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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

Commission file number 1-12626

EASTMAN CHEMICAL COMPANY

Registrant’s telephone number, including area code: (423) 229-2000

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

Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x    No   o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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.   x

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   x    No   o

The aggregate market value (based upon the closing price on the New York Stock Exchange on June 30, 2002) of the 77,085,937 shares of common equity held by nonaffiliates as of December 31, 2002 was approximately $3,615,330,445, using beneficial ownership rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, to exclude common stock that may be deemed beneficially owned as of December 31, 2002 by the current directors and executive officers and Eastman Chemical Company’s (“Eastman” or the “Company”) charitable foundation, some of whom might not be held to be affiliates upon judicial determination. At December 31, 2002, 77,346,296 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement relating to the 2003 Annual Meeting of Stockholders (the “2003 Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10 to 12 of this Annual Report on Form 10-K (the “Annual Report”) as indicated herein.

FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report are forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. These statements and other written and oral forward-looking statements made by the Company from time to time may relate to, among other things, such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters; legal proceedings; exposure to, and effects of hedging of, raw material and energy costs and foreign currencies; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin, and sales; earnings, cash flow, dividends and other expected financial conditions; expectations, strategies, and plans for individual products, businesses, segments and divisions as well as for the whole of Eastman; cash requirements and uses of available cash; financing plans; pension expenses and funding; future expenses and insurance settlement associated with operational disruptions; credit rating; cost reduction and control efforts and targets; integration and rationalization of acquired businesses; development, production, commercialization, and acceptance of new products, services and technologies and related costs; and business, asset and product portfolio changes.

These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. Certain important factors that could cause actual results to differ materially from those in the forward-looking statements are included with such forward-looking statements and in Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements and Risk Factors.”

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PART I

ITEM 1.   BUSINESS

CORPORATE PROFILE

Eastman Chemical Company (“Eastman” or the “Company”), a global chemical company engaged in the manufacture and sale of a broad portfolio of chemicals, plastics, and fibers, began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company’s (“Kodak’s”) photographic business. The Company was incorporated in Delaware in 1993 and became an independent entity as of December 31, 1993, when Kodak spun off its chemicals business. The Company’s headquarters and largest manufacturing site are located in Kingsport, Tennessee.

Eastman is the largest producer of polyethylene terephthalate (“PET”) polymers for packaging based on capacity share and is a leading supplier of raw materials for paints and coatings, inks and graphic arts, adhesives, textile sizes, and other formulated products, and of cellulose acetate fibers. Eastman has 41 manufacturing sites in 17 countries that supply major chemicals, fibers, and plastics products to customers throughout the world. In 2002, the Company had sales revenue of $5.3 billion, operating earnings of $208 million, and net earnings of $61 million. Earnings per diluted share were $0.79.

The Company’s products and operations are managed and reported in five operating segments. Effective January 1, 2002, the Company implemented a divisional structure that separated the businesses into two divisions. Eastman Division consists of the Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”) segment, the Performance Chemicals and Intermediates (“PCI”) segment and the Specialty Plastics (“SP”) segment. Voridian Division contains the Polymers segment and the Fibers segment.

EASTMAN DIVISION

Business and Industry Overview

Operating in a variety of markets with varying growth prospects and competitive factors, the segments in Eastman Division manufacture a diverse portfolio of specialty chemicals and plastics that are used in a wide range of consumer and industrial markets. With 35 manufacturing sites in 15 countries, Eastman Division is focused on providing its customers with chemicals and plastics products that meet their evolving needs. Eastman Division is comprised of the following segments: CASPI, PCI, and SP, which are more fully discussed below.

The CASPI segment generally competes in the markets for raw materials for paints and coatings, inks and graphic arts and adhesives. Growth in these markets in North America and Europe typically coincides with economic growth in general, due to the wide variety of end uses for these applications and the particular dependence on the economic conditions of the market for durable goods. Higher growth sub-markets exist within North America and Europe, driven primarily by increasing governmental regulation. Industry participants are promoting, for example, products and technologies primarily designed to reduce air emissions. Growth outside of North America and Europe is substantially higher, driven primarily by the increasing requirements of industrializing economies. The adhesives raw materials market historical growth rate has been consistent with general economic growth. In addition to steady overall market growth, Eastman believes that greater growth opportunities exist for hot melt adhesives due to their superior performance characteristics and the resulting ability to displace other adhesives.

The PCI segment competes in diverse markets for its intermediates, specialty organic and custom manufacturing chemicals offerings. Specialty organic chemicals products are specifically developed based on product performance criteria, which make market quantification difficult. Instead, the focus in this market is on specific opportunities for value added products, and market size, growth opportunities and other industry characteristics are a function of the level and extent to which a producer chooses to participate in niche opportunities driven by these customer specifications. For other PCI products, the markets are varied, from durables to food products to pharmaceuticals and, although opportunities for differentiation on service and product offerings exist, these products compete primarily on price.

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The SP segment competes in the market for the development of plastics that meet specific performance criteria, typically determined on an application-by-application basis. Development is dependent upon a manufacturer’s ability to design products that achieve specific performance characteristics determined by the customer, while doing so either more effectively or more efficiently than alternative materials such as polycarbonate (“PC”) and acrylic. Increases in market share are gained through the development of new applications, substitution of plastic for other materials, and particularly, displacement by plastic resins in existing applications. The Company estimates that the market growth for copolyesters, which has historically been high due to the relatively small market size, will be substantially higher than general economic growth due to displacement opportunities. Eastman believes that growth of the cellulosic plastics markets will be flat or, at best, equal to the rate of growth of the economy in general.

Strategy

The Company’s objectives for Eastman Division are to improve gross margins, accelerate revenues and earnings growth through exploiting growth opportunities in its core businesses, and build capabilities for future growth. The key elements of this strategy include:

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Improve Gross Margins

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Integrate Acquisitions

The Company has substantially completed the integration of a number of acquisitions in its Eastman Division, which is expected to improve cost structure and business focus. As part of its integration process, the Company applied its historical expertise in manufacturing process improvements and supply chain management to these businesses. In particular, the Company has completed the deployment of its management teams among the businesses it has acquired as part of the CASPI growth strategy, and substantially completed the worldwide implementation of its enterprise resource planning systems among these operations in July 2002.

4

Rationalization of Businesses and Products

	The Company continues to evaluate its portfolio of products and businesses, which has resulted in the exiting of certain products and businesses. The Company expects further rationalization to occur, which could result in additional product lines or businesses being removed from its portfolio to improve overall profitability. In addition, the Company anticipates that it will further consolidate manufacturing facilities, primarily in the CASPI segment, to improve profitability.
	The Company intends to continue to implement historically successful initiatives to eliminate inefficiencies and unnecessary costs, as well as improve manufacturing processes, all with the goal of improving the cost structure of Eastman Division segments. For example, the Company intends to improve gross margin by:

	•		driving cost efficiency throughout the supply chain;
	•		utilizing shared services;
	•		using information technology for productivity gains and cost savings;
	•		applying Six Sigma*, a quality improvement program aimed at reducing costs, improving customer satisfaction, and improving efficiency through reduction of variation and defects; and
	•		aggressively implementing selling price increases to offset raw material cost increases.

	The economic downturn in 2002 reduced demand for Eastman Division’s products, but the Company is well positioned to achieve benefits from improved capacity utilization without the need for significant incremental capital investment, particularly in oxo chemicals and coatings products.
	* Six Sigma is a trademark of Motorola, Inc.

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Exploit Growth Opportunities in Core Businesses

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Develop New Specialty Products and Expand into New Markets

Eastman believes that it is a market leader based on sales in a number of Eastman Division’s product lines, and is focused on growth through continued innovation and displacement of competitive products with offerings that provide greater functionality or better value. Recent examples of the continued focus on the development of new and innovative products are DuraStar™, Embrace™, and Provista™ in the SP segment. Recent examples of efforts to enter new markets include the aggressive introduction by the CASPI segment of coatings products using waterborne, powder and pigment dispersion technologies to meet the growing requirement for environmentally friendly products. In addition, growth opportunities will be driven by optimization of Eastman Division’s product portfolio.

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Leverage Opportunities Created by the Broad Product Line

Eastman Division is able to offer a broad array of complementary products that customers would otherwise need to obtain from multiple manufacturers, increasing cross-selling opportunities. In addition, the CASPI segment is organized as an integrated platform that combines its leading products and technologies in order to develop additional customer-specific applications. This integrated platform should allow Eastman Division to further benefit from advancements and developments with respect to one product line by applying them to another product line; for instance, its ability to use technology from the adhesives market in applications for the coatings and inks market.

•

Build Capabilities for Future Growth

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Develop Customer Service Oriented Initiatives to Leverage Unique Capabilities

	The Company is expanding beyond the core business of chemicals and plastics manufacturing to develop less capital-intensive service businesses that allow it to take advantage of its long-term customer relationships, operational skills and technological capabilities.

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Cendian Corporation

Launched by the Company in 2000, Cendian Corporation (“Cendian”) is an Eastman subsidiary that offers logistics services for small to mid-sized chemicals manufacturers. Cendian combines the Company’s long-standing distribution and logistics capabilities and its strong reputation and brand in the chemicals industry with recent information technologies to create a full-scale outsourcing logistics provider for chemicals industry participants. Cendian supports substantially all of the Company’s worldwide logistics requirements, as well as provides logistics outsourcing services to other chemicals manufacturers globally.

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Ariel Research Corporation

In January 2002, Eastman acquired Ariel Research Corporation (“Ariel”). Ariel, headquartered in Bethesda, Maryland, is a leading provider of worldwide regulatory information and software products that enable corporations to manage product safety and stewardship functions, including requirements for workplace, environmental, and dangerous goods compliance. Ariel’s comprehensive product offerings arise from its over 14 year history of delivery of improvement protocols for environmental, health and safety operations. Its customers include major global corporations in the chemical, pharmaceutical, consumer products, aerospace, electronics and telecommunications markets. The addition of Ariel’s capabilities should result in better product stewardship information solutions for the Company’s customers.

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Coal Gasification Services

The Company is developing a service business model for coal gasification operations as an alternative clean technology for producing electric power. Recognized as an industry leader in reliability and efficiency of gasification operations, Eastman has operated a coal gasification plant in Kingsport, Tennessee for approximately 20 years. Eastman Division plans to leverage its expertise in gasification by offering operations and maintenance services to third party gasification facilities. In the fourth quarter of 2002, the Company entered into a cooperative agreement with Texaco Development Corporation, a wholly-owned subsidiary of ChevronTexaco Corporation, that will enable Eastman to provide operation, maintenance, management and technical services, as well as parts fabrication and sales, for gasification plants of Texaco Development licensees.

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Pursue Opportunities for Business Development and Diversification

The Company currently has in place and continues to pursue opportunities for joint ventures, equity investments and other alliances. These strategic initiatives are expected to diversify and strengthen businesses by providing access to new markets and high-growth areas as well as providing an efficient means of ensuring that Eastman is involved in and supportive of technological innovation in or related to the chemicals industry. The Company is committed to pursuing these initiatives in order to capitalize on new business concepts that differentiate it from other chemical manufacturers and that will provide incremental growth beyond that which is inherent in the chemicals industry and at lesser capital investment requirements.

The Company’s current initiatives include its approximate 42% equity interest in Genencor International, Inc. (“Genencor”), a publicly traded biotechnology company engaged in the discovery, development, manufacture, and marketing of biotechnology products for the industrial chemicals, agricultural, and health care markets, and a developer of integrated genomics technology. The Company, which was an early stage investor and held a 50% interest prior to Genencor’s initial public offering in 2000, believes this investment provides the opportunity for a financial return as well as access to complementary technologies that may result in expanded product offerings and additional market penetration. Genencor is accounted for by the equity method of accounting for investments in common stock. Genencor’s common stock is registered under the Securities Exchange Act of 1934 and is listed on the NASDAQ National Market System under the symbol GCOR. See the “Investments” section of Note 1 to the Company’s consolidated financial statements for a discussion of the equity method of accounting for the investment in Genencor.

CASPI SEGMENT

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Overview

Through the CASPI segment, Eastman Division manufactures binders, liquid vehicles, pigment concentrates and additives, unsaturated polyester resins and polyester and acrylic emulsions, which are integral to the production of paints and coatings, inks and graphic arts, adhesives, textile sizes and other formulated products. The CASPI segment focuses on raw materials rather than finished products in order to develop long-term, strategic relationships and achieve preferred supplier status with its customers. In 2002, the CASPI segment had sales revenue of approximately $1.6 billion, which represented 29% of Eastman’s total sales and 43% of Eastman Division’s total sales.

Success in the CASPI segment is dependent upon Eastman Division’s ability to realize value from the optimization of returns from recently-acquired businesses and assets and to capitalize on organic growth opportunities by offering existing products and technologies to new markets and new products and technologies to customers in multiple markets. For these reasons, activities within the CASPI segment are focused on capitalizing on the higher growth rates in environmentally friendly products such as waterborne, powder and pigment dispersion technologies and on higher growth geographical markets, such as the Asia Pacific region. The CASPI segment has strong technology capabilities and an international presence that position it to take advantage of new product growth and international opportunities. Continued optimization will result in further operational efficiencies in areas such as manufacturing, supply chain and cost management. This optimization, coupled with further rationalization of businesses and products, is expected to improve overall gross margins.

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Products

The CASPI segment manufactures raw materials, additives and specialty polymers, primarily for the paints and coatings, inks and graphic arts, adhesives and other markets. The CASPI segment’s products consist of binders and resins, liquid vehicles, pigment concentrates and additives, unsaturated polyester resins and polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as key components in paints and inks to form a protective coating or film, and bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol solvents, maintain the binders in liquid form for ease of application. Pigment concentrates and additives, such as cellulosic polymers, Texanol™ coalescing aid and chlorinated polyolefins, provide different properties or performance enhancements to the end product. Unsaturated polyester resins are used primarily in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions are traditionally used as textile sizes to protect fibers during processing in textile manufacturing, and the technology is also used in water-based paints, coatings and inks. Additional products are developed in response to, or in anticipation of, new applications where the Company believes significant value can be achieved.
The CASPI segment’s annual sales revenue is approximately 50% to paint and coatings markets, approximately 25% to adhesives markets, and approximately 25% to inks and graphic arts and other markets. The following table describes the CASPI segment’s major product groups and the primary (P) and secondary (S) markets into which those products are sold:

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Growth Strategy

The CASPI segment’s market position has been enhanced through a combination of internal product development and strategic acquisitions of products and technology, and cost reduction efforts.
A key element of the CASPI segment’s growth strategy is the continued development and implementation of innovative product offerings in high–growth areas that meet customers’ evolving needs and improve the quality and performance of customers’ end products. Eastman Division believes that its ability to leverage its broad product line and industry-leading research and development capabilities across the CASPI segment make it uniquely capable of offering a broad array of solutions for new and emerging markets.
Eastman Division is focused on the expansion of the CASPI segment’s product offerings into other high-growth areas. These include areas with growth due to specific product developments, such as adhesion promoters, high solids coatings, and water-based products, as well as growth in geographic areas due to the level and timing of industrial development. Due to the Company’s global manufacturing presence, it is strategically positioned to take advantage of areas of high industrial growth.
The CASPI segment has realized significant savings through the consolidation of plant operations and continues to implement projects to leverage common corporate systems and infrastructure, as well as best manufacturing practices and processes. Further cost reductions are expected to be realized through improvements in supply chain, distribution channels, and other optimizations. The CASPI segment’s product and resource portfolios are expected to be consolidated to maximize value creation and reduce costs, including through the previously announced closing of two sites during 2003.

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In the future, the Company intends to continue to leverage its resources by sharing best practices, both internal and those acquired, across the CASPI segment and throughout the entire company. Although sales and application development is often specialized by end-use market, developments in technology may be successfully shared across all end uses. In addition, new product offerings and manufacturing assets are shared across multiple end uses.

•

Customers and Markets

As a result of the variety of end uses for its products, the customer base in the CASPI segment is broad and diverse. This segment has more than 3,000 customers around the world and 80% of its sales revenue in 2002 was attributable to approximately 250 customers. Eastman Division focuses on establishing long-term, customer service oriented relationships with its strategic customers in order to become their preferred supplier. Eastman Division sees significant growth potential in its ability to leverage these relationships to provide sales opportunities in previously underserved markets, as well as expand the scope of its value-added services. However, from time to time, customers decide to vertically integrate their own processes and internally develop products or diversify their sources of supply that had been provided by Eastman. Growth in these markets in North America and Europe typically coincide with economic growth in general, due to the wide variety of end uses for these applications and particular dependence on the economic conditions of the market for durable goods.

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Competition

Competition within the CASPI segment markets varies widely depending on the specific product or product group. Because of the depth and breadth of its product offerings, Eastman does not believe that any one of its competitors presently offers all of the products that it manufactures within the CASPI segment. Additionally, Eastman believes that, based on estimated sales revenue, it is the largest producer of raw materials for the inks and graphic arts market that it serves and the second largest producer of resins for adhesives. However, many of the Company’s competitors within portions of its CASPI segment are substantially larger companies, such as The Dow Chemical Company(“Dow”), BASF Corporation, and Exxon Mobil Corporation, which may have greater financial and other resources than those of Eastman. Additionally, within each market in this segment, the Company competes with other smaller, regionally focused companies that may have advantages based on location, local market knowledge, manufacturing strength in a specific product, or other factors. At any time, any one or more of these competitors could develop additional products that compete with, or that may make obsolete, some of Eastman’s current product offerings.
Eastman does not believe that any of its competitors is dominant within the CASPI segment’s markets. Further, the Company attempts to maintain competitive advantages through its level of vertical integration, breadth of product and technology offerings, low-cost position, consistent product quality and process and market knowledge. In addition, Eastman attempts to leverage its strong customer base and long-standing customer relationships to promote substantial recurring business, further strengthening its competitive position.

PCI SEGMENT

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Overview

The Company’s PCI segment manufactures diversified products that are used in a variety of markets and industrial and consumer applications, including chemicals for agricultural intermediates, fibers, food and beverage ingredients, photographic chemicals, pharmaceutical intermediates, polymer compounding and chemical manufacturing intermediates. The PCI segment also offers custom manufacturing services through its custom synthesis business. The Company believes it has one of the industry’s broadest product offerings, ranging from custom manufacturing to high volume manufacturing of complex organic molecules for customers. In 2002, the PCI segment had sales revenue of $1.5 billion, which represented 21% of Eastman’s total sales and 41% of Eastman Division’s total sales.
Because a portion of the PCI segment’s sales are derived from higher margin, highly specialized products with niche applications, success in the PCI segment will require the Company to continue to innovate and develop new products and find new applications for its existing products. Eastman Division intends to invest in high–growth specialty products, such as additives for food, personal care and pharmaceuticals, where it believes the highest returns can be generated. Eastman Division is also concentrating its efforts on new uses for existing products, such as optical brighteners and specialty anhydrides. Some of Eastman Division’s other products in this segment are more substitutable and price sensitive in nature, requiring the Company to operate on a lower cost basis while maintaining high quality products and customer service.

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Products

The PCI segment offers over 150 products to customers, many of whom are major producers in a broad range of markets. The following is a summary of key products:

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Specialty Organic Chemicals

Eastman manufactures complex organic molecules such as diketene derivatives, specialty ketones, specialty anhydrides, optical brighteners and color developers for fiber, food and beverage ingredients and photographic chemicals, which are typically used in market niche applications. The Company also engages in custom manufacturing of complex organic chemicals where business is developed on a customer-by-customer basis after significant consultation and analysis. These niche and custom manufacturing products are typically priced based on the amount of value added rather than supply and demand factors, and are often characterized by higher margins and steady growth rates.

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Other Chemicals Primarily for Chemical Manufacturing, Polymer Compounding and Pharmaceutical Applications

Eastman manufactures a variety of intermediate chemicals based on oxo and acetyl chemistries. The Company is the largest marketer of acetic anhydride in the United States, a critical component of analgesics and other pharmaceutical and agricultural products, and is the only U.S. producer of acetaldehyde, a key intermediate in the production of vitamins and other specialty products. Eastman manufactures the broadest range of oxo aldehyde derivatives products in the world and owns proprietary technology for the production of epoxybutene (“EpB™”) oxirane, an intermediate with growing use in pharmaceuticals and other small volume, high–value specialty products. The Company’s other products include plasticizers, glycols and polymer intermediates. Many of the products in this portion of the PCI segment are priced based on supply and demand of substitute and competing products. In order to maintain a competitive position, the Company strives to operate with a low–cost manufacturing base.

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Growth Strategy

A two-pronged strategy for success in the PCI segment focuses on continuing to develop and access markets with high growth potential for the Company’s specialty organic chemicals, while maintaining its competitive advantage as a low-cost, high quality and customer service oriented supplier of products to other chemicals customers. The Company engages in customer focused research and development initiatives in order to develop new products and find additional applications for existing products, both in response to, and in anticipation of, customer needs. The Company believes that this strategy will enable it to remain a leader in application-specific, higher margin PCI products. For example, Eastman has leveraged its expertise in chemicals manufacturing to jointly develop with Genencor a process for making ascorbic acid, or vitamin C, which provides significantly lower manufacturing costs over current processes. Additionally, Eastman has been successful in developing new applications for some of its existing PCI products. For instance, Sustane ™ SAIB, which has long been used as a coatings additive and for inks end uses, has new applications in the U.S. as a stabilizer in citrus flavored drinks. Food and Drug Administration regulations now allow the use of SAIB for this application. In the future, the Company expects to continue to capitalize on applications such as these in biotechnology and in other industries, and intends to seek to create additional opportunities to apply its products in new and innovative ways.

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In order to build on and maintain its status as a low–cost producer, Eastman continuously focuses on cost control, operational efficiency and capacity utilization in order to maximize earnings. The Company’s highly integrated and world-scale manufacturing facilities position it to achieve its strategic goals. For example, the Kingsport, Tennessee manufacturing facilities allow the PCI segment to produce acetic anhydride and other acetyl derivatives from coal rather than natural gas or other petroleum feedstocks. Similarly, at the Longview, Texas facility, the PCI segment utilizes local ethane and propane supplies along with Eastman’s proprietary oxo-technology in the world’s largest single-site oxo-aldehyde manufacturing facility to produce a wide range of alcohols, esters and other derivatives products. These integrated facilities, combined with large scale production processes and continuous focus on additional process improvements, allow the Company to remain cost competitive with, and for many products cost-advantaged over, its competitors.

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Customers and Markets

Because of the niche applications of the PCI segment’s specialty organic chemical products, each individual product offering is tailored to specific end uses. Other performance chemicals and intermediates are more readily substitutable, and have a more identifiable potential customer base. In order to obtain a better understanding of its customers’ requirements, which in turn allows it to focus on developing application-specific products, the Company focuses on establishing long-term, partnership-oriented relationships with its customers. From time to time, customers decide to vertically integrate their own processes and internally develop products or diversify their sources of supply that had been provided by Eastman. Approximately 80% of the PCI segment’s sales revenue in 2002 was to 100 customers out of approximately 1,450 customers worldwide.

During 2001, the Company reported that a large customer of the PCI segment did not intend to renew its contract for a custom synthesis product beyond June 30, 2002. As a consequence, the related assets were impaired as expected cash flows over the remaining term of the contract were not sufficient to recover the carrying value of such assets. Nonrecurring charges related to the impacted assets were recorded during the second and third quarters 2001 as part of the $69 million in charges taken for restructuring of the fine chemicals product lines, as described in Note 15 to the Company’s consolidated financial statements. Subsequently, the customer initiated discussions with the Company, which resulted in an agreement being reached in June 2002, to extend the custom synthesis product contract one year based on renegotiated terms. Sales revenue related to the contract extension was approximately 3% of the PCI segment’s sales in 2002.

The PCI segment’s products are used in a variety of markets and end uses, including agrochemical, automotive, beverages, catalysts, nutrition, pharmaceuticals, coatings, flooring, medical devices, toys, photographic and imaging, household products, polymers, textiles and consumer and industrials. The markets for products with market-based pricing in the PCI segment are cyclical. This cyclicality is caused by periods of supply and demand imbalance, either when incremental capacity additions are not offset by corresponding increases in demand, or when demand exceeds existing supply. Demand, in turn, is based on general economic conditions, energy prices, consumer demand and other factors beyond the Company’s control. Eastman may be unable to increase or maintain its level of sales in periods of economic stagnation or downturn, and its future results of operations and financial condition may experience fluctuations from period to period due to these economic conditions. The Company believes many of these markets to be in the “trough” of the cycle. Cyclicality is expected to remain a significant factor in the PCI segment, particularly in the near term, as existing capacity becomes absorbed and utilization rates increase from current levels. The Company believes that, as excess capacity disappears, market conditions will improve.

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Competition

For specialty organic chemicals and other niche applications, there are typically few equivalent products, as the products and their applications are very specialized. For this reason, producers compete with others only to the extent they attempt to manufacture similar or enhanced products that share performance characteristics. Barriers to entry in this market have typically been cost, either due to raw material, integration, size or capacity issues, technology and customer service. On a general level, Eastman’s primary competitors for specialty organic chemicals are multinational specialty chemical manufacturers such as Ciba Specialty Chemicals Holding Inc., Clariant International Ltd. and Lonza Group Ltd. Recently, an increasing number of producers, primarily from China and India, have been entering the market primarily on price, benefiting from low-cost labor, less stringent environmental regulations and government support. These producers may later focus on improving their product quality and customer service. Although the entry of new competitors is impacting the pricing of existing products, Eastman believes it currently maintains a competitive advantage over these competitors due to the combination of its successful research and development applications, its low-cost manufacturing base due to vertical integration, its long-term customer relations and related customer service focus, as well as the fact that these suppliers are frequently unable to produce products of consistently high quality.

For the majority of the PCI segment’s products with market-based pricing, historically there have been significant barriers to entry, namely the fact that the relevant technology has been held by a small number of companies. As this technology has become more readily available, competition from multinational chemicals manufacturers has intensified. Eastman competes with these and other producers primarily based on price, as products are interchangeable, and, to a lesser extent, based on technology, marketing and other resources. While some of the Company’s competitors within the PCI segment have greater financial resources than Eastman does, which may better enable them to compete on price, the Company believes it maintains a strong position due to a combination of its scale of operations, breadth of product line, level of integration and technology leadership. For manufacturers of products with market-based pricing, there continues to be increasing consolidation, as evidenced by the combination of Dow and Union Carbide Corporation in 2001.

SP SEGMENT

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Overview

The SP segment produces highly specialized copolyesters, cellulosic plastics and compounded polyethylene plastics that possess unique performance properties for value-added end uses such as appliances, store fixtures and displays, building and construction, electronics and electronic packaging, medical packaging, personal care and cosmetics, performance films, tape and labels, biodegradeables, cups and lids, fiber and strapping, photographic and optical, graphic arts and general packaging. In 2002, the SP segment had sales revenue of $595 million, which represented approximately 10% of Eastman’s total sales and 16% of Eastman Division’s total sales.

Specialty copolyester products within the SP segment, including modified specialty copolyesters such as Eastar™ and Spectar™, have higher than industry average growth rates. Eastman’s specialty copolyesters, which generally are based on Eastman’s market leading supply of CHDM modified polymers, typically fill a market position between polycarbonates and acrylics. While polycarbonates traditionally have had some superior performance characteristics, acrylics have been less expensive. Specialty copolyesters combine superior performance with competitive pricing and are taking market share from both polycarbonates and acrylics as their performance characteristics continue to improve and their pricing remains competitive.

The specialty copolyesters market also includes environmentally friendly specialty copolyesters and plastic sheeting that allow for flexibility in designing signs and displays. The SP segment includes cellulosic plastics, which has historically been a steady business with strong operating margins for the Company, and also includes what Eastman believes is a North American market-leading position in cellulose esters for tape and film products and cellulose plastics for molding applications.

Eastman has the ability within its SP segment to modify its polymers and plastics to control and customize their final properties, creating numerous opportunities for new application development, including the expertise to develop new materials and new applications starting from the molecular level in the research laboratory to the final designed application in the customer’s plant. In addition, the SP segment has a long history of manufacturing excellence with strong process improvement programs providing continuing cost reduction.

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Manufacturing process models and information technology systems support global manufacturing sites and provide monitoring and information transfer capability that speed up the innovation process.

•

Products

The SP segment’s key products are:

4

Engineering and Specialty Polymers

	Engineering and specialty polymers accounted for approximately 50% of the SP segment’s 2002 sales revenue. Engineering and specialty polymers include a broad line of polyesters, filled polyesters, copolyesters, alloys, and cellulosic plastics that are sold to a diverse and highly fragmented customer base in numerous market segments on a global basis. Approximately 50% of the revenues from engineering and specialty polymers are generated in North America. Sales in all regions are generated through a mix of the Company’s direct sales force and a network of distributors. Engineering and specialty polymers products are sold into three sectors: durable goods (e.g., components used in appliances, electronic products and to a lesser degree, automobiles); medical goods (e.g., disposable medical devices, healthcare equipment and instruments, and pharmaceutical packaging); and personal care and consumer goods (e.g., housewares, cosmetics, tools, toys and a variety of other uses). Engineering and specialty polymers sales revenue is approximately 30% to durable goods, approximately 20% to medical goods, and approximately 50% to personal care and consumer goods.
	The products for engineering and specialty polymers are heavily specification-driven. The Company works with original equipment manufacturing companies to enable product designers to design polymers for a specified use in a specified product. Although the average life cycle of many of these products is shrinking over time, the Company works to identify uses for the polymers in products that will have multi-year lives. In working with original equipment manufacturing companies on new consumer product designs, new polymer products are often developed for use in a particular type of end-use product. There are numerous variations of polymer products sold under ten different trade names.
	The Company competes in market niches requiring polymers with combinations of clarity, toughness and chemical resistance.

4

Specialty Film and Sheet

	Approximately 25% of the SP segment’s 2002 revenue resulted from sales of specialty film and sheet products. The key markets for specialty film and sheet are packaging, display and building and construction. The SP segment’s specialty film and sheet annual sales revenue is approximately 50% to packaging, 45% to display and approximately 5% to building and construction.
	Direct customers are film and sheet producers, but extensive marketing activities target customers in end-use markets. The Company is a major supplier of specialty film and sheet to selected markets, but with less than 10% of the global specialty film and sheet market, substantial growth opportunities exist for Eastman. The growth strategy is to penetrate new market segments or geographies and offer a substitute for other materials by providing an improved or lower cost solution.
	Specialty film and sheet is sold in the packaging markets including medical and electronic component trays, shrink label films and multilayer films. Copolyester use in these markets is relatively mature with the exception of shrink label films. Competitive materials in these markets are typically PET, PVC and polystyrene. Eastman’s primary brands for these markets are Eastar™ and Embrace™ copolyesters.
	In the display market, Spectar™ copolyester is marketed primarily for point of purchase displays including indoor sign and store fixtures. Eastar™ copolyester is marketed into the graphics market. Copolyester use in these markets is expected to grow above market rates. Competitive materials in these markets are typically PET, PVC, polymethylmethacrylate (“PMMA”), and PC.

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	The building and construction market is a new focus for specialty film and sheet beginning with Kelvx™ resin for the sign market. The Company plans to seek a number of new opportunities within this market. The use of copolyester in these markets is expected to grow significantly above market rates. Competitive materials in these markets are typically PMMA and PC.

4

Packaging, Film and Fiber

	Packaging, film and fiber products, which represented approximately 25% of the SP segment’s 2002 revenue, include a range of specialty polymer products for markets such as photographic, optical film, biodegradable food service packaging and industrial film, nonwovens and tapes/labels. Customers are typically manufacturers of film and fiber products, employing a range of processing technologies, including film and sheet melt extrusion, thermoforming, solvent casting, fiber extrusion and extrusion coating. These films and fibers products are further converted to produce value-added products, such as photographic film, adhesive tape, or nonwoven articles, which are sold as branded items. Products include cellulose esters, copolyesters, specialty polyesters and concentrates/additives. Packaging, film and fiber sales consist of 75% photographic and optical film, 15% tapes and labels, 10% biodegradable, packaging, industrial film and nonwovens. Currently, North America comprises 85% of sales revenue for packaging, film and fiber. Competition is primarily from other producers of copolyesters.
	The Company expects to expand the current customer base for packaging, film and fiber products to penetrate other regions with existing products and to develop new products targeted at the optical films and biodegradable packaging and film markets.

•

Growth Strategy

The SP segment is focused on innovation and marketing and, within the past three years, has commercialized over 15 new products. Eastman Division believes that the continued differentiation of its current offerings and introduction of new products will provide access to previously underserved markets, such as its introduction of polymers with higher heat resistance and products designed to be environmentally friendly. Additionally, the SP segment develops product enhancements in order to respond to specific market needs, and expects this to result in increased market penetration for existing products. The SP model of innovation leverages a unique and growing portfolio of cellulosics and specialty copolyesters, such as Embrace™ for shrink film, Provista™ for retail displays, Durastar™ for cosmetic and household applications, and Kelvx™ resin for higher temperature sheet applications. This product portfolio is focused on substitution for other materials, such as PC, acrylic, or PVC, in applications that require clarity, toughness and chemical resistance.

The Company expects to continue to pursue profitable alliances with strategic customers to engage in branding in order to increase name recognition, to offer one of the industry’s widest varieties of products and to maintain its focus on high-growth markets, all with the intent of maximizing the return from its recognized brand position in its SP products.

•

Customers and Markets

The SP segment produces highly-specialized copolyesters, cellulosic plastics and compounded polyethylene plastics that possess performance properties for value-added end uses such as appliances, in-store fixtures and displays, building and construction, electronics and electronic packaging, medical packaging, personal care and cosmetics, performance films, tapes and labels, biodegradeables, cups and lids, fiber and strapping, photographic and optical, graphic arts and general packaging. The customer base in the SP segment is broad and diverse, consisting of over 900 companies worldwide in a variety of industries. Approximately 80% of the SP segment’s 2002 revenue was attributable to approximately 75 customers. Particularly in the SP segment, Eastman Division seeks to develop mutually beneficial relationships with its customers throughout various stages of product life cycles. By doing so, Eastman Division is better able to understand its customers’ needs as those customers develop new products, and more effectively bring new solutions to market. Additionally, Eastman Division builds additional brand loyalty, lengthening the time before its products compete based entirely on price.

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Competition

Competition for Eastman Division’s products in the SP segment varies as a function of where the products are in their life cycle. For example, the SP segment’s products in the introduction phase of the life cycle compete mainly on the basis of performance. As products begin to advance in the life cycle, and substitute products come into existence, the basis of competition begins to shift, taking into account factors such as price, customer service and brand loyalty. At maturity, where one or more competitors may have equivalent products in the market, competition is based primarily on price. Many large, well-recognized manufacturers produce substitute products of different materials, some of which may offer better performance characteristics than those of the Company, and others of which may be offered at a lower price.
Eastman Division has a full array of products moving across the SP segment’s life cycle. For example, two commonly used plastics materials in the heavy gauge sheet market are acrylic and PC. In general, acrylics are lower in cost, but polycarbonates provide higher performance. Eastman’s products capture portions of both markets. Customers of the SP segment can select from products that offer improved performance over acrylics at a slightly higher cost, or products that are lower cost than polycarbonates while still possessing excellent performance properties. In this way, the SP segment is able to meet the industry need for low-cost, high performance plastics materials and maintain a significant advantage over its competitors. With regard to engineering and specialty polymers products, the Company competes in market niches requiring polymers with combinations of clarity, toughness and chemical resistance. Eastman’s primary competitors for engineering and specialty polymers are polymer companies such as Bayer AG, Dow, E. I. duPont de Nemours (“DuPont”), GE Plastics, Ticona (a business of Celanese AG) and others, including PC, acrylic and filled polyester producers in regions outside North America. Specialty film and sheet competitors include SK Chemical Industries (“SK”) and Radici Chimica Deutschland GmbH (“Radici”) for PETG. Competition for packaging, film and fiber products is primarily from other producers of copolyester such as, SK, KoSa, Gruppo Mossi & Ghisolfi (“M&G”), Nan Ya, and Wellman, Inc. (“Wellman”); producers of cellulose ester polymers such as Acetati, Acordis, and Daicel Chemical Industries, Ltd.; or producers of biodegradable polymers such as, Cargill Dow LLC, BASF, and DuPont. Intermaterial competition with other polymers such as polystyrene, polypropylene and PC is also significant in several markets and applications. Channels to market include corporate accounts, direct sales and e-commerce.
Eastman Division believes that it maintains competitive advantages over its competitors in the SP segment throughout the product life cycle. At product introduction, Eastman Division’s breadth of offerings combined with its research and development capabilities and customer service orientation enable it to quickly bring a wide variety of products to market. As products enter the growth phase of the life cycle, Eastman Division is able to continue to leverage its product breadth by receiving revenues from multiple sources, as well as retaining customers from long-term relationships. As products become price sensitive, Eastman Division can take advantage of its scale of operations and vertical integration to remain profitable as a low-cost manufacturer.
Eastman Division believes it has competitive advantages in copolyester and cellulose ester plastics. However, new competitors, such as SK in Asia and Radici in Europe, have entered the copolyester marketplace. These new competitors cannot yet produce the wide variety of specialty copolyesters offered by Eastman Division or offer the same level of technical assistance. Additionally, Eastman Division is committed to increasing the utilization of current capacity and maintaining its cost advantages obtained from its scale of operations and manufacturing experience. There can be no assurance, however, that the SP segment will be able to maintain this competitive advantage and if it is unable to do so, its results of operations could be adversely affected.

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EASTMAN DIVISION GENERAL INFORMATION

Sales, Marketing and Distribution

The Company markets Eastman Division products primarily through a global sales organization, which has a presence in the United States as well as in over 35 other countries around the world. Eastman Division has a number of broad product lines which require a sales and marketing strategy that is tailored to specific customers in order to deliver high quality products and high levels of service to all of its customers worldwide. Judgment and process knowledge are critical in determining the application of Eastman Division’s products for a particular customer. Through a highly skilled and specialized sales force that is capable of providing customized business solutions for each of its three operating segments, Eastman Division is able to establish long-term customer relationships and strives to become the preferred supplier of specialty chemicals and plastics.

Eastman Division’s products are marketed through a variety of selling channels, with the majority of sales being direct and the balance sold primarily through indirect channels such as distributors. International sales tend to be made more frequently through distributors than domestic sales. Eastman Division’s customers throughout the world have the choice of obtaining products and services through Eastman’s website, www.eastman.com, through any of the global customer service centers, or through any of Eastman’s direct sales force or independent distributors. Customers who choose to use the Company’s website can conduct a wide range of business transactions such as ordering online, accessing account and order status and obtaining product and technical data.

Eastman is an industry leader in the implementation and utilization of e-business technology for marketing products to customers and was one of the first chemical companies to offer this capability. Eastman views this as an opportunity to increase supply chain efficiency by having an enterprise resource-planning platform with connectivity to customers. These sales and marketing capabilities combine to reduce costs and provide a platform for growth opportunities for the Company by providing potential customers new methods to access Eastman’s products.

Eastman Division’s products are shipped to customers directly from Eastman’s manufacturing plants as well as from distribution centers worldwide, with the method of shipment generally determined by the customer. In order to further capitalize on its expertise and minimize its costs, the Company completed the outsourcing of all of its North American logistics needs to Cendian in 2001 and substantially all of its international logistics requirements in 2002. Cendian also provides logistics outsourcing services to other chemicals manufacturers and companies.

Intellectual Property and Trademarks

The Company considers its Eastman Division-related intellectual property portfolio to be a valuable corporate asset which it expands and vigorously protects globally through a combination of patents that expire at various times, trademarks, copyrights and trade secrets. The Company’s primary strategy regarding its Eastman Division-related intellectual property portfolio is to protect all innovations that provide its segments with a significant competitive advantage. The Company also derives significant value from its intellectual property by actively licensing and selling patents and expertise worldwide. In addition, when appropriate, the Company licenses technology from third parties that complement Eastman Division’s strategic business objectives. Neither Eastman Division’s business as a whole nor any particular segment is materially dependent upon any one particular patent, trademark, copyright, or trade secret. As a producer of a broad and diverse portfolio of chemicals and plastics, Eastman Division’s intellectual property and trademarks relate to a wide variety of products and processes. As the laws of many foreign countries do not protect intellectual property to the same extent as the laws of the United States, Eastman Division cannot assure that it will be able to adequately protect all of its intellectual property assets.

Research and Development

Eastman Division devotes significant resources to its research and development programs, which are primarily targeted towards three objectives:

•		improving existing products and processes to lower costs, improving product quality and reducing environmental impact;
•		developing new products and processes; and

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•

developing new product lines and markets through applications research.

In the last several years, research and development has developed a number of new copolyesters for specific market applications and has improved the Company’s specialty polyester manufacturing expertise. There has been a significant expansion in coatings and adhesives technologies, resulting in a number of new products in the waterborne and emulsion resins area. In addition, a new cellulose based water dispersible additive that has been commercialized provides the opportunity for more environmentally friendly automotive coatings while maintaining a smooth finish. Recently, Eastman Division has discovered and is developing Bophoz ™, a catalyst that has the potential to provide intermediates for medicinal drugs. This is a recent innovation for Eastman Division, and the Company believes it has large market potential in the pharmaceutical and other industries.

VORIDIAN DIVISION

Business and Industry Overview

The Voridian Division consists of the Polymers segment and the Fibers segment. The Polymers segment is the largest producer of PET polymers for packaging based on capacity share and the Fibers segment is one of the two largest producers of acetate tow worldwide. With eight manufacturing plants in six countries and two contract-manufacturing arrangements in Asia, Voridian is globally positioned to serve its growing markets.

PET polymers are clear, lightweight plastics used principally in packaging applications such as containers for beverages, edible oils and other foods. To a lesser extent, they are also used in films and sheet for packaging and consumer and industrial applications. Defining characteristics include high strength, light weight, durability, clarity, versatility, low cost, safety and recyclability.

In 2002, the worldwide market for PET polymers, including containers, film and sheet was over 8.9 million metric tons. Demand for PET polymers has grown briskly over the past several years, driven by its popularity as a substitute for glass in packaging and consumer applications. PET polymers have already made significant inroads in soft drink and water bottles, and producers are currently targeting markets such as hot-fill and barrier containers for beer, soups and sauces. Industry analysts report that PET polymers consumption grew worldwide from 1.0 million metric tons in 1989 to approximately 8 million in 2001, a compound annual growth rate of 17.3%. Global demand for PET polymers is expected to grow approximately 10% annually over the next several years. The strong growth in demand, coupled with ease of access to manufacturing technology, has resulted in the presence of approximately seventy suppliers in this market, up from fewer than twenty in 1995. Capacity utilization rates in Western Europe and the Americas could decline slightly in 2003 if expected additions to capacity materialize.

The Polymers segment’s polyethylene products consist of both low-density polyethylene, or LDPE, and linear low-density polyethylene, or LLDPE. According to industry analysts, demand growth in the combined LDPE and LLDPE markets in North America is expected to be 2% to 3% through 2005. Competitive advantages in this market are achieved through increased operating efficiencies and new product offerings.

The industries utilizing PET polymers and polyethylene products compete to a large extent on price and can be characterized as capital intensive. Success in these industries depends largely on attaining scale-related benefits by keeping manufacturing costs at a minimum through the use of efficient processes at high levels of capacity utilization and obtaining access to low-cost utilities, energy and raw materials.

The acetate tow market, which Voridian believes is approximately a $2 billion market annually, grew at a rate of 2.5% annually from 1998 to 2001. Voridian estimates that, for 2002, the acetate tow market grew by 1% to 2% as compared to 2001. Three trends are contributing to the current increase in demand and are expected to do so in future years:

•		a decline in the use of polypropylene tow in China and its replacement by acetate tow;
•		requirements in the European Union, Brazil and China to reduce tar deliveries in cigarettes, resulting in cigarette filter manufacturers producing longer cigarette filters; and
•		increase in production of filtered cigarettes worldwide.

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If polypropylene tow usage in China was totally replaced by acetate tow over the next five years, the world market for acetate tow could grow at a rate of approximately 2% per year. Increased filter lengths due to legislated lower tar deliveries in the European Union, Brazil and China could increase the expected growth rate to 2% to 3% per year for the next few years. After polypropylene tow is replaced in China, the expected growth rate for worldwide demand is approximately 0.5% to 1.0% per year. Included within these estimates are adjustments for the expected decrease in cigarette consumption in the United States, which is expected to be more than offset by a corresponding increase in consumption overseas.

Voridian estimates that the market for acetate yarn was approximately $300 million in 2002. The demand for acetate yarn has declined 50% since the mid-1990’s due to the impact of business casual fashions and the substitution of polyester yarn. This decrease in demand has led to associated decreases in price and profitability throughout the market. The market demand is expected to stabilize at these levels for the next 2 to 3 years.

Strategy

Voridian focuses on strategic goals that are appropriate for a company operating in a price-sensitive industry. Voridian will continue to take advantage of its global position as one of the most efficient producers of PET polymers and acetate tow, while maintaining its reputation for market-leading quality products at competitive prices. To achieve these objectives, Voridian employs operational strategies on both a division-wide and segment-by-segment basis. The key elements of the division-wide strategy include:

•

Continue to Focus on Operational Efficiency

Voridian is a global leader in market share in two of its major product markets and expects to leverage its product knowledge, experience and scale to further reduce production costs and increase output. As a highly integrated major PET polymers producer and one of only a few integrated acetate fiber producers, Voridian intends to develop further efficiencies to enhance its cost position.

•

Maintain Superior Process Technologies

Voridian is a leader in developing and implementing improved process technologies through efficient use of research and development. Voridian intends to develop increasingly efficient technologies to improve its cost position with the goal of improving operating margins.

•

Leverage Reputation for Quality and Innovation

Voridian’s product quality and innovation make it a recognized industry leader in the manufacture of PET polymers and acetate fibers products. Voridian will continue to commercialize new PET polymers products driven by customer needs and consumer preference.

•

Expand Intelligently in Response to Expected Growth in the PET Polymers Market

Voridian intends to expand its production capabilities in a capital-efficient manner. Voridian intends to focus on utilizing excess capacity at existing manufacturing sites, adding capacity by reducing bottlenecks in its current production lines to increase productivity and participating in strategic manufacturing alliances.

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POLYMERS SEGMENT

•

Overview

The Polymers segment offers the world’s largest, most global and vertically integrated PET polymers product line with a broad formula capability. Voridian is the largest producer of PET polymers for beverage bottles and sheet for thermoforming. PET polymers serve as source products for packaging for a wide variety of products including carbonated soft drinks, water, beer, personal care items and food containers that are suitable for both conventional and microwave oven use. Voridian has PET polymers manufacturing sites strategically positioned around the world, and competes primarily in North America, Latin America and Europe. Voridian manufactures polymers at facilities in Argentina, Mexico, Spain, the Netherlands and England, as well as the United States. In addition, Voridian has contract manufacturing arrangements in Asia. In 2002, the Polymers segment had revenues of $1.6 billion, which represented 28% of the Company’s total sales and 69% of Voridian’s total sales.
The Polymers segment also offers a polyethylene product line including low-density polyethylene and linear low-density polyethylene, which is manufactured using the Company’s proprietary technology. Polyethylene products are used primarily for packaging and film applications and in extrusion-coated containers such as milk and juice cartons.
The Polymers segment’s product line benefits from a global asset base, which Voridian intends to grow in a capital efficient manner including through the elimination of production bottlenecks and the use of business models such as contract manufacturing.

•

Products

The Polymers segment’s products are integral to a broad range of end markets, which provides Voridian a number of growth opportunities. The Polymers segment manufactures and supplies PET polymers and both low-density and linear low-density polyethylene.

4

PET Polymers

Voridian’s broad PET polymers product line accounted for approximately 80% of the Polymers segment’s sales revenue in 2002. PET polymers are used in beverage and food packaging and other applications such as custom-care and cosmetics packaging, health care and pharmaceutical uses, household products and industrial. Voridian’s polymers offer fast and easy processing, superb clarity, excellent colorability and color consistency, durability and strength, impact and chemical resistance and high heat stability.

4

Low-Density and Linear Low-Density Polyethylene

Voridian is a market-leading supplier of low-density polyethylene for extrusion coatings in North America and is a manufacturer of linear low-density polyethylene through utilization of Voridian’s proprietary Energx™ technology for gas-phase polyethylene production. The low-density and linear low-density polyethylene product lines accounted for approximately 20% of the Polymers segment’s sales revenue in 2002.

•

Growth Strategy

4

Increase Capacity to Meet Market Demand in a Capital Efficient Manner

Voridian intends to capitalize on PET polymers industry growth with timely and efficient capacity additions resulting from debottlenecking production processes, asset expansions, contract-manufacturing arrangements, and manufacturing alliances. For example in 2002, the Company entered into a bi-lateral strategic purchasing agreement with Wellman that provides an increase of Voridian’s PET polymers capacity of approximately 130 million pounds on an annual basis with minimal additional capital investment.

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4

Maintain Leadership in Innovation Through Research and Development

Voridian expects to continue to make efficient research and development expenditures in the Polymers segment in order to provide customers with incremental improvements in existing products and innovative new products. For example, Voridian has introduced sixteen new products since the beginning of 2000 including two Eastapak™ polymer formulas for the water market, two Elegante™ polymer formulas for the personal care/cosmetics market, AmberGuard™ polymer for the beer market, Heatwave™ polymer for hot-fill beverage applications that require ultra-violet (UV) protection and VersaTray™ polymer for food packaging and cooking, suitable for both conventional and microwave oven use.

4

Maintain and Expand Technology Licensing

	The Company believes that the licensing of certain of its Polymers technologies, such as its purified terephthalic acid EPTA™ and Energx™ technologies, provides significant revenue opportunities and intends to seek additional licensing opportunities.

•

Customers and Markets

The Polymers segment has a diverse customer base consisting of more than 150 companies worldwide. The largest 75 customers within the Polymers segment accounted for 80% of the segment’s total sales revenue in 2002. These customers are primarily PET polymer container suppliers whose business is in the large volume beverage segments such as carbonated soft drinks, water and juice, with strong participation in custom areas such as food, liquor, sport and fruit beverages, health and beauty aids and household products.

PET polymers supply has significantly exceeded demand since 1997 as a result of excess capacity being introduced into the market. While the demand for PET polymers has steadily increased since then, some excess capacity still remains. As a result of this imbalance, the Polymers segment may continue to be unable to maintain sales volume at desired price levels.

•

Competition

Within the PET resin industry, competition varies by region. There are a substantial number of regional competitors worldwide, with no PET polymers competitors having any dominant role or any significant competitive advantage over Voridian. These competitors, such as KoSa, M&G and Wellman do not have Voridian’s level of integration or global operations. Competition is primarily on the basis of price, as well as product performance and quality, service and reliability. Industry pricing, in turn, is strongly affected by industry capacity utilization and raw material costs. For this reason, the Company believes that the combination of its size and scale of operations enables Voridian to be a low-cost PET polymers producer, providing a significant advantage.

In the marketing of PET resin, the Company believes it maintains a distinct competitive advantage due to its breadth of product line and formula capability. Voridian is considered to be a technology leader in PET polymers and strives to remain at the forefront of new product development.

Voridian is a niche polyethylene producer due to its size and ability to target specific markets. In the low-density polyethylene product line, Voridian is a significant producer of materials used in extrusion coatings applications and is one of only two North American producers of acrylate copolymers. In the linear low-density polyethylene market, Voridian employs its proprietary Energx™ technology, which offers ease of processability, to compete in higher strength film markets. Some polyethylene producers are substantially larger than Voridian, and have greater market presence and resources devoted to polyethylene than Voridian. This may allow them, or other competitors, to price competing products at lower levels, or devote substantial resources to product development, that Voridian is unable or unwilling to match, which may substantially impair Voridian’s polyethylene revenues.

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FIBERS SEGMENT

•

Overview

The Fibers segment manufactures Estron™ acetate tow and Estrobond™ triacetin plasticizers, which are used primarily in cigarette filters; Estron™ and Chromspun™ acetate yarns for use in apparel, home furnishings and industrial fabrics; and acetate flake and acetyl raw materials for other acetate fiber producers. Voridian is one of the world’s two largest suppliers of acetate tow and has been a market leader in the manufacture and sale of acetate tow since it began producing the product in the early 1950’s. Voridian is also one of the three largest producers of acetate yarn worldwide. In 2002, the Fibers segment had sales revenue of approximately $714 million, which represented 12% of the Company’s total sales and 31% of Voridian’s total sales.
Voridian’s long history and experience in the fibers markets are reflected in its operating expertise, both within the Company and in support of its customers’ processes. Voridian’s expertise in internal operating processes allows it to achieve a consistently high level of product quality, a differentiating factor in the industry. Further, Voridian’s fully integrated facilities allow it to reduce its dependence on necessary petrochemicals from third parties. Voridian management believes that all of these factors combine to make it a leader in performance and cost position.
Voridian’s high-quality products, technical expertise and superior customer service in the Fibers segment are its key competitive strengths. Voridian’s industry knowledge and knowledge of its Fibers segment customers’ processes allow it to assist its customers in maximizing their processing efficiencies, promoting repeat sales and mutually beneficial, long-term customer relationships. Voridian’s scale, strong customer base, long-standing customer relationships and expert technical service contribute to its market-leading position. Voridian’s goal is to build on these strengths to improve its strategic position.

•

Products

Voridian’s main products in the Fibers segment are acetate tow, acetate yarn and acetate flake.

4

Acetate Tow

	Voridian is one of the two largest producers of acetate tow worldwide. Voridian manufactures acetate tow to customer specifications which are used to produce various filtration patterns for cigarettes. In addition, Voridian manufactures triacetin plasticizers for use by cigarette manufacturers as a bonding agent in these filters.

4

Acetate Yarn

Voridian is one of the three largest producers of acetate yarn worldwide. Voridian is a market leader offering over 300 types of acetate yarn. Chromspun™ and Estron™ acetate yarns are used in apparel, home furnishings and industrial applications. Voridian acetate yarn products have characteristics that allow for highly efficient mill processability. From an end user’s perspective, fabrics of Estron™ and Chromspun™ have a silky feel, drape, breathability and comfort. Further, fabrics of Voridian acetate yarns have good shrinkage-resistant and mildew-resistant characteristics. Chromspun™ acetate yarn is available in more than 70 colors.

4

Acetate Flake and Acetyl Raw Materials

	Voridian produces acetate flake as part of its highly integrated production chain and sells flake to other acetate fiber producers. Acetyl raw materials are acetylation-grade acetic acid and acetic anhydride for fiber production purposes.

•

Growth Strategy

Voridian’s growth strategy in the Fibers segment is as follows:

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4

Position for Growth

	In the Fibers segment, Voridian intends to focus competitively on high quality products, excellent customer service and operational efficiencies to take advantage of global market growth.

4

Continue to Capitalize on Operating Expertise

	The Fibers segment emphasizes incremental product and process improvements to continue to meet customers’ evolving needs and to maximize efficiencies in the supply chain through collaborative planning. The Fibers segment intends to further focus on refining its processes to lower manufacturing costs and provide additional product quality and operations improvements.

4

Maintain Cost-Effective Operations

The Fibers segment expects to continue to operate in a cost effective manner, capitalizing on its scale and vertical integration, and intends to make further productivity and efficiency improvements through continued investments in research and development. The Company plans to reinvest in the Fibers business to continue to improve product performance and productivity in order to generate consistently strong cash flows.

•

Customers and Markets

The customer base in the Fibers segment is relatively concentrated, consisting of about 150 companies, primarily those involved in the production of cigarettes and in the textiles industry. The largest 20 customers within the Fibers segment, multinational as well as regional cigarette producers and textile industry fabric manufacturers, accounted for greater than 80% of the segment’s total sales revenue in 2002.

Voridian is well known for its expert technical service. Voridian periodically reviews customers’ processes and provides process training to some of its customers’ employees to assist them in the efficient use of Voridian’s products. Voridian also engages in collaborative planning with its customers to maximize supply chain management. These customer-focused efforts, combined with Voridian’s long history and product quality reputation, have resulted in many long-term customer relationships, a key competitive advantage.

•

Competition

Competition in the fibers industry is based primarily on product quality, technical and customer service, reliability, long-term customer relationships and price. To be successful, Voridian is required to minimize costs and maximize production efficiency. Competitors in the fibers market include one global supplier, Celanese AG, in both the acetate tow and yarn markets, and several regional competitors in each market. The supply and demand balance at a given time affects pricing in the market. Currently, the acetate yarn market has an excess supply of products due to manufacturing capacity remaining high while demand declined, resulting in lower prices. Voridian management believes it is well positioned to respond to competitive price pressures due to its scale of operations and level of integration.

In the acetate tow market, Celanese AG has capacity in China and is considering additional capacity through joint ventures with the government-owned China National Tobacco Corporation. Increased local production in China may diminish Voridian’s access to this market.

Within the acetate yarn market, product quality, technical service and global distribution are key competitive factors. Particularly with respect to textile customers, a majority of the customer base and production capacity has moved to regions where Voridian does not have manufacturing sites. This shift in the worldwide customer base requires Voridian to capitalize upon its global product distribution capability and product quality.

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VORIDIAN DIVISION GENERAL INFORMATION

Sales, Marketing and Distribution

Voridian primarily markets its products through direct sales channels; however, it employs contract representatives and resellers where beneficial. As part of its commitment to customer and technical service which leads to increased repeat sales, Voridian periodically provides audits of customers’ processes, as well as process training to some of its customers’ employees. Voridian is committed to maintaining its high level of customer service by remaining current with customer needs, market trends and performance requirements.

Through the use of e-business platforms that improve connectivity and reduce costs, Voridian offers its customers an internet option, www.voridian.com, for placing and tracking orders, generating reports and bidding at online auctions. Voridian also provides integrated direct capabilities to customers, allowing enhanced collaborative planning to improve supply chain efficiencies.

Intellectual Property and Trademarks

The Company believes that significant advantages can be obtained through the continued focus on branding its products and, for this reason, protects its Voridian Division-related intellectual property through a combination of patents that expire at various times, trademarks and licenses. The Company expects to expand its portfolio of technologies licensed to other companies in the future. To date, the Company has selectively licensed a fairly extensive portfolio of patented Voridian polyester, intermediates, and polyethylene technologies. The Company has formed an alliance to license PTA technology, trademarked EPTA, to SK, a PET and EPTA producer headquartered in South Korea and to Lurgi Oel Gas Chemie, an EPC firm headquartered in Germany. Energx™ polyethylene technology has been licensed to Hanwha Chemical, headquartered in South Korea, and BP Amoco ("BP"), headquartered in the United Kingdom. BP is also licensed to market and sub-license the technology to other gas-phase LLDPE producers. Additionally, the Company has formed an alliance with W.R. Grace/Davison Catalysts to further exploit Energx™ globally. Voridian Division’s intellectual property portfolio is an important asset. However, neither its business as a whole nor any particular segment is materially dependent upon any one particular patent, trademark, copyright, or trade secret. As the laws of many foreign countries do not protect intellectual property to the same extent as the laws of the United States, Voridian Division cannot assure that it will be able to adequately protect all of its intellectual property assets.

Research and Development

Voridian directs its research and development programs for the Polymers segment toward five key objectives:

•		developing new products and services in PET polymers through applications research and customer feedback;
•		developing new products and processes that are compatible with Voridian’s commitment to producing more environmentally friendly products;
•		lowering manufacturing costs through new process improvement efforts;
•		enhancing product quality by improvement in manufacturing technology and processes; and
•		marketing, licensing and delivering PET, EPTA™ and polyethylene product and production technologies.

Voridian’s research and development efforts in the Polymers segment have resulted in new products that have met with wide acceptance in the marketplace. In the PET polymers business, Voridian has introduced sixteen new products since the beginning of 2000 including two Eastapak Aqua™ polymer formulas for the water market, two Elegante™ polymer formulas for the personal care/cosmetics market, AmberGuard™ polymer for the beer market, Heatwave™ polymer for hot-fill beverage applications that require ultra-violet (UV) protection, VersaTray™ polymer for food packaging and cooking, suitable for both conventional and microwave oven use, and new enhanced reheat resins for the European and Asian markets. In the polyethylene business, Voridian has commercialized a group of new, higher-value polyethylene products with increased tear strength and impact performance such as Mxsten™ and Voridian Hifor™.

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Research and development efforts for the Fibers segment are primarily focused on incremental process and product improvements, as well as cost reduction, with the goal of increasing sales and reducing costs. Achievements have included fiber product advancements that allow improved processability on customers’ equipment and improved packaging design.

EASTMAN CHEMICAL COMPANY GENERAL INFORMATION

Sources and Availability of Raw Materials and Energy

Eastman purchases a substantial portion, approximately 70%, of its key raw materials and energy through long-term contracts, generally of three to five years initial duration with renewal or cancellation options for each party. Most of those agreements do not require the Company to purchase materials or energy if its operations are reduced or idle. The cost of raw materials and energy is generally based on market price at the time of purchase, although derivative financial instruments, valued at quoted market prices, have been utilized to mitigate the impact of short-term market price fluctuations. Key raw materials and purchased energy include paraxylene, ethylene glycol, PTA, propane and ethane, cellulose, methanol, coal, natural gas, electricity, and a wide variety of precursors for specialty organic chemicals. The Company has multiple suppliers for most key raw materials and energy and uses quality management principles, such as the establishment of long-term relationships with suppliers and on-going performance assessment and benchmarking, as part of the supplier selection process. When appropriate, the Company purchases raw materials from a single source supplier to maximize quality and cost improvements, and has developed contingency plans that would minimize the impact of any supply disruptions from single source suppliers.

While temporary shortages of raw materials and energy may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuous availability and price are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic or world market and political conditions, changes in government regulation, war or other outbreak of hostilities. Eastman’s operations or products may, at times, be adversely affected by these factors. The Company’s total cost of raw materials as a percent of total cost of operations was approximately 50% in 2002.

Capital Expenditures

The completion of several significant capital investment projects in the late 1990’s and Eastman’s strategy of growth through strategic acquisitions resulted in reduced capital expenditures in recent years. Capital expenditures were $427 million, $234 million and $226 million in 2002, 2001 and 2000, respectively. Capital expenditures for 2002 included $161 million related to the purchase of certain machinery and equipment previously utilized under an operating lease.

In 2003, Eastman expects that capital expenditures and other directed investments for small acquisitions and other ventures will be no more than depreciation and amortization. Efficiency of capital utilization is a key element of the Company’s strategy to improve gross margins and, where appropriate, alliances, joint ventures, acquisitions of existing businesses, and tolling arrangements are used to expand available capacity using less capital.

Employees

Eastman employs approximately 15,700 men and women worldwide. Approximately 12% of the total worldwide labor force is represented by unions, mostly outside the United States.

Customers

Eastman has an extensive customer base and, while it is not dependent on any one customer, loss of certain top customers could adversely affect the Company until such business is replaced. The top 100 customers accounted for approximately 55% of the Company’s 2002 sales revenue.

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Intellectual Property and Trademarks

While the Company’s intellectual property portfolio is an important Company asset which it expands and vigorously protects globally through a combination of patents that expire at various times, trademarks, copyrights, and trade secrets, neither its business as a whole nor any particular segment is materially dependent upon any one particular patent, trademark, copyright, or trade secret. As a producer of a broad and diverse portfolio of both specialty and commodity chemicals, plastics, and fibers, Eastman owns well over 1,000 active United States patents and more than 1,000 active foreign patents, expiring at various times over several years, and also owns over 3,000 active worldwide trademarks. The Company’s intellectual property relates to a wide variety of products and processes. As the laws of many foreign countries do not protect intellectual property to the same extent as the laws of the United States, Eastman cannot assure that it will be able to adequately protect all of its intellectual property assets.

Research and Development

For 2002, 2001 and 2000, Eastman’s research and development expense totaled $159 million, $160 million and $149 million, respectively. Research and development expenses are expected to increase in 2003, driven by Voridian’s efforts to develop operational efficiencies and as a result of the Company’s increased technology efforts associated with new business initiatives.

Seasonality

The Company typically experiences a seasonal decline in earnings in the fourth quarter. Demand in the CASPI segment is typically higher in the second and third quarters due to increased use of coatings products in the building and construction industries and weaker during the winter months and the holiday season because of seasonal construction downturns. The Polymers segment typically experiences stronger demand for PET polymers for beverage plastics during the second quarter due to higher consumption of beverages, while demand typically weakens during the third quarter. Seasonality in the SP segment is associated with certain segments of the photographic and adhesive tape market, coupled with the effect of a typical year-end inventory reduction by several customers.

Environmental

Eastman is subject to laws, regulations and legal requirements relating to the use, storage, handling, generation, transportation, emission, discharge, disposal and remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which it does business. These health, safety and environmental considerations are a priority in the Company’s planning for all existing and new products and processes. The Health, Safety, and Environmental/Public Policy Committee of Eastman’s Board of Directors reviews the Company’s policies and practices concerning health, safety and the environment and its processes for complying with related laws and regulations, and monitors related matters.

The Company’s policy is to operate its plants and facilities in a manner that protects the environment and the health and safety of its employees and the public. The Company intends to continue to make expenditures for environmental protection and improvements in a timely manner consistent with its policies and with the technology available. In some cases, applicable environmental regulations such as those adopted under the U.S. Clean Air Act and Resource Conservation and Recovery Act, and related actions of regulatory agencies, determine the timing and amount of environmental costs incurred by the Company.

The Company accrues environmental costs when it is probable that the Company has incurred a liability and the amount can be reasonably estimated. The amount accrued reflects the Company’s assumptions about remedial 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. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations and testing requirements could result in higher or lower costs.

Other matters pertaining to health, safety, and the environment are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 11 to the Company’s consolidated financial statements.

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Backlog

On January 1, 2003, Eastman’s backlog of firm sales orders was approximately $233 million compared with approximately $244 million at January 1, 2002. The Company adjusts its inventory policy to control the backlog of products depending on customers’ needs. In areas where the Company is the single source of supply, or competitive forces or customers’ needs dictate, the Company may carry additional inventory to meet customer requirements.

Available Information

The Company makes available free of charge, through the “Investors – SEC Filings” section of its Internet website (www.eastman.com), 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 Securities Exchange Act of 1934, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission (the “SEC”). Once filed with the SEC, such documents may be read and/or copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including Eastman Chemical Company, that electronically file with the SEC at http://www.sec.gov.

Financial Information About Geographic Areas

For information about revenues and long-lived assets based on geographic areas, see Note 22 to the Company’s consolidated financial statements.

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EXECUTIVE OFFICERS OF THE COMPANY

Certain information about the Company’s executive officers is provided below:

J. Brian Ferguson, age 48, is Chairman of the Board and Chief Executive Officer. Mr. Ferguson joined the Company in 1977. He was named Vice President, Industry and Federal Affairs in 1994, became Managing Director, Greater China in 1997, was named President, Eastman Chemical Asia Pacific in 1998, became President, Polymers Group in 1999, became President, Chemicals Group in 2001, and was elected to his current position in January 2002.

Allan R. Rothwell, age 55, is Executive Vice President of the Company and President of Voridian Division. Mr. Rothwell joined the Company in 1969, became Vice President and General Manager, Container Plastics Business Organization in 1994, and was appointed Vice President, Corporate Development and Strategy in 1997. He was named Senior Vice President and Chief Financial Officer in 1998, became President, Chemicals Group in 1999, became President, Polymers Group in 2001, and was appointed to his current position in January 2002.

James P. Rogers, age 51, joined Eastman in 1999 as Senior Vice President and Chief Financial Officer and effective in January 2002, was also appointed Chief Operations Officer of Eastman Division. Mr. Rogers served previously as Executive Vice President and Chief Financial Officer of GAF Materials Corporation. He also served as Executive Vice President, Finance, of International Specialty Products, Inc., which was spun off from GAF in 1997. During 2003, Mr. Rogers will become President of Eastman Division upon the expected hiring by the Company of a new Chief Financial Officer.

Betty W. DeVinney, age 58, is Senior Vice President, Human Resources, Organizational Effectiveness, and Communications and Public Affairs. Mrs. DeVinney joined Eastman in 1973. She became Manager, Employment in 1991, Manager, Community Relations in 1995, Manager, Corporate Relations in 1997, Vice President, Communications and Public Affairs in 1998, and was appointed to her current position in January 2002.

Theresa K. Lee, age 50, is Senior Vice President, General Counsel and Secretary. Ms. Lee joined Eastman as a staff attorney in 1987, served as Assistant General Counsel for the health, safety, and environmental legal staff from 1993 to 1995, and served as Assistant General Counsel for the corporate legal staff from 1995 until her appointment as Vice President, Associate General Counsel and Secretary in 1997. She became Vice President, General Counsel, and Secretary of Eastman in 2000 and was appointed to her current position in January 2002.

Roger K. Mowen, Jr., age 57, is Senior Vice President, Global Developing Businesses and Corporate Strategy. Mr. Mowen joined Eastman in 1971. He was named Vice President and General Manager, Polymer Modifiers in 1991, Superintendent of the Polymers Division in 1994, President, Carolina Operations in 1996, Vice President, Customer Demand Chain in 1998, Vice President, CustomerFirst and Chief Information Officer in 1999, Vice President, Global Customer Services Group and Chief Information Officer in 2000, and appointed Senior Vice President, Global Customer Services Group and Chief Information Officer in 2001. He was appointed to his current position in March 2003.

Gregory O. Nelson, age 51, is Senior Vice President and Chief Technology Officer. Dr. Nelson joined Eastman in 1982 as a research chemist. He has held a number of positions in the research and development organization, and became Director, Polymers Research Division in 1995, was appointed Vice President, Polymers Technology in 1997, and appointed Vice President and Chief Technology Officer in 2001. He was appointed to his current position in January 2003.

Curtis E. Espeland, age 38, is Controller of the Company. Mr. Espeland joined Eastman in 1996. At Eastman, Mr. Espeland has served as Director of Internal Auditing and Director of Financial Services, Asia Pacific, was named Assistant Controller of the Company and Controller of Eastman Division in 2002, and was appointed to his current position in December 2002. Prior to joining Eastman, he was an audit and business advisory manager with Arthur Andersen LLP.

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ITEM 2. PROPERTIES

PROPERTIES

At December 31, 2002 Eastman operated 41 manufacturing sites in 17 countries. Utilization of these facilities may vary with product mix and economic, seasonal, and other business conditions, but none of the principal plants are substantially idle. The Company’s plants, including approved expansions, generally have sufficient capacity for existing needs and expected near-term growth. These plants are generally well maintained, in good operating condition, and suitable and adequate for their use. Unless otherwise indicated, all of the properties are owned. The locations and general character of the major manufacturing facilities are:

*  indicates a location that Eastman leases from a third party.

**  indicates a location that Eastman leases from a third party under a long-term ground lease.

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Eastman has a 50% interest in Primester, a joint venture that manufactures cellulose esters at its Kingsport, Tennessee plant. The production of cellulose esters is an intermediate step in the manufacture of acetate tow and other cellulose-based products. The Company also has a 50% interest in a manufacturing facility in Nanjing, People’s Republic of China. This joint venture produces Eastotac™ hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and sealants. Eastotac™ hydrocarbon resins are also used to produce hot melt adhesives for packaging applications in addition to glue sticks, tapes, labels, and other adhesive applications.

Eastman has distribution facilities at all of its plant sites. In addition, the Company owns or leases over 120 stand-alone distribution facilities in the United States and 17 other countries. Corporate headquarters are in Kingsport, Tennessee. The Company’s regional headquarters are in Miami, Florida; the Hague, the Netherlands; Singapore; and Kingsport, Tennessee. Technical service is provided to the Company’s customers from technical service centers in Kallo, Belgium; Kingsport, Tennessee; Kirkby, England; Pleasant Prairie, Wisconsin; and Singapore. Customer service centers are located in Kingsport, Tennessee; Rotterdam, the Netherlands; Miami, Florida; and Singapore.

A summary of properties, classified by type, is contained in Note 3 to the Company’s consolidated financial statements.

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ITEM 3. LEGAL PROCEEDINGS

General

From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any of such pending matters, including the sorbates litigation and the asbestos litigation described in the following paragraphs, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could negatively impact earnings in a particular future period.

Sorbates Litigation

As previously reported, on September 30, 1998, the Company entered into a voluntary plea agreement with the U.S. Department of Justice and agreed to pay an $11 million fine to resolve a charge brought against the Company for violation of Section One of the Sherman Act. Under the agreement, the Company entered a plea of guilty to one count of price-fixing for sorbates, a class of food preservatives, from January 1995 through June 1997. The plea agreement was approved by the United States District Court for the Northern District of California on October 21, 1998. The Company recognized the entire fine as a charge against earnings in the third quarter of 1998 and is paying the fine in installments over a period of five years. On October 26, 1999, the Company pleaded guilty in a Federal Court of Canada to a violation of the Competition Act of Canada and was fined $780,000 (Canadian). The plea in Canada admitted that the same conduct that was the subject of the United States guilty plea had occurred with respect to sorbates sold in Canada, and prohibited repetition of the conduct and provides for future monitoring. The Canadian fine has been paid and was recognized as a charge against earnings in the fourth quarter of 1999.

Following the September 30, 1998 plea agreement, the Company, along with other defendants, was sued in federal, state and Canadian courts in a number of putative class action lawsuits filed on behalf of purchasers of sorbates and products containing sorbates, claiming those purchasers paid more for sorbates and for products containing sorbates than they would have paid in the absence of the defendants’ price-fixing. All but three of these more than twenty lawsuits have been resolved via settlement. No class has been certified in any of the three unresolved private cases, and the trial court in one of them decided in October 2002 that the case would not proceed as a class action, though that decision has been appealed by the plaintiff. One of the other two remaining cases is dormant and the third was filed on February 7, 2003.

In addition, several states have recently sued the Company and other defendants in connection with the sorbates matter, seeking unspecified damages, restitution and civil penalties on behalf of consumers of sorbates in those respective states. Several other states have advised the Company that they intend to bring similar actions against the Company and others.

The Company has recognized charges to earnings in each of the past four years for estimated and actual costs, including legal fees and expenses, related to the sorbates fine and litigation. While the Company intends to continue to vigorously defend the remaining sorbates actions unless they can be settled on acceptable terms, the ultimate outcome of the matters still pending and of additional claims that could be made is not expected to have a material impact on the Company’s financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to monetary damages, costs or expenses and charges against earnings in particular periods.

Asbestos Litigation

Over the years, Eastman was named as a defendant, along with numerous other defendants, in lawsuits in various state courts in which plaintiffs alleged injury due to exposure to asbestos at Eastman’s manufacturing sites and sought unspecified monetary damages and other relief. Historically, these cases were dismissed or settled without a material effect on Eastman’s results of operations or financial condition.

The Company has recently experienced an increase in the number of asbestos claims against it. Currently, there are approximately 7,000 claims asserted against the Company in about 17 cases that also involve hundreds of other defendants. By far, the majority of these claims are in Mississippi, with smaller numbers in Texas and Illinois. In the recently filed cases in Mississippi, plaintiffs allege exposure to asbestos-containing products allegedly made by Eastman. Based on its investigation to date, the Company has information that it manufactured limited amounts of an asbestos-containing plastic product between the mid-1960’s and the early 1970’s. The Company’s investigation has found no evidence that any of the Mississippi plaintiffs worked with or around any such product alleged to have been manufactured by the Company. The Company intends to defend vigorously all of these actions or to settle them on acceptable terms.

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The Company continues to evaluate the allegations and claims made in recent asbestos-related lawsuits and its insurance coverages. Based on such evaluation to date, the Company continues to believe that the ultimate resolution of asbestos cases will not have a material impact on the Company’s financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to monetary damages, costs or expenses and charges against earnings in particular periods. To date, costs incurred by the Company related to the recent asbestos-related lawsuits have not been material, and in the case of the Mississippi claims have been limited to legal fees and expenses.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company’s stockholders during the fourth quarter of 2002.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company’s common stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol EMN. The following table presents the high and low closing sales prices of the common stock on the NYSE and the cash dividends per share declared by the Company’s Board of Directors for each quarterly period of 2001 and 2002.

As of December 31, 2002, there were 77,346,296 shares of the Company’s common stock issued and outstanding, which shares were held by 39,066 stockholders of record. These shares include 144,825 shares held by the Company’s charitable foundation. The Company has declared a cash dividend of $0.44 per share during the first quarter of 2003. Quarterly dividends on common stock, if declared by the Company’s Board of Directors, are usually paid on or about the first business day of the month following the end of each quarter. The payment of dividends is a business decision to be made by the Board of Directors from time to time based on the Company’s earnings, financial position and prospects, and such other considerations as the Board considers relevant. Accordingly, while management currently expects that the Company will continue to pay the quarterly cash dividend, its dividend policy may change at any time.

For information concerning issuance of shares and option grants in 2002 under compensation and benefit plans and shares held by the Company’s charitable foundation, see Notes 13 and 14 to the Company’s consolidated financial statements.

Information require by Item 201(d) of Regulation S-K is set forth under Part III — Item 12 — “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and is incorporated herein by reference.

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ITEM 6. SELECTED FINANCIAL DATA

In 2002 the Company adopted the non-amortization provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142. As a result of the adoption of SFAS No. 142, results for the year 2002 do not include certain amounts of amortization of goodwill and indefinite-lived intangible assets that are included in prior years’ financial results. See Note 4 to the Company’s consolidated financial statements for additional information.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the consolidated financial statements for Eastman Chemical Company (“Eastman” or the “Company”), which have been prepared in accordance with accounting principles generally accepted in the United States of America, and should be read in conjunction with the Company’s consolidated financial statements included elsewhere in this Annual Report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.

CRITICAL ACCOUNTING POLICIES

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, the Company’s management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to customer programs and incentives, doubtful accounts, inventory valuation, impaired assets, restructuring of operations, environmental costs, pensions and other postemployment benefits, goodwill and intangible assets, and litigation and contingencies. The Company bases its estimates on historical experience 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’s management believes the critical accounting policies described below are the most important to the fair presentation of the Company’s financial condition and results. The policies require management’s more significant judgments and estimates in the preparation of the Company’s consolidated financial statements.

Customer Programs and Incentives

The Company records estimated obligations for customer programs and incentive offerings, which consist primarily of revenue or volume-based amounts that a customer must achieve over a specified period of time, as a reduction of revenue to each underlying revenue transaction as the customer progresses toward reaching goals specified in incentive agreements. These estimates are based on a combination of forecast of customer sales and actual sales volumes and revenues against established goals, the customer’s current level of purchases, and Eastman’s knowledge of customer purchasing habits and industry pricing practice. The incentive payment rate may be variable, based upon the customer reaching higher sales volume or revenue levels over a specified period of time in order to receive an agreed upon incentive payment. The Company’s reserve for customer programs and incentives was $50 million, $44 million, and $49 million at December 31, 2002, 2001, and 2000, respectively, and was recorded as a reduction of trade receivables. If market conditions change, the Company may take actions to adjust customer incentive offerings to maintain market share and capacity utilization.

Allowances for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management continuously assesses the financial condition of the Company’s customers and the markets in which these customers participate and adjusts credit limits or the allowance for doubtful accounts based on this periodic review. Actual losses for uncollectible accounts have historically been consistent with the Company’s estimates. However, deteriorating financial conditions of certain key customers or a significant continued slow down in the economy could have a material negative impact on the Company’s ability to collect on accounts, in which case additional allowances may be required. The Company’s allowance for doubtful accounts was $32 million, $35 million, and $16 million at December 31, 2002, 2001, and 2000, respectively. Further information is provided in Schedule II, “Valuation and Qualifying Accounts.”

In response to economic developments in Argentina in late 2001, management established a reserve for credit risks related to devaluation of the peso. At December 31, 2001, the reserve was established at $18 million and at December 31, 2002, $3 million remained in the reserve. Management believes the reserve balance at December 31, 2002 adequately reflects the Company’s potential losses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Inventory Reserves

Inventories are valued at the lower of cost or market. The Company determines the cost of most raw materials, work in process, and finished goods inventories in the United States of America by the last-in, first-out (“LIFO”) method. At December 31, 2002, 2001, and 2000 the Company had $273 million, $288 million, and $275 million, respectively, recorded in the LIFO reserve. The cost of all other inventories, including inventories outside the United States of America, is determined by the average cost method, which approximates the first-in, first-out method. The Company regularly compares inventory quantities on hand against anticipated future requirements to identify and evaluate inventory items for obsolescence and excessive quantities. Several factors, such as decisions to exit product lines, technological changes, changes in customer requirements, and new product development, could result in a change in the amount of obsolete or excess inventory quantities on hand. Additionally, estimates of future product demand may prove to be inaccurate, in which case excess and obsolete inventory provisions may be understated or overstated. The Company writes down its inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company’s reserve for excess and obsolete inventories was $5 million at December 31, 2002, and $2 million at December 31, 2001 and 2000.

Impaired Assets

The Company evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets, when events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such asset are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the projected cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for disposal costs. As the Company’s assumptions related to assets to be held and used are subject to change, additional write-downs may be required in the future. If estimates of fair value less costs to sell are revised, the carrying amount of the related asset is adjusted, resulting in recognition of a charge or benefit to earnings.

Restructuring of Operations

The Company records restructuring charges incurred in connection with consolidation or relocation of operations, exited business lines, or shutdowns of specific sites. These restructuring charges, which reflect management’s commitment to a termination or exit plan that generally will begin and will be substantially completed within 12 months, are based on estimates of the expected costs associated with site closure, legal and environmental matters, demolition, contract terminations, or other costs directly related to the restructuring. If the actual cost incurred exceeds the estimated cost, an additional charge to earnings will result. If the actual cost is less than the estimated cost, a credit to earnings will be recognized. At December 31, 2002, 2001, and 2000, the Company’s reserve for restructuring of operations, including severance and site closure costs, was $9 million, $23 million, and $10 million, respectively. For additional information see Note 15 to the Company’s consolidated financial statements.

Environmental Costs

The Company accrues environmental costs when it is probable that the Company has incurred a liability and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. 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. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental contingencies ranged from the minimum or best estimate of $97 million to the maximum of $111 million at December 31, 2002. The Company’s reserve for environmental contingencies was $60 million, $54 million, and $49 million at December 31, 2002, 2001, and 2000, respectively, representing the minimum or best estimate for remediation costs and, for closure/postclosure, costs accrued to date over the facilities’ estimated useful lives. For additional information see Note 11 to the Company’s consolidated financial statements and Schedule II, “Valuation and Qualifying Accounts.”

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Pension and Other Postemployment Benefits

The Company maintains defined benefit plans that provide eligible employees with retirement benefits. Additionally, Eastman provides life insurance and health care benefits for eligible retirees and health care benefits for retirees’ eligible survivors. The costs and obligations related to these benefits reflect the Company’s assumptions related to general economic conditions (particularly interest rates), expected return on plan assets, rate of compensation increase for employees and health care cost trends. At December 31, 2002, the Company assumed a discount rate of 6.75%; an expected return on assets of 9.0%; a rate of compensation increase of 4.0%; and an initial health care cost trend of 10%. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover and plan participation. If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease. For example, a 1% increase in health care cost trend would increase the 2002 service and interest costs by $3 million, and the 2002 benefit obligation by $40 million. A 1% decrease in health care cost trend would decrease the 2002 service and interest costs by $3 million, and the 2002 benefit obligation by $34 million. For additional information see Note 9 to the Company’s consolidated financial statements.

Goodwill and Other Intangibles

Prior to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the Company amortized certain intangible assets on a straight-line basis over the estimated useful lives of such assets. The Company adopted the provisions of SFAS No. 142, effective January 1, 2002. Under the provisions of SFAS No. 142, the Company performs the annual review for impairment at the reporting unit level, which Eastman has determined to be one level below its operating segment level and considers the criteria set forth in SFAS No. 142 in aggregating the reporting units. The tests are performed by determining the fair values of the reporting units using a discounted cash flow model and comparing those fair values to the carrying values of the reporting units, including goodwill. If the fair value of a reporting unit is less than its carrying value, the Company then allocates the fair value of the reporting unit to all the assets and liabilities of that reporting unit, including any unrecognized intangible assets, as if the reporting unit’s fair value was the price to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to such excess. Events or changes in circumstances could occur that may create underperformance relative to projected future cash flows which could create future impairments. At December 31, 2002, 2001, and 2000, the Company recorded approximately $344 million, $339 million, and $344 million, respectively, of goodwill and $229 million, $275 million, and $277 million, respectively, of other intangibles.

Litigation and Contingent Liabilities

From time to time, the Company and its operations are parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company believes the amounts reserved are adequate for such pending matters; however, results of operations could be affected by significant litigation adverse to the Company.

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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nonrecurring Items

It is the Company’s policy to report as a “nonrecurring item” a material charge or gain that is not associated with on-going operations or that is caused by unique events not reflective of the Company’s normal business activities in the period if such items individually or in the aggregate have a material impact on a specific line item in the Consolidated Statements of Earnings (Loss) or have a material impact on results overall. The Company believes that separately reporting such charges or gains enhances transparency and comparability of results by removing distortion that would otherwise occur. Examples of such items that have been separately reported in the past under this policy include material charges or gains resulting from asset impairments and restructuring of operations, including employee terminations; litigation not related to on-going operations; discontinued businesses; and acquisition charges including those related to acquired in-process research and development. Nonrecurring items are appropriately identified in the Consolidated Statements of Earnings (Loss).

RESULTS OF OPERATIONS

SUMMARY OF CONSOLIDATED RESULTS — 2002 COMPARED WITH 2001

The Company’s results of operations as presented in the Company’s consolidated financial statements appearing in this Annual Report are described below:

Earnings (Loss)

Operating earnings for 2002 were significantly impacted by lower selling prices for all of the Company’s segments. Such selling prices decreased more than raw material costs, resulting in a reduction in gross margin in excess of $100 million. Higher sales volumes and lower unit costs resulting from increased capacity utilization had a positive impact on operating earnings for 2002.

In addition, operating earnings for 2002 were negatively impacted by:

	•		approximately $39 million due to operational disruptions at the Company’s Columbia, South Carolina and Rotterdam, the Netherlands facilities;
	•		costs pertaining to asset charges relating primarily to equipment dismantlements and other write-offs recorded in the fourth quarter 2002 totaling approximately $17 million;
	•		an unfavorable shift in product mix; and
	•		asset impairments and restructuring charges (as described more fully below and in Note 15 to the Company’s consolidated financial statements) totaling approximately $5 million.

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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating results for 2001 were negatively impacted by:

	•		asset impairments and restructuring charges and other nonrecurring operating items totaling approximately $446 million (as described more fully below and in Notes 15 and 16 to the Company’s consolidated financial statements); and
	•		the effect of amortization of goodwill and indefinite-lived intangible assets totaling approximately $20 million.

Sales revenue for 2002 declined slightly compared to 2001 primarily due to lower selling prices for all of the Company’s segments which had a negative impact on revenues of $351 million. The decline in selling prices is indicative of the Company’s inability to increase its selling prices for some of its products, as discussed below, and also of a persistently sluggish global economy, particularly for manufacturers. Increased sales volumes for all of the Company’s segments had a positive impact on sales revenue of $359 million.

Decreased selling prices had a negative impact on gross profit for 2002 of $351 million, offset approximately two-thirds by decreased raw material costs. Operational disruptions at the Company’s plants in Rotterdam, the Netherlands and Columbia, South Carolina negatively impacted gross profit by approximately $39 million. Fourth quarter 2002 asset charges relating primarily to equipment dismantlements and other write-offs totaling approximately $17 million also had a negative impact on gross profit.

The following factors affect the Company’s ability to impact margins by increasing selling prices:

	•		the worldwide supply/demand balance of products and services sold by the Company;
	•		the relative cost positions of the Company’s competitors;
	•		the power of the Company’s customers to resist rising selling prices; and
	•		whether or not the Company’s products and services are different or unique compared to products offered by its competitors.

The Company expects that higher raw material costs and a sluggish global economy in 2003 will negatively impact operating results unless the Company is able to offset this impact in part through price increases for certain of its products and through various cost control measures. In addition, the Company has begun taking the following actions to improve its near-term and long-term profitability:

	•		immediate corporate actions to reduce costs in the areas of labor, travel, contractors, fees and out-of-pocket purchases of all kinds;
	•		implementation of organizational changes to improve efficiency and better enable strategy execution; and
	•		review of the Company’s portfolio of products and businesses, primarily in the Eastman Division; the Company expects that some of its product lines or businesses may be removed from its portfolio to improve profitability.

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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Selling and general administrative expenses for 2002 were flat compared to 2001 even though costs related to the Company’s growth initiatives increased from $35 million in 2001 to approximately $50 million in 2002. This increase was offset by cost control efforts. For 2003, the Company expects to recognize increased selling and general administrative expenses related to Cendian Corporation (“Cendian”), the Company’s logistics subsidiary, as it adds capacity while continuing to add new customers and revenues. Research and development expenses for 2002 were flat compared to 2001. While the Company expects research and development expenses to increase in 2003, the combined costs related to selling and general administrative expenses and research and development expenses are expected to continue to be at or below 11% of sales revenue.

Asset Impairments and Restructuring Charges, Net

In 2002 and 2001, the Company recorded charges related to the write-down of underperforming polyethylene assets totaling approximately $1 million and $103 million, respectively. Also in 2001, the Company recorded a charge of $108 million for the write-off of a prepaid asset related to the termination of a raw material supply agreement. These charges were reflected in the Polymers segment.

Consolidation and restructuring of the operations of the Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”) segment resulted in restructuring charges, including related asset write-downs, of approximately $5 million in 2002 and $77 million in 2001. In the fourth quarter 2002, the Company recognized restructuring charges of approximately $4 million related to closure of plants in Duesseldorf, Germany; Rexdale, Canada; and LaVergne, Tennessee; and additionally recognized an asset impairment charge of approximately $2 million related to certain other European assets. A change in estimate for shutdown reserves for Philadelphia, Pennsylvania and Portland, Oregon resulted in a $1 million credit to earnings in the third quarter 2002.

In the fourth quarter 2002, a change in estimate related to the sale of operating assets resulted in a $2 million credit to earnings in the Performance Chemicals and Intermediates (“PCI”) segment. A charge of approximately $1 million related to impaired research and development assets was also recognized in the PCI segment. Both of these items were related to the Company’s fine chemicals product lines. In 2001, the Company recorded restructuring charges, including related asset write-downs, of approximately $70 million related to its restructuring of the fine chemicals product lines.

During 2001, the Company recorded asset impairment charges related to under-utilized assets including $10 million related to the discontinuation of the precolored-green PET product line in Kingsport, Tennessee; $10 million related to cessation of production at the Company’s solid-stating facility in Toronto, Ontario; $15 million related to deterioration of demand for certain specialty plastics products produced in Kingsport, Tennessee; and $3 million related to other impaired assets in Europe. Approximately $20 million of these charges were reflected in the Polymers segment, $15 million in the Specialty Plastics (“SP”) segment, and $3 million in the PCI segment.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For additional information regarding these asset impairments and restructuring charges, see Note 15 to the Company’s consolidated financial statements.

Other Nonrecurring Operating Items

Other nonrecurring operating items totaling $50 million were recognized in 2001. These items consisted of approximately $20 million in charges associated with efforts to spin-off the specialty chemicals and plastics businesses; an $18 million write-down of accounts receivable for credit risks resulting from the economic crisis in Argentina; a $7 million pension settlement charge; and a $5 million write-off of acquired in-process research and development related to the May 2001 acquisition of certain businesses from Hercules Incorporated (“Hercules Businesses”). Approximately $26 million of these items were reflected in the Polymers segment, $11 million in the CASPI segment, $7 million in the PCI segment, $4 million in the SP segment, and $2 million in the Fibers segment.

Interest Expense, Net

Lower interest expense for 2002 compared to 2001 reflected a net reduction in borrowings and decreases in market interest rates, partially offset by a higher interest rate on the Company’s April 2002 10-year bond issue versus the interest rate on commercial paper that was outstanding during the prior period.

Other (Income) Charges, Net