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

FORM 10-Q

Commission file number 1-6450

GREAT LAKES CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (317) 715-3000

        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 report(s), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý

No o

        As of October 31, 2002, the Registrant had only one class of common stock, $1.00 par value, of which 50,192,685 shares were outstanding.

GREAT LAKES CHEMICAL CORPORATION
INDEX TO SEPTEMBER 30, 2002 FORM 10-Q

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PART I.—Financial Information

ITEM 1.    Financial Statements

GREAT LAKES CHEMICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(millions, except per share data)

See notes to consolidated financial statements

3

GREAT LAKES CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(millions, except per share data)

(Unaudited)

See notes to consolidated financial statements

4

GREAT LAKES CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions)

See notes to consolidated financial statements

5

GREAT LAKES CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(millions, except as indicated)

(Unaudited)

NOTE 1: Basis of Presentation

        The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations.

        It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair presentation of the interim financial statements. The results for the interim period are not necessarily indicative of the results to be expected for the year.

        For further information, refer to the consolidated financial statements included in the Company's 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

NOTE 2: New Accounting Standards and Reclassifications

        Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." As a result of the application of FAS 144 and the classification of the Energy Services and Products business unit, OSCA, and the Fine Chemicals portion of the Performance Chemicals business unit as discontinued operations (see Note 6), the Company was required to restate its consolidated financial position, results of operations and cash flows for all periods presented.

        In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Other intangible assets continue to be amortized over their estimated useful lives. The Company adopted FAS 142 effective January 1, 2002.

        With the adoption of FAS 142, the Company ceased amortization of goodwill as of January 1, 2002. The following table provides a reconciliation of previously reported net income and earnings per share to amounts adjusted to reflect the exclusion of goodwill amortization, net of related income taxes.

        The Company has completed the transitional impairment tests required by FAS 142. In connection with that review, the Company determined that the fair values of its reporting units exceeded the carrying value of those reporting units as of January 1, 2002. Accordingly, no impairment loss was recognized as a result of adopting

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FAS 142. The Company will complete the annual impairment tests required by FAS 142 in the fourth quarter of 2002.

        In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations," effective for fiscal years beginning after December 15, 2001. Under the Statement, the pooling of interest method is no longer permitted for business combinations initiated after June 30, 2001. The Company adopted this new standard beginning January 1, 2002.

        In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (FAS 143), "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, which is adjusted to its present value each period. In addition, the companies must capitalize a corresponding amount by increasing the carrying amount of the related long-lived asset, which is depreciated over the useful life of the related asset. A gain or loss may be incurred upon settlement of the liability. FAS 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of adopting this statement.

NOTE 3: Income Taxes

        A reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate is as follows:

NOTE 4: Comprehensive Income (Loss)

        Comprehensive income (loss) for the three and nine months ended September 30 is as follows:

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NOTE 5: Earnings Per Share

        The computation of basic and diluted earnings per share is determined by dividing net income as reported as the numerator, by the number of shares included in the denominator as follows:

NOTE 6: Discontinued Operations

        On February 20, 2002, the Company announced that its Energy Services and Products business unit, OSCA, entered into a definitive merger agreement with BJ Services Company. The sale of OSCA was completed on May 31, 2002. Under the terms of the sale, BJ Services acquired all of the outstanding shares of OSCA, including the Company's 53.2% holding, for $28.00 per share in cash or $221 million, resulting in a gain of $175.4 million. This transaction provided the Company with net proceeds of approximately $200 million in cash, a part of which was used to reduce the Company's debt position. As a result of this transaction, the Company has reflected OSCA as discontinued operations for all periods presented.

        During the second quarter of 2002, management, with approval of the Board of Directors, committed to a plan to divest the Company's Fine Chemicals business, previously a part of the Performance Chemicals business unit. The Company is now engaged in efforts to sell the net assets of the Fine Chemicals business. As a result of these actions, the Company has reflected the Fine Chemicals business as discontinued operations for all periods presented.

        The operating results from discontinued operations presented in the accompanying consolidated statements of operations are as follows:

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        Included in special charges for the Fine Chemicals business for the three months ended September 30, 2002 are $0.3 million of severance accruals. Special charges for the Fine Chemicals business for the nine months ended September 30, 2002 include $22.9 million of fixed asset impairment charges and $3.8 million of severance accruals. These charges were recorded in conjunction with the preparation of the Fine Chemicals business for sale. Fine Chemicals special charges for the three months ended September 30, 2001 of $6.9 million consisted of $5.5 million of fixed asset impairments and $1.4 million of severance accruals. Fine Chemicals special charges for the nine months ended September 30, 2001 of $118.2 million consisted of $105.9 million of asset impairments, including $21.9 million of fixed asset impairments and $84.0 million of impaired goodwill, $6.0 million of severance accruals, $5.0 million of plant closure and environmental costs and $1.3 million of other costs. The prior year charges were undertaken as a part of a detailed repositioning plan approved by the Company's Board of Directors in 2001.

        Also included in 2002 operating income for the nine months ended September 30, 2002 for Fine Chemicals are $3.7 million of inventory write-downs. Fine Chemicals operating income for the nine months ended September 30, 2001 includes $17.6 million of inventory write-downs recorded as a part of the 2001 repositioning plan.

        The assets and liabilities held for sale from discontinued operations related to OSCA and Fine Chemicals presented in the accompanying consolidated balance sheets are comprised of:

        As of September 30, 2002, $4.0 million of the $26.7 million of special charges recorded in 2002 and $9.3 million of the $111.3 million of special charges recorded in 2001 remain to be spent. The major components of the remaining reserves relate to severance and plant closure and environmental costs.

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NOTE 7: Segment Information

        The Company is organized into three global segments: Polymer Additives, Performance Chemicals, and Water Treatment. These segments are strategic business units that offer products and services that are intended to satisfy specific customer requirements. The units are organized and managed to deliver a distinct group of products, technology, and services.

        The Company evaluates business unit performance and allocates resources based on operating income, which represents net sales less cost of products sold and selling, general and administrative expenses. Each of the Company's segments uses bromine as a raw material in its production processes. Bromine is transferred at cost to all business segments. In addition, assets used in the production of bromine are allocated to each business unit based on the percentage of production consumed.

        The increase in Polymer Additives assets reflects the impact of higher sales volumes on working capital. Polymer Additives assets also reflect the strengthening of the Euro and the British Pound against the U.S. dollar as a significant amount of these assets are located in Europe. Corporate assets at September 30, 2002 reflect

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higher cash and cash equivalent balances. Results of the Fine Chemicals business have been reclassified from Performance Chemicals to discontinued operations.

NOTE 8: Acquisitions

        On February 14, 2001 the Company finalized its acquisition of the Optical Monomers business from Akzo Nobel Polymer Chemicals LLC for approximately $30 million in cash, which was funded with available cash and borrowing capacity. The Optical Monomers business operates at a leased manufacturing site in Pasadena, TX and has sales and support networks throughout the United States, Europe and Asia. This acquisition was accounted for using the purchase method of accounting with its results of operations included since the date of acquisition. Goodwill resulting from the acquisition amounted to approximately $11.5 million.

NOTE 9: Commitments and Contingencies

        The Company is subject to various lawsuits and claims with respect to matters such as governmental regulations (including environmental matters), income taxes and other actions arising out of the normal course of business.

        The Company has been cooperating with the United States Department of Justice (DOJ) and the European Commission since the spring of 1998 in their respective investigations of the bromine and brominated products industry. Both investigations were initiated after the Company self-reported to those agencies certain business practices that raised questions under anti-trust laws. As a result of the Company's cooperation, the Company and its current directors and employees have been accepted into the DOJ's amnesty program. As a result, the Company will be exempt from United States federal criminal prosecution and fines relating to the practices in question if the Company complies with certain conditions, including its full cooperation with the DOJ's investigation and policy regarding reasonable remedial efforts. Concurrently, the Company is seeking favorable treatment under a program in the European Union that also rewards self-reporting and cooperation.

        The Company believes it has fully complied with all applicable conditions to date and has continued to cooperate with the DOJ in connection with certain follow-up matters arising out of the investigation, all of which are covered by the Company's acceptance into the amnesty program. The Company intends to continue full compliance with the DOJ and European Union programs.

        Participation in the above programs did not provide the Company with immunity from civil liability, including restitution claims. Ten federal purported class action lawsuits and five California purported class action lawsuits were filed against the Company, each claiming treble damages. These suits claimed, among other things, that the Company conspired with others in violation of the antitrust laws regarding the pricing of bromine and brominated products. The federal lawsuits were consolidated in the District Court for the Southern District of Indiana. Over the Company's opposition, the District Court certified a class of direct purchasers of brominated diphenyl oxides and their blends, tetrabromobisphenol A and its derivatives and all methyl bromide products in the United States between January 1, 1995 and April 30, 1998. The Seventh Circuit denied the Company's application for an interlocutory appeal of the certification order.

        On September 10, 2002, the Company agreed to settle all of the federal class actions, subject to an option on the part of the Company to withdraw from the settlement, which option has now expired without being exercised, and subject to approval by the federal court. The settlement agreement affects direct purchasers from Great Lakes of brominated diphenyl oxides (decabromodiphenyl oxide, octabromodiphenyl oxide and pentabromodiphenyl oxide) and their blends, tetrabromobisphenol-A and its derivatives and all methyl bromide products and their derivatives in the United States between January 1, 1995 and April 30, 1998. The Company agreed to a $4.1 million cash payment and $2.6 million in vouchers for the future purchase of decabromodiphenyl oxide and/or tetrabromobisphenol-A, to be distributed to class members. The settlement will be presented to the federal court

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for approval during the fourth quarter 2002. The settlement has been reflected in third quarter 2002 as a reduction to litigation reserves previously recorded in prior periods.

        The California cases purport to allege violations of California competition laws and were stayed pending resolution of the federal cases. The cases are not impacted by the federal settlement. The Company has denied that they were legitimately filed as class actions, denies all liability and intends to defend the cases vigorously.

        OSCA, the interest that the Company divested to BJ Services Company as of May 31, 2002, is a party to certain pending litigation regarding a blowout of a well in the Gulf of Mexico operated by Newfield Exploration Company. In the lawsuit, the plaintiffs claimed that OSCA and the other defendants breached their contracts to perform work-over operations on the well and were negligent in performing those operations. On April 4, 2002, a jury reached a verdict on those claims, finding OSCA and the other defendants responsible for those claims and finding OSCA's share of the damages to be approximately $13.3 million. In connection with the lawsuit, the Company asserted claims against its insurers and insurance brokers in support of insurance coverage for this incident. A related trial on these insurance coverage claims is being conducted by the submission of legal briefs. The court has not yet entered a final judgment on the liability claims and the Company does not expect final judgment to be entered until completion of the related insurance trial. Pursuant to an indemnification agreement between the Company and BJ Services entered into at the time of the sale of OSCA (see Note 6), Great Lakes has agreed to pay BJ Services, a certain percentage of any uninsured cash damages in excess of a certain amount paid by OSCA upon any settlement or final determination of this pending litigation. During the second quarter of 2002, a $9.0 million reserve was recorded for this indemnification liability and continues to be included in discontinued operations at September 30, 2002.

        While it is not possible to predict or determine the outcome of the various lawsuits and claims as described above, the Company believes that the unreserved costs associated with all such matters will not have a material adverse effect on its consolidated results of operation, financial position, or liquidity.

        On May 28, 2002, Albemarle Corporation filed two complaints against the Company in the United States District Court for the United States District Court for the Middle District of Louisiana, one alleging that the Company had infringed one of three process patents held by Albemarle Corporation relating to bromine vacuum tower technology, and the other alleging that the Company had infringed or contributed or induced the infringement of a patent relating to the use of decabromodiphenyl ethane as a flame retardant in thermoplastics. On motion by the Company and over Albemarle's objection, the cases were consolidated. In addition, the Company has filed a counterclaim in the flame retardant cases, alleging, among other things, that the Albemarle patent is invalid or was obtained as a result of inequitable conduct in the United States Patent and Trademark Office.

        With respect to the Albemarle case, the Company believes that the allegations of the complaints are without basis factually or legally, and intends to defend the cases vigorously. While management is unable to determine whether the outcome of the legal actions will have a material adverse effect on the results of operations in any particular period, management does not believe that the outcome will have a material adverse effect on the Company's consolidated financial position or liquidity.

        The Company is subject to various U.S. and international federal, state and local environmental, health and safety laws and regulations. The Company is also subject to liabilities arising under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA") and similar state and international laws that impose responsibility for remediation of hazardous substances and hazardous waste constituents released into the environment.

        The Company provides reserves for environmental liabilities that management considers probable for which a reasonable estimate of the liability can be made. Accordingly, the Company's reserves for environmental liabilities related to continuing operations, including reserves associated with restructuring charges, were approximately $47.2 million and $53.6 million at September 30, 2002 and December 31, 2001, respectively. The Company does

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not believe that the unreserved costs, if any, associated with environmental liabilities will have a material adverse effect on its consolidated results of operations, financial position, or liquidity.

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations and Other Matters

        This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and Management's Discussion and Analysis contained in the 2001 Annual Report on Form 10-K and the unaudited interim consolidated financial statements included elsewhere in this report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.

        The following table sets forth the percentage relationship to net sales of certain income statement items for the Company's continuing operations:

RESULTS OF OPERATIONS

CONTINUING OPERATIONS

Three Months Ended September 30, 2002 Compared to the Three Months Ended September 30, 2001

        Net sales increased to $360.6 million or 12% from $321.0 million in the prior year. Sales volume increases across all business units more than offset lower selling prices in the Polymer Additives and Performance Chemicals business units. While sales volumes for the Company increased 12% in the quarter, the effects of pricing and foreign exchange fluctuations were offsetting. Pricing was down 2% while foreign exchange fluctuations increased sales by a corresponding 2%.

        Gross profit margins increased to 23.3% from 6.6% in the prior year. Excluding inventory write-downs of $8.3, environmental remediation costs of $24.5 million, $4.6 million of announced plant shutdown operating inefficiencies and $1.0 million of contract cancellation costs taken in 2001, gross profit margins increased to 23.3% from 18.6%. The increase in gross margin reflects higher sales volumes, the benefits of focused productivity efforts and lower raw material costs, which more than offset lower selling prices.

        Selling, general and administrative expenses decreased $2.2 million to $54.3 million, reflecting the benefits of repositioning efforts undertaken in 2001 and lower information technology and legal spending. As a percent of net sales, these expenses decreased from 17.6% to 15.1%.

        Operating income (loss) increased $136.6 million to $30.1 million of income from a loss of $(106.5) million in the prior year. Excluding the impact of special charges (credits) and repositioning activities, operating income

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increased $25.5 million from $4.2 million in 2001 to $29.7 million in 2002. The increase in operating income reflects the above-mentioned increase in sales and gross profit margins combined with reduced selling, general and administrative expenses.

        Interest income (expense)—net decreased $1.3 million year over year reflecting reduced net debt levels and higher cash balances in the current year and the effects of an interest rate swap entered into during the first quarter of 2002.

        Other income (expense)—net decreased $7.0 million from a net other expense of $(11.3) million in the prior year to a net other expense of $(4.3) million. Other income (expense) in 2002 includes $2.1 million of fixed assets write-downs net of a reversal of ($2.7) million for litigation and other settlements. Other income (expense) in 2001 includes one-time charges of $4.8 million, which consist of $3.5 million of fixed asset write-downs and $1.3 million of other costs. In addition, as of January 1, 2002, the Company ceased amortization of goodwill in accordance with the adoption of FAS 142 (see Note 2 to the Consolidated Financial Statements). Excluding the $2.1 million (pre-tax) of goodwill amortization expense recognized in the third quarter of 2001, as well as the net reversal and charges in 2002 and 2001 of ($0.6) and $4.8 million, other income (expense)—net increased $0.5 million. This increase reflects higher unconsolidated affiliate earnings in the prior year.

        Income taxes (credit) were 30.1% and (21.5)% of income (loss) before taxes for 2002 and 2001, respectively.

        Income from continuing operations was $13.7 million or $0.27 per share in 2002, as compared to $(98.3) million or $(1.95) per share in 2001.

Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September 30, 2001

        Net sales increased to $1,074.1 million from $1,069.5 million in the prior year. Strong volume gains reported by the Water Treatment and Polymer Additives businesses were offset by lower sales in Performance Chemicals related to the Fluorine business and lower selling prices in Polymer Additives and Performance Chemicals. For the Company as a whole, sales volumes increased 3% while pricing was down 3% and acquisitions added 1%.

        Gross profit margins increased to 23.8% from 18.1% in the prior year. Excluding inventory write-downs of $14.5 million, environmental remediation costs of $24.5 million, $4.6 million of announced plant shutdown operating inefficiencies, and $1.0 million of contract cancellation costs taken in 2001, gross profit margins increased to 23.8% from 22.3%. The gross margin increase reflects the benefits of productivity gains and lower raw material costs, which more than offset the impact of lower sales volumes in Performance Chemicals and reduced selling prices in Polymer Additives and Performance Chemicals.

        Selling, general and administrative expenses decreased $7.6 million to $163.3 million and as a percent of net sales decreased to 15.2% from 16.0% year over year. The decrease reflects the benefits of repositioning efforts undertaken in the second half of 2001 as well as lower information technology and legal spending. Included in 2001 are $0.9 million of accounts receivable write-offs related to repositioning activities.

        Operating income (loss) increased $212.5 million to $91.0 million of income from a loss of $(121.5) million in the prior year. Excluding the impact of special charges and repositioning activities, operating income (loss) increased $24.3 million from $68.0 million in 2001 to $92.3 million in 2002. As a percent of sales, operating income increased from 6.4% to 8.6%. This reflects higher sales volumes, productivity efforts, lower raw material costs, and a $7.6 million decrease in selling, general and administrative expenses, which more than offset lower selling prices.

        Interest income (expense)—net decreased $3.1 million year over year reflecting reduced net debt levels in the current year and the effects of an interest rate swap entered into during the first quarter of 2002.

        Other income (expense)—net decreased $28.9 million from a net other expense of $(38.8) million in the prior year to a net other expense of $(9.9) million. Other income (expense) in 2002 includes $4.6 million of fixed asset

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write-downs net of a reversal of ($2.7) million for litigation and other settlements. Other income (expense) in 2001 includes one-time charges of $29.7 million, which consist of $10.7 million of fixed asset write downs, the write-off of a note receivable of $11.6 million, charges of $6.1 million for litigation and other settlements and $1.3 million of other costs. In addition, as of January 1, 2002, the Company ceased amortization of goodwill in accordance with the adoption of FAS 142 (see Note 2 to the Consolidated Financial Statements). Excluding the $5.5 million (pre-tax) of goodwill amortization expense recognized in the first three quarters of 2001, as well as the reversals and one-time charges in 2002 and 2001, other income (expense)—net increased $4.4 million. Net other (expense) in 2001 benefited from higher earnings from unconsolidated affiliates and higher foreign exchange gains.

        Income taxes (credit) were 31.0% and (24.2)% of income (loss) before taxes for 2002 and 2001, respectively.

        Income (loss) from continuing operations was $40.9 million or $0.81 per share in 2002, as compared to $(140.4) million or $(2.79) per share in 2001.

Segment Information

        Set forth below is a discussion of the operations of the Company's business segments: Polymer Additives, Performance Chemicals, and Water Treatment. Performance Chemicals excludes the Fine Chemicals business as the Fine Chemicals business has been reported as discontinued operations for all periods presented (see Note 6 to the Consolidated Financial Statements). Operating income, which is the income measure the Company uses to evaluate business segment performance, represents net sales less costs of products sold and selling, general and administrative expenses. Each of the Company's segments uses bromine as a raw material in its production process. Bromine is transferred at cost to all business segments. In addition, assets used in the production of bromine are allocated to each business unit based on the percentage of production consumed.

Polymer Additives

        The Polymer Additives segment produces bromine-, phosphorus- and antimony-based flame retardants; antioxidants; UV absorbers; light stabilizers; optical monomers and patented No Dust Blends (NDB^TM). The segment serves suppliers in a wide variety of industries, including electrical and electronics, construction, automotive and furnishings. Results for the third quarter and year-to-date are as follows:

        Third quarter net sales increased 16.9% to $158.2 million from $135.3 million one year ago while year-to-date sales increased 2.2% to $460.4 million. Strong year over year volume growth evident in the second quarter continued into the third quarter. The higher volumes were offset in part by lower selling prices.

        Operating income (loss) increased $46.6 million and $61.7 million to $2.2 million and $10.6 million for the third quarter and year-to-date, respectively. Excluding special charges, inventory write-downs, and other charges taken in the prior year quarter of $29.6 million and prior year-to-date of $33.3 million, operating income (loss) increased $17.0 million and $28.4 million for the third quarter and year-to-date, respectively. These increases reflect higher sales volumes, productivity gains, lower raw material costs and the benefits of repositioning activities undertaken in 2001, which more than offset lower selling prices.

Performance Chemicals

        The Performance Chemicals segment produces chemicals to exact specifications or to meet specific applications requirements. The product offering is characterized by technology-based product solutions that benefit specific customers. The businesses included in the segment are: agricultural products; brominated intermediates;

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fluorine chemicals for use in fire suppression systems, refrigerants and medical and pharmaceutical products; and toxicological testing services for pharmaceutical, chemical and biotechnology customers. Performance Chemicals excludes the Fine Chemicals business as the Fine Chemicals business has been reported as discontinued operations for all periods presented (see Note 6 to the Consolidated Financial Statements). Results for the third quarter and year-to-date are as follows:

        Net sales increased $4.9 million or 8.9% in the third quarter, reflecting an upswing in volumes in the Fluorine and Bromine Intermediates businesses. Net sales, however, decreased $32.6 million or 16.5% year-to-date as compared to the same period in the prior year. This year-to-date decrease reflects the slowing in information technology infrastructure and telecommunications spending beginning in the second quarter of 2001, which affected sales volumes in the Fluorine business.

        Operating income (loss) increased $5.8 million or 62.4% to $15.1 million in the third quarter, but decreased $13.1 million or 25.9% to $37.5 million year-to-date compared to prior year. Excluding special charges and inventory write-downs of $5.0 million and $7.5 million in the prior year quarter and prior year-to-date, respectively, operating income (loss) increased $0.8 million or 5.6% for the third quarter, reflecting the higher sales, but decreased $20.6 million or 35.5% year-to-date. The decrease in year-to-date operating income reflects the decline in sales volumes and lower selling prices versus last year combined with the impact of unabsorbed manufacturing costs in the first two quarters of the year.

Water Treatment

        The Water Treatment segment is a producer of water treatment chemicals for the recreational and commercial swimming pool and spa water treatment industry. These products are sold to pool and spa dealers, distributors and mass market retailers. The Water Treatment segment also produces specialty biocides, antiscalants, corrosion inhibitors and other products for use in cooling tower water treatment; wastewater treatment; pulp and paper processing; and desalination products. Results for the third quarter and year-to-date are as follows:

        Water Treatment net sales increased 9.6% to $140.0 million and 7.3% to $443.4 in the third quarter and year-to-date from $127.7 million and $413.4 million in the prior year, respectively. Customer acceptance of important new technologies drove the year over year increases in sales volumes while selling prices remained flat.

        Operating income increased from $10.1 million and $53.6 million in 2001 to $19.8 million and $73.1 million in 2002 for the third quarter and year-to-date, respectively. These increases reflect higher sales volumes noted above combined with the impact of productivity gains and process improvements and lower raw material costs.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

        Cash and cash equivalents at September 30, 2002 were $232.1 million, which is an increase of $176.6 million from year-end and an increase of $19.7 million from the previous year third quarter.

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        Cash provided by operating activities—continuing operations for the nine months ended September 30, 2002 was $76.0 million compared to $125.4 million in the prior year. Cash provided by operating activities in 2001 benefited from a higher level of cash provided by working capital improvements.

        Cash used for investing activities—continuing operations for the nine months ended September 30, 2002 was $36.0 million, which is a decrease of $99.9 million from the cash used for investing activities in the prior year period. The decrease reflects the Company's emphasis on controlling capital expenditures, which were $61.2 million lower than in the prior year. The prior year period also includes the acquisition of the optical monomers business.

        Financing activities—continuing operations used $84.1 million of cash in the current nine-month period compared to a use of cash of $30.1 million in the previous year period. Net repayments of outstanding borrowings increased $53.3 million from net repayments of $17.6 million in the prior year to $70.9 million in the current year. Dividends were consistent with previous year levels.

        In addition, as described in Note 6, the Company received net cash proceeds from the sale of OSCA of approximately $200 million in the second quarter of 2002. The proceeds from the sale of OSCA and the related gain from the transaction have been reflected in the Consolidated Statements of Cash Flows as operating and financing activities from discontinued operations, respectively. These proceeds were used to reduce the Company's debt position as reflected in the increase in net repayments on borrowings noted above and to increase cash and cash equivalents from year-end.

        The Company anticipates that cash provided by operating activities in the future will be sufficient to fund its operating expenses, debt service obligations, dividend payments to common shareholders and capital expenditures.

        Long-term debt, less current portion, decreased $67.3 million from year-end to $433.5 million at September 30, 2002, reflecting the activity noted above. Net debt to capital at September 30, 2002 was 22% which is a 21 percentage point decrease from year-end.

        Capital spending for the third quarter and year-to-date amounted to $15.3 million and $47.9 million, respectively, which was in line with budget. Spending for the year is expected to be approximately $75 million.

        In addition, on October 3, 2002, the Company renewed the 364-day portion of its unsecured revolving credit facility established on October 4, 2001, subject to certain conditions. Under the combined facility, the Company may borrow up to $462.5 million. The facility is used to support the Company's commercial paper program and for general corporate purposes. The facility contains certain covenants that include, among others, requirements for a maximum ratio of debt to EBITDA, as defined in the agreement. Interest on borrowings outstanding under the agreement is based upon a variable rate tied to LIBOR.

        As a result of continuing declines in interest rates and the market value of the assets held in the Company's defined benefit pension plans, the Company believes that it will be required to record a minimum pension liability as of December 31, 2002 and that the pension expense for 2003 will be significantly increased. The minimum pension liability reflects the amount by which the plans' accumulated benefit obligations exceed the value of the plans' assets less amounts previously accrued for pension costs. While the amount of minimum pension liability and 2003 pension expense will be finalized based on actuarial calculations in the fourth quarter of 2002, the Company anticipates that the minimum pension liability to be recognized at December 31, 2002 will be approximately $46 million ($32 million, net of tax) as a charge to stockholder's equity, and pension expense will increase approximately $7 to $8 million in 2003.

OTHER MATTERS

ACQUISITIONS

        Refer to Note 8 of the Notes to the Consolidated Financial Statements for a discussion of acquisitions.

17

SPECIAL CHARGES

2001

        On June 27, 2001, the Company's Board of Directors approved a detailed repositioning plan that provided for a series of cost reduction initiatives to further streamline operations, strengthen the Company's competitive position and continue to provide a strong platform for future growth. Additionally, on September 15 and December 6, 2001, the Company's Board of Directors approved an additional series of cost reduction initiatives developed to minimize the effects of then current economic conditions. The major components of these repositioning plans in continuing operations included the consolidation of certain Polymer Additives operations, resulting in two planned plant closures and the shutdown of an unprofitable product line; elimination of approximately 485 manufacturing, research and development, sales and other management positions; and the impairment of certain under-performing and non-strategic long-lived assets, including goodwill.

        The special charges related to this repositioning plan and included in continuing operations totaled $153.6 million, $118.9 million after income taxes, or $2.36 per share, for the year ended December 31, 2001. The special charges consisted of $106.1 million of asset impairments, including $61.3 million for fixed asset impairments and $44.8 million of impaired goodwill, $25.6 million of severance costs, $15.3 million for plant closure and environmental costs and $6.6 million of other costs.

        Net special charges for the year ended December 31, 2001, totaled $148.8 million, $115.4 million after income taxes, or $2.29 per share. This reflects the $153.6 million of charges recorded in 2001 offset by a reversal of $3.5 million related to changes in estimates in the 2001 special charge and certain reversals of the special charges taken in 2000 totaling $1.3 million, as detailed below. The net effect of the special charge reversals after income taxes was $3.5 million or $0.07 per share. The net of the 2001 special charges and reversals are reflected in the 2001 consolidated statement of operations as a separate component of operating income.

        In the second quarter of 2002, an additional charge of $1.7 million (net of reversals) was recorded due to changes in estimates relating to the 2001 restructuring plan. In the third quarter of 2002, an additional $(0.4) was reversed due to changes in estimates. Net special charges related to the 2001 restructuring plan and included in 2001 and 2002 operations total $154.9 million.

18

        A progression of the reserve balance in continuing operations to September 30, 2002 by business unit is as follows: