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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 333-49957-01

EaglePicher Holdings, Inc.

I.R.S. Employer Identification

3402 East University Drive, Phoenix, Arizona 85034

Registrant’s telephone number, including area code:

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

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

*	EAGLEPICHER HOLDINGS, INC. IS FILING THIS REPORT VOLUNTARILY IN ORDER TO COMPLY WITH THE REQUIREMENTS OF THE TERMS OF 11 3/4% SERIES B CUMULATIVE EXCHANGEABLE PREFERRED STOCK AND IS NOT REQUIRED TO FILE THIS REPORT PURSUANT TO EITHER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

          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 Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.     Yes o          No þ     (See explanatory note immediately above.)

          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.     þ

          The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was zero.

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

          1,000,000 shares of common capital stock, $0.01 par value each, were outstanding at February 12, 2004

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TABLE OF ADDITIONAL REGISTRANTS

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

      Certain of the matters discussed in this report may constitute forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these terms or other comparable words, or by discussions of strategy, plans or intentions. Statements in this report which are not historical facts are forward-looking statements. Without limiting the generality of the preceding statement, all statements in this report concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting our judgment based upon current information and involve a number of risks and uncertainties. Other factors may affect the accuracy of these forward-looking statements and our actual results may differ materially from the results anticipated in these forward-looking statements.

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PART I

Item 1.     Business

General

      We are a diversified manufacturer of advanced technology and industrial products that are used in the automotive, defense, aerospace, environmental testing, medical implant devices, pharmaceutical services, nuclear energy and food and beverage industries, in addition to other industrial arenas. Our long history of innovation in technology and engineering has helped us become a leader in certain markets in which we compete. Headquartered in Phoenix, Arizona, we have domestic operations throughout the United States and international operations in Mexico, Germany, Canada and Asia.

      Our business consists of three operating segments: the Automotive Segment, the Technologies Segment and the Filtration and Minerals Segment.

	•	Our Automotive Segment is operated under two separate divisions, the Hillsdale division and the Wolverine division. The Hillsdale division produces Noise, Vibration, Harshness (“NVH”) dampers for engine crankshafts and drivelines, yokes and flanges, transmission and engine pumps, automatic transmission filtration products, chassis corners and knuckle assemblies and other precision machined components. The Wolverine division produces rubber-coated materials and gaskets for automotive and non-automotive applications.
	•	Our Technologies Segment develops and commercializes advanced power systems for defense, aerospace and commercial applications; produces boron isotopes for nuclear radiation containment; supplies ultra-clean scientific containers for pharmaceutical and environmental testing; and provides contract pharmaceutical services.
	•	Our Filtration and Minerals Segment mines, processes and markets diatomaceous earth and perlite for use as a filtration aid, absorbent, performance additive and soil amendment.

      For the fiscal year ended November 30, 2003, we generated $685.4 million of net sales. Our Automotive Segment, Technologies Segment and Filtration and Minerals Segment generated 60%, 28%, and 12%, respectively, of our total net sales for the fiscal year ended November 30, 2003.

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      The following table sets forth the primary product groups that each of our business segments develop and manufacture, the current markets for each of these product groups and the major customers for each product group:

Business Segments

     Automotive Segment

     General

      Our Automotive Segment, consisting of the Hillsdale and Wolverine divisions, supplies the global automotive market with a diverse range of products. Together these two divisions produce systems,

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     Hillsdale Division

      The Hillsdale division provides NVH dampening solutions to the worldwide automotive market. The Hillsdale division also supplies complex machined components for engine, transmission, axle/driveline and chassis/suspension applications. The Hillsdale division has a diverse customer base with over 64% of its sales made directly to automotive vehicle manufacturers. The Hillsdale division utilizes its manufacturing facilities located throughout the United States and Mexico to produce its diverse product line. It employs complex manufacturing and quality control systems such as robotic material handling and assembly, lean manufacturing and six sigma methodologies to produce high quality and often custom automotive components and systems. The Hillsdale division is expanding the use of low cost production in Mexico and sourcing from China and Southeast Asia to remain competitive across its product lines.

      For the fiscal year ended November 30, 2003, approximately 36% of the Hillsdale division’s sales were to Japanese operators in North America and approximately 19% to General Motors for use in light truck and SUV platforms. Sales to Honda represented approximately 24% of the Hillsdale division’s net sales and approximately 12% of our consolidated net sales in fiscal year 2003. We believe the Hillsdale division is North America’s leading torsional vibration damper manufacturer. Although competitive conditions are intense in the automotive parts industry, the Hillsdale division’s primary product groups are incorporated into automotive products that typically run for four to eight years. However, these programs are not contractually guaranteed, and generally customers have the right to re-source products at any time.

     Major Products

	•	Dampers. Dampers are vibration control devices which reduce the torsional stress vibrations caused by internal combustion engine systems, thereby alleviating the stress on shafts and relaxing the flex points. Dampers reduce fatigue and prevent cracking thereby enhancing the durability of engines and their components. We believe the Hillsdale division is widely recognized as North American’s leading manufacturer of torsional vibration damper devices for use in engine and drivetrain applications, with custom rubber compounding and manufacturing capabilities.
	•	Precision Machined Components. The Hillsdale division also manufactures a wide array of precision machined metal components. These parts, made of iron, aluminum, steel and magnesium, include flanges and yokes, connecting rods, driveshaft support brackets, front engine covers and pump housings.
	•	Chassis Corners and Knuckles. Corners and knuckles are structural components of vehicle chassis and suspension systems. The Hillsdale division’s corner and knuckle products include front and rear steering knuckles and damper forks.
	•	Pumps. The Hillsdale division also designs and manufactures both fixed and variable pressure style pumps for engines and transmissions. Its products include complete pump components and complete oil pump assemblies. Although one of its major pump programs with Ford is being phased out, the Hillsdale division believes that certain market trends present new business opportunities for its pump products. We believe that increased fuel efficiency requirements for motor vehicles will drive the market towards a larger demand for variable displacement pumps. To achieve improved fuel efficiency, vehicle manufacturers are developing vehicles that idle at lower revolutions per minute (RPMs) requiring either a larger and more burdensome pump or a variable displacement pump. The Hillsdale division currently is exploring new technologies to address this market trend.

     Wolverine Division

      We believe our Wolverine division is among the world’s largest and most diversified suppliers of rubber-coated metal and gasket material, designed for superior performance under extreme conditions, for sealing,

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      The Wolverine division sells primarily to Tier 1 and Tier 2 suppliers, with nearly 85% of its fiscal year 2003 sales to the automotive end-market (OEM and OEM replacement parts). The Wolverine division has a diverse customer base with over 250 customers.

     Major Products

	•	Brake products. The Wolverine division’s brake product segment focuses on the design, manufacture and sale of shims and sound damping materials for disc brakes and replacement part markets. The Wolverine division combines substrates, elastomer coatings, attachment options and adhesive layers in different formulations to arrive at economical products to meet a wide range of application demands. The Wolverine division’s aftermarket products accounted for approximately 5% of its fiscal year 2003 brake product sales and it plans to continue to penetrate this market to mitigate the impact of vehicle production cycles.
	•	Gasket and gasket materials. The Wolverine division supplies a wide range of rubber-coated metals for sealing and sound damping and other applications in the automotive OEM and aftermarket, and industrial and consumer markets. The Wolverine division’s gaskets and gasket materials are used in many automotive applications including cylinder head and various other engine, fuel system, and transmission gaskets. The increased demand for more fuel efficient vehicles and reduced warranty expense has led to an increased demand for more sophisticated sealing applications. Aftermarket applications now account for nearly 6% of all of the Wolverine division’s gasket related sales.
	•	Compressor gaskets. The Wolverine division’s compressor gaskets focus on the design, manufacture and sale of gaskets and gasket materials for industrial and consumer product applications including small engines, industrial air compressor systems, air power tools, commercial and residential air conditioning systems and fluid pumps and pneumatic applications. The Wolverine division plans to further penetrate these higher margin applications by leveraging its reputation and market leading position as a premier supplier of gasket products and materials.

     Technologies Segment

     General

      Our Technologies Segment consists of a diverse group of businesses with a broad spectrum of technologies and capabilities and operates these businesses through the following three divisions: the Power Group, the Specialty Materials Group, and the Pharmaceutical Services Group. These divisions provide innovative advanced technology products for aerospace, defense, and commercial power, nuclear energy, environmental and pharmaceutical applications.

      The Power Group supplies batteries and power systems for aerospace, defense, medical implant and other specialty commercial applications. It has been providing the aerospace and defense industries with high quality, reliable batteries for more than 50 years. Nickel hydrogen and other types of batteries manufactured by the Power Group provide power for commercial and government satellites and spacecraft, serve as launch

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      Our batteries power a significant number of the United States’ most advanced communications and surveillance satellites. Our batteries have been on every United States manned space flight, and our silver zinc batteries provided the power for the safe return to earth of the famed Apollo 13 flight crew.

      The Power Group also manufactures a line of batteries sold commercially for use in items such as medical implants, industrial fire and burglary alarm systems, telecommunications backup systems and remote global positioning units.

      Defense and space power products. Over 90% of the Power Group’s revenue comes from military or space applications. Major customers include Raytheon, Lockheed Martin, Boeing and the United States Army.

      Commercial power products. The Power Group, through its Commercial Power division, produces batteries for commercial applications in various high growth market segments. Its commercial line of batteries include Carefree® batteries and Keeper^TM II batteries. Carefree® cells and batteries, based upon lead acid, nickel cadmium, nickel metal hydride and lithium-ion chemistries, are long-life rechargeable batteries. Common applications for these batteries include emergency lighting, fire and security systems, handheld power tools, telecommunications back-up systems and wheelchairs and scooters. Keeper^TM II cells and batteries, based upon lithium thionyl chloride, lithium manganese dioxide and lithium sulfur dioxide chemistries, are non-rechargeable batteries. Common applications include automotive toll tags, memory back-up for computer servers and radio frequency transponders. The Power Group is looking to expand its presence in the commercial market through joint ventures, licensing, and other technology development initiatives. These new market opportunities presently include high performance lead-acid batteries, medical implant medical device batteries, fast battery chargers, and long life batteries for remote applications.

      The Specialty Materials Group manufactures and markets high purity specialty material compounds for a wide range of services and products. The Specialty Materials Group supplies isotopically enriched boron and isotopically purified zinc, which are used in nuclear power plants for radioactive absorption and containment. The Specialty Materials Group also supplies ultra-clean containers for use in pharmaceutical and environmental testing.

      Boron and related products. The Specialty Materials Group uses sophisticated manufacturing processes to produce isotopically pure boron, which involves the separation of boron into its isotopes, and to produce high purity enriched boron compounds. The Specialty Materials Group maintains a strong commitment to delivering innovative products such as BondAids^TM, a ceramic concrete product based on technology licensed from the Argonne National Laboratory with radiation absorption qualities that is used in containers for radioactive and hazardous waste. This product is in the initial commercialization phase. The Specialty Materials Group also produces depleted zinc and lithium products for nuclear containment applications.

      Environmental Sciences & Technology. Our Environmental Sciences & Technology (ESAT) division is the leading resource for glassware and plasticware cleaning and treating services. This division supports the pharmaceutical/ biotech, semiconductor and environmental industries globally with off-the-shelf and customized solutions.

      The Pharmaceutical Services Group manufactures drug active ingredients for pharmaceutical companies principally in small batches for clinical trials and low volume prescription drugs. The Pharmaceutical Services Group has manufactured hundreds of new drug candidates for use in pre-clinical studies, toxicology studies, clinical trials and commercial use. The manufacturing of these drugs require specially designed facilities and operating systems to ensure safe handling and to prevent cross-contamination with other drugs. Our high level facility in Harrisonville, Missouri provides the rigorous controls necessary to develop and manufacture both

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      Our Filtration and Minerals Segment mines, processes and markets diatomaceous earth and perlite products. The primary uses of its products are as a filtration aid for removing solids and impurities, as a fine mineral additive for enhancing the performance of plastics and coatings, and as a liquid absorbent. Filtration aids are used in processing food sweeteners, beer, wine, fruit juices, chemicals, pharmaceuticals, lube oils, and in swimming pool filtration systems. Fine mineral additives are used in plastic film and architectural paints. Diatomaceous earth absorbents are used as oil, chemical and water absorbents in auto shops and industrial and chemical plants and as a soil enhancements in golf courses, sports fields and agricultural applications. The Filtration and Minerals Segment serves over 35 markets and more than 2,000 customers around the globe with its various products.

      Diatomaceous earth, or diatomite, is a natural material that is odorless, tasteless and highly stable. With its natural honeycomb structure, strength and low bulk density, diatomite is an ideal medium for filtration and absorption applications. Perlite is a mineral of volcanic origin, also with natural qualities that make it valuable as a filter aid. The Filtration and Minerals Segment sells its filter aid and additive products under the trademark CELATOM® both directly and through distributors to many customers. The Filtration and Minerals Segment also sells products known as FLOOR DRY^TM, AXIS^TM, PLAY BALL^TM, Celabrite®, Celabrew®, CelaBloc®.

Competition

      Our three business segments collectively manufacture hundreds of products for customers worldwide. The economic and competitive conditions at any given time in the markets we serve are likely to vary significantly from market to market. Our competitive position for our products varies substantially across product lines and geographies.

      Automotive Segment. Our Automotive Segment competes with other automotive parts suppliers as well as OEMs themselves. Competition in the automotive parts industry is intense on a global basis but varies along product lines. Generally, competitive conditions in the automotive parts industry are characterized by a decreasing number of competitors with increasing foreign competition, particularly from Asia, an increased emphasis on quality, and intense pricing pressures from automotive manufacturers.

      Technologies Segment. Our Technologies Segment competes in several industries and industry sub-segments. The Power Group’s battery and power products serve several industries including defense, aerospace and specialty commercial industries and competes with many different companies. The Power Group supplies batteries and power components for use in defense and aerospace applications in North America. SAFT, a subsidiary of Alcatel, is the Power Group’s leading competitor with respect to these products. The Specialty Materials Group supplies enriched boron, which is used in nuclear power plants for radioactive absorption and containment. Its enriched boron products compete primarily on the basis of cost versus natural boron, although there are a few smaller competitors in the enriched boron market. The Pharmaceutical Services Group has numerous small competitors in a highly fragmented, high margin market.

      Filtration and Minerals Segment. Our Filtration and Minerals Segment competes primarily on the basis of price in a market with relatively few competitors, one of which is significantly larger than us. The primary competitor is World Minerals Inc., a subsidiary of Alleghany Corporation.

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Corporate Structure

      We are a majority-controlled subsidiary of Granaria Holdings B.V. of The Netherlands. Our corporate headquarters is located in Phoenix, Arizona with operations in the United States, Mexico, Canada, and Germany. We were founded in 1843 as a manufacturer of paint pigments which were marketed under the brand name Eagle White Lead. In 1876, the Picher family of Joplin, Missouri formed the Picher Lead Mining Company. The two firms merged in 1916 forming the Eagle-Picher Lead Company. In 2003, we were renamed EaglePicher Holdings, Inc. to reflect our ongoing diversification into other industries.

Recent Acquisitions and Divestures

      During 2003, we sold certain assets of our Hillsdale UK Automotive operation for cash of $1.1 million and recognized an after-tax loss of approximately $4.3 million. In addition, during 2003, we sold certain assets of our Germanium-based business in our Technologies Segment for cash of approximately $15.0 million and recognized an after-tax gain of approximately $0.5 million. These divestitures were accounted for as discontinued operations. Accordingly, our financial statements have been restated to exclude their results.

      During 2002, we sold certain assets and liabilities of our Precision Products business for cash of $3.1 million and recognized a pre-tax loss of approximately $2.8 million.

      Effective December 14, 2001, we sold certain of the assets of our former Construction Equipment Division, which represented our entire former Machinery Segment. The sale price was $6.1 million in cash plus the assumption of $6.7 million of liabilities. We recognized an after tax loss of $30.4 million. This divestiture was accounted for as a discontinued operation. Accordingly, our financial statements have been restated to exclude its results.

      During 2000, we completed the sale of our Ross Aluminum Foundries, Fluid Systems, Michigan Automotive Research Corporation, Rubber Molding, and Cincinnati Industrial Machinery divisions for aggregate net proceeds of $85.0 million, and recognized a pre-tax gain of approximately $17.1 million.

      On June 30, 2000, our Technologies Segment acquired the stock of BlueStar Battery Systems Corporation for $4.9 million in cash. Immediately following the transaction the name of the corporation was changed to Eagle-Picher Energy Products Corp. (“EPEP”). EPEP manufactures batteries using lithium based technology, which is of strategic importance to the battery manufacturing operations in our Technologies Segment. Substantially all of EPEP’s products are sold to the United States Army.

      On December 1, 1999, our Technologies Segment acquired the depleted zinc distribution business of Isonics Corporation for approximately $8.2 million.

      Our Hillsdale Division acquired Carpenter Enterprises Limited as of March 1, 1999 for a purchase price of approximately $73.0 million. Carpenter is a supplier of precision machined components to the automotive industry with operations, products and a customer base complimentary to those of our Hillsdale Division.

Backlog

      Our backlog was $168.6 million at November 30, 2003, an increase of $37.5 million, or 28.6%, from $131.1 million at November 30, 2002. We expect 90% of our order backlog outstanding at November 30, 2003 to be filled during fiscal 2004.

      Within our Technologies Segment, we are a supplier of U.S. Government contracts. The U.S. Government backlog is limited to amounts obligated to contracts. Normally, the U.S. Government funds its major programs only to the dollar level appropriated annually by Congress, even though the total estimated program values are considerably greater. Accordingly, our backlog represents only that amount which has been appropriated and against which we can be reimbursed for work performed. Non-appropriated backlog at November 30, 2003, totaled $19.0 million and at November 30, 2002 was not material.

      As is customary in the automotive industry, we enter into blanket purchase orders with our customers with respect to specific product orders. From time to time, the customer, depending on their needs, will

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Raw Materials

      The prices of our raw materials are subject to volatility. Our principal raw materials consist of rubber, steel, zinc, nickel, boron, and aluminum. In addition, due to their manufacturing processes, our Filtration and Minerals Segment and our Wolverine division consume large amounts of natural gas. Generally, these raw materials are commodities that are widely available. Although we have alternate sources for these commodities, our policy is to establish arrangements with select vendors based upon price, quality and delivery terms. We also are looking to further diversify our supplier base and increase the percentage of our materials purchased in lower cost regions, such as Asia, Mexico, and Eastern Europe.

Intellectual Property

      We own or license a number of patents, primarily in the United States. Many of our products incorporate a wide variety of technological innovations, some of which are protected by individual patents. Many of these innovations are treated as trade secrets with programs in place to protect these trade secrets. No one patent or group of related patents is material to our business. We also have numerous trademarks, including the EaglePicher name.

Government Contracts

      Our Technologies Segment has contracts, directly or indirectly, with the United States government that have standard termination provisions permitting the United States government to terminate the contracts at its convenience. However, if contracts are terminated, we are entitled to be reimbursed for allowable costs and profits through the date of the contract termination. The United States government contracts are also subject to reduction or modification in the event of changes in Government requirements or budgetary constraints. During fiscal year 2003, a majority of our Technologies Segment’s sales were directly with the United States government or with other companies where the United States government was the end customer.

Research and Development

      We spent approximately $10.4 million in fiscal year 2001, $9.8 million in fiscal year 2002 and $13.2 million in fiscal year 2003 on research and development activities, primarily for the development of new products or the improvement of existing products. These amounts were offset by customer sponsored research activities of $9.3 million in fiscal year 2001, $8.8 million in fiscal year 2002 and $11.0 million in fiscal year 2003.

Employees

      As of November 30, 2003, we employed approximately 3,900 persons and as of November 30, 2002, we employed approximately 3,600 persons. At both periods, approximately 45% of our employees were represented by labor organizations. We believe that our relations with our employees are generally good.

Environmental Matters

      We are subject to extensive and evolving Federal, state, local and international environmental laws and regulations. Compliance with such laws and regulations can be costly. Governmental authorities may enforce these laws and regulations with a variety of enforcement measures, including monetary penalties and remediation requirements. We have policies and procedures in place to ensure that our operations are conducted in compliance with such laws and regulations and with a commitment to the protection of the environment.

      We are involved in various stages of investigation and remediation of soil and groundwater at approximately 15 sites as a result of past and present operations, including currently owned and formerly

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      The ultimate cost of site remediation is difficult to predict given the uncertainties regarding the extent of the required remediation, the interpretation of applicable laws and regulations and alternative remediation methods. Based on our available information and experience with environmental remediation matters, we have accrued reserves for our best estimate of remediation costs, and we do not believe that remediation activities will have a material adverse impact on our financial condition, results of operations or cash flows. In addition, in the course of our bankruptcy, we obtained an agreement with the United States Environmental Protection Agency and Department of Interior and the states of Arizona, Michigan and Oklahoma whereby we have limited responsibility to them for response costs and natural resource damages for environmental contamination of sites not owned by us that is attributable to pre-bankruptcy activities. We retain all of our defenses, legal or factual, at such sites. However, if we are found liable for such contamination at any of these sites, our liability is capped at approximately 37%.

      We incurred environmental compliances expenses of $7.9 million in 2001, $8.7 million in 2002, and $8.3 million in 2003. We expect to incur approximately $7.8 million in 2004.

      In addition, we made capital expenditures for environmental compliance and remediation of $0.3 million in 2001, $0.6 million in 2002 and $0.6 million in 2003. We expect to incur approximately $2.3 million in 2004.

      We had total remediation expenditures of $1.1 million in 2001, $1.2 million in 2002, and $3.3 million 2003, of which $1.1 million in 2001, $1.2 million in 2002 and $2.8 million in 2003 were charged to our accrued environmental reserves. As of November 30, 2002, we had $17.7 million, and as of November 30, 2003, we had $9.3 million accrued for sold divisions and businesses related to legal and environmental matters. In addition, as of November 30, 2002, we had $2.4 million, and as of November 30, 2003, we had $1.6 million accrued in other accrued liabilities related to environmental liabilities for our on-going businesses.

Financial Information about Foreign and Domestic Operations and Export Sales

      Financial information about Foreign and Domestic Operations and Export Sales is included in our financial statements (see Notes M and T of the financial statements).

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      Our principal fixed assets consist of our manufacturing, processing and storage facilities, and our transportation and plant vehicles. We have pledged substantially all of our owned properties and assets as collateral under our existing senior secured credit agreement. The following table sets forth selected information regarding our manufacturing and processing facilities:

(1)	In addition to the facilities listed, the Technologies Segment leases office space in Phoenix, Arizona.
(2)	In addition to the facilities listed, the Filtration and Minerals Segment has office space in Reno, Nevada, and mining locations in California, Nevada and Oregon.

      We own or lease additional office space, including our corporate headquarters in Phoenix, Arizona as well as our former corporate headquarters in Cincinnati, Ohio. We also have sales offices in Europe and Asia, and warehouse space for certain of our operations.

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      We believe our properties are adequate and suitable for our business and generally have capacity for expansion of existing buildings on owned real estate. Plants range in size of floor space and generally are located away from large urban centers. Substantially all of our buildings have been well maintained, and are in sound operating condition.

     Mining

      Our Filtration and Minerals Segment owns and leases diatomaceous earth and perlite mining locations as well as numerous claims in Nevada, Oregon and California. Our owned and leased mining properties, including those not currently being mined, comprise a total of approximately 12,000 acres in Storey, Lyon, Pershing and Churchill Counties in Nevada and 5,000 acres in Malhuer and Harney Counties in Oregon, as well as rights on 2,200 acres not currently being mined in Siskiyou County in California. We continually evaluate potential mining properties, and additional mining properties may be acquired in the future. The Filtration and Minerals Segment extracts diatomaceous earth and perlite through open-pit mining using a combination of bulldozers, wheel type tractor scrapers, excavators and articulated trucks. We transport extracted materials by truck to separate processing facilities. A total of approximately 263,000 tons of diatomaceous earth and perlite were extracted from the companies mining properties in Nevada and Oregon in fiscal 2003. On average, we have extracted a total of approximately 400,000 tons of diatomaceous earth and perlite from our Nevada and Oregon properties each year for the past seven years. As ore deposits are depleted, we reclaim the land in accordance with plans approved by the relevant Federal, state and local regulators.

      The following mining properties are of major significance to our mining operations.

      Nevada. Our diatomaceous earth mining operations in Nevada commenced in 1945 in Storey County and are referred to as Clark Station. We commenced perlite-mining operations in Churchill County in 1993. We extracted a total of approximately 163,000 tons of diatomaceous earth and perlite from Nevada mining properties in fiscal 2003 and, on average, have extracted a total of approximately 250,000 tons of diatomaceous earth and perlite from Nevada mining properties each year for the past seven years, or approximately 62% of our total diatomaceous earth and perlite production (and including 100% of our perlite production). Diatomaceous earth from Storey, Churchill and Lyon mining properties is processed at our Clark Station, Nevada facility. Clark Station holds approximately 4,884 acres of owned and leased property. We are mining approximately 265 acres in Storey County, where mining activities commenced 58 years ago, and approximately 62 acres in the Counties of Lyon and Churchill for diatomaceous earth. We believe our proven reserves of diatomaceous earth in the Counties of Storey, Churchill and Lyon, including mining properties not actively being mined, are approximately 3,000,000 tons based on estimates by our mining and exploration personnel. Diatomaceous earth extractions from the Pershing mining properties, which commenced more than 43 years ago, are processed at the Lovelock, Nevada facility, Colado Operations. Colado Operations, located in Pershing County, hold approximately 7,145 acres of owned and leased lands. Approximately 975 acres are actively being mined for diatomaceous earth in Pershing County. We believe our proven reserves of diatomaceous earth in Pershing County, including mining properties not actively being mined, are approximately 2,000,000 tons based on estimates prepared by our mining and exploration personnel. Access to the Nevada holdings is via public roads, highways and non-exclusive rights of way appurtenant to specific properties. Beginning in 1993, we have actively mined approximately 25 acres in Churchill County for perlite, which is processed at the Lovelock, Nevada facility. We believe our probable reserves of perlite in Churchill County, including mining properties not actively mined, are approximately 1,400,000 tons based upon estimates prepared by our mining and exploration personnel.

      Oregon. We commenced mining diatomaceous earth in Oregon in 1985 at our mining properties in Harney and Malhuer Counties called Celatom Operations. Diatomaceous earth extracted from these mines is processed at our Vale, Oregon facility. Celatom Operations hold approximately 4,978 acres of owned and leased property. We are mining approximately 88 acres in Harney County and 80 acres in Malhuer County for diatomaceous earth. We extracted approximately 100,000 tons of diatomaceous earth from the Harney County and Malhuer County mining properties during fiscal 2003 and on average, have extracted approximately 150,000 tons of diatomaceous earth each year for the past seven years from these mining properties, or

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Item 3.     Legal Proceedings

      On January 25, 1996, Richard Darrell Peoples, a former employee, filed a lawsuit in the United States District Court for the Western District of Missouri claiming that we violated the federal False Claims Act based on alleged irregularities in testing procedures in connection with certain United States Government contracts. Mr. Peoples filed this lawsuit under a procedure which gives a private individual the right to file a lawsuit for a violation of a Federal statute and be awarded up to 30% of any recovery. The government has the right to intervene and take control of such a lawsuit. Following an extensive investigation, the United States Government declined the opportunity to intervene or take control of this suit. The allegations in the lawsuit are similar to allegations made by Mr. Peoples, and investigated by our outside counsel, prior to the filing of the lawsuit. Our outside counsel’s investigation found no evidence to support any of Mr. Peoples’ allegations, except for some inconsequential expense account matters. In early 2003, the court disqualified Mr. Peoples’ lawyer from the case after he read some of our attorney-client privileged documents that Mr. Peoples took from our lawyers’ offices without authorization. In December 2003, the court dismissed this lawsuit for failure to prosecute.

      On May 8, 1997, Caradon Doors and Windows, Inc. (“Caradon”) filed a suit against us in the United States District Court for the Northern District of Georgia alleging breach of contract, negligent misrepresentation, and contributory infringement and seeking contribution and indemnification in the amount of approximately $20.0 million. This suit arose out of patent infringement litigation between Caradon and Therma-Tru Corporation extending over the 1989-1996 time period, the result of which was for Caradon to be held liable for patent infringement. In June 1997, we filed a motion with the United States Bankruptcy Court for the Southern District of Ohio, Western Division, seeking an order that Caradon’s claims had been discharged by our bankruptcy and enjoining Caradon from pursuing its lawsuit. On December 24, 1997, the Bankruptcy Court held that Caradon’s claims had been discharged and enjoined Caradon from pursuing its lawsuit. Caradon appealed the Bankruptcy Court’s decision to the United States District Court for the Southern District of Ohio, and on February 3, 1999, the District Court reversed on the grounds that the Bankruptcy Court had not done the proper factual analysis and remanded the matter back to the Bankruptcy Court. The Bankruptcy Court held a hearing on this matter on September 24 and 25, 2001, and on May 9, 2002 again held that Caradon’s claims had been discharged and enjoined Caradon from pursuing the Caradon Suit. Caradon has again appealed this decision to the District Court. We intend to contest this suit vigorously and do not believe that the resolution of this suit will have a material adverse effect on our financial condition, results of operations or cash flows.

      In March 2002, a purported class action on behalf of approximately 3,000 homeowners was filed in state court in Colorado against us and a company with a facility adjacent to our facility in Colorado Springs, Colorado seeking property damages, testing and remediation costs and punitive damages arising out of chlorinated solvents and nitrates in the groundwater alleged to arise out of activities at our facility and the adjacent facility. The case has been removed to federal court and there has been no decision whether to certify a class. In September 2002, as amended in May 2003, a trust purportedly the assignee of approximately 200 property owners filed suit against us and the same co-defendant in Colorado state court, which was subsequently removed to Federal District Court in Colorado. This lawsuit seeks unspecified damages to provide for remediation of the groundwater contamination as well as unspecified punitive damages. The owner of the adjacent facility, which is upgradient from our facility, is operating a remediation system aimed at chlorinated solvents in the groundwater originating from its facility under a compliance order on consent with the Colorado Department of Public Health and Environment (“CDPHE”). We are operating a remediation system for nitrates in the groundwater originating from our facility, also under a compliance order on consent with CDPHE. We do not believe that nitrates in groundwater materially affect any of the properties related to

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      On December 10, 2003, a purported class action on behalf of approximately 600 members of the Quapaw Tribe of Oklahoma owning or possessing lands within the Quapaw Reservation was filed in the United States District Court for the Northern District of Oklahoma against us and six other corporations. The lawsuit alleges liability for property damage resulting from historical mining activities prior to 1959. We believe that any possible liability to members of the Quapaw Tribe was discharged in connection with our bankruptcy reorganization in 1996. We intend to contest this lawsuit vigorously and do not believe that the resolution of this suit will have a material adverse effect on our financial condition, results of operations, or cash flows.

      In addition, we are involved in routine litigation, environmental proceedings and claims pending with respect to matters arising out of the normal course of our business. In our opinion, the ultimate liability resulting from all claims, individually or in the aggregate, will not materially affect our financial position, results of operations or cash flows.

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

      None.

PART II

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

      Not Applicable.

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(1)	Net sales includes $146.1 million in the year ended November 30, 1999; $56.2 million in the year ended November 30, 2000; $10.2 million in the year ended November 30, 2001; and $3.4 million in the year ended November 30, 2002 which is attributed to certain divested or sold businesses.
(2)	In 2000, we received $16.0 million from insurance companies as a result of the settlement of certain claims relating primarily to environmental remediation. In the second quarter of 2002, we recorded a provision of $3.1 million primarily related to a dispute with an insurance carrier over the coverage on a

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	fire which occurred at one of our facilities during 2001. During the third quarter of 2003, we recorded a $2.8 million gain related to the settlement of this claim. In 2003, we recorded a $5.5 million gain primarily related to the settlement of a claim with our insurance carrier over the coverage on a fire during 2002 at a non-operating facility.
(3)	Interest expense excludes $8.6 million in the year ended November 30, 1999; $8.6 million in the year ended November 30, 2000; $8.0 million in the year ended November 30, 2001; $4.3 million in the year ended November 30, 2002; and $2.3 million in the year ended November 30, 2003 which has been allocated to discontinued operations (see footnote 5).
(4)	Effective September 1, 2003, we adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which requires that certain instruments be classified as liabilities in our balance sheet. The effect of the adoption was that, as of September 1, 2003, we reclassified the current redemption value plus unpaid dividends on our preferred stock to long-term liabilities and the accrual of dividends payable for the period September 1, 2003 through November 30, 2003 has been recorded as a component of non-operating expenses in our consolidated statements of income.
(5)	In 2001, we discontinued the operations of our former Construction Equipment Division, which represented our entire former Machinery Segment. We completed this sale on December 14, 2001, effective November 30, 2001. In addition, during the second quarter of 2003, we discontinued the operations of our Hillsdale UK automotive operation. We sold our Hillsdale UK automotive operation on June 11, 2003. Finally, in the third quarter of 2003, we discontinued the operations of certain assets of our Germanium-based business in our Technologies Segment. We sold this business in July 2003.
(6)	Total debt excludes $3.8 million at November 30, 1999; $1.8 million at November 30, 2000; and $2.1 million at November 30, 2001, which has been allocated to discontinued operations (see footnote 5). In addition, total debt excludes $46.5 million at November 30, 2002, which represents amounts advanced under our unconsolidated accounts receivable asset-backed securitization.
(7)	For purposes of determining the ratio of earnings to fixed charges and preferred stock dividends, “earnings” consist of income from continuing operations before provision (benefit) for income taxes and fixed charges from continuing operations. “Fixed charges” consist of interest expense (including amortization of deferred financing costs) and approximately 30% of our rental expense, representing that portion of interest expense deemed to be representative of the interest factor. Earnings were insufficient to cover fixed charges and preferred stock dividends by $22.5 million in the year ended November 30, 1999; $45.7 million in the year ended November 30, 2001; $45.0 million in the year ended November 30, 2002; and $0.7 million in the year ended November 30, 2003.

Critical Accounting Policies

      Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We believe that our critical accounting policies, which involve a higher degree of judgments, estimates and complexity, are as follows:

      We are subject to extensive and evolving Federal, state, local and international environmental laws and regulations. Compliance with such laws and regulations can be costly. Governmental authorities may enforce these laws and regulations with a variety of enforcement measures, including monetary penalties and remediation requirements. We have policies and procedures in place to ensure that our operations are conducted in compliance with such laws and regulations and with a commitment to the protection of the environment.

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      We are involved in various stages of investigation and remediation of soil and groundwater at approximately 15 sites as a result of past and present operations, including currently owned and formerly owned plants. Also, we have received notice that we may have liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, as a potentially responsible party at approximately 22 additional sites, but we believe that any potential liability would not be material to our financial position or results of operations.

      The ultimate cost of site remediation is difficult to predict given the uncertainties regarding the extent of the required remediation, the interpretation of applicable laws and regulations and alternative remediation methods. Based on our available information and experience with environmental remediation matters, we have accrued reserves for our best estimate of remediation costs, and we do not believe that remediation activities will have a material adverse impact on our financial condition, results of operations or cash flows. In addition, in the course of our bankruptcy, we obtained an agreement with the United States Environmental Protection Agency and Department of Interior and the states of Arizona, Michigan and Oklahoma whereby we have limited responsibility to them for response costs and natural resource damages for environmental contamination of sites not owned by us that is attributable to pre-bankruptcy activities. We retain all of our defenses, legal or factual, at such sites. However, if we are found liable for such contamination at any of these sites, our liability is capped at approximately 37%.

      We incurred environmental compliances expenses of $7.9 million in 2001, $8.7 million in 2002, and $8.3 million in 2003. We expect to incur approximately $7.8 million in 2004.

      In addition, we made capital expenditures for environmental compliance and remediation of $0.3 million in 2001, $0.6 million in 2002 and $0.6 million in 2003. We expect to incur approximately $2.3 million in 2004.

      We had total remediation expenditures of $1.1 million in 2001, $1.2 million in 2002, and $3.3 million 2003, of which $1.1 million in 2001, $1.2 million in 2002 and $2.8 million in 2003 were charged to our accrued environmental reserves. As of November 30, 2002, we had $17.7 million, and as of November 30, 2003, we had $9.3 million accrued for sold divisions and businesses related to legal and environmental matters. In addition, as of November 30, 2002, we had $2.4 million, and as of November 30, 2003, we had $1.6 million accrued in other accrued liabilities related to environmental liabilities for our on-going businesses.

      We review for impairment the carrying value of our long-lived assets held for use and assets to be disposed of. For assets held for use, the carrying value of a long-lived asset is considered impaired if the sum of the undiscounted cash flows is less than the carrying value of the asset. If this occurs, an impairment charge is recorded for the amount by which the carrying value of the long-lived assets exceeds its fair value. For assets to be disposed of, the recorded amount is the lower of the carrying value or fair value less cost to sell. For goodwill, we no longer record amortization expense and are required to complete an annual impairment test. These evaluations require us to forecast our future cash flows or current fair values, which require significant judgment. As of November 30, 2002 and November 30, 2003, we had recorded $159.6 million of goodwill. In addition, as of November 30, 2002, we had recorded $173.7 million of property, plant, and equipment, net (our primary long-lived asset), and as of November 30, 2003, we had recorded $151.9 million of property, plant, and equipment, net.

      We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collectibility is reasonably assured. These conditions are met at the time we ship our products to our customers. Net Sales and Cost of Products Sold include transportation costs that are billed to customers. For certain products sold under fixed-price contracts and subcontracts with various United States Government agencies and aerospace and defense contractors, we utilize the percentage-of-completion method of accounting. When we use the percentage-of-completion method, we measure our percent complete based on total costs incurred to date as compared to our best estimate of total costs to be incurred. Under the percentage-of-completion method, contract costs include direct material, labor costs, and those indirect costs

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      As noted above, the United States Government has the right to terminate contracts at its convenience. If the United States Government were to terminate one or more of our contracts, we may be required to write-off a portion of our asset called costs and estimated earnings in excess of billings.

      We provided for estimated losses on uncompleted contracts of $0.5 million at November 30, 2002 and $0.2 million at November 30, 2003. The percentage of completion method requires a higher degree of judgment and use of estimates than other revenue recognition methods. The primary judgments and estimates involved include our ability to accurately estimate the contracts’ percent complete and the reasonableness of the estimated costs to complete as of each financial reporting period.

      We have an off-balance sheet accounts receivable asset-backed qualifying special purpose entity to assist us in our capital resources and liquidity. Under this arrangement, we sell to the off-balance sheet entity certain receivables, which in turn sells an interest in the revolving pool of receivables to a major U.S. financial institution. We account for the securitization of these sold receivables in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a Replacement of FASB Statement No. 125.” Under this guidance, at the time the receivables are sold, the balances are removed from our financial statements. We continue to service sold receivables and receive a monthly servicing fee of approximately 1% per annum of the receivable pool’s average balance. The accounting for qualifying special purpose entities is a complex and evolving area of accounting. In the event the accounting is modified in the future, we may be forced to consolidate the off-balance sheet special purpose entity which could have a significant impact on our financial position. As of November 30, 2003, our retained interest in the off-balance sheet entity, which is recorded as an asset on our balance sheet, was $63.3 million and the revolving pool of receivables that the off-balance sheet entity owned and we serviced totaled $64.9 million. At November 30, 2003, the outstanding balance of the interest sold to the financial institution recorded on the off-balance sheet special purpose entities’ financial statements was zero.

      We sponsor pension plans covering substantially all employees who meet certain eligibility requirements. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liability related to these plans. These factors include key assumptions, such as discount rate, expected return on plan assets and rate of future compensation increases. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension benefit expenses we have recorded or may record in the future. Assuming a constant employee base, we estimate that as of November 30, 2003, a 25 basis point change in the discount rate, would change the annual pension expense by approximately $0.3 million and change our pension benefit obligation by $7.6 million. Additionally, a 25 basis point change in the expected return on plan assets would change the annual pension expense by approximately $0.6 million. Based on our asset values as of November 30, 2003, a 100 basis point change would increase or decrease our asset values by $2.5 million.

      In 2004, we will consider, at the advice of our actuary, adopting a more recently issued actuarial mortality table, which will have the impact of increasing our pension plan benefit obligations by approximately $13.0 million (assuming all assumptions at November 30, 2003 are held constant), and increasing our annual expense by approximately $2.0 million. If we elect to adopt this more recent actuarial mortality table and if our plan assets do not increase more than the liabilities, our pension plans may become underfunded. If this

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      The write-off to OCI of the prepaid pension asset and the accrual for the pension liability are all non-cash items that are required under United States generally accepted accounting principles (“GAAP”). The accounting treatment under GAAP is different from the funding requirements mandated by the Employee Retirement Income Security Act of 1974 (“ERISA”). Accordingly, we do not expect these non-cash charges to OCI to impact the need for potential cash contributions to our pension plans. Under the pension funding assumptions currently being evaluated, we do not anticipate a requirement for any cash contributions during the next several years. However, at our discretion, we may make voluntary contributions from time to time, based on our cash position, deductibility limits, and overall financial status, and the potential to further strengthen the funded status of the plans over the long-term.

      In our Filtration and Minerals Segment, we generally charge our mining costs to Cost of Products Sold as sales occur. However, we defer and amortize certain mining costs on a units-of-production basis over the estimated life of the particular section of a mine, based on estimated recoverable cubic yards of ore in that section. These mining costs, which are commonly referred to as “deferred stripping” costs, are incurred in mining activities that are normally associated with the removal of waste rock. The deferred stripping accounting method is generally accepted in the mining industry where mining operations have diverse grades and waste-to-ore ratios; however industry practice does vary. By deferring stripping costs, we match the costs of production when the sale of the ore occurs with an appropriate amount of waste removal cost. If we were to expense deferred stripping costs as incurred, there could be greater volatility in our period-to-period operating results. Deferred stripping costs are included in Other Assets, net, in our accompanying balance sheets and totaled $3.7 million at November 30, 2002 and $4.8 million at November 30, 2003.

      We are a defendant in numerous litigation and regulatory matters including those involving environmental law, employment law and patent law, as discussed in Note R of our November 30, 2003 financial statements included elsewhere in this report. As required by SFAS No. 5, we determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We analyze our litigation and regulatory matters based on available information to assess potential liability. We develop our views on estimated losses in consultation with outside counsel and environmental experts handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should these matters result in an adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such judgment or settlement occurs.

      Over the last several years we have engaged in significant restructuring actions and divestitures, which have required us to develop formalized plans as they relate to exit activities. These plans have required us to utilize significant estimates related to salvage values of assets that were made redundant or obsolete. In addition, we have had to record estimated expenses for severance and other employee separation costs, lease cancellation and other exit costs. Given the significance and the timing of the execution of such actions, this process is complex and involves periodic reassessment of estimates made at the time the original decisions were made. Our policies, as supported by current authoritative guidance, require us to continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. As we continue to evaluate the business, there may be supplemental charges for new plan initiatives as well as changes in estimates to amounts previously recorded as payments are made or actions are completed. As of November 30, 2003, we

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      We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our balance sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our reported results. Conversely, if we generate positive pre-tax income, as we did in 2003, and maintain a trend of positive reported results, we could be required to reduce our existing valuation allowance on a portion or all of our deferred tax assets resulting in a substantial decrease in our effective tax rate and a material positive impact on our reported results. As of November 30, 2003, our gross deferred tax assets were approximately $52.3 million and our gross deferred tax liabilities were approximately $25.7 million. These amounts were reduced by a valuation allowance of $18.6 million for a net deferred tax asset of $8.0 million.

      Other significant accounting policies, not involving the same level of uncertainties as those discussed above, are nevertheless important to an understanding of our financial statements. See Note B to the November 30, 2003 consolidated financial statements included elsewhere in this report which discusses our other significant accounting policies.

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Results of Operations

      The following summary financial information about our industry segment data is presented to gain a better understanding of the narrative discussion below about our business segments. See Note T in our November 30, 2003 consolidated financial statements for additional financial information by segment. All references herein to years are to our fiscal year ending November 30 unless otherwise indicated (in thousands of dollars).

2003 Compared to 2002

      Sales in our Automotive Segment decreased $8.4 million, or 2.0%, to $413.7 million in 2003 from $422.0 million in 2002. This decline in sales was less than the estimated 4.0%-4.5% decline in the industry-wide North American light vehicle production levels in 2003 due to significant sales growth in our Wolverine division.

      Our Wolverine division’s sales increased $10.5 million, or 13.2%, to $89.9 million in 2003 from $79.4 million in 2002. This increase is due to a 6.3% volume increase despite lower overall North American automotive production levels and 6.8% favorable foreign currency exchange rates as a result of the strengthening of the Euro. Approximately 40% of our Wolverine division’s sales are European. Wolverine’s volume increases were driven by increased gasket material sales primarily as a result of new program wins in North America, and increased brake programs with original equipment manufacturers in Europe, as well as other new programs with original equipment manufacturers.

      Offsetting our Wolverine division’s sales increase was a decrease in our Hillsdale division’s sales of $18.8 million, or 5.5%, to $323.8 million in 2003 from $342.7 million in 2002. The lower Hillsdale sales are

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      The North American automotive market remains a highly competitive market that is subject to potentially significant volume changes. We expect these competitive pressures to continue and possibly intensify. There are indications that our customers are consolidating their supplier base, increasing international sourcing and intensifying pressure for price reductions. We have been and will continue to respond to these pressures by (a) continually improving productivity through Lean manufacturing, six sigma, and increased sourcing from lower cost international suppliers, (b) improving our technology positions, including designing products to be manufactured at a lower cost, and (c) achieving cost reductions from our existing supplier base.

      The Automotive Segment’s operating income increased $11.0 million, or 104.6%, to $21.5 million in 2003 from $10.5 million in 2002. This $11.0 million improvement in operating income was primarily due to the following favorable/ (unfavorable) items:

	a. $8.8 million reduction in costs due to productivity and cost improvements;
	b. ($2.9) million in price decreases;
	c. ($4.0) million of increased costs primarily related to the a supplier related quality issue ($1.0 million), increased start-up costs primarily related to a new Visteon program ($1.0 million), expedited freight costs due to production schedule issues ($0.9 million), and other higher operating costs ($1.1 million), primarily related to higher energy, and wage and benefits expenses at our unionized facilities;
	d. $8.0 million reduction in goodwill amortization expense in 2003 compared to 2002 (due to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which no longer requires the amortization of goodwill);
	e. $1.1 million in additional depreciation expense recorded in 2002 related to adjustments to bring the estimated useful lives of certain equipment within this segment in line with estimated periods of active production.

      The Automotive Segment’s decrease in margin associated with the volume changes discussed above was more than offset by favorable sales mix and favorable foreign currency exchange rates as a result of the strengthening of the Euro.

      Sales in our Technologies Segment increased $29.2 million, or 17.8%, to $193.2 million in 2003 from $164.0 million in 2002. Excluding sales from our Precision Products business, which we divested in July 2002, this segment’s sales increased $32.6 million, or 20.3%.

      Sales in the Power Group, which represent 74% of this segment’s sales, increased $39.2 million, or 37.5%. The increase in our Power Group sales is primarily related to new contracts, improved pricing, and increased defense spending. Growth was particularly strong in battery sales to Boeing Corporation for the JDAM (Joint Direct Attack Munitions) Programs, the U.S Army CECOM (Communications Electronic Command)

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      Partially offsetting the strong increase in our Power Group sales were declines in our Specialty Materials Group and our Pharmaceutical Services businesses. In our Specialty Materials Group, sales decreased $2.5 million, or 5.8%, primarily related to $1.5 million from two relatively small businesses that we exited during 2003, and $0.7 million due to a decrease in boron sales, which are generally larger value orders that are not consistent in timing. In our Pharmaceutical Services business, sales decreased $4.1 million, or 31.2%. A fire in the third quarter of 2001 disrupted operations at our primary pharmaceutical facility and resulted in customer concerns as to the potential impact on quality and sourcing capability. This led to the non-renewal of some contracts and general softening in orders due to customer concerns. Recently, a Federal Drug Administration (“FDA”) quality audit was successfully completed with very favorable results, which have been communicated to our customers. We have recently seen new orders being placed by customers that were lost after the disruptive impact of the fire.

      The Technologies Segment’s operating income improved $39.3 million to income of $36.7 million in 2003 from a loss of $2.6 million in 2002. Included in the 2002 amount were the following unusual items that reduced 2002 operating income by $12.0 million and affect the comparability of 2002 and 2003.

	a. $5.7 million of legal expenses and legal settlement charges recorded in the first six months of 2002 in Selling and Administrative expenses;
	b. $3.1 million loss for an insurance receivable recorded in the second quarter of 2002 primarily related to inventories damaged in a fire during the third quarter of 2001 at our Missouri bulk pharmaceutical manufacturing plant;
	c. $5.5 million charge in restructuring expense recorded in the second quarter of 2002 associated with our decision to exit our Gallium-based specialty material business due to continued soft demand from customers in the telecommunications and semi-conductor markets. The $5.5 million restructuring charge included an inventory write-down of $2.9 million, representing the estimated loss incurred from the liquidation of current inventory. An additional $2.4 million was recorded in other accrued liabilities primarily related to the estimated loss of inventory to be purchased under a firm purchase commitment. Finally, a $0.2 million asset impairment charge was recorded against property, plant and equipment;
	d. $0.4 million of officer severance compensation during the third quarter of 2002 included in Selling and Administrative expense;
	e. $1.2 million of income recorded in the second quarter of 2002 related to the reversal of a portion of our fourth quarter 2001 Restructuring expense for severance payments made by our pension plan; and
	f. $1.5 million of income from an inventory adjustment to adjust inventory values to equal actual physical counts.

      Included in the 2003 amount were the following unusual items that increased 2003 operating income by $11.3 million and affect the comparability of 2002 and 2003.

	a. $2.6 million of expense primarily related to the settlement of environmental and legal issues at our Colorado Springs facility as discussed in the Item 3, Legal Proceeding, included elsewhere in this report;

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	b. $2.1 million of depreciation expense as we accelerated our depreciation schedule for assets in businesses that we are exiting or restructuring;
	c. $0.4 million related to a reserve on receivables from Loral Corporation, a customer who has filed for bankruptcy;
	d. $9.0 million of insurance gains in 2003 related to the settlement of fire insurance claims; and
	e. $7.4 million in 2003 of lower goodwill amortization expense due to our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on December 1, 2002.

      In addition, the following favorable/(unfavorable) items, with a net favorable total of $16.0 million in 2003, contributed to the improvement in operating income:

	a. $8.2 million related to productivity initiatives from better management of our supply chain ($5.8 million) and six sigma production techniques ($2.4 million);
	b. $12.4 million related to increased volumes ($6.2 million) and improved pricing ($6.2 million);
	c. ($3.0) million primarily related to management infrastructure expense investments made to launch our commercial power products growth initiatives;
	d. $1.4 million of business consulting expenses in 2002 to develop a strategy for our Power Group business and;
	e. ($3.0) for other general net cost increases, primarily selling related costs to support the increase in net sales, and wage and benefit cost increases.

      Sales in our Filtration and Minerals Segment decreased $3.6 million, or 4.3%, to $78.6 million in 2003 from $82.1 million 2002. This decrease was due primarily to lower volumes and a change from acting as a distributor to a sales agent for the sale of a certain product. During the fourth quarter of 2002, we were, but are no longer, exploring the possible sale of our Filtration and Minerals business. This potential sale diverted a significant amount of divisional management attention from operational focus, which had a negative impact on 2003 performance. During 2003, a new divisional leadership team was put in place, including a divisional president and functional leaders for sales and marketing, finance, human resources, and operations.

      The Filtration and Minerals Segment’s operating income decreased $2.8 million, or 34.6%, to $5.3 million in 2003 from $8.1 million in 2002. The decreased earnings were primarily due to lower volumes ($1.7 million), higher energy costs ($1.0 million), higher severance and recruiting costs related to restructuring the segment’s management team ($1.2 million), and additional freight costs largely related to the resolution of disputed freight claims with a former carrier ($0.8 million). These negative factors were partially offset by favorable foreign currency exchange rates as a result of the strengthening of the Euro and lower per ton mining costs.

      Net sales. Net Sales increased $17.3 million, or 2.6%, to $685.4 in 2003 from $668.1 in 2002. Excluding sales from our Precision Products business within our Technologies Segment, which we divested in July 2002, net sales increased $20.7 million, or 3.1%. This increase was due to strong increases of 37.5% in our Technologies Segment’s Power Group and 13.2% in our Automotive Segment’s Wolverine business, partially offset by decreases of 5.5% in our Automotive Segment’s Hillsdale business and 4.3% in our Filtration and Minerals Segment. See above for a discussion of the individual segments’ results.

      Cost of products sold (exclusive of depreciation). Costs of products sold increased $0.5 million, or 0.1%, to $522.3 million in 2003 from $521.8 million in 2002. Our gross margin increased $16.8 million to $163.1 million in 2003 from $146.3 million in 2002, and the gross margin percentage increased 1.9 points from 21.9% to 23.8%, despite an increase in energy costs which represent a significant component of the operating costs of our Automotive Segment’s Wolverine business and Filtration and Minerals Segment. This margin rate

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      Selling and administrative. Selling and administrative expenses decreased $0.5 million, or 0.8%, to $63.2 million in 2003 from $63.7 million in 2002. The decreased expenses are primarily related to the following favorable/ (unfavorable) items:

      a. $3.1 million of decreased expenses related to environmental and legal matters;

      b. $3.5 million in reduced officer severance costs and Supplemental Executive Retirement Plan expenses in 2003 compared to 2002;

      c. $1.4 million of business consulting expenses in 2002 to develop a strategy for our Power Group business,

      d. ($4.2) million of increased costs related to (a) strengthening our management team, (b) investing in the development of our commercial power products growth initiatives within our Technologies Segment, and (c) pursuing international sourcing opportunities primarily in our Hillsdale division;

      e. ($1.2) million higher severance and recruiting costs related to restructuring our Filtration and Minerals Segment’s management team; and

      f. ($2.1) million in other general net cost increases.

      Depreciation and amortization. Depreciation and amortization expense increased $1.6 million, or 3.4%, to $48.1 million in 2003 from $46.5 million 2002. The increase in depreciation and amortization expense was primarily the result of accelerating our depreciation schedule for assets in businesses that we are exiting or restructuring.

      Goodwill amortization. Due to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, no goodwill amortization expense was recorded in 2003 while 2002 included $15.4 million of expense. This new accounting standard required that we cease the amortization of goodwill, effective December 1, 2002, and complete an annual impairment test to determine if an impairment charge has occurred. We did not recognize any impairment charges in 2003.

      Restructuring. During 2002, we recorded $5.9 million of restructuring expense, which was primarily related to our announcement on May 31, 2002 to exit our Gallium business in our Technologies Segment, due to the downturn in the fiber-optic, telecommunication and semiconductor markets. This resulted in a $5.5 million charge recorded in restructuring expense during the second quarter of 2002. This charge primarily represents the liquidation of existing inventories and an accrual for inventory to be purchased under firm purchase commitments. There were no restructuring charges in 2003.

      Loss from divestitures. All amounts recorded in loss from divestitures expense relate to operations that were sold or that were divested prior to November 30, 2002. During 2002, we completed the sale of our Precision Products business in our Technologies Segment to a group of former employees and divisional management personnel. We recorded a $2.8 million loss on this sale in the second quarter of 2002. Also, during the second quarter of 2002, we recorded $3.4 million in accruals related to costs for certain litigation issues and environmental remediation costs. The remaining amounts related to worker’s compensation claims for employees of our sold divisions. There was no loss from divestitures during 2003.

      Insurance related losses/(gains). During the second quarter of 2002, we recorded a $3.1 million loss for an insurance receivable primarily related to inventories damaged in a fire during the third quarter of 2001 at our Missouri bulk pharmaceutical manufacturing plant. We recorded this charge to fully reserve the receivable because the insurance underwriter was contesting the coverage on these assets. We were disputing the insurance carrier’s position and were vigorously pursuing efforts to collect on our claims. In the third quarter of 2003, we recorded a $2.8 million gain related to our final settlement with this insurance carrier. In addition, in

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      Interest expense. Interest expense was $36.5 million in 2003 compared to $36.8 million in 2002 (excluding $2.3 million in 2003 and $4.3 million in 2002 which was allocated to discontinued operations as required by GAAP). Included in 2002 was $1.5 million in fees and other costs, primarily related to establishing our accounts receivable asset-backed securitization. Including the interest allocated to discontinued operations and the one-time fees related to our accounts receivable asset-backed securitization, our reduced interest expense is due to lower average debt levels. As a result of our August 2003 refinancings, we incurred an additional $39.5 million of debt ($250.0 million of senior unsecured notes were issued to redeem $210.5 million of our existing $220.0 million of senior subordinated notes). These additional proceeds were used to reduce lower rate bank debt and the obligations of our accounts receivable asset-backed securitization. Assuming interest rates are constant or increase, this will result in increased interest expense in 2004.

      Preferred stock dividends accrued. Effective September 1, 2003, we adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which requires that certain instruments be classified as liabilities in our balance sheet. The effect of the adoption was that, as of September 1, 2003, we reclassified the current redemption value plus unpaid dividends on our redeemable preferred stock to long-term liabilities and the accrual of dividends payable for the period September 1, 2003 through November 30, 2003 has been recorded as a component of non-operating expenses in our consolidated statements of income.

      Other income (expense), net. Other income (expense), net decreased $3.1 million to expense of $1.6 million in 2003 from income of $1.5 million in 2002. This decrease is primarily related to losses on foreign currency exchange rate forward contract hedges in the Corporate Segment which are entered into to offset foreign currency exchange rate exposures in the operating segments.

      Write-off of deferred financing costs. During the third quarter of 2003, we wrote-off $6.3 million of deferred financing costs in connection with the retirement of our former senior secured credit facility and the redemption of approximately 95% of our senior subordinated notes.

      Income (loss) from continuing operations before taxes. Income (loss) from continuing operations before taxes improved $41.7 million from a loss of $30.1 million in 2002 to income of $11.6 million in 2003. This change was primarily the result of the following favorable/ (unfavorable) unusual items (in million of dollars):

      The remaining $8.8 million represents $13.0 million of operating improvements as a result of increased sales and productivity initiatives partially offset by $4.2 million of preferred stock dividend accruals.

      Income tax provision (benefit). Income tax provision (benefit) was $2.8 million in 2003 and $1.9 million in 2002 (excluding $0.6 million tax benefit in 2003 and $0.7 million tax provision in 2002 which was allocated to discontinued operations). These provisions relate to the allocation of income and loss between the United States and foreign jurisdictions and primarily represent the estimated tax that will be due in certain non-U.S. jurisdictions where no tax benefit can be assured from utilizing previous losses. There was no U.S. Federal tax benefit or provision recorded during 2003 and 2002.

      Discontinued operations. During the second quarter of 2003, we accounted for our Hillsdale U.K. Automotive operation as a discontinued operation. During the third quarter of 2003, we accounted for the sale of certain assets of our Germanium-based business in our Technologies Segment as a discontinued operation.

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      Net income (loss). Net income (loss) improved $39.7 million to net income of $2.8 million in 2003 from a net loss of $36.8 million in 2002 as a result of the items discussed above.

2002 Compared to 2001

      Sales in our Automotive Segment increased $13.8 million, or 3.4%, to $422.0 million in 2002 from $408.3 million in 2001. Our Hillsdale division’s net sales increased $8.5 million, or 2.5%, to $342.7 million in 2002 from $334.2 million in 2001. This increase is a result of increased North American automotive builds in 2002 compared to 2001. Our Wolverine division’s sales increased $5.3 million, or 7.1%, to $79.4 million in 2002 from $74.1 million in 2001. This increase was a result of the increased North American automotive build in 2002 compared to 2001, as well as the initial penetration in the United States aftermarket business.

      The Automotive Segment’s operating income increased $3.0 million, or 40.3%, to $10.5 million in 2002 from $7.5 million in 2001. This improved performance resulted primarily from slightly higher sales volumes, improved sales mix, and productivity improvements. Unusual expenses, totaling $1.8 million in 2002 were incurred for severance, recruiting and relocation related to strengthening the Automotive Segment’s management team and workforce-related consulting fees that further dampened our profitability. An additional $1.1 million in depreciation expense was recorded in the second quarter of 2002 related to adjustments to bring the estimated useful lives of certain equipment within this segment in line with estimated periods of active production.

      Sales in our Technologies Segment decreased $3.9 million, or 2.3%, to $164.0 million in 2002 from $167.8 million in 2001. Excluding sales from our Precision Products business, which we divested in July 2002, this segment’s sales increased $2.9 million, or 1.8%. Sales in the Power Group increased $3.8 million, or 3.8%, during 2002 compared to 2001, which was offset by a decrease of $0.4 million, or 1.0%, in our Specialty Materials Group. Within the Specialty Materials Group, the demand for gallium-based products, was significantly impacted by the extremely weak demand which led to our decision to exit the business. The decrease in gallium sales was partially offset by an increase of $5.5 million, or 33.5%, in sales of enriched boric acid products sold to nuclear power reactor facilities.

      The Technologies Segment’s operating results decreased $0.4 million to an operating loss of $2.6 million in 2002 from $2.2 million in 2001. The decrease in 2002 operating results included provisions of $15.7 million in unusual charges, detailed below, versus $8.7 million of restructuring charges recorded in our 2001 earnings. These 2002 unusual charges, detailed below, impact the comparability with 2001. The following items detail the $15.7 million of unusual charges charges in 2002:

	•	$5.7 million of legal expenses and legal settlement charges recorded in Selling and Administrative expenses during the first half of 2002;
	•	$3.1 million loss for an insurance receivable primarily related to inventories damaged in a fire during the third quarter of 2001 at our Missouri bulk pharmaceutical manufacturing plant;
	•	$1.4 million in expense for business consulting fees to develop a strategy for our Power Group business; and
	•	$5.5 million charge in restructuring expense in the second quarter of 2002 associated with our decision to exit our gallium-based specialty material business due to continued soft demand from customers in the telecommunications and semi-conductor markets. The $5.5 million restructuring charge during the second quarter of 2002 included an inventory write-down of $2.9 million, representing the estimated loss incurred from the liquidation of current inventory. An additional $2.4 million was recorded in other accrued liabilities primarily related to the estimated loss of inventory to be purchased under a firm

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		purchase commitment. Finally, a $0.2 million asset impairment charge was recorded against property, plant and equipment.

      Sales in our Filtration and Minerals Segment increased $0.1 million, or 0.2%, to $82.1 million in 2002 from $82.0 million in 2001. The sales increase during 2002 was primarily the result of improved pricing and sales mix, partially offset by decreased volumes.

      The Filtration and Minerals Segment’s operating income increased $3.3 million, or 70.8%, to $8.1 million in 2002 from $4.7 million in 2001. Improved profitability was primarily attributable to lower energy costs, favorable product mix and pricing, improved production efficiencies and favorable foreign currency exchange rates due to the strengthening of the Euro during 2002.

      Net sales. Net sales of $668.1 million in 2002 increased $10.8 million, or 1.6%, from $657.3 million in 2001. Excluding the sale in July 2002 of our Precision Products business included in our Technologies Segment, our net sales increased $17.6 million, or 2.7% in 2002 compared to 2001.

      Cost of products sold (exclusive of depreciation). Our gross margins increased 2.9 points to 21.9% in 2002 from 19.0% in 2001. The improved sales mix primarily related to increased sales in our Technologies Segment’s Power Group and our Automotive Segment’s Wolverine operation, and productivity improvements in all our businesses contributed to the increased gross margins. Our Technologies Segment was also favorably impacted by the restructuring actions initiated in the fourth quarter of 2001, while our Filtration and Minerals Segment benefited from improved pricing and significantly lower energy costs, which were high in 2001 when the Western United States experienced an energy crisis.

      Selling and administrative. Selling and administrative expenses increased $11.3 million, or 21.5%, to $63.7 million in 2002 from $52.5 million in 2001. The increased costs in 2002 were primarily related to:

	a. $6.0 million of legal expenses and legal settlement charges recorded in Selling and Administrative expenses during the first half of 2002;
	b. $1.4 million in our Technologies Segment for business consulting fees to develop a strategy for our Power Group business;
	c. $3.7 million in severance, recruiting, relocation costs, and workforce-related consulting fees as we continued our investment in restructuring and strengthening our leadership team; and
	d. $1.2 million in increased compensation costs related to a recently adopted long-term bonus plan for certain corporate and divisional management executives.

      Depreciation and amortization (including Goodwill Amortization). Depreciation and amortization expenses increased $4.9 million, or 8.6%, to $61.9 million in 2002 from $57.0 million in 2001. The increase is primarily attributable to higher depreciation costs as a result of capital expenditures in 2001, primarily for new automotive programs, and an adjustment for an additional $1.1 million in expense in the second quarter of 2002 to bring the estimated useful lives of certain equipment in the Automotive Segment in line with estimated periods of active production on existing automotive programs.

      Restructuring. During 2002, we recorded $5.9 million of restructuring expense, which was primarily related to our announcement on May 31, 2002 to exit our Gallium business in our Technologies Segment due to the downturn in the fiber-optic, telecommunication and semiconductor markets. This resulted in a $5.5 million charge recorded in restructuring expense during the second quarter of 2002. This charge primarily represents the liquidation of existing inventories and an accrual for inventory to be purchased under firm purchase commitments.

      During 2001, we recorded asset write-downs and other charges totaling $14.1 million in connection with a restructuring plan (the “Plan”) announced in November 2001. The Plan primarily relocated our corporate

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      The facility costs of $5.4 million include a non-cash adjustment of $1.3 million to write down the carrying value of the three plants to their estimated fair value in holding them for sale, a non-cash charge of $2.2 million on the loss of abandoning the machinery and equipment and other assets at the plant locations and at corporate headquarters, and a $1.9 million charge for future lease commitments, net of estimated proceeds received from subleasing the various spaces. The asset impairment adjustments are recorded against Property Plant and Equipment in our balance sheets. The other shutdown costs to exit the business consist primarily of a $3.0 million non-cash charge related to inventory.

      Loss from divestitures. All amounts recorded in divestitures expense relate to operations that were sold or that were divested prior to November 30, 2002. During 2002, we completed the sale of our Precision Products business in our Technologies Segment to a group of former employees and divisional management personnel. We recorded in the second quarter of 2002 a $2.8 million loss on this sale. Also, during the second quarter of 2002, we recorded $3.4 million in accruals related to costs for certain litigation issues and environmental remediation costs. The remaining amounts related to worker’s compensation claims for employees of our sold divisions, and additional accruals related to litigation and environmental remediation costs. The amounts recorded in 2001 related to costs of divestitures in previous years.

      Insurance related losses. During the second quarter 2002, we recorded a $3.1 million loss for an insurance receivable primarily related to inventories damaged in a fire during the third quarter 2001 at our Missouri bulk pharmaceutical manufacturing plant. We recorded this charge to fully reserve the receivable because the insurance underwriter is contesting the coverage on these assets. We were disputing the insurance carrier’s position and vigorously pursuing efforts to collect on our claims, but the recovery of our claim was uncertain in 2002.

      Interest expense. Interest expense was $36.8 million in 2002 and $35.4 million in 2001 (excluding interest allocated to discontinued operations in 2002 of $4.3 million and in 2001 of $8.0 million). Also included in interest expense in 2002 are $1.5 million in fees and other costs, primarily related to our unconsolidated accounts receivable asset-backed securitization. Excluding these $1.5 million in fees and other costs and including the interest allocated to discontinued operations, our interest expense decreased due to lower interest rates and lower debt levels.

      Income (loss) from continuing operations before taxes. Loss from continuing operations before taxes decreased $2.3 million, or 7.1%, to $30.1 million in 2002 from $32.4 million in 2001. The following items represent charges by segment that affect the comparability between loss from continuing operations before taxes for 2001 and 2002 (in millions).

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      In addition, during 2002, we incurred $1.4 million of expense in our Technologies Segment for business consulting fees to develop a strategy for our Power Group.

      Income tax provision (benefit). Income tax provision was $1.9 million in 2002 compared to a benefit of $10.2 million in 2001. Differences in the income taxes recorded primarily relate to recording a tax benefit during 2001 on losses, to the extent those losses could be carried back to prior fiscal years, and a refund could be obtained from the taxing authority. For any amounts in excess of the carry back amounts, we have elected to provide a valuation allowance as it is more likely than not that some or all of the deferred tax assets will not be realized. Accordingly, there is no tax benefit recorded during 2002. The provision in 2002 relates to the allocation of income and loss between the United States and foreign jurisdictions and represents the estimated tax that will be due in certain jurisdictions where no tax benefit can be assured from utilizing our losses.

      Discontinued operations. Throughout 2001, we accounted for our former Machinery Segment as a discontinued operation and prior periods have been restated to conform to the discontinued operations presentation. On December 14, 2001, we completed the sale of our Machinery Segment as of November 30, 2001. Accordingly, there is no effect on our operations in 2002. In addition, the accompanying 2001 and 2002 financial information has been restated to reflect the accounting for the sale of our Hillsdale UK Automotive operation and the sale of certain assets in our Germanium-based business as discontinued operations. The Hillsdale UK Automotive operation was sold on June 11, 2003, and certain assets in our Germanium-based business were sold in July 2003.

      Net loss. The net loss decreased $17.1 million, or 31.8%, to $36.8 million in 2002 from $54.0 million in 2001. The decrease in net loss is the result of the items discussed above.

Liquidity and Capital Resources

      Our cash flows from operations and availability under our various credit facilities are considered adequate to fund our short-term and long-term capital needs. As of November 30, 2003, we had $114.1 million unused under our various credit facilities. However, due to various financial covenant limitations under our New Credit Agreement (as defined under the Capitalization section below) measured at the end of each quarter, on November 30, 2003, we could only incur an additional $60.1 million of indebtedness.

      In August 2003, we entered into the New Credit Agreement which provides for an original term loan of $150.0 million and a revolving credit facility of $125.0 million. The proceeds of the New Term Loan (as defined under the Capitalization section below) were used to repay our prior credit agreement. In addition, we issued $250.0 million of Senior Unsecured Notes due 2013 and completed a tender offer for approximately

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      At November 30, 2003, we were in compliance with all of our debt covenants. We expect to remain in compliance with our debt covenants throughout fiscal year 2004.

      Operating Activities. Operating activities used $1.0 million in cash during 2003 compared to providing $75.9 million in 2002. In 2002, cash flows from operating activities were impacted by our net loss of $36.8 million, which was offset by non-cash charges of $65.0 million from depreciation and amortization, $6.5 million from losses from divestitures, $6.1 million from deferred income taxes, and $3.1 million from insurance related losses, which results in cash sources of $43.9 million compared to a similarly calculated amount in 2003 of $60.0 million. The 2003 amount of $60.0 million, an improvement of $16.1 million, or 36.7%, over 2002, is comprised of our net income of $2.8 million, and non-cash charges of $50.8 million from depreciation and amortization, $4.2 million for preferred stock dividends accrued, $4.2 million from loss from discontinued operations, and $6.3 million from the write-off of deferred financing costs, partially offset by non-cash insurance gains of $8.3 million.

      The operating cash flow for 2002 was also increased by $32.0 million due to changes in certain assets and liabilities, resulting in net cash provided by operating activities of $75.9 million, primarily due to $46.5 million of proceeds from the sale of receivables to our accounts receivable asset-backed securitization, which was partially offset primarily by increases in our percentage of completion accounting working capital needs and decreases in accrued liabilities.

      The operating cash flow for 2003 was reduced by $61.0 million due to changes in certain assets and liabilities, resulting in net cash used in operating activities of $1.0 million. This was primarily due to:

	a. $46.5 million use of cash to pay off all the obligations of EaglePicher Funding Corporation;
	b. $3.1 million of cash generated from the better management of the primary working capital areas of accounts receivable, inventories, and accounts payable;
	c. $7.8 million of cash received from insurance settlements;
	d. approximately $15.0 million for payments on restructuring and legal matters which were expensed in 2002; and
	e. $10.3 million increase in production on long-term defense contracts where costs are incurred before shipments or milestone billings are made and collected; this was primarily driven by a 37.5% increase in our Power Group revenues within our Technologies Segment.

      Investing Activities. Investing activities used $23.6 million in cash during 2003 compared to using $7.9 million in 2002. The 2003 amount primarily includes $16.2 million for capital expenditures and $7.6 million for the purchase of intangibles and investments in unconsolidated subsidiaries. The 2002 amount primarily includes $16.3 million for capital expenditures, which was partially offset by $6.9 million of proceeds from the sale of our Construction Equipment Division, which represented our former Machinery Segment, and $3.1 million of proceeds from the sale of our Precision Products business. We expect our capital expenditures to be between $35.0 million to $40.0 million in 2004, and our investments in unconsolidated or consolidated ventures to be between $8.0 million and $10.0 million.

      Financing Activities. Financing activities provided $37.1 million of cash during 2003 compared to using $67.4 million during 2002. During 2003, we completed a tender offer on our senior subordinated notes and issued new senior unsecured notes. In addition, we paid off our former credit agreement and issued a new credit agreement. For a detailed discussion of these transactions and the conditions of the new instruments, see the Capitalization section below. Accordingly, during 2003, we used $351.0 million of cash to redeem our senior subordinated notes, pay-off our former credit agreement, and make regularly scheduled debt payments,

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      Our capitalization, which excludes the obligations of our accounts receivable asset-backed securitization of $46.5 million at November 30, 2002 and zero at November 30, 2003, consisted of the following at November 30, 2002 and November 30, 2003 (in thousands of dollars):

      New Credit Agreement. We have a syndicated senior secured loan facility (“New Credit Agreement”) providing an original term loan (“New Term Loan”) of $150.0 million and a $125.0 million revolving credit facility (“New Facility”). The New Facility and the New Term Loan bear interest, at our option, at a rate equal to (i) LIBOR plus 350 basis points or (ii) an Alternate Base Rate (which is equal to the highest of (a) the agent’s prime rate, (b) the Federal funds effective rate plus 50 basis points, or (c) the base CD rate plus 100 basis points) plus 250 basis points. Interest is generally payable quarterly on the New Facility and New Term Loan. We have entered into interest rate swap agreements to manage our variable interest rate exposure. Our interest rate swap agreements that were outstanding as of November 30, 2003 matured in December 2003. The New Credit Agreement also contains certain fees. There are fees for letters of credit equal to 3.5% per annum for all issued letters of credit, and there is a commitment fee on the New Facility equal to 0.5% per annum of the unused portion of the New Facility. If we meet certain financial benchmarks, the interest rate spreads on the borrowing, the commitment fees and the fees for letters of credit may be reduced.

      The New Term Loan will mature upon the earlier of (i) August 7, 2009, (ii) 180 days prior to the maturity of our Senior Subordinated Notes if more than $5.0 million of aggregate principal amount of Senior Subordinated Notes are outstanding, or (iii) 180 days prior to the mandatory redemption of our 11.75% Cumulative Redeemable Exchangeable Preferred Stock (“Preferred Stock”) if more than $5.0 million of its aggregate liquidation preference remains outstanding. The New Facility will mature upon the earlier of

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      At November 30, 2003, we had $40.1 million in outstanding letters of credit under the New Facility, which together with borrowings of zero, made our available borrowing capacity of $84.9 million. However, due to various financial covenant limitations under our New Credit Agreement measured at the end of each quarter, on November 30, 2003, we could only incur an additional $60.1 million of indebtedness.

      The New Credit Agreement is secured by our capital stock, the capital stock of substantially all of our domestic United States subsidiaries, a certain portion of the capital stock of our foreign subsidiaries, and substantially all other assets of our United States subsidiaries. Additionally, the New Credit Agreement is guaranteed by us and certain of our United States subsidiaries.

      The New Credit Agreement contains covenants that restrict our ability to declare dividends or redeem capital stock, incur additional debt or liens, alter existing debt agreements, make loans or investments, form or invest in joint ventures, undergo a change in control or engage in mergers, acquisitions or asset sales. These covenants also limit the annual amount of capital expenditures and require us to meet certain minimum financial ratios. For purposes of determining outstanding debt under our New Credit Agreement, we include the outstanding obligations of EPFC, our off-balance sheet special purpose entity (see Note K for a detailed discussion of EPFC). We were in compliance with all covenants at November 30, 2003.

      In addition to regularly scheduled payments on the New Credit Agreement, we are required to make mandatory prepayments equal to 50.0% of annual excess cash flow, as defined in the New Credit Agreement, beginning with our fiscal year ending November 30, 2004. The net proceeds from the sale of assets (subject to certain conditions), the net proceeds of certain new debt issuance, and 50.0% of the net proceeds of any equity securities issuance are also subject to mandatory prepayments on the New Credit Agreement.

      Former Credit Agreement. We had a syndicated senior secured loan facility (“Former Credit Agreement”) which provided for an original term loan (“Former Term Loan”) of $75.0 million, as amended, and a $220.0 million revolving credit facility (“Former Facility”). We paid off the Former Credit Agreement with the proceeds from our New Credit Agreement and Senior Unsecured Notes in August 2003. The Former Facility and the Former Term Loan bore interest, at our option, at LIBOR plus 275 basis points, or the bank’s prime rate plus 150 basis points. Interest was generally payable quarterly on the Former Facility and Former Term Loan. The Former Credit Agreement also contained certain fees.

      Senior Unsecured Notes. In August 2003, we issued $250.0 million 9.75% Senior Unsecured Notes, due 2013, at a price of 99.2% of par to yield 9.875%. Accordingly, the net proceeds before issuance costs were $248.0 million. The discount is being amortized over the life of the Senior Unsecured Notes. The Senior Unsecured Notes require semi-annual interest payments on September 1 and March 1, beginning on March 1, 2004. The Senior Unsecured Notes are redeemable at our option, in whole or in part, any time after September 1, 2008 at set redemption prices. We are required to offer to purchase the Senior Unsecured Notes at a set redemption price should there be a change in control. The Senior Unsecured Notes contain covenants which restrict or limit our ability to declare or pay dividends, incur additional debt or liens, issue stock, engage in affiliate transactions, undergo a change in control or sell assets. We are in compliance with these covenants at November 30, 2003. The Senior Unsecured Notes are guaranteed by us and certain of our subsidiaries

      Senior Subordinated Notes. Our Senior Subordinated Notes require semi-annual interest payments on September 1 and March 1. In connection with the issuance of the Senior Unsecured Notes in August 2003, as described above, we repurchased approximately 95% of the outstanding senior subordinated notes at par and executed a supplemental indenture on our Senior Subordinated Notes which eliminated substantially all of the restrictive covenants in the Senior Subordinated Notes that remain outstanding. We continue to be required to make interest payments on the Senior Subordinated Notes and will be required to pay the remaining aggregate principal amount outstanding at maturity in 2008.

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      Industrial Revenue Bonds. Our industrial revenue bonds require monthly interest payments at variable interest rates based on the market for similar issues and are secured by letters of credit issued under the New Facility described above. In December 2003, we paid off $10.0 million of Industrial Revenue Bonds and accordingly, our outstanding letters of credit under the New Facility were reduced.

      Preferred Stock. Our preferred stock increased $16.4 million during 2003 as a result of accretion of the liquidation preference and the accrual of preferred dividends. The liquidation preference of the Preferred Stock was fully accreted to $141.9 million in the aggregate at March 1, 2003. Commencing March 1, 2003, dividends on our Preferred Stock became cash payable at 11.75% per annum of the liquidation preference if and when declared by the Board of Directors; the first semiannual dividend payment of $8.3 million was due September 1, 2003. The New Credit Agreement and the Senior Unsecured Notes contain financial covenants that currently prohibit us from paying dividends on the preferred stock. Our Board of Directors did not declare a cash dividend as of September 1, 2003. If we do not pay cash dividends on the Preferred Stock, the holders of the Preferred Stock may become entitled to elect a majority of our Board of Directors. Dakruiter S.A. and Harbourgate B.V., both companies controlled by Granaria Holdings B.V., our controlling common shareholder, hold approximately 78% of our Preferred Stock, and therefore Granaria Holdings B.V. would continue to be able to elect our entire Board of Directors. The election of a majority of the directors is the only remedy of holders of the preferred stock for a failure to pay cash dividends. Unpaid dividends are cumulative but do not bear interest.

      Shareholders’ Deficit. Our shareholders’ deficit increased $2.6 million during 2003 primarily due to our comprehensive income of $8.7 million and the issuance of common shares from our Treasury of $0.9 million, which was more than offset by the accretion and accrual of preferred stock dividends of $12.2 million.

      During the first quarter of 2002, we entered into an agreement with a major United States financial institution to sell an interest in certain receivables through an unconsolidated qualifying special purpose entity, EaglePicher Funding Corporation (“EPFC”). The size of this facility is $55.0 million, subject to certain financial covenant limitations. Initially $47.0 million of proceeds from this new facility were used primarily to payoff amounts outstanding under our existing Receivables Loan Agreement with our wholly owned subsidiary, EaglePicher Acceptance Corporation. This agreement provides for the sale of certain receivables to EPFC, which in turn sells an interest in a revolving pool of receivables to the financial institution. EPFC has no recourse against us for failure of the debtors to pay when due. In the third quarter of 2003, we amended this agreement to extend the receivables program until the earlier of (a) 90 days prior to the maturity of our New Credit Agreement (as defined in the Capitalization Section above) or (b) January 2008.

      We account for the securitization of these sold receivables in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a Replacement of FASB Statement No. 125.” Under this guidance, at the time the receivables are sold, the balances are removed from our financial statements. For purposes of calculating our debt covenant compliance under our New Credit Agreement, we include the outstanding obligations of EPFC.

      At November 30, 2002, our interest in EPFC was $29.4 million and the revolving pool of receivables that we serviced totaled $77.5 million. At November 30, 2002, the outstanding balance of the interest sold to the financial institution recorded on EPFC’s financial statements was $46.5 million. The effective interest rate as of November 30, 2002 in the securitization was approximately 2.55%.

      As of November 30, 2003, we reduced the amount due to the financial institution by EPFC. Accordingly, our retained interest in EPFC was $63.3 million and the revolving pool of receivables that we serviced totaled $64.9 million. At November 30, 2003, the outstanding balance of the interest sold to the financial institution recorded on EPFC’s financial statements was zero. The effective interest rate as of November 30, 2003 in the securitization was approximately 2.95%.

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      In our New Credit Agreement, we have certain financial covenants, as discussed below in Credit Agreement and Accounts Receivable Asset-Backed Securitization Financial Covenants, which we believe are significant and material in the context of our capital structure. Credit Agreement EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, and certain non-cash items, as defined in the New Credit Agreement. We believe these financial covenants are a material piece of information for the readers of our reports. To support our readers’ understanding of these financial covenants and our compliance with them, we have provided below a reconciliation from Generally Accepted Accounting Principles (GAAP) Net Income (Loss) to Credit Agreement EBITDA. For purposes of calculating our credit agreement financial covenants, Credit Agreement EBITDA is based on the last twelve months of operating results, which is summarized below.

      Credit Agreement EBITDA is also presented herein because we believe it is a useful supplement to net income. We use this measurement as part of our evaluation of core operating results and underlying trends and therefore believe it is a key measure of our performance. However, Credit Agreement EBITDA, which does not represent operating income or net cash provided by operating activities, as those items are defined by GAAP, should not be considered by readers as an alternative to operating income or cash flow from operations or indicative of whether cash flows will be sufficient to fund our future cash requirements. Funds depicted by Credit Agreement EBITDA are not available for our discretionary use to the extent they are required for debt service and other commitments. In addition, Credit Agreement EBITDA may differ from and may not be comparable to similarly titled measures used by other companies.

      The following is a reconciliation from Net Income (Loss) to our Credit Agreement EBITDA (in thousands of dollars):