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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 1-5667

Cabot Corporation

(617) 345-0100

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

Preferred Stock Purchase Rights

      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

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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     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 Nanogel^TM 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 Nanogel^TM 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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      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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      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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      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:

     Leased — Administrative Offices and/or Manufacturing Plants:

     Owned — Research and Development Facilities:

     Leased — Research and Development Facilities:

     Fumed Metal Oxides:

     Owned — Administrative Offices and/or Manufacturing Plants:

     Leased — Administrative Offices and/or Manufacturing Plants:

     Inkjet Colorants:

     Owned — Administrative Offices and/or Manufacturing Plants:

     Leased — Administrative Offices and/or Manufacturing Plants:

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     Aerogels:

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

     Leased — Administrative Offices and/or Manufacturing Plants:

Performance Materials

     Owned — Administrative Offices and/or Manufacturing Plants:

     Leased — Administrative Offices and/or Manufacturing Plants:

Specialty Fluids

     Owned — Administrative Offices and/or Manufacturing Plants:

     Leased — Administrative Offices and/or Manufacturing Plants:

	* 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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      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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      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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      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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      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.)

      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:

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Part II

      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

Cabot Corporation Selected Financial Data

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      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.

      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.

      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.

      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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      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.

      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.

      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.

      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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      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.

      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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      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

Sales by Geographic Region

Continuing Operations

      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.

      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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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 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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      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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      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:

      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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      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.

      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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      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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      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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     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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      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

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CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

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

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CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS—(Continued)

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

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CABOT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME