LIFO inventory layers carried at lower costs which prevailed in prior years. The effect of the 2000 liquidation was to decrease cost of sales by approximately $5 million and to increase net earnings by $3 million. Other inventory is comprised of spare parts and supplies.

 
Note F. Investments

      At September 30, 2002 and 2001, investments in common stock accounted for using the equity method amounted to $48 million and $76 million, respectively. Dividends received from equity affiliates were $3 million in 2002, $11 million in 2001 and $8 million in 2000. CSM was a 50% joint venture in the Performance Materials segment until February 8, 2002 when Cabot purchased the remaining 50% interest and the entity was consolidated. Other equity affiliates consist of several joint ventures in the Chemical Businesses segment.

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      The results of operations and financial position of Cabot Supermetals for the period as an equity affiliate and Cabot’s other equity-basis affiliates are summarized below:

                                                   
Cabot Supermetals Other Equity Affiliates


September 30

2002 2001 2000 2002 2001 2000
(Dollars in millions)





Condensed Income Statement Information:
                                               
 
Net sales
  $ 58     $ 209     $ 175     $ 471     $ 475     $ 511  
 
Gross profit
    11       64       39       181       173       196  
 
Net income
    2       30       15       23       18       23  
Condensed Balance Sheet Information:
                                               
 
Current assets
  $     $ 147     $ 142     $ 193     $ 171     $ 179  
 
Non-current assets
          53       28       322       337       356  
 
Current liabilities
          77       78       143       153       193  
 
Non-current liabilities
          66       38       254       245       238  
 
Net assets
          57       54       118       110       104  

      Other investments of $32 million include $2 million of cost based investments and $30 million of available-for-sale equity securities at September 30, 2002. At September 30, 2001 other investments included $2 million of cost based investments and $27 million of available-for-sale equity securities. The cost and fair value of available-for-sale equity securities included in other investments are summarized as follows:

                 
September 30

2002 2001
(Dollars in millions)

Cost
  $ 33     $ 24  
Cumulative unrealized holding gains
          9  
Foreign currency translation adjustment on foreign denominated securities
    (3 )     (6 )
     
     
 
Fair value
  $ 30     $ 27  
     
     
 

      At September 30, 2002, the fair market value of Cabot’s investment in Sons of Gwalia, an Australian mining company, was $29 million. Subsequent to the balance sheet date, the fair value of the investment declined by approximately $15 million. Cabot’s investment in Sons of Gwalia is accounted for under FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, as an available-for-sale equity security.

      Dividends received from available-for-sale equity securities were $1 million in 2002, 2001 and 2000. In fiscal 2002, an unrealized loss was recorded in accumulated other comprehensive income in stockholders’ equity of $6 million, net of deferred tax of $3 million. In fiscal 2001 and 2000, unrealized holding gains of $2 million and $1 million, respectively, were credited to accumulated other comprehensive income in stockholders’ equity, net of deferred taxes of $4 million and $3 million, respectively. Foreign currency translation adjustments on foreign securities are included in accumulated other comprehensive income within stockholders’ equity as part of foreign currency translation adjustments. There were no sales of available-for-sale equity securities for the years ended September 30, 2002, 2001 and 2000.

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Note G.     Property, Plant & Equipment

      Property, plant and equipment is summarized as follows:

                   
September 30

2002 2001
(Dollars in millions)

Land and improvements
  $ 51     $ 50  
Buildings
    319       299  
Machinery and equipment
    1,393       1,302  
Other
    94       79  
Construction in progress
    162       126  
     
     
 
 
Total property, plant and equipment
    2,019       1,856  
Less: accumulated depreciation
    (1,134 )     (1,049 )
     
     
 
 
Net property, plant and equipment
  $ 885     $ 807  
     
     
 

      Depreciation expense for continuing operations was $108 million, $111 million and $116 million for the years ended September 30, 2002, 2001 and 2000, respectively.

Note H.     Goodwill and Other Intangible Assets

      Cabot adopted FAS No. 142 on October 1, 2001. As a result, all goodwill amortization ceased for Cabot on October 1, 2001. Upon adoption, the goodwill attributable to each reporting unit was tested for impairment by comparing the fair value of each reporting unit to its carrying value. The fair value of a reporting unit was determined by estimating the present value of expected future cash flows. No impairment existed upon adoption of FAS No. 142.

      As required by FAS No. 142, impairment tests are performed at least annually. During the third quarter of fiscal 2002, Cabot performed the fiscal 2002 FAS No. 142 impairment test and determined that no impairment loss should be recognized.

      At September 30, 2002 and 2001, Cabot had goodwill balances of $105 million and $19 million, respectively. During the first quarter of 2002, Cabot acquired shares of certain minority interest shareholders in the Chemical Businesses, resulting in $5 million of additional goodwill. During the second quarter of 2002, Cabot acquired the remaining 50% of the shares in CSM in the Performance Materials business, resulting in $71 million of additional goodwill.

      The carrying amount of goodwill attributable to each reportable operating segment with goodwill balances and the changes in those balances during the year ended September 30, 2002 are as follows:

                         
Chemical Performance
Businesses Materials Total
(Dollars in millions)


Balance at September 30, 2001
  $ 16     $ 3     $ 19  
Goodwill acquired during period
    5       71       76  
Foreign exchange translation adjustment
    1       9       10  
     
     
     
 
Balance at September 30, 2002
  $ 22     $ 83     $ 105  
     
     
     
 

      Cabot does not have any indefinitely lived intangible assets. At September 30, 2002 and 2001, Cabot had $8 and $2 million of finite-lived intangible assets, respectively, primarily composed of patented and unpatented technology. Intangible assets are amortized over their estimated useful lives, which range from 2 to 15 years, with a weighted average amortization period of 10 years. Amortization expense is estimated to be approximately $1 million in each of the next five years.

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      If FAS No. 142 had been adopted in the prior periods, Cabot’s pro forma net income and pro forma net income per common share for the years ended September 30, 2001 and 2000 would have been:

                   
Year Ended
September 30,

2001 2000
(Dollars in millions, except per share amounts)

Net income available for common shares — as reported
  $ 121     $ 450  
Goodwill amortization, net of tax benefit
    2       2  
     
     
 
Net income available for common shares — pro forma
  $ 123     $ 452  
Net income per common share — pro forma:
               
 
Basic
  $ 1.98     $ 7.06  
 
Diluted
  $ 1.69     $ 6.23  
 
Note I. Accounts Payable & Accrued Liabilities

      Accounts payable and accrued liabilities consisted of the following:

                   
September 30

2002 2001
(Dollars in millions)

Accounts payable
  $ 127     $ 128  
Accrued employee compensation
    30       31  
Other accrued liabilities
    81       84  
     
     
 
 
Total
  $ 238     $ 243  
     
     
 

Note J.     Debt

      Long-term debt consisted of the following:

                     
September 30

2002 2001
(Dollars in millions)

Fixed Rate Notes (stated rate):
               
 
Notes due 2002 – 2022, 8.1%
  $ 67     $ 89  
 
Notes due 2004 – 2011, 7.1%
    90       90  
 
Notes due 2027, 6.6%, 7.3%
    8       8  
 
Note due 2027, put option 2004, 6.6%
    1       1  
 
Notes due 2005 – 2018, 7.0%
    64       60  
 
Guarantee of ESOP notes, due 2013, 8.3%
    51       54  
 
Foreign notes due 2004 – 2006, 1.5% to 2.1%
    28        
 
Other, due beginning in 2002, 6.0% to 15.5%
    5       9  
Variable Rate Notes (end of year rate):
               
 
Foreign notes due 2005 – 2006, 0.5% to 0.7%
    39        
 
Foreign note due 2003, 4.0%
    147       138  
     
     
 
      500       449  
Less: current portion of long-term debt
    (5 )     (30 )
     
     
 
   
Total long-term debt
  $ 495     $ 419  
     
     
 

      On February 8, 2002, Cabot acquired the remaining 50% ownership of CSM from its joint venture partner (See Note C.) On the date of acquisition, CSM had notes payable to banks and long-term debt from

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institutional lenders denominated in Japanese yen. Because the notes payable to banks have renewable one year terms, they are classified as current liabilities on the consolidated balance sheet.

      In the fourth quarter of 2002, CSM obtained an additional bank note of 700 million yen ($6 million). At September 30, 2002, the outstanding principal balance on the bank notes is approximately $36 million.

      In September 2002, CSM repaid 1.2 billion yen ($10 million) of the variable rate bank notes. This repayment was not included in the fiscal 2002 consolidated results due to the one-month lag in reporting.

      The long-term debts of CSM are also payable in Japanese yen and mature on various dates in fiscal years 2004 to 2006. At September 30, 2002, the principal balance on the long-term debt is approximately $67 million.

      Maximum amounts and additional advances under some of the CSM loan agreements are subject to CSM’s ongoing creditworthiness. As of September 30, 2002, Cabot is not aware of any credit concerns under CSM’s loan agreements.

      Subsequent to the fiscal 2002 year end, Cabot refinanced its yen based borrowing. In October 2002 (fiscal 2003), Cabot repaid the remaining CSM bank notes and $47 million of the CSM long-term debt. Associated with the refinancing, Cabot entered into a new 9.3 billion yen ($75 million) term loan agreement that matures in fiscal 2006. This new loan is based in yen and bears interest at yen-LIBOR (0.07% at September 30, 2002) plus 0.9%.

      During 2001, Cabot entered into a $250 million revolving credit loan facility at floating rates, replacing a $300 million revolving credit and term loan facility. Commitment fees are based on both the used and unused portions of the facility. The facility is available through July 13, 2006. No amounts were outstanding under either revolving credit facility at September 30, 2002 or 2001.

      In November 2000, a Cabot subsidiary borrowed 150 million EURO ($147 million) from institutional lenders. The loan is payable in EUROs, bears interest at EURIBOR (3.3% at September 30, 2002) plus 0.7% and matures in November 2003.

      The new 9.3 billion yen term loan, the revolving credit loan facility and the 150 million EURO loan agreements contain specific covenants. The covenants include financial covenants for certain maximum indebtedness limitations and minimum cash flow requirements, that would limit the amount available for future borrowings.

      In December 1998, Cabot issued $100 million in medium-term notes. In fiscal 2001, Cabot repaid $40 million of these notes. The outstanding notes have a weighted-average maturity of 10 years and included in the balance at September 30, 2002 is $4 million of mark-to-market swap valuation related to Cabot’s fixed-to-variable interest rate swaps.

      In June 1992, Cabot filed a registration statement on Form S-3 with the Securities and Exchange Commission covering $300 million of debt securities. In 1992, $105 million of medium-term notes were issued to refinance $105 million of notes payable. In May 2000, Cabot repurchased $16 million of these medium-term notes. In 2002, Cabot repaid $23 million of these medium term notes, resulting in $66 million of the notes still outstanding as of September 30, 2002. The outstanding notes have a weighted average maturity of 10 years and included in the balance at September 30, 2002 is $1 million of mark-to-market swap valuation related to Cabot’s fixed-to-variable interest rate swaps.

      In September 1998, Cabot filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission covering $500 million of debt securities. This registration includes the remaining $55 million not issued under the 1992 registration.

      In October 1997, Cabot issued a total of $50 million in medium-term notes. These notes included a $25 million note, with an interest rate of 7.3% due in 2027, and a $25 million note, with an interest rate of 6.6% due in 2027 and a put option in 2004. In fiscal 2000, Cabot repurchased $24 million of the 6.6% notes. In fiscal 2001, Cabot repurchased $17 million of the 7.3% notes. The outstanding balance of $8 million has a weighted-average maturity of 25 years and a weighted-average interest rate of 7.2%.

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      In February 1997, Cabot issued $90 million of medium-term notes. The notes have a weighted-average maturity of 5 years and a weighted-average interest rate of 7.1%.

      In November 1988, Cabot’s Employee Stock Ownership Plan (ESOP) borrowed $75 million from an institutional lender in order to finance its purchase of 75,000 shares of Cabot’s Series B ESOP Convertible Preferred Stock. This debt bears interest at 8.3% per annum and is to be repaid in equal quarterly installments through December 31, 2013. Cabot, as guarantor, has reflected the outstanding balance of $51 million and $54 million as a liability in the consolidated balance sheet at September 30, 2002 and 2001, respectively. An equal amount, representing deferred employee benefits, has been recorded as a reduction to stockholders’ equity.

      The aggregate principal amounts of long-term debt due in each of the five fiscal years 2003 through 2007 and thereafter are as follows:

           
September 30
2002

(Dollars in millions)
       
2003
  $ 5  
2004
    187  
2005
    8  
2006
    96  
2007
    39  
Thereafter
    165  
     
 
 
Total
  $ 500  
     
 

      At September 30, 2002 and 2001, the fair market value of long-term borrowings was approximately $529 million and $445 million, respectively, compared to book values of approximately $500 million and $449 million, respectively. These fair market values do not reflect any of Cabot’s fair value or cash flow hedges described in Note R.

      The weighted-average interest rate on short-term borrowing of $40 million and $13 million was approximately 1.4% and 6.5% as of September 30, 2002 and 2001, respectively.

Note K.     Employee Benefit Plans

      Cabot provides both defined benefit and defined contribution plans for its employees. The defined benefit plans consist of the Cabot Cash Balance Plan (CBP) and several foreign pension plans. The defined contribution plans consist of the Cabot Retirement Savings Plan (RSP) and several foreign plans. Cabot also provides postretirement benefit plans, which include medical coverage and life insurance. Cabot has unrecognized liabilities in defined benefit plans of $7 million and in postretirement benefit plans of $28 million, for a total unrecognized liability of $35 million. To the extent necessary and required, Cabot will recognize these liabilities over a period of time. As described below, the defined benefit plans are funded and the postretirement plans are not. Accordingly, Cabot pays for its obligations under the postretirement plans on an ongoing basis. In the case of the defined benefit plans, Cabot’s funding obligations depend upon the fair value of plan assets in relation to Cabot’s projected benefit obligations. The information provided below includes a brief summary of the plans.

 
Defined Contribution Plans
 
Retirement Savings Plan

      The RSP is a defined contribution plan which encourages long-term systematic savings and provides funds for retirement or possible earlier needs. The RSP has two components, a 401(k) plan and an Employee Stock Ownership Plan (ESOP).

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401(k)

      The 401(k) plan allows an eligible participant to contribute a percentage of his or her eligible compensation on a before-tax basis or an after-tax basis. Cabot makes a matching contribution of 75% of a participant’s eligible before-tax or after-tax contribution up to 7.5% of the participant’s eligible compensation. This matching contribution is in the form of Cabot stock and is made on a quarterly basis.

 
Employee Stock Ownership Plan

      In September 1988, Cabot established the ESOP as an integral part of the retirement program that was designed for participants to share in the growth of Cabot. All regular employees of Cabot and its participating subsidiaries in the U.S., except employees of the Performance Materials business subject to collective bargaining agreements, are eligible to participate beginning on the later of the first day of employment or the date the employee is included in an employee group that participates in the plan. Under the ESOP, which is 100% Company funded, Cabot allocates convertible preferred stock to each participant’s account on a quarterly basis. The allocation is generally between 4% and 8% of a participant’s compensation. The ESOP is accounted for in compliance with SOP 76-3, “Accounting Practices for Certain Employee Stock Ownership Plans”.

      In November 1988, Cabot placed 75,336 shares of its Series B ESOP Convertible Preferred Stock in the ESOP for cash at a price of $1,000 per share. Each share of the Series B ESOP Convertible Preferred Stock was convertible into 87.5 shares of Cabot’s common stock, subject to certain events and anti-dilution adjustment provisions, and carries voting rights on an “as converted” basis. As a result of the Cabot Microelectronics dividend (Note D) that was distributed on September 29, 2000 to the holders of Cabot common stock, the conversion rate of the Series B ESOP Convertible Preferred Stock was adjusted from 87.5 to 146.4 shares of Cabot’s common stock. The trustee for the ESOP has the right to cause Cabot to redeem shares sufficient to provide for periodic distributions to plan participants. Cabot has the option to redeem the shares for $1,000 per share, convert the shares to common stock, or a combination thereof.

      The issued shares of Series B ESOP Convertible Preferred Stock receive preferential and cumulative quarterly dividends and are ranked as to dividends and liquidation prior to Cabot’s Series A Junior Participating Preferred Stock and common stock. For purposes of calculating diluted earnings per share, the Series B ESOP Convertible Preferred Stock is assumed to be converted to common stock based on the conversion rate. At September 30, 2002, 8 million shares of Cabot’s common stock were reserved for conversion of the Series B ESOP Convertible Preferred Stock.

      On the last business day of each calendar quarter, 742.6 shares, as amended in March 2001 from 750 shares, of the Series B ESOP Convertible Preferred Stock are released and allocated to participants’ accounts. The allocation to each participant is based on the value of Cabot’s preferred stock, the number of shares allocated as dividends, and the total eligible compensation. If the amount of the participant allocation were to fall below 4%, Cabot would make an additional contribution to bring the total value to 4% for the participant. The allocation is made to the account of each participant who is employed on that date, has retired, died or become totally and permanently disabled during the quarter. At September 30, 2002, 22,253 shares have been allocated to participants, 604 shares have been released, but not allocated and 33,416 shares are unallocated.

      Cabot is the guarantor for the outstanding debt held by the ESOP (See Note J). Cabot contributed $3 million, $2 million and $2 million in 2002, 2001 and 2000, respectively, to the ESOP. Dividends on ESOP shares used for debt services in 2002, 2001 and 2000 were $4 million, $5 million and $5 million, respectively. In addition, actual interest incurred on debt associated with the ESOP was $4 million, $5 million and $5 million in 2002, 2001 and 2000, respectively.

      Cabot recognized expenses related to all defined contribution plans in the amounts of $7 million in 2002, $6 million in 2001, and $10 million in 2000.

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Defined Benefit Plans

      Defined benefit plans provide pre-determined benefits to employees to be distributed for future use upon retirement. Cabot’s defined benefit plans are primarily pension plans. At September 30, 2002, Cabot has pension obligations exceeding assets by $14 million. Cabot is making all contributions required for each plan.

 
Cash Balance Plan

      The CBP is a U.S. defined benefit plan in which participants accrue benefits in the form of account balances, with a defined or guaranteed rate of return and defined notional contributions. While Cabot does not make actual cash contributions into participants’ accounts, the plan meets its obligations through the plan assets, which are described below. The notional contributions take the form of pay-based credits, which are computed as a percentage of eligible pay, and credited quarterly to an account balance for each participant. Interest is credited quarterly based on the average one-year Treasury bill rate for the month of November in the preceding calendar year. Cabot’s obligation to contribute to the plan is a function of the fair value of the plan assets, expected returns and Cabot’s projected benefit obligations and their timing.

      Cabot provides similar benefits to employees in foreign locations through several other foreign defined benefit plans.

      Prior to September 1988, Cabot’s pension plan was known as the Retirement Income Plan (RIP), which was a traditional defined benefit pension plan with a specified monthly benefit payable upon retirement of a participant. In 1988, when the RIP was amended and the CBP formula was adopted, the Company purchased a group annuity contract, which covers all of Cabot’s accrued pension obligations as of September 1988. Approximately 300 employees have “grandfathered” benefits under the RIP, which, under certain circumstances, may entitle them to benefits in addition to those under the CBP. Cabot’s benefit obligations with regard to such employees are accounted for as part of Cabot’s defined benefit liabilities.

 
Plan Assets

      The assets of the worldwide defined benefit pension plans are comprised principally of investments in equity securities and government bonds. Included in plan assets at September 30, 2002 and 2001 are $9 million and $7 million, respectively, of insurance contracts.

      Measurement of defined benefit pension expense is based on assumptions used to value the defined benefit pension liability at the beginning of the year. The CBP and certain foreign pension plans use the straight-line method of amortization over five years for the unrecognized net gains and losses.

      Cabot used a June 30, 2002 measurement date for all plan obligations and assets in fiscal 2002 and used either a June 30, 2001 or a September 30, 2001 measurement date for fiscal 2001. The change in measurement date for certain plans in fiscal 2002 was made to apply a consistent measurement date for all plans. The change in measurement date did not have a material effect on the financial statements.

 
Cabot Supermetals

      Cabot assumed the liability for the retirement obligations of Showa Denko employees who transferred to CSM as of February 8, 2002 (Note C). The amount of the liability and assets assumed are presented in the reconciliation of benefit obligations and plan assets as business combinations.

 
Postretirement Benefit Plans

      Cabot also has postretirement benefit plans that provide certain health care and life insurance benefits for retired employees. Typical of such plans, the Cabot postretirement benefit plans are unfunded. Substantially all U.S. employees become eligible for these benefits if they have met certain age and service requirements at retirement. Cabot funds the plans as claims or insurance premiums come due, as plans are not required to have assets for this obligation. The current accumulated benefit obligation for postretirement benefit plans is $115 million. Cabot has, however, accrued $87 million for this liability at September 30, 2002.

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      Measurement of postretirement benefit expense is based on assumptions used to value the postretirement benefit liability at the beginning of the year. Assumed health care trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in the 2002 assumed health care cost trend rate would have the following effects:

                 
1-Percentage-Point

Increase Decrease
(Dollars in millions)

Effect on total of service and interest cost components
  $     $  
Effect on postretirement benefit obligation
  $ 6     $ (5 )

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      The following provides a reconciliation of benefit obligations, plan assets, the funded status, and weighted-average assumptions of the defined benefit pension and postretirement benefit plans:

                                 
Pension Postretirement
Benefits Benefits


September 30 September 30


2002 2001 2002 2001
(Dollars in millions)



Change in Benefit Obligation:
                               
Benefit obligation at beginning of year
  $ 233     $ 211     $ 95     $ 92  
Service cost
    12       8       8       1  
Interest cost
    15       14       7       6  
Plan participants’ contribution
                1       1  
Amendments
    1                   (3 )
Foreign currency exchange rate changes
    7       1              
Gain (loss) from changes in actuarial assumptions
    1       15       12       5  
Benefits paid
    (20 )     (16 )     (8 )     (7 )
Business combinations
    9                    
     
     
     
     
 
Benefit obligation at end of year
  $ 258     $ 233     $ 115     $ 95  
     
     
     
     
 
Change in Plan Assets:
                               
Fair value of plan assets at beginning of year
  $ 256     $ 281     $     $  
Actual return on plan assets
    (12 )     (14 )            
Employer contribution
    10       4       7       6  
Plan participants’ contribution
                1       1  
Foreign currency exchange rate changes
    8       1              
Benefits paid
    (20 )     (16 )     (8 )     (7 )
Business combinations
    2                    
     
     
     
     
 
Fair value of plan assets at end of year
  $ 244     $ 256     $     $  
     
     
     
     
 
 
Funded status
  $ (14 )   $ 23     $ (115 )   $ (95 )
Unrecognized transition amount
    (1 )     (2 )            
Unrecognized prior service cost
    7       6       (2 )     (2 )
Unrecognized net (gain) loss
    1       (34 )     28       19  
Fourth quarter contributions
                2        
     
     
     
     
 
Recognized liability
  $ (7 )   $ (7 )   $ (87 )   $ (78 )
     
     
     
     
 
Amounts Recognized in the Consolidated Balance Sheets Consist of:                                
Prepaid benefit cost
  $ 19     $ 14     $     $  
Accrued benefit liabilities
    (37 )     (21 )     (87 )     (78 )
Intangible asset
    1                    
Accumulated other comprehensive loss
    10                    
     
     
     
     
 
Net amount recognized
  $ (7 )   $ (7 )   $ (87 )   $ (78 )
     
     
     
     
 

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Assumptions as of September 30

2002 2001 2002 2001




Weighted-Average Rates:
                               
Discount rate
    6.2 %     6.4 %     6.7 %     6.8 %
Expected rate of return on plan assets
    8.2 %     8.4 %     N/A       N/A  
Assumed rate of increase in compensation
    4.1 %     4.3 %     N/A       N/A  
Assumed annual rate of increase in health care benefits
    N/A       N/A       11.5 %     6.3 %

      The service cost for fiscal 2002 shown in the reconciliation of benefit obligations for pension benefits and postretirement benefits includes $4 million and $6 million, respectively, of costs related to benefits earned in previous years. Employer contributions for fiscal 2002 shown in the reconciliation of plan assets of pension benefits includes $2 million related to contributions and appreciation of assets from previous years. The net effect of these costs in fiscal 2002 was $8 million and was not material to the consolidated results.

      Net periodic defined benefit pension and other postretirement benefit costs include the following components:

                                                 
Postretirement
Pension Benefits Benefits


Years Ended September 30

2002 2001 2000 2002 2001 2000
(Dollars in millions)





Service cost
  $ 12     $ 8     $ 6     $ 8     $ 1     $ 1  
Interest cost
    15       14       13       7       6       6  
Expected return on plan assets
    (20 )     (19 )     (14 )                  
Amortization of transition asset
    (1 )     (1 )     (1 )                  
Recognized losses (gains)
    (2 )     (3 )     (2 )     1       1       1  
Settlement gain
    1                         (3 )      
     
     
     
     
     
     
 
Net periodic benefit cost
  $ 5     $ (1 )   $ 2     $ 16     $ 5     $ 8  
     
     
     
     
     
     
 

      For those plans where the accumulated benefit obligation exceeded the related fair value of plan assets, the accumulated benefit obligation and fair value of plan assets for Cabot’s pension benefits are as follows:

                 
2002 2001


Accumulated benefit obligation
  $ 47     $  
Fair value of plan assets
    39        

      For those plans where the projected benefit obligation exceeded the related fair value of plan assets, the projected benefit obligation and fair value of plan assets for Cabot’s pension benefits are as follows:

                 
2002 2001


Projected benefit obligation
  $ 95     $ 74  
Fair value of plan assets
    67       63  

Note L.     Equity Incentive Plans

      Cabot has an Equity Incentive Plan for key employees. Under the plan adopted in 1988, Cabot was able to grant participants various types of stock and stock-based awards. During the period from 1988 through 1991, the awards granted consisted of stock options, performance appreciation rights (PARs) and tandem units that could be exercised as stock options or PARs. These awards were granted at the fair market value of Cabot’s common stock at date of grant, vested ratably on each of the next four anniversaries of the award, and generally expired ten years from the date of grant. From 1992 through 1995, awards consisted of Cabot common stock, which employees could elect to receive in the form of restricted stock purchased at a price equal to 50% of the fair market value on the date of the award, nonqualified stock options at fair market value

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of Cabot’s common stock on the date of the award, or a combination of one-half of each. Effective March 1996, no new awards were permitted under this plan.

      In December 1995, the Board of Directors adopted, and in March 1996, Cabot stockholders approved, the 1996 Equity Incentive Plan. Under this plan, Cabot can make various types of stock and stock-based awards, the terms of which are determined by Cabot’s Compensation Committee. Awards under the 1996 plan have been made primarily as part of Cabot’s Long-Term Incentive Program. These awards consisted of restricted stock, which could be purchased at a price equal to 40% of the fair market value on the date of the award, or nonqualified stock options exercisable at the fair market value of Cabot’s common stock on the date of the award. Variations of the restricted stock awards were made to international employees in order to provide results comparable to U.S. employees. The awards generally vested on the third anniversary of the grant for participants then employed by Cabot, and the options generally expired five years from the date of grant. In November 1998, the Board of Directors adopted, and in March 1999, Cabot stockholders approved, the 1999 Equity Incentive Plan. This plan is similar to the 1996 Equity Incentive Plan with the exception of the discount price, which was established at a price equal to 30% of the fair market value on the date of the award.

      During March 2002, Cabot reserved an additional 3 million shares of common stock, increasing the shares reserved for issuance under the 1996 and 1999 plans to approximately 9 million. There were approximately 4 million shares available for future grants at September 30, 2002, under both plans. Compensation expense recognized during 2002, 2001, and 2000 for restricted stock grants was $22 million, $26 million, and $17 million, respectively. Compensation expense for 2001 includes $4 million to accelerate the vesting of restricted stock grants and stock options held by Cabot’s former Chief Executive Officer and Chief Financial Officer. The $4 million charge is included in 2001 special items on the consolidated statement of income. On July 14, 2000, the Compensation Committee of the Board of Directors voted to accelerate the vesting of both the restricted stock grants and the stock options held by employees of Cabot Microelectronics and Cabot’s LNG business. As a result, the compensation charge for fiscal 2000 includes $2 million related to the accelerated vesting of those restricted stock grants, which has been included in discontinued operations.

     Restricted Stock

      The following table summarizes the plans’ restricted stock activity from September 30, 1999 through September 30, 2002:

                   
Weighted-Average
Restricted Stock Purchase Price


(Shares in thousands)
Outstanding at September 30, 1999
    2,667     $ 10.37  
 
Granted
    1,497       6.69  
 
Vested
    (875 )     9.49  
 
Canceled
    (217 )     10.41  
     
         
Outstanding at September 30, 2000
    3,072     $ 8.82  
 
Granted
    1,169       9.80  
 
Vested
    (1,204 )     11.36  
 
Canceled
    (113 )     9.14  
     
         
Outstanding at September 30, 2001
    2,924     $ 8.22  
 
Granted
    1,149       7.54  
 
Vested
    (590 )     7.82  
 
Canceled
    (281 )     8.05  
     
         
Outstanding at September 30, 2002
    3,202     $ 8.08  
     
         

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     Stock-Based Compensation

      The following table summarizes the plans’ stock option activity from September 30, 1999 through September 30, 2002:

                   
Weighted-Average
Stock Options Exercise Price


(Options in thousands)
Outstanding at September 30, 1999
    1,645     $ 20.53  
 
Granted
    435       24.44  
 
Exercised
    (685 )     10.98  
 
Canceled
    (179 )     27.41  
Adjustment due to Cabot Microelectronics spin-off
    910          
     
         
Outstanding at September 30, 2000
    2,126     $ 15.07  
 
Granted
    284       34.87  
 
Exercised
    (437 )     12.46  
 
Canceled
    (117 )     15.70  
     
         
Outstanding at September 30, 2001
    1,856     $ 18.67  
 
Granted
    401       26.40  
 
Exercised
    (301 )     16.57  
 
Canceled
    (102 )     22.36  
     
         
Outstanding at September 30, 2002
    1,854     $ 20.48  
     
         

      Options outstanding at September 30, 2002, were as follows:

                                           
Options Outstanding

Weighted-Average Options Exercisable


Thousands of Remaining Thousands of
Options Exercise Contractual Options Weighted-Average
Range of Exercise Price Outstanding Price Life Years Exercisable Exercise Price






10.83 – 10.83
    119     $ 10.83       2.11           $  
15.50 – 15.57
    950     $ 15.53       2.06       523     $ 15.50  
20.27 – 26.40
    541     $ 24.82       3.57       139     $ 20.27  
34.87 – 34.87
    244     $ 34.87       3.61           $  
     
     
     
     
     
 
 
Total Options
    1,854     $ 20.48       2.71       662     $ 16.50  
     
                     
         

      Due to the fiscal 2000 spin-off of Cabot Microelectronics, Cabot adjusted the exercise price and number of options outstanding at September 30, 2000 to maintain the same intrinsic value as prior to the spin-off. The estimated weighted-average fair value of the options granted during fiscal 2002, 2001 and 2000 were $8.86, $7.06, and $7.06 per option share, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

                         
Years Ended September 30

2002 2001 2000



Expected stock price volatility
    48%       49%       39%  
Risk free interest rate
    4.0%       4.5%       6.5%  
Expected life of options
    3 years       3 years       4 years  
Expected annual dividends
  $ 0.52     $ 0.48     $ 0.44  

      In accordance with FAS No. 123, the Company has elected to account for stock based compensation plans in accordance with APB No. 25. Therefore, Cabot does not record compensation expense related to fixed term options granted at or above fair market value at the measurement date. If the fair value method

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prescribed by FAS No. 123 had been adopted, Cabot’s net income and net income per common share for fiscal 2002, 2001 and 2000 would have been reduced to the following:
                           
Years Ended September 30

2002 2001 2000



(Unaudited)
Net income — pro forma (in millions)
  $ 104     $ 122     $ 451  
Net income per common share — pro forma:
                       
 
Basic
  $ 1.73     $ 1.91     $ 7.00  
 
Diluted
  $ 1.47     $ 1.63     $ 6.18  

      The effects of applying the fair value method in this pro forma disclosure are not indicative of future amounts.

 
Note M. Stockholders’ Equity

      The following table summarizes Cabot’s stock activity:

                           
Years Ended September 30

2002 2001 2000



Preferred Stock (in thousands)
                       
Beginning of year
    75       75       75  
Converted preferred stock
    (2 )            
     
     
     
 
 
End of year
    73       75       75  
     
     
     
 
Preferred Treasury Stock (in thousands)
                       
Beginning of year
    16       13       10  
Purchased preferred treasury stock
    1       3       3  
     
     
     
 
 
End of year
    17       16       13  
     
     
     
 
Common Stock (in millions)
                       
Beginning of year
    63       68       67  
Issued common stock
    1       2       3  
Purchased and retired common stock
    (3 )     (7 )     (2 )
Converted preferred stock
    1              
     
     
     
 
 
End of year
    62       63       68  
     
     
     
 
Common Treasury Stock (in thousands)
                       
Beginning of year
                 
Issued common treasury stock
    (12 )            
Purchased common treasury stock
    178              
     
     
     
 
 
End of year
    166              
     
     
     
 

      In May 2002, 2001 and 2000, Cabot offered a stock purchase assistance plan whereby Cabot extended credit to purchase restricted shares of Cabot Corporation common stock awarded under Cabot’s 1999 Equity Incentive Plans to those participants in Cabot’s 2002, 2001 and 2000 Long-Term Incentive Programs. The full recourse notes issued in 2002 and 2001 bear interest of 5.5% per annum and the notes issued in 2000 bear interest at 6% per annum, in each case on a principal amount of up to 30% of the aggregate fair market value of such purchased stock on the day of grant. Interest is payable quarterly and principal is due on various dates through 2005.

      In May 2002, the Board of Directors authorized Cabot to purchase up to 12.6 million shares of Cabot Corporation common stock superseding the previous authorization of 10 million shares issued in September

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2000. Approximately 11 million shares have been repurchased pursuant to this and prior authorizations during the three fiscal years ended September 30, 2002.

      In fiscal 2002, the Company purchased shares of Cabot’s common stock to be held in treasury for use in the Supplemental Executive Retirement Plan (SERP). The SERP is a non-qualified plan which is intended to provide supplemental benefits to highly compensated employees who are otherwise limited by Internal Revenue Service (IRS) benefit maximums. Contributions to the plan are generally based on pay in excess of the IRS maximum and the RSP match and ESOP formula described in Note K. Effective January 1, 2002, participants receive distributions of their vested account balance in the form of shares of Cabot common stock.

      In November 1995, Cabot declared a dividend of one Preferred Stock Purchase Right (“Right”) for each outstanding share of Cabot’s common stock. Each Right entitles the holder, upon the occurrence of certain specified events, to purchase from Cabot one one-hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $200 per share. The Right further provides that each Right will entitle the holder, upon the occurrence of certain other specified events, to purchase from Cabot its common stock having a value of twice the exercise price of the Right, and upon the occurrence of certain other specified events, to purchase from another person into which Cabot was merged or which acquired 50% or more of Cabot’s assets or earnings power, common stock of such other person having a value of twice the exercise price of the Right. The Right may generally be redeemed by Cabot at a price of $0.01 per Right. The Rights are not presently exercisable and will expire on November 10, 2005.

      During 2002, 2001 and 2000, Cabot paid cash dividends of $19.38 per share of preferred stock and $0.52, $0.48 and $0.44, respectively, per share of common stock.

Comprehensive Income

      The pre-tax, tax, and after-tax effects of the components of other comprehensive income are shown below:

                         
Years Ended September 30

Pre-tax Tax After-tax
(Dollars in millions)


2000
                       
Foreign currency translation adjustments
  $ (58 )   $     $ (58 )
Unrealized holding gain arising during the period
    4       (3 )     1  
     
     
     
 
Other comprehensive income (loss)
  $ (54 )   $ (3 )   $ (57 )
     
     
     
 
2001
                       
Foreign currency translation adjustments
  $ (26 )   $     $ (26 )
Unrealized holding gain arising during the period
    6       (4 )     2  
     
     
     
 
Other comprehensive income (loss)
  $ (20 )   $ (4 )   $ (24 )
     
     
     
 
2002
                       
Foreign currency translation adjustments
  $ 11     $     $ 11  
Unrealized holding loss arising during the period
    (9 )     3       (6 )
Minimum pension liability adjustment
    (10 )     3       (7 )
     
     
     
 
Other comprehensive income (loss)
  $ (8 )   $ 6     $ (2 )
     
     
     
 

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      The balance of related after-tax components comprising accumulated other comprehensive income (loss) are summarized below:

                 
September 30

2002 2001


(Dollars in millions)
               
Foreign currency translation adjustments
  $ (120 )   $ (131 )
Unrealized holding gain on marketable equity securities
          6  
Minimum pension liability adjustment
    (7 )      
     
     
 
Accumulated other comprehensive income (loss)
  $ (127 )   $ (125 )
     
     
 
 
Note N. Earnings per Share

      Basic and diluted earnings per share (“EPS”) were calculated as follows:

                             
Years Ended September 30

2002 2001 2000



(In millions, except per share amounts)
                       
Basic EPS:
                       
 
Income available to common shares (numerator)
  $ 103     $ 121     $ 450  
     
     
     
 
 
Weighted-average common shares outstanding
    62       65       67  
 
Less: contingently issuable shares (a)
    (3 )     (3 )     (3 )
     
     
     
 
 
Adjusted weighted-average shares (denominator)
    59       62       64  
     
     
     
 
 
Basic EPS
  $ 1.76     $ 1.94     $ 7.04  
     
     
     
 
Diluted EPS:
                       
 
Income available to common shares
  $ 103     $ 121     $ 450  
 
Dividends on preferred stock
    3       3       3  
 
Less: income impact of assumed conversion of preferred stock
                (2 )
     
     
     
 
 
Income available to common shares plus assumed conversions (numerator)
  $ 106     $ 124     $ 451  
     
     
     
 
 
Weighted-average common shares outstanding
    62       65       67  
 
Effect of dilutive securities:
                       
   
Assumed conversion of preferred stock
    8       9       6  
   
Assumed conversion of incentive stock options (b)
    1              
     
     
     
 
 
Adjusted weighted-average shares (denominator)
    71       74       73  
     
     
     
 
 
Diluted EPS
  $ 1.50     $ 1.66     $ 6.20  
     
     
     
 


(a)  Represents restricted stock issued under Cabot Equity Incentive Plans.
 
(b)  At September 30, 2002, 0.3 million of options to purchase shares of common stock outstanding were not included in the calculation of diluted earnings per share because those options’ exercise price was greater than average market price of common shares. At September 30, 2001, the average fair value of Cabot’s stock price exceeded the exercise prices of all options outstanding. As a result, all options outstanding have been included in the calculation of diluted earnings per share. Options to purchase 2 million shares of common stock were outstanding at September 30, 2000, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares, adjusted for the spin-off of Cabot Microelectronics Corporation.

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Note O. Income Taxes

      Income before income taxes was as follows:

                             
Years Ended
September 30

2002 2001 2000



(Dollars in millions)
                       
Income from continuing operations:
                       
 
Domestic
  $ 68     $ 66     $ 54  
 
Foreign
    66       84       103  
     
     
     
 
      134       150       157  
     
     
     
 
Discontinued Operations:
                       
 
Income from operations of discontinued businesses
    2             62  
 
Gain on sale of business
          5       487  
     
     
     
 
      2       5       549  
     
     
     
 
   
Total
  $ 136     $ 155     $ 706  
     
     
     
 

      Taxes on income consisted of the following:

                             
Years Ended
September 30

2002 2001 2000



(Dollars in millions)
                       
U.S. federal and state:
                       
 
Current
  $ 9     $ 17     $ (3 )
 
Deferred
    2       (2 )     16  
     
     
     
 
   
Total
    11       15       13  
     
     
     
 
Foreign:
                       
 
Current
    25       29       43  
 
Deferred
    (6 )     (2 )     1  
     
     
     
 
   
Total
    19       27       44  
     
     
     
 
   
Total U.S. and foreign
    30       42       57  
     
     
     
 
Discontinued Operations:
                       
 
Income from operations of discontinued businesses
    1             22  
 
Gain on sale of business
          2       178  
     
     
     
 
   
Total Discontinued Operations
    1       2       200  
     
     
     
 
   
Total
  $ 31     $ 44     $ 257  
     
     
     
 

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      The provision for income taxes at Cabot’s effective tax rate differed from the provision for income taxes at the statutory rate as follows:

                             
Years Ended
September 30

(Dollars in millions) 2002 2001 2000




Continuing Operations:
                       
 
Computed tax expense at the federal statutory rate
  $ 46     $ 53     $ 55  
 
Foreign income:
                       
   
Impact of taxation at different rates, repatriation and other
    (13 )     (13 )     2  
   
Impact of foreign losses for which a current tax benefit is not available
    6       1       1  
 
State taxes, net of federal effect
          2        
 
Extraterritorial income exclusion/foreign sales corporation
    (8 )     (2 )     (1 )
 
U.S. and state benefits from research and experimentation activities
    (2 )     (1 )     (1 )
 
Other, net
    1       2       1  
     
     
     
 
   
Total Continuing Operations
    30       42       57  
     
     
     
 
Discontinued Operations:
                       
 
Income from operations of discontinued businesses
    1             22  
 
Gain on sale of businesses
          2       178  
     
     
     
 
   
Total Discontinued Operations
    1       2       200  
     
     
     
 
   
Provision for income taxes
  $ 31     $ 44     $ 257  
     
     
     
 

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      Significant components of deferred income taxes were as follows:

                     
September 30

(Dollars in millions) 2002 2001



Deferred tax assets:
               
 
Depreciation and amortization
  $ 30     $ 29  
 
Pension and other benefits
    73       68  
 
Environmental matters
    11       11  
 
Special charges
    6       5  
 
Investments
    12       11  
 
Inventory
    15       8  
 
Net operating loss and other tax carryforwards
    23       17  
 
Other
    20       18  
     
     
 
   
Subtotal
    190       167  
 
Valuation allowances
    (19 )     (11 )
     
     
 
   
Total deferred tax assets
  $ 171     $ 156  
     
     
 
Deferred tax liabilities:
               
 
Depreciation and amortization
  $ 91     $ 86  
 
Pension and other benefits
    17       16  
 
Special charges
    5       3  
                   
Investments
          1  
State and local taxes
    1       1  
Other
    140       127  
     
     
 
 
Total deferred tax liabilities
  $ 254     $ 234  
     
     
 

      Approximately $80 million of net operating losses and other tax carryforwards remain at September 30, 2002. Of this amount, $48 million will expire in the years 2003 through 2009; $32 million can be carried forward indefinitely. The benefits of these carryforwards are dependent upon taxable income during the carryforward period in those foreign jurisdictions where they arose. Accordingly, a valuation allowance has been provided where management has determined that it is more likely than not that the carryforwards will not be utilized.

      The valuation allowances at September 30, 2002 and 2001 represent management’s best estimate of the ultimate realization of the net deferred tax amounts. The deferred tax valuation allowance increased in 2002 by $8 million due to the uncertainty of the ultimate realization of certain future foreign tax benefits and net operating losses reflected as deferred tax assets.

      Cabot maintains income tax reserves for probable tax exposures that can be reasonably estimated. Given the uncertainty surrounding the resolution of outstanding tax matters, it is reasonably possible that Cabot’s estimate will change. Cabot believes the final outcome of these matters will not have a material effect on Cabot’s consolidated financial position.

      As of September 30, 2002, Cabot had non-U.S. taxes payable of $5 million and U.S. taxes receivable of $14 million. As of September 30, 2001, Cabot had non-U.S. taxes receivable of $10 million and U.S. taxes receivable of $1 million.

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Note P.     Supplemental Cash Flow Information

      Cash payments for interest and taxes were as follows:

                         
Years Ended
September 30

2002 2001 2000
(Dollars in millions)


Income taxes paid
  $ 15     $ 197     $ 50  
Interest paid
  $ 27     $ 21     $ 38  

      Cabot issued restricted stock for notes receivable of $7 million, $11 million and $10 million in 2002, 2001 and 2000, respectively.

Note Q.     Commitments & Contingencies

 
Lease Commitments

      Cabot leases certain transportation vehicles, warehouse facilities, office space, machinery and equipment under operating cancelable and non-cancelable leases, most of which expire within ten years and may be renewed by Cabot. Rent expense under such arrangements for 2002, 2001 and 2000 totaled $11 million, $11 million and $12 million, respectively. Future minimum rental commitments under non-cancelable leases are as follows:

         
(Dollars in millions)
2003
  $ 10  
2004
    9  
2005
    8  
2006
    7  
2007
    7  
2008 and thereafter
    25  
     
 
Total future minimum rental commitments
  $ 66  
     
 
 
Other Long-Term Commitments

      Cabot has entered into long-term purchase agreements for various key raw materials in the Performance Materials and Chemical Businesses. The purchase commitments for the Performance Materials business covered by these agreements are with one supplier and are estimated to aggregate approximately $196 million for the periods 2003 through 2005. Purchases under these agreements are expected to be $60 million, $66 million, and $70 million in 2003, 2004 and 2005, respectively. Raw materials purchased under these agreements were $64 million, $69 million and $32 million in 2002, 2001 and 2000, respectively. The purchase commitments for the Chemical Businesses covered by these agreements are with three suppliers and are estimated to aggregate approximately $397 million for the periods 2003 through 2028. Purchases under these agreements are expected to be $62 million, $61 million, $16 million, $16 million, $17 million and $225 million for 2003, 2004, 2005, 2006, 2007 and thereafter, respectively. Raw materials purchased under these agreements were $66 million, $66 million, and $60 million in 2002, 2001 and 2000, respectively.

      During 2001, Cabot entered into long-term supply agreements with certain Performance Materials customers. The contracts provide such customers with agreed upon amounts of product at agreed upon prices. These supply agreements are with four customers and expire in the periods from 2005 through 2006. The supply agreements contributed approximately $220 million of revenue in 2002.

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Contingencies

      Cabot is a defendant in various lawsuits and environmental proceedings wherein substantial amounts are claimed.

      As of September 30, 2002 and 2001, approximately $29 million and $30 million, respectively, was reserved for environmental matters by Cabot. This amount represents Cabot’s current best estimate of costs likely to be incurred based on its analysis of the extent of cleanup required, alternative cleanup methods available, abilities of other responsible parties to contribute and its interpretation of laws and regulations applicable to each site.

      Operating results included charges for environmental expense of $3 million in 2002, $1 million in 2001 and $3 million in 2000.

      Cabot has been named as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (the “Superfund law”) and comparable state statutes with respect to several sites. During the next several years, as remediation of various environmental sites is carried out, Cabot expects to spend a significant portion of its $29 million environmental reserve for costs associated with such remediation. Cabot anticipates that the expenditures at these sites will be made over a number of years, and will not be concentrated in any one year. Adjustments are made to the reserve based on Cabot’s continuing analysis of its share of costs likely to be incurred at each site. Inherent uncertainties exist in these estimates due to unknown conditions at the various sites, changing governmental regulations and legal standards regarding liability, and changing technologies for handling site investigation and remediation. No assurance can be given that the actual costs to investigate and remediate these sites will not exceed the accrued amounts in the environmental reserve. The sites are primarily associated with divested businesses. It is possible that Cabot may also incur future costs relating to sites that are not currently known to Cabot or as to which it is currently not possible to make an estimate. While it is always possible that an unusual event may occur with respect to a given site and have a material adverse effect on the results of operations in a particular period, in light of the environmental reserve, Cabot does not believe that the cost relating to these sites, in the aggregate, are likely to have a material adverse effect on Cabot’s financial condition.

      Cabot has exposure to a safety respiratory products business that it acquired, through a subsidiary, in April 1990. It disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, after an initial period during which responsibility was shared, to indemnify the seller, American Optical Corporation (American Optical), for costs, including legal costs, settlements and judgments, in connection with a number of lawsuits and claims relating to the respirators (in exchange for which the subsidiary received the benefits of the seller’s insurance and other indemnities). These lawsuits and claims typically involve allegations that the plaintiffs suffer from asbestosis or silicosis as a result, in part, from respirators that were negligently designed or labeled. The defendants in these lawsuits are often numerous and include, in addition to respirator manufacturers, makers of asbestos and sand used in sand blasting.

      Neither Cabot, nor its past or present subsidiaries, at any time manufactured asbestos or asbestos-containing products. Moreover, not every person with exposure to asbestos giving rise to an asbestos claim used a form of respiratory protection. At no time did the business for which Cabot is financially responsible for legal costs represent a significant portion of the respirator market. In addition, as a result of the arrangements involving these lawsuits and claims, Cabot has only a portion of the liability in any given case.

      When Cabot’s subsidiary disposed of the business in 1995 to Aearo Corporation (Aearo), it agreed with Aearo that for an annual fee of $400,000, the subsidiary would retain responsibility for, and indemnify Aearo against, claims asserted after July 11, 1995 to the extent they are attributable to the use of respirators sold before that date. Aearo can discontinue payment of the fee at any time, in which case it will assume the responsibility for and indemnify the Company with respect to these claims. Between the date of divestiture and fiscal 2001, Cabot had never spent more than the $400,000 that it collects from Aearo each year.

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      As of the beginning of calendar year 2002, there were approximately 28,000 claimants in pending cases asserting claims against American Optical in connection with respirators. As of September 30, 2002, there were approximately 43,000 claimants. Under the present allocation arrangements, as claims are settled, Cabot would expect to contribute toward settlement of a significant percentage, but not all, of these claims.

      During the third quarter of fiscal year 2002, Cabot agreed to pay up to $2 million as its contribution toward a settlement involving up to 13,000 claimants in Mississippi. Cabot, at the time, expected to pay this amount over a period of approximately eighteen months. Due to complications in the funding mechanism of the overall settlement of these Mississippi claims, a shortfall of $5.5 million in the initial amount to be paid to the plaintiff group resulted. In December 2002, Cabot agreed to fund this shortfall in exchange for an undertaking from the representatives of the payor group (consisting of the various insurers and other parties) to exercise their best efforts to seek a global settlement with the payor group. While Cabot’s ability to negotiate an acceptable global settlement and its specific terms are uncertain at this time, the global settlement discussed with the representatives of the payor group would provide that as long as the payor group continues to pay all costs and liabilities in connection with the respirator litigation, Cabot’s liability under a global settlement would be limited to a specified amount.

      As a result of the Mississippi settlement and the rate of new claims which have been filed during the calendar year, Cabot recorded a charge of $5 million during the third quarter bringing its total reserve for respirator matters to $6 million as of September 30, 2002. In estimating its liability, Cabot made the following assumptions: (i) that future settlements would continue at the historical rate of $320 per claimant; (ii) while the actual number of claims for which Cabot contributes depends upon a number of factors, that Cabot will continue to be responsible for well over half of the total claims; and (iii) that a significant number of the outstanding claims are included in the Mississippi settlement. This amount represents Cabot’s best estimate of the liability it will incur in connection with the settlement of pending respirator claims. Cabot is unable to reasonably estimate a range of possible loss for pending respirator claims given the current status of litigation and uncertainty involving the outcome of numerous cases.

      In addition, because this is a very unpredictable area, Cabot is also unable to estimate the number of future claims or the range of liability that may be incurred as a result of such claims on any reasonable basis. As a result, Cabot has not recorded a reserve for future claims at this time. While Cabot’s liability associated with these future claims could have a material effect on the results of operations in a particular quarter or fiscal year as these matters develop or as a result of Cabot’s initiative to seek a global settlement, Cabot continues to believe that this issue will not