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

FORM 10-K

Commission file number 1-6450

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

9025 NORTH RIVER ROAD, SUITE 400
INDIANAPOLIS, INDIANA 46240
(Address of principal executive offices)    (Zip Code)

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

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

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

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

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

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

As of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was $1,031,184,178 based on the last reported sales price on the New York Stock Exchange.

As of February 27, 2004, 50,667,679 shares of the registrant's stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's Annual Meeting of Shareholders to be held on May 6, 2004 are incorporated by reference into Part III.

TABLE OF CONTENTS

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PART I

ITEM 1.    Business

GENERAL

Great Lakes Chemical Corporation is a Delaware corporation incorporated in 1933 having its principal executive offices at 9025 North River Road, Suite 400, Indianapolis, Indiana 46240. As used in this report, except where otherwise stated or indicated by the context, "Great Lakes" or "the Company" means Great Lakes Chemical Corporation and its consolidated subsidiaries.

Great Lakes (NYSE: GLK) is a global company dedicated to delivering innovative, market-focused specialty chemical solutions and consumer products. The Company's products and services help treat and purify water, keep surfaces in and around the home shining, protect against and extinguish fire, and enhance the stability and performance of a wide range of consumer products, such as computers, electronics, automobiles, packaging, building materials and furniture. The Company serves customers and markets through an integrated network of research, production, sales, distribution and technical services facilities. The Company is organized into three global business units that serve diverse markets around the world:

Polymer Additives - The Polymer Additives business unit offers one of the world's most comprehensive portfolios of polymer additive solutions formulated specially to meet the needs of its customers in a wide range of markets, from furniture and textiles to automotive to consumer electronics to building and construction. The Company's flame retardant division is a leading producer of bromine-, phosphorus- and antimony-based flame retardants and synergists, as well as physical form compounds and blends, which reduce or eliminate the flammability of a wide variety of combustible materials. The Company provides additives that are essential to the performance of natural, semi-synthetic and synthetic lubricants under extreme pressure, as well as fire-resistant fluids and lubricants used in industrial applications. The Company's broad range of stabilizing products - from UV stabilizers to antioxidants to patented non-dusting blends - enhance critical polymer performance characteristics such as heat and light resistance and color consistency. The Company also produces optical monomers used in eyewear and for such applications as protection sheets for welding masks and screens, safety shields, photographic filters, lenses for welders goggles and lab equipment. The bromine performance products business offers products for use in soil, crop and structural pest control applications; bromine intermediates used in electronics, photographic papers, rubber compounds, detergents and pharmaceuticals; and clear brine fluids used in oil and gas exploration.

Specialty Products - The Specialty Products business unit is a leading supplier of consumer products for use in swimming pools, hot tubs and home cleaning, along with products for industrial water treatment. The recreational water treatment division is the world's leading provider of pool and spa care products for pool and spa dealers and distributors, mass market retailers, wholesale distributors, specialty store owners, commercial pool and water park operators, residential and commercial builders, and retail customers. The Company offers non-abrasive bathroom, glass and surface, tub and shower, and toilet bowl cleaners, drain openers, and rust and calcium removers, as well as multipurpose cleaners for indoor and outdoor applications such as bath, kitchen, flooring, laundry and patio. The specialty cleaning line also includes high-performance cleaning solutions that include automotive cleaner/degreaser, wheel cleaner, car wash concentrate and wipes and bug and tar remover. The Company also produces specialty additives for the industrial water treatment and desalination industries, including antiscalants, corrosion inhibitors, dispersants, antifoams, and non-oxidizing and superior bromine-based oxidizing microbiological control processes.

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Performance Chemicals - The Performance Chemicals business unit includes businesses that provide value-added products and services to pharmaceutical, information technology, telecommunications and other important markets worldwide. The Company offers world-leading fire suppressants for mission-critical and high-value applications that require waterless fire protection such as computer and telecommunications systems, transportation, medical equipment, laboratories, document vaults and archives, and museums. The Company's fluorine specialties are essential to the performance of fluoro-silicone materials and fluids used under demanding conditions such as extreme temperature fluctuation. Fluorine specialties are also used in high-technology applications such as optical fibers and computer chips, in refrigerants that are used in residential air conditioners as an environmentally friendly alternative to Freon®, and as propellants in medical inhalers. The Company also provides nonclinical toxicological testing and bioanalytical contract services used for product safety and toxicological assessment in the pharmaceutical, chemical and biotechnology industries. As a result of the Company's decision in 2002 to sell its Fine Chemicals business, which provides complex chemical synthesis and process development for the pharmaceutical and agrochemical markets, the net assets of Fine Chemicals have been reclassified as assets held for sale, with operating results reported in Discontinued Operations for all periods presented.

Segment data for the Company's operations for each of the three years in the period ended December 31, 2003 are presented in Note 16 to the Consolidated Financial Statements.

PRODUCTS AND SERVICES

The following is a list of the principal products and services, markets and production facilities of the Company:

POLYMER ADDITIVES

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SPECIALTY PRODUCTS

PERFORMANCE CHEMICALS

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PERFORMANCE CHEMICALS (Continued)

RAW MATERIALS

The primary source of essential raw materials for bromine is the brine from Company-owned wells in Arkansas. The Arkansas properties are located atop the Smackover lime deposits, which constitute a vast underground sea of bromine-rich brine. The 35-mile area between El Dorado and Magnolia, Arkansas, provides the best known geological location for bromine production in the United States, and both major domestic bromine manufacturers are located in this area. In addition, during the third quarter of 2003, the Company entered into a long-term strategic sourcing agreement for elemental bromine and certain derivatives from Dead Sea Bromine Ltd. Based on projected production rates and the above-mentioned sourcing agreement, the Company's bromine and brine supplies are estimated to be adequate.

Other raw materials used in the business are obtained from outside suppliers through purchase agreements. The cost of raw materials is generally based on market prices, although risk management tools may be utilized, as appropriate, to mitigate short-term market price fluctuations. Other raw materials purchased include chlorine, caustic, hexafluoropropene, phenol, bisphenol A and antimony oxide.

The Company has multiple suppliers for most key raw materials and uses quality raw materials management principles, such as the establishment of long-term relationships with suppliers and ongoing performance assessment and benchmarking, as part of the total supplier selection process. In addition, the Company uses electricity and natural gas to meet its energy needs.

INTERNATIONAL OPERATIONS

Great Lakes has a significant presence in foreign markets, principally Western Europe and Asia. Approximately one-third of the Company's assets and sales are outside the United States. The geographic segment data is set forth in Note 16, "Segment Information," of the Notes to Consolidated Financial Statements.

CUSTOMERS AND DISTRIBUTION

During the last three years, no single customer accounted for more than 10% of Great Lakes total consolidated sales. The Company has no material contracts or subcontracts with government agencies. A major portion of the Company's sales are to industrial or commercial businesses for use in the production of other products. Some products, such as recreational Specialty Products and household chemicals and supplies, are sold to a large number of retailers, mass merchandisers and distributors. Some export sales are marketed through distributors and brokers.

The Company's business does not normally reflect any significant backlog of orders.

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COMPETITION

Great Lakes is in competition with businesses producing the same or similar products, as well as businesses producing products intended for similar use. There is one other major bromine producer in the United States, which competes with the Company to varying degrees, depending on the product. In addition, the Company competes with only one major overseas manufacturer of bromine and brominated products, which competes with the Company's products primarily in Europe and Asia. Several small producers in the United States and overseas are competitors for various individual products. Furthermore, there are numerous manufacturers that compete with the Company by offering alternatives to Great Lakes products. In Polymer Stabilizers, the Company competes with a significantly larger supplier across this entire product line and with a number of smaller companies in individual product areas. Within Performance Chemicals, the Fluorine business competes with a global manufacturer producing similar products, as well as manufacturers with products intended for similar use. The Company's Specialty Products business competes with several manufacturers and distributors of swimming pool and spa chemicals, as well as household cleaners.

Principal methods of competition are innovation, price, product quality and purity, technical services and service delivery. The Company is able to move quickly in providing new products to meet identified market demands. Management believes these factors, combined with highly qualified technical personnel, allow the Company to compete effectively.

SEASONALITY AND WORKING CAPITAL

The Company's products sold to the swimming pool industry exhibit some seasonality. The Company experiences higher sales and profits in the second and third quarters for pool products. Seasonality also requires that the Company build inventories for rapid delivery at certain times of the year. In particular, sales related to the pool product season require a build-up of inventory at the beginning of the year. Certain arrangements with mass market customers permit returns of unsold material at the end of a season. The effect of these items on working capital and liquidity requirements quarter to quarter may be material.

RESEARCH AND DEVELOPMENT, PATENTS AND TRADEMARKS

The Company holds various patents and trademarks covering a number of its products and processes. While the Company believes these patents and trademarks offer significant commercial benefits, the Company's management does not believe any individual patent or trademark is of material importance to the Company's business as a whole or that the success of the Company's business is dependent upon its portfolio of patents and trademarks.

Research and development expenditures are described in Note 1, "Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements.

ENVIRONMENTAL

The Company's operations are subject to various laws and regulations relating to maintaining or protecting the quality of the environment. Information regarding environmental compliance and contingencies is set forth under the "Environmental" caption in "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Note 2, "Repositioning Plans," and in Note 19, "Commitments and Contingencies," of the Notes to Consolidated Financial Statements.

EMPLOYEES

The Company currently employs approximately 4,200 people, 38% of whom are employed outside the United States. Approximately 150 U.S. employees are represented by collective bargaining

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agreements. The Company maintains good employee relations, and while the Company has successfully completed its past labor negotiations without a work stoppage, it cannot predict the outcome of any future contract negotiations.

AVAILABLE INFORMATION

The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge on the Company's Internet website at http://www.greatlakes.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission.

ITEM 2.    Properties

The Company leases its principal executive offices in Indianapolis, Indiana. The Company operates 20 production facilities in 9 countries. The Company has distribution facilities at all of its manufacturing sites. Listed under "Item I. Business" above in the table captioned "Products and Services" are the production facilities by business unit. The Company's principal research facilities are in West Lafayette, Indiana, and Decatur, Georgia. Most principal locations are owned.

In addition, the Company owns or leases warehouses, distribution centers and office space for administrative and sales activities throughout the world. All of the Company's facilities are in good repair, suitable for the Company's businesses, and have sufficient capacity to meet present market demands at an efficient operating level.

ITEM 3.    Legal Proceedings

The Company cooperated with the United States Department of Justice (DOJ) and the European Commission in their respective investigations of the bromine and brominated products industry. Both investigations were initiated after the Company self-reported to those agencies certain business practices that raised questions under antitrust laws. As a result of the Company's cooperation, the Company and its current directors and employees were accepted into the DOJ's amnesty program. In addition, the Company sought favorable treatment under a program in the European Union that also rewards self-reporting and cooperation. On May 26, 2003, the Company received a letter from the EC Competition Directorate General officially notifying the Company of the Commission's decision not to pursue any proceedings.

The Company believes it has fully complied with all applicable conditions to date and has continued to cooperate with the DOJ in connection with certain follow-up matters arising out of the investigation, all of which are covered by the Company's acceptance into the amnesty program. Although, to the Company's knowledge, there have been no additional matters that have arisen in connection with the investigations, the Company intends to continue to be in full compliance with the DOJ and European Union programs.

There were 10 federal purported class action lawsuits and five California purported class actions naming the Company, each claiming treble damages arising out of an alleged conspiracy concerning the pricing of bromine and brominated products. The federal lawsuits were consolidated in the District Court for the Southern District of Indiana, which, over the Company's opposition, certified a class of direct purchasers of certain brominated products.

On September 10, 2002, the Company agreed to settle all of the federal class actions. The settlement agreement affects direct purchasers from the Company of brominated diphenyl oxides (decabromodiphenyl oxide, octabromodiphenyl oxide and pentabromodiphenyl oxide) and their blends, tetrabromobisphenol-A and its derivatives and all methyl bromide products and their derivatives in the United States between January 1, 1995 and April 30, 1998. The Company agreed

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to a $4.1 million cash payment and $2.6 million in vouchers for the future purchase of decabromodiphenyl oxide and/or tetrabromobisphenol-A, to be distributed to class members. The cash settlement was reflected in the fourth quarter of 2002 as a reduction to litigation reserves previously recorded in prior periods.

Pursuant to the settlement agreement, the Company remitted the cash portion to an escrow account on November 8, 2002, subject to final approval of the settlement agreement by the federal court. After notice to class members, the federal court gave final approval to the settlement in January 2003. In addition, the plaintiffs submitted a plan of distribution for court approval. The plan included a form of voucher agreed to by the Company. As of the end of the fourth quarter of 2003, no vouchers have been issued.

The California cases pending in the Superior Court for San Francisco County claim alleged violations of California competition laws and were stayed pending resolution of the federal cases. The cases are not impacted by the federal settlement. The Company has denied that the cases were legitimately filed as class actions, denies all liability and intends to defend the cases vigorously.

OSCA, the interest in which the Company divested to BJ Services Company as of May 31, 2002, is a party to certain pending litigation regarding a blowout of a well in the Gulf of Mexico operated by Newfield Exploration Company. In the lawsuit, the plaintiffs claimed that OSCA and the other defendants breached their contracts to perform work-over operations on the well and were negligent in performing those operations. On April 4, 2002, a jury reached a verdict on those claims, finding OSCA and the other defendants responsible for those claims and determining OSCA's share of the damages. In connection with the lawsuit, the Company asserted claims against its insurers and insurance brokers in support of insurance coverage for this incident. A related trial on these insurance coverage claims was conducted by the submission of legal briefs. Thereafter, the court issued its final judgments on the underlying liability claims and the insurance coverage claims, entering judgment against OSCA for a net amount of approximately $13.3 million plus interest, and finding that such amount was only partially covered by insurance. Pursuant to an indemnification agreement between the Company and BJ Services entered into at the time of the sale of OSCA (see Note 4 to the Consolidated Financial Statements), Great Lakes has agreed to pay BJ Services a certain percentage of any uninsured cash damages in excess of an amount paid by OSCA upon settlement or final determination of this pending litigation. As of December 31, 2003, the Company has a $9.4 million reserve in discontinued operations for this indemnification liability. Great Lakes and BJ have appealed the liability and insurance coverage decisions.

On May 28, 2002, Albemarle Corporation filed two complaints against the Company in the United States District Court for the Middle District of Louisiana, one alleging that the Company infringed on three process patents held by Albemarle Corporation relating to bromine vacuum tower technology, and the other alleging that the Company had infringed or contributed or induced the infringement of a patent relating to the use of decabromodiphenyl ethane as a flame retardant in thermoplastics. On a motion by the Company and over Albemarle's objection, the cases were consolidated. In addition, the Company has filed a counterclaim with the District Court in the flame retardant cases, alleging, among other things, that the Albemarle patent is invalid or was obtained as a result of inequitable conduct in the United States Patent and Trademark Office. On August 28, 2003, Albemarle moved to amend its complaints seeking to add additional counts of patent infringement and trade secret violations. The Company has opposed that motion.

With respect to the Albemarle case, the Company believes that the allegations of the original complaints, as well as the allegations in the additional counts which are the subject of the pending motion, are without basis factually or legally, and intends to defend the cases vigorously.

During the second quarter of 2003, the Company favorably resolved a dispute arising out of a customer's breach of a supply contract in the amount of $3.1 million, related to its Fluorine business.

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There are also various other lawsuits and claims, other than those mentioned above, pending against the Company and certain of its consolidated subsidiaries. While it is not possible to predict or determine the outcome of legal actions brought against the Company or the ultimate cost of these actions, the Company believes the costs associated with all such actions in the aggregate will not have a material adverse effect on its consolidated financial position, liquidity or results of operations. Furthermore, no director, officer or affiliate of the Company, or any associate of any director or officer is involved, or has a material interest in, any proceeding that would have a material adverse effect on the Company.

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

No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

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PART II

ITEM 5.    Market for Registrant's Common Equity and Related Stockholder Matters

The common stock of Great Lakes Chemical Corporation is traded on the New York Stock Exchange (the "NYSE") under the trading symbol GLK. The following table sets forth the quarterly dividends paid per share and the ranges of high and low market prices per share on the NYSE for the last two fiscal years, based upon information supplied by the NYSE.

As of February 27, 2004, there were approximately 2,006 stockholders of record of the Company's common stock.

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ITEM 6.    Selected Financial Data

⁽¹⁾

Amounts reflect balances for continuing operations.

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ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following provides a review of the consolidated financial position of Great Lakes Chemical Corporation ("the Company"), at December 31, 2003 and 2002, the consolidated results of operations for each of the three years in the period ended December 31, 2003, and where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the accompanying consolidated financial statements, notes and selected consolidated financial data. As described in Note 3 to the Consolidated Financial Statements, the results of the Fine Chemicals business as a part of the Performance Chemicals business unit and OSCA, formerly the Energy Services and Products business unit, are reported in Discontinued Operations for all periods presented.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The Company is including the following cautionary statement to make applicable and take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 with respect to any forward-looking statement made by, or on behalf of, the Company. Forward-looking statements generally may be identified by words such as "believes," "expects," "intends," "may," "will likely result," "estimates," "anticipates," "should" and other similar expressions, or the negative of such words or expressions. The factors identified in this cautionary statement are important factors (but do not necessarily constitute all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company.

Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished.

Taking into account the foregoing, certain factors, including, but not limited to, those listed below, may cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company.

•

Economic factors over which the Company has no control, including changes in inflation, tax rates, interest rates and foreign currency exchange rates.



•

Competitive factors such as pricing pressures on key products and the cost and availability of key raw materials.



•

Governmental factors including laws and regulations and judicial decisions related to the production or use of key products such as bromine and bromine derivatives.



•

The difficulties and uncertainties inherent in new product development. New product candidates that appear promising in development may fail to reach the market because of safety concerns, inability to obtain necessary regulatory approvals, difficulty or excessive costs to manufacture, or infringements of the patents or intellectual property rights of others.



•

Legal factors, including unanticipated litigation of product liability claims, antitrust litigation, environmental matters or patent disputes with competitors, which could preclude commercialization of products or negatively affect the profitability of existing products.

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•

Inability to obtain existing levels of product liability insurance or denial of insurance coverage following a major product liability claim.



•

Changes in tax laws, including future changes in tax laws related to the remittance of foreign earnings or investments in foreign countries with favorable tax rates.



•

Changes in accounting standards promulgated by the Financial Accounting Standards Board; the Securities and Exchange Commission; or the American Institute of Certified Public Accountants, which are adverse to the Company.



•

Internal factors such as changes in business strategies and the impact of cost control efforts and business combinations.



•

Loss of brine leases or inability to produce the bromide ion in required quantities due to depletion of resources or other causes beyond the Company's control.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. See Note 1 to the Company's Consolidated Financial Statements for a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. We believe the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our consolidated financial position and results of operations.

GENERAL

The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. The most significant estimates and assumptions relate to restructuring charges, impairment of goodwill, intangibles and other long-lived assets, income taxes, pensions, asset retirement obligations and contingencies related to litigation and environmental matters. Actual amounts could differ significantly from these estimates.

RESTRUCTURING ACTIVITIES

The Company recorded restructuring charges, net of adjustments, of $28.7 million, $(0.9) million and $42.5 million in 2003, 2002 and 2001, respectively. These charges and adjustments were made in connection with detailed repositioning and restructuring plans approved by the Board, which provided for a series of cost reduction initiatives to further streamline operations, strengthen the Company's competitive position and provide a platform for future growth. The charges associated with these plans included estimates for employee severance costs, plant closure and related environmental costs and the settlements of various contractual obligations resulting from these repositioning and restructuring actions. When it is determinable that the actual costs differ from the original estimates, adjustments, either additional charges or reversals, are made to the remaining restructuring reserves at that time.

IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS

The Company evaluates long-lived assets, including goodwill and other intangible assets, annually or when events occur or circumstances change that may result in a potential impairment. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of acquired businesses. If impairment indicators are present, the Company is required to assess the recoverability of these assets. In assessing the recoverability of the

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Company's goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to adjust the impairment charges for these assets. The Company recorded asset impairments of $69.1 million, $6.0 million and $106.1 million in 2003, 2002 and 2001, respectively.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The statement also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

At December 31, 2003 and 2002, the Company had deferred tax assets, net of valuation allowances, in excess of deferred tax liabilities of $50.5 million and $9.9 million, respectively. At December 31, 2003 and 2002, management determined that it is more likely than not that $56.4 million and $35.7 million, respectively, of certain deferred tax assets, primarily foreign jurisdiction net operating loss carryforwards, will not be realized, requiring the Company to establish a valuation allowance for those amounts.

The Company evaluates on a quarterly basis its ability to realize its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company's forecast of future taxable income and available tax planning strategies that could be implemented to support realization of certain deferred tax assets.

Failure to achieve forecasted taxable income might affect the ultimate realization of certain deferred tax assets. Factors that may affect the Company's ability to achieve sufficient forecasted taxable income include, but are not limited to, increased competition, general economic conditions, a decline in sales or earnings, loss of market share or delays in product availability.

In addition, the Company operates within multiple taxing jurisdictions and is subject to audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. In management's opinion, adequate provisions for income taxes have been made.

DEFINED BENEFIT PENSION PLANS

The Company sponsors various non-contributory and contributory defined benefit pension plans which have significant pension benefit costs developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets and rates of increases in compensation levels. The Company is required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions. At October 1, 2003 (the annual plan measurement date), appropriate changes were made in the key assumptions for the plans. See Note 15 to the Company's Consolidated Financial Statements for detail of these assumptions. The Company currently expects pension costs to decrease by approximately $3 million to $12 million in 2004 compared to 2003. The Company has no funding requirements for 2004 as actuarially determined for the U.S. plans. Although there were no funding requirements for 2003, the Company made a voluntary contribution of 300,000 shares of Company treasury stock, or $6.3 million, to the U.S. qualified plan during the second quarter of 2003. In the third quarter of 2003, the Company made an additional discretionary cash contribution to the U.S. qualified plan of $10 million. Company contributions to the non-U.S. plan in 2004 are expected to be approximately $3 million, in line with 2003 amounts.

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An increase in either the discount rate or expected return on plan assets of one-fourth of 1 percentage point, holding all other assumptions constant, would decrease the Company's pension expense by $2.4 million and $0.6 million, respectively. Correspondingly, a decrease in these assumptions of one-fourth of 1 percentage point, holding all other assumptions constant, would increase the Company's pension expense by $2.4 million and $0.6 million, respectively.

ASSET RETIREMENT OBLIGATIONS

The Company currently has legal obligations to close bromine supply and disposal wells at the end of the assets' useful lives. The Company carries these obligations at their fair value as determined under Statement of Financial Accounting Standards (SFAS) 143, "Accounting for Asset Retirement Obligations," (ARO) which was adopted as of January 1, 2003. The statement requires that upon recognition of a liability, the cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. Upon adoption, the Company recorded an increase in plant and equipment, net of related accumulated depreciation, of $0.6 million and recognized an asset retirement obligation of $5.7 million, resulting in a charge to income reported as a cumulative effect of an accounting change of $3.3 million, net of income taxes. The calculation of fair value requires the Company to make certain estimates, including the amount and timing of future cash outflows and appropriate discount rates. Changes in certain estimates resulted in an adjustment to reduce the asset retirement obligation by $0.3 million. Additional adjustments may be required in the future if the estimated costs and timing of closure activities changes.

CONTINGENCIES

The Company is subject to legal proceedings, lawsuits and other claims related to environmental, labor, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes related to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The Company records a reserve when management considers the likelihood of an unfavorable outcome probable and when a reasonable estimate of the liability can be made. At December 31, 2003, the Company had accrued $8.0 million and $43.8 million related to litigation and environmental liabilities, respectively, related to continuing operations. These accruals are estimates and may change in the future as new developments arise as changes are made in settlement strategy.

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RESULTS OF OPERATIONS

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

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The following table provides details of amounts for asset impairments, restructuring charges and certain other significant items reflected in the Company's operating results in 2003, 2002 and 2001. This information should be referenced when reading the Results of Operations section below.

Certain Other Significant Items included in Operating Income:

⁽¹⁾

See Note 2 to the Consolidated Financial Statements

2003 COMPARED WITH 2002

Continuing Operations

Net sales increased 4.5% to $1,464.6 million from $1,401.5 million in the prior year. Included in net sales in 2003 were $43.9 million of sales related to the household product acquisitions of Lime-O-Sol and A&M Products. Excluding the sales from these acquisitions, net sales increased 1.4%. Sales for the year were positively impacted by 4.3% from the effects of foreign exchange, offset by lower volumes of 2.2% and a 0.7% impact of lower prices.

Gross profit decreased $59.0 million to $272.8 million in 2003 from $331.8 million in 2002. Gross profit margins (gross margin as a percentage of net sales) decreased to 18.6% from 23.7% in the prior year. Included in cost of products sold in 2003 and 2002 were $28.6 million and $(1.5) million, respectively, of certain significant items, as reflected in the above table. Excluding these amounts, gross margin decreased to 20.6% from 23.6% year-over-year. The decrease reflects the impact of

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lower sales volumes during the year. Higher raw material and energy costs totaling $23.8 million, lower selling prices and unabsorbed manufacturing costs also contributed to the decline in gross profit margin.

Selling, general and administrative expenses increased $41.4 million to $256.0 million. Included in the increase are net expenses for restructuring and other significant items of $14.0 million and $(0.4) million for 2003 and 2002, respectively, detailed in the table above. Also contributing to the increase in selling, general and administrative expenses was the inclusion of $10 million of expenses incurred by the household product acquisitions in 2003, the negative effects of foreign currency of $9 million and higher pension and insurance costs of $6 million.

Asset impairments in 2003 and 2002 totaled $69.1 million and $6.0 million, respectively. Impairment charges in the current year reflect the closure of three Polymer Additives manufacturing sites and a research and development facility which totaled $41.8 million, approximately $21.5 million for the impairment of goodwill and other long-lived assets of the antimony products business, $1.4 million of asset impairments due to Specialty Products site consolidations and $4.4 million of assets related to the Fluorine business. These asset impairments are part of the repositioning plan implemented by Company management starting in the second quarter of 2003. Asset impairments in 2002 reflect the activities occurring in 2002 subject to the 2001 repositioning plan.

Operating income (loss) decreased $163.5 million to $(52.3) million in 2003 from $111.2 million in the prior year. Included in operating income (loss) were net charges of $111.7 million and $4.1 million in 2003 and 2002, respectively, detailed in the above table. In addition, operating income decreased due to lower sales prices and volumes, higher raw material and energy costs and increased selling, general and administrative expenses. In total, foreign exchange lowered operating income by $3.0 million.

Other income (expense) - net decreased $4.0 million from an expense of $(14.9) million in the prior year to an expense of $(10.9) million in 2003. Other income (expense) in 2003 included a $1.1 million favorable arbitration settlement and a $1.1 million net reduction to environmental reserves related to three non-operating sites. Other income (expense) in 2002 included $4.6 million of fixed asset write-downs net of a reversal of $(2.7) million for litigation and other settlements. Included in the fixed asset write-downs of $4.6 million is a $1.6 million impairment of the Specialty Products business unit's BioLab corporate office facility as a part of a management plan to move to a leased facility in 2003. The existing facility was sold in January 2003. Changes in foreign exchange were favorable by $2.3 million in the current year compared to the prior year. Amortization expense in 2003 and 2002 were $5.8 million and $3.4 million, respectively, with the increase in 2003 reflecting the amortization of intangible assets acquired through the household products acquisitions.

Income tax expense (credit) for the year ended December 31, 2003 amounted to a credit of $(55.1) million or an effective tax rate of (61.9)% compared to an expense of $21.3 million or an effective tax rate of 31.0% in the prior year. The 2003 effective rate benefited from a favorable ruling from the Internal Revenue Service (IRS) regarding certain income tax issues related to the Company's federal income tax filings. As a result of this decision and through evaluation of its remaining reserves, the Company released $27.5 million to earnings through income taxes (credits) in the third quarter of 2003. Excluding this release to earnings in 2003, the Company's effective tax rate would have been 31.0%.

Income (loss) from continuing operations before cumulative effect of accounting change was $(33.9) million or $(0.67) per share in 2003, as compared to $47.4 million or $0.94 per share in 2002.

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SEGMENT INFORMATION

The Company has changed its reportable business segments as of the first quarter of 2003 in order to align the external presentation of results with the Company's current management and operating structure. The Company continues to operate in three business segments - Polymer Additives, Specialty Products (formerly named Water Treatment) and Performance Chemicals. In addition, the Agricultural Products and Bromine Intermediates businesses, collectively referred to as the Brominated Performance Products business, were reclassified from Performance Chemicals to the Polymer Additives business segment. The remaining components of the Performance Chemicals segment are unaffected. In addition, the Water Treatment segment has been renamed Specialty Products to include the Company's recent acquisitions of specialty household cleaning products, which joins the Company's swimming pool and industrial water sanitizers and related products.

The segment information for the year ended December 31, 2002 reported in the Company's 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission were presented in the previously existing business segments. The following table provides a comparison of the business segments as reported on the Form 10-K as of December 31, 2002 and the realigned segment presentation beginning in the first quarter of 2003.

As a result of this realignment, segment results from the prior year have been reclassified to conform to the current year presentation.

The Company's three global segments: Polymer Additives, Specialty Products and Performance Chemicals are strategic business units that offer products and services that are intended to satisfy specific customer requirements. The units are organized and managed to deliver a distinct group of products, technology and services.

Set forth below is a discussion of the operations of the Company's business segments: Polymer Additives, Specialty Products and Performance Chemicals. The Company evaluates business unit

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performance and allocates resources based on operating income, which represents net sales less cost of products sold and selling, general and administrative expenses, as well as cash flows and return on investment. Both Polymer Additives and Specialty Products use bromine as a raw material in their production processes. Bromine is transferred at cost from Polymer Additives to Specialty Products. In addition, assets used in the production of bromine are allocated from Polymer Additives to Specialty Products based on the percentage of production consumed.

Polymer Additives

The Polymer Additives business unit is a leading provider of flame retardants, polymer stabilizers and optical monomers and brings the most comprehensive product basket to the global marketplace. Polymer Additives provides its customers an array of integrated polymer additive solutions that meet specific, well-defined customer needs in a variety of products including consumer electronics, computers and business equipment, automotive, furniture, fibers, wire and cable, household appliances, communications equipment, building and construction materials, packaging, textiles, polymers, cosmetics and optical monomers.

Net sales increased $4.3 million or 0.6% in 2003. The increase in sales in Polymer Stabilizers more than offset a decline in sales in Flame Retardants and Brominated Performance Products. Overall selling prices for Polymer Additives were comparable year over year. Price increases in Flame Retardants were offset by pricing pressure in Polymer Stabilizers, which leveled off in the second half of the year. Sales volumes in Polymer Additives decreased sales by 5.1%. The business continues to focus on offering new innovative solutions in the marketplace. The level of new product sales, defined by management as products introduced in the last five years, increased to $81 million in 2003 from $59 million in 2002. Sales in Polymer Additives were favorably impacted 5.3% year-to-date from the effects of foreign exchange.

Operating income (loss) decreased $126.5 million to $(89.5) million for the year. Included in operating income in 2003 are $94 million of charges for asset impairment, restructuring and other significant items. Included in operating income in 2002 are $5.4 million of charges for adjustments to reserves for previously recorded charges. In addition, the decrease reflects the impact of higher raw material costs, lower sales volumes, the reduction of inventory levels and unfavorable manufacturing variances in 2003 in the Bromine business. Operating results of Polymer Additives were also affected by a decline in sales of Methyl Bromide, an agricultural product, when compared to last year. This decline reflects variations in customer order patterns and the phase-down of sales of Methyl Bromide in accordance with the Montreal Protocol. Mandated production cuts began in 1999 and are expected to continue through 2005 unless legislation or other regulatory actions modify current phase-down requirements.

Specialty Products

The Specialty Products business unit is the world's leading provider of recreational water care products to the consumer. BioLab Water Additives, through its proprietary position in polymaleate chemistry, and as the world's foremost provider of bromine-based biocides, is a leading supplier of antiscalants, corrosion inhibitors, dispersants, antifoams, hydantoin derivatives, formulated oxidizers and desalination solutions. Through its acquisitions of Lime-O-Sol and A&M Cleaning Products in 2003, the Specialty Products business entered the specialty household cleaning products business with The Works® brand of non-abrasive bathroom cleaners, glass and surface cleaners, toilet bowl

21

cleaners, drain openers and rust and calcium removers, as well as Greased Lightning™ and Orange Blast™ multipurpose cleaners.

Specialty Products net sales increased $68.9 million or 12.7% to $611.9 million in the current year. Net sales attributable to the Company's 2003 household products acquisitions (see Note 4 to the Consolidated Financial Statements) were $43.9 million or 7.2%. Also contributing to the increase in sales were higher sales volumes of new products of 2.0% and the favorable effects of foreign currency of 3.2%, partially offset by a 1% decline in price.

Operating income for Specialty Products decreased $10.4 million to $72.7 million for the year 2003. Included in 2003 are $4.2 million of asset impairment charges, severance costs and headquarter relocation costs. Included in 2002 are reversals of $1.0 million of previously recorded reserves for contract cancellation and other costs. An unfavorable sales mix triggered by an unseasonably cool and rainy pool season in the northeast and mid-central U.S. contributed to the lower operating results in the current year. In addition, the positive effects of acquisitions and foreign exchange were more than offset by the effects of a decrease in productivity, higher raw material costs and increased selling, general and administrative expenses to fund growth initiatives, in particular, the household products business.

Performance Chemicals

The Performance Chemicals business unit, which includes WIL Laboratories, is a global supplier of fluorine-based fire suppression agent FM-200®, fluorine-based intermediates and all phases of nonclinical toxicological testing to broad and diverse markets that include information technology; telecommunications; transportation; medical; automotive; electronics; photographic paper and films; rubber compounds; detergents; soil, crop and structural pest control; pharmaceuticals; and the chemical and biotechnology industry. Performance Chemicals excludes the Fine Chemicals business as this business has been reported as discontinued operations for all periods presented, (see Note 3 to the Consolidated Financial Statements).

Net sales for Performance Chemicals decreased $12.0 million or 10.4% in the current year. Sales volumes decreased 3.9% while pricing decreased by 7.9%. These decreases were slightly offset by the positive effects of foreign exchange. Sales at WIL Laboratories increased from the prior year due to increased volumes and a favorable service mix, while the Company's fluorine-based businesses continued to face weaknesses in pricing and volume based on the state of the information and telecommunication infrastructure spending levels.

Operating income decreased $12.8 million or 48.1% in the current year. Operating income in 2003 included $4.8 million of asset impairments and restructuring charges offset by a favorable litigation settlement of $3.1 million. The volume and price declines in the fluorine-based business and higher spending to fund growth programs surrounding the fire suppression business negatively impacted 2003 operating income.

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2002 COMPARED WITH 2001

Continuing Operations

Net sales increased 3.6% to $1,401.5 million from $1,352.8 million in the prior year. Strong volume gains in the Specialty Products and Polymer Additives business units were offset by lower sales in Performance Chemicals related to the Fluorine business and lower selling prices in the Polymer Additives and Performance Chemicals business units. For the Company as a whole, sales volumes increased 5% while pricing was down 2%.

Gross profit margins increased to 23.7% from 14.4% in the prior year. Included in the gross profit margin in 2001 are $96.9 million of repositioning activity costs as reflected in the table on page 18. Excluding these costs, gross profit margins increased to 23.7% from 21.5%. The increase reflects the benefits realized from improved manufacturing efficiencies, lower raw material costs and productivity gains associated with the repositioning efforts undertaken in the second half of 2001. These items more than offset reduced selling prices in Polymer Additives and Performance Chemicals.

Selling, general and administrative expenses decreased $15.2 million to $214.6 million. As a percent of sales, selling, general and administrative expenses decreased from 17.1% to 15.3%. These decreases reflect the benefits of repositioning efforts undertaken in the second half of 2001, as well as lower information technology and legal spending, which more than offset higher pension and insurance costs. Included in 2002 and 2001 are net repositioning activity costs of $(1.5) million and $6.7 million, respectively (see Note 2 to the Consolidated Financial Statements).

Asset impairments in 2002 of $6.0 million reflect additional impairments needed to complete actions undertaken in connection with the 2001 repositioning plan. Asset impairments in 2001 of $106.1 million reflect the closure of three plants and impairment of goodwill in the Polymer Additives business unit as reflected in the table on page 18.

Operating income (loss) was $111.2 million compared to $(141.4) million in the prior year. Included in operating income in 2002 are $5.1 million of restructuring charges and asset impairments offset by $1.0 million of reversals of previously recorded repositioning items. Operating income in 2001 includes the effects of $209.7 million of restructuring charges and other repositioning activities. Excluding the impact of restructuring charges and repositioning items, operating income increased $47.0 million year over year. This increase reflects the higher sales volumes, productivity gains, lower raw material costs and the decrease in selling, general and administrative expenses, all of which more than offset lower selling prices.

Interest income (expense) - net decreased $5.2 million to $(27.6) million in 2002 reflecting reduced net debt levels in the current year and the effects of an interest rate swap entered into during the first quarter of 2002, which reduced interest expense by $2.1 million in 2002.

Other income (expense) - net decreased $31.9 million from other expense - net of $(46.8) million in the prior year to $(14.9) million in 2002. Other income (expense) in 2002 included $4.6 million of fixed asset write-downs net of a reversal of $(2.7) million for litigation and other settlements. Included in the fixed asset write-downs of $4.6 million is a $1.6 million impairment of the Specialty Products business unit's BioLab corporate facility as a part of a management plan to move to a leased facility in 2003. The existing facility was sold in January 2003. Other income (expense) in 2001 included one-time charges of $33.8 million (see Note 2 to the Consolidated Financial Statements). In addition, as of January 1, 2002, the Company ceased amortization of goodwill in accordance with the adoption of SFAS No. 142 (see Note 1 to the Consolidated Financial Statements). Goodwill amortization of $6.5 million was recognized in 2001. The absence of $6.5 million in goodwill amortization in other income (expense) - net in 2002 was more than offset by lower earnings of

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affiliates and higher foreign exchange losses due to the weakening of the U.S. dollar against the euro and the British pound.

Income tax expense (credit) for the year ended December 31, 2002 amounted to an expense of $21.3 million or an effective tax rate of 31.0% compared to a credit of $(39.8) million or effective tax rate of (18.0)% in the prior year. The 2002 effective income tax rate of 31% was higher than the Company's 2001 income tax rate due primarily to the increase in the valuation allowance and non-deductible goodwill write-offs related to the 2001 repositioning activities.

Income (loss) from continuing operations was $47.4 million or $0.94 per share in 2002, as compared to $(181.2) million or $(3.60) per share in 2001.

Set forth below is a discussion of the operations of the Company's business segments: Polymer Additives, Specialty Products and Performance Chemicals. Operating income, which is the income measure the Company uses to evaluate business segment performance, represents net sales less costs of products sold and selling, general and administrative expenses. Both Polymer Additives and Specialty Products use bromine as a raw material in their production processes. Bromine is transferred at cost from Polymer Additives to Specialty Products. In addition, assets used in the production of bromine are allocated from Polymer Additives to Specialty Products based on the percentage of production consumed.

Net sales increased $45.4 million or 6.5% in 2002. New product introductions and stronger end market demand drove an increase in sales volumes of 7%. This volume growth was partially offset by a 2% decline in selling prices. Roughly one-half of the 7% volume growth, or $25 million, is attributable to new product growth. Foreign exchange added 2% to sales.

Operating income (loss) increased $226.5 million to $37.0 million for the year. Excluding restructuring costs and asset impairments of $5.4 million in 2002 and restructuring costs, asset impairments, inventory write-downs, environmental remediation costs and other repositioning items of $186.4 million included in operating income (loss) in 2001 (see Note 2 to the Consolidated Financial Statements), operating income increased $45.5 million. Higher sales volumes and new product growth contributed $25 million to the increase. In addition, benefits derived from restructuring activities, lower raw material costs and focused productivity efforts added $39 million. These benefits more than offset the decrease in selling prices of $17 million and the negative impact of foreign exchange of $1 million in the current year.

Specialty Products net sales increased 7.1% to $543.0 million in the current year. Market penetration led by growing consumer acceptance of innovative product offerings and warmer weather patterns throughout most of the 2002 pool season drove the increase.

Operating income increased from $53.6 million in 2001 to $83.1 million in 2002. Included in 2002 are reversals of $1.0 million of previously recorded reserves for contract cancellation and other costs. Excluding these 2002 reversals and restructuring charges, inventory write-downs, contract cancellation costs and other repositioning items of $11.2 million included in operating income in 2001 (see Note 2 to the Consolidated Financial Statements), operating income increased $17.3 million. The positive impact of higher sales volumes and the strength of the new product portfolio contributed

24

$10 million. In addition, focused productivity efforts and lower raw material costs each added $5 million. Acquisitions also added $1 million. The positive impact of these items more than offset the effect of slightly lower selling prices of $4 million.

Net sales decreased $26.4 million or 18.7% in the current year. Sales decreased 11% from lower volumes and 8% from a decline in selling prices, primarily in the Fluorine business. These decreases reflect the continued slow-down in information technology and telecommunication infrastructure spending.

Operating income decreased $7.4 million or 21.8% in the current year. Excluding restructuring charges, inventory write-downs, environmental remediation costs and other repositioning items of $9.6 million included in operating income in 2001 (see Note 2 to the Consolidated Financial Statements), operating income decreased $17.0 million. Lower sales volumes contributed $11 million to the decrease while lower selling prices added $6 million to the decrease.

Discontinued operations

In 2002, management, with the approval of the Board of Directors, committed to a plan to divest the Company's Fine Chemicals business, previously a part of the Performance Chemicals business unit. As a result of these actions and management's continued efforts to sell the business, the Company reports Fine Chemicals as discontinued operations for all periods presented. The Halebank, U.K. site of the Fine Chemicals business was sold on December 17, 2003 resulting in a loss on sale of approximately $900,000, reported in other income (expense) - net. Management's plans are to continue its efforts to sell the remaining Fine Chemicals site until a sale has been consummated.

In May 2002, the Company completed the sale of its Energy Services and Products business unit, OSCA, to BJ Services Company. Under the terms of the sale, BJ Services acquired all outstanding shares of OSCA, including the Company's 53.2% holding, for $28.00 per share in cash, or $221 million, resulting in a gain of $175.4 million. This transaction provided the Company with net proceeds of approximately $200 million, which was used to reduce the Company's debt position. As a result of this transaction, the Company has reflected OSCA as discontinued operations in 2002 and 2001.

Net sales and operating income (loss) relating to discontinued operations for 2003, 2002 and 2001, are as follows:

Included in operating income in 2003 were restructuring charges for Fine Chemicals consisting of asset impairments of $15.8 million and $1.9 million of charges for severance. Included in operating income for the Fine Chemicals business in 2002 are $22.9 million of asset impairment charges and $3.8 million of severance costs. These charges were recorded in conjunction with the intended sale of the Fine Chemicals business. Fine Chemicals net restructuring charges recorded in 2001 of

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$118.5 million consisted of $106.0 million of asset impairments, which included $22.0 million of fixed asset impairments and $84.0 million of impaired goodwill; $5.8 million of severance costs; $5.1 million of plant closure and environmental costs; and $1.6 million of other costs. The 2001 charges were undertaken as a part of a detailed repositioning plan approved by the Company's Board of Directors in 2001.

As of December 31, 2003, $0.7 million of restructuring charges recorded in 2003 and $8.9 million of restructuring charges recorded in 2001 remain to be spent. There are no amounts outstanding related to the charges taken in 2002 or 2000. The major components of the remaining reserves relate to severance of $1.5 million and $6.4 million of plant closure and environmental costs. Plant closure and environmental costs have been allocated between accrued expenses and non-current liabilities based on the anticipated timing of these expenditures.

Outlook

The Company took actions in 2003 in order to meet current and future challenges by restructuring, creating critical strategic alliances, continuing the growth of new products and expanding the reach of the Company's consumer products portfolio. These actions helped the Company emerge from a difficult year with optimism for the Company's long-term future.

New Product Growth

The Company has gone from virtually no revenue from new products five years ago in the industrial businesses (Polymer Stabilizers, Flame Retardants and Fluorine) to approximately $90 million in 2003, and revenue is anticipated to reach $125 million in 2004. Specialty Products new product revenues were $150 million in 2003 and are anticipated to be approximately $190 million in 2004. For the Company as a whole, new product revenues are expected to reach 20% of total revenues in 2004.

Raw Material and Energy Costs

The Company's operating units are greatly impacted by price changes for raw material and energy costs. Increases in raw material costs reduced earnings by $20.4 million in 2003. Energy costs, primarily natural gas prices, increased operating costs by $2.8 million in 2003. Due to the magnitude of energy usage across the manufacturing processes of Great Lakes, a $1 change in the price of natural gas MMBTUs has an approximate $0.03 impact on the Company's earnings per share on an annual basis. The Company has entered into raw material contracts and certain financial instruments such that raw material costs for 2004 are anticipated to be at worst even with 2003 levels and the cost of natural gas in 2004 to be comparable with 2003 levels.

Foreign Exchange

Great Lakes, as a multinational company, is exposed to fluctuations in foreign exchange rates, primarily the euro and British pound in relation to the U.S. dollar. Approximately 40% of the Company's external sales are invoiced from foreign locations, and approximately 35% of the Company's long-lived assets reside in foreign locations. In 2003, foreign exchange rate fluctuations increased sales $60 million or 4.3% but had a negative impact on operating income of $3.0 million. As a result of the Company closing two U.K. plants and entering into alternative sourcing arrangements in the fourth quarter of 2003, the Company's exposure to foreign exchange fluctuations has been reduced heading into 2004. While the Company currently hedges certain portions of its foreign currency exposure, significant changes in foreign currency exchange rates in 2004 would impact both sales and operating income levels.

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Polymer Additives

The Polymer Additives business saw sluggish end market demand through most of 2003. However, in the fourth quarter of 2003, Polymer Additives reported positive volume gains on a sequential basis reflecting stronger order patterns. This does provide some evidence of an upturn in demand in key end markets such as electronics going into 2004.

During 2003, the Polymer Additives business was able to enact price increases on several of its products. Pricing in Polymer Additives continues to be challenging due to the effects of competition as well as the weak U.S. dollar. As a result, the business continues to focus on driving continuous productivity gains, executing restructuring plans, including the closure of three manufacturing facilities, expanding new product applications and increasing selling prices to help offset continued higher raw material and energy costs. In 2003, the Company entered into a long-term strategic sourcing agreement for elemental bromine and certain derivatives from Dead Sea Bromine Ltd. The agreement will allow Polymer Additives to benefit from the scale and efficiency of the world's largest bromine manufacturing complex on the Dead Sea.

Specialty Products

Demand for recreational water care products is influenced by a variety of factors including seasonal weather patterns. Sales volumes in 2003 were hampered by an unseasonably cool and wet spring in the Northeast and mid-Central regions of the United States. While management does not anticipate a repeat of these weather conditions in 2004, volumes in 2004 may be impacted by weather trends during the pool season.

In 2003, the Specialty Products segment entered the consumer household products market through the acquisitions of Lime-O-Sol and A&M Products. These acquisitions are leveraging Specialty Products' brand and channel management, consumer marketing and product innovation to expand the Company's reach into the consumer market. Expenditures were made in 2003 to integrate Lime-O-Sol and A&M Products into Specialty Products and to expand the markets for The Works® and Greased Lightning™ beyond the markets existing at the time of the acquisitions. Specialty Products is working to further penetrate the market with these established products as well as new household products through multiple channels.

Performance Chemicals

Throughout 2003, the fluorine-based businesses of the Performance Chemicals segment continued to feel the effects of lower information technology infrastructure and telecommunications spending, which led to lower sales volumes and prices. Performance Chemicals continues to work to increase market share through its Total Cost of Ownership program that encourages companies to install fire suppression systems using the Company's non-residue, non-ozone-depleting FM-200® product.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents - continuing operations at December 31, 2003 were $171.2 million, which represents a decrease of $87.9 million from $259.1 million at year-end 2002.

Cash provided by operating activities - continuing operations was $82.6 million in the current year compared to $152.3 million in the prior year. The current year decrease reflects the use of cash as a result of a decrease in earnings partially offset by working capital reductions in 2003 compared to prior year. Included in operating activities - continuing operations in 2003 was a $10 million cash contribution to the Company's pension plan and approximately $11 million of spending related to the Company's 2003, 2001 and 2000 repositioning plans. Spending in 2002 for 2001 and 2000

27

repositioning plans totaled $22 million. In addition, $14.4 million of cash tax payments were made during 2003, of which $12.5 million related to prior year tax liabilities.

Cash (used for) provided by investing activities - continuing operations amounted to $(164.9) million in 2003 compared to $(77.3) million in the prior year. Current year investing activities reflect the Company's acquisitions of Lime-O-Sol and A&M Products of $105.7 million. Prior year investing activities included $11.1 million for the Flexsys acquisition. Capital expenditures for 2003 were $62.7 million compared to $64.8 million in 2002.

Cash (used for) provided by investing activities - discontinued operations in 2002 includes $221 million of net cash proceeds received by the Company from the sale of OSCA (see Note 3 to the Consolidated Financial Statements).

Cash used for financing activities - continuing operations used $24.1 million of cash in 2003 compared to a use of $101.9 million in 2002. Net repayments of debt were $4.2 million in the current year and $81.6 million in 2002. The Company paid dividends of $18.1 million in 2003 versus $16.5 million in 2002, reflecting management's decision to increase the per share dividend rate. No repurchases of common stock were made in 2003 or 2002.

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

Long-term debt, less current portion decreased $5.0 million to $427.6 million from $432.6 million at the end of 2002 reflecting the cash activity noted above. The Company's total long-term debt, including the current portion, as a percentage of total capitalization at December 31, 2003 was 36.9%. This compares to 37.1% at December 31, 2002. The Company's net debt, defined as total long-term debt less cash and cash equivalents, was $263.5 million or 26.1% of capitalization at December 31, 2003. This compares to $181.5 million or 19.6% at December 31, 2002.

On October 2, 2003, the Company renewed the 364-day portion of its unsecured revolving credit facility. This facility was established on October 4, 2001 along with a facility with a five-year term. The facilities contain certain covenants, as defined in the agreements, with which the Company was in compliance as of December 31, 2003. Interest on borrowings outstanding under the agreements is based upon a variable rate tied to LIBOR. The facilities are used to support the Company's commercial paper program and for general corporate purposes. There were no outstanding borrowings on these facilities as of December 31, 2003 and 2002. On February 12, 2004, the Company amended these facilities to modify certain covenants and to reduce the amount the Company may borrow on the facilities from $425 million to $375 million.

The Company has outstanding $400 million of 7% notes due July 15, 2009. The notes were sold under a shelf registration process. The Company may sell various debt securities, common stock or rights or warrants to purchase common stock individually or in combination up to $750 million. The unissued securities remaining on the registration statement is $350 million at December 31, 2003. The registration provides the Company with increased flexibility to finance its growth. The amount and timing of any borrowings will depend on the Company's specific cash requirements.

At December 31, 2003, the Company's senior debt rating with Standard & Poor's and Moody's was A- and A3, respectively, and its commercial paper rating was A2 and P2, respectively.

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As of December 31, 2003, the Company had the following contractual obligations for continuing operations:

As of December 31, 2003, the Company had three long-term arrangements that require the purchase of raw materials to be used in operations. The arrangements require the purchase of a supplier's output up to a maximum quantity of material at prices negotiated during the term of the contract. It is expected that all purchases under these arrangements will be utilized in production. Other non-current liabilities primarily relate to environmental liabilities and long-term employee benefit obligations.

No common stock share repurchases were made in 2003 or 2002. At December 31, 2003, a total of 2.8 million shares remain available for repurchase under existing Board authorizations. Management continues to analyze share repurchases as cash flow, market conditions and investment opportunities warrant.

At December 31, 2003, the Company had guaranteed $20.8 million of debt of an unconsolidated affiliate.

Capital expenditures (excluding business acquisitions) in 2003 of $62.7 million were slightly lower than the $64.8 million spent a year ago. Capital spending is expected to be consistent with depreciation levels in 2004, with expenditures estimated to be approximately $75 million. Future capital spending, including amounts for environmental and safety projects, is expected to be financed primarily with cash provided by operating activities and, if necessary, with available debt financing.

OTHER MATTERS

Repositioning Activities
2003 Repositioning Plan

Throughout 2003, the Company experienced the detrimental effects of weak demand, competitive pricing and higher energy and raw material costs, which resulted in significantly lower levels of operating income and profitability. As a result, management presented to the Board of Directors on July 22, 2003 a comprehensive cost reduction plan to help mitigate these effects. The plan included site closures and consolidations, headcount reductions and other actions. Pre-tax charges related to this plan, which have been incurred over the second half of 2003 and will continue through the fourth quarter of 2004, are estimated to be $120 million. The impact of these actions, once completed, is expected to generate approximately $32 million in annual pre-tax savings.

Subsequent to the approval of the comprehensive cost reduction plan by the Board of Directors, the Company commenced an evaluation of the strategic alternatives for the antimony products business of Polymer Additives. This evaluation resulted in an impairment in the carrying value of these assets such that the Company recognized a $21.5 million charge in the fourth quarter of 2003. Inclusive of this charge, the total cost of the 2003 repositioning plan is estimated to be approximately $140 million.

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In the third and fourth quarters of 2003, the Company recorded pre-tax restructuring charges in continuing operations of $97.8 million related to the repositioning plan. The restructuring charges incurred during the year included costs associated with the planned closure of three plants in the Polymer Additives business segment, a strategic realignment of a Specialty Products facility and other organizational changes, with the elimination of approximately 400 positions. The charges also included the impairment of $18.1 million of goodwill as a result of evaluating strategic alternatives for the antimony products business. Severance and other charges of $28.7 million were recorded in the Statement of Operations of which $24.2 million was recorded in cost of products sold and $4.5 million in selling, general and administrative expenses. Other charges included costs for decommissioning, environmental remediation, contract cancellations, inventoried spares impairment and other items. Full year charges also included charges of $69.1 million for asset impairments. Additional severance, decommissioning and environmental costs are expected to be recorded during 2004 when the recognition criteria under Statement of Financial Accounting Standards (SFAS) 146, "Accounting for Costs Associated with Exit or Disposal Activities," are met. Under SFAS 146, a liability for costs associated with exit or disposal activities is recognized when the liability is incurred rather than when an entity commits to an exit plan.

Certain other costs were recorded during the year that did not meet the definition of restructuring costs under SFAS 146 but were included in the 2003 repositioning plan. These costs include a change in the useful life of the Company's enterprise software based on intended replacement in 2004, which added an additional $10.0 million of depreciation expense to 2003. Also included are $2.1 million for costs to relocate the Corporate and BioLab, Inc. headquarters, severance, lease cancellation and other costs.

2001 Repositioning Plan

In 2001, the Company's Board of Directors approved detailed repositioning plans which provided for a series of cost reduction initiatives which were intended to streamline operations, to strengthen the Company's competitive position and to continue to provide a strong platform for future growth. The major components of these repositioning plans included the consolidation of certain Polymer Additives and Fine Chemicals operations, resulting in three planned plant closures; elimination of approximately 485 manufacturing, research and development, sales and other management positions; and the impairment of certain underperforming and non-strategic long-lived assets, including goodwill.

Restructuring charges

The restructuring charges related to this repositioning plan totaled $153.6 million. The restructuring charges consisted of $106.1 million of asset impairments, including $61.3 million for fixed asset impairments and $44.8 million of impaired goodwill, $25.6 million of severance costs, $15.3 million for plant closure and environmental costs and $6.6 million of other costs.

Net restructuring charges for the year ended December 31, 2001 totaled $148.6 million. This reflects the $153.6 million of charges recorded 2001 offset by a reversal of $5.0 million related to changes in estimates in the 2001 and 2000 restructuring charges. The net of the 2001 restructuring charges and reversals is reflected in the 2001 consolidated statement of operations as follows: $37.2 million in cost of products sold, $5.3 million in selling, general and administrative expenses and $106.1 million of asset impairments. Additional information regarding the 2001 special charges is provided in Note 2 to the Consolidated Financial Statements.

As of December 31, 2002, $15.7 million of the $148.6 million charge remained to be spent. During 2003, severance and plant closure and environmental activity of $4.4 million was incurred. This activity includes $0.1 million of reversals related to changes in estimates in the restructuring charge reserves recorded in 2001. As of December 31, 2003, $10.3 million of 2001 charges remain to be

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spent and are included in the Consolidated Financial Statements in accrued expense and other non-current liabilities depending on the expected timing of the spend. The major components of this remaining reserve relate to severance and plant closure costs.

Other Non-restructuring Costs

During 2001, certain other costs were recorded as a part of the 2001 repositioning plan that were not considered restructuring costs under the definitions of Emerging Issues Task Force 94-3. These details of these costs are as follows.

In 2001 the Company recorded lower of cost or market inventory write-downs totaling $25.7 million. These write-downs were recorded as a component of cost of products sold and resulted primarily from significant declines in forecasted revenue for the Polymer Additives business unit. In addition, the Specialty Products business incurred some lower of cost or market valuation adjustments due to some unsuccessful promotional inventory buys. These write-downs were calculated in accordance with the Company's inventory valuation accounting policies.

The Company also recorded a $24.5 million liability for environmental remediation costs for operating sites, $7.4 million for plant shutdown operating inefficiencies, a $1.6 million cumulative U.K. pension liability, $0.9 million of accounts receivable write-offs and $1.0 million of contract cancellation costs. These items amounted to $35.4 million and were recorded in the 2001 consolidated statement of operations as follows: $34.0 million to cost of products sold and $1.4 million as a component of selling, general and administrative expenses.

Certain other charges of $33.8 million were recorded, which included $11.6 million related to the write-off of an uncollectible note receivable from the sale of a previously owned business, $10.7 million for losses incurred on fixed asset replacement activities, primarily at one of the Company's U.S. plants, $13.4 million of increases in litigation accruals resulting from estimated settlement amounts on outstanding litigation matters, a $(3.2) million net foreign exchange gain arising from the repatriation of cash from a foreign subsidiary partially offset by a loss from a fair value adjustment on an intercompany loan of a foreign subsidiary and $1.3 million of other costs. All of these charges are reflected in the 2001 consolidated statement of operations as a component of other income (expense) - net.

2000 Repositioning Plan

The major components of the 2000 repositioning plan included the consolidation of the Company's three antimony manufacturing operations, elimination of approximately 300 manufacturing and research and development positions, primarily in the Polymer Additives business unit, and impairment or disposal of certain underperforming and non-strategic assets. The asset impairments related to four Polymer Additives manufacturing locations, including sites in Europe and the United States, and two Performance Chemicals locations, including sites in the United States and the United Kingdom. The restructuring charges related to this repositioning plan totaled $56.4 million for 2000. The $56.4 million of restructuring charges consisted of $38.0 million for asset impairments, $12.2 million for severance costs and $6.2 million for plant closure and environmental costs. Additional information regarding the 2000 special charges is provided in Note 2 to the Consolidated Financial Statements.

Net restructuring charges for the year ended December 31, 2000 totaled $54.3 million. This reflects the $56.4 million charge offset by reversals of $2.1 million, which related to changes in estimates in the 2000, 1999 and 1998 restructuring charges.

The 2000 repositioning plan has now been substantially completed, with only $3.8 million of the original $56.4 million remaining to be spent. This remaining reserve relates to costs yet to be incurred for the closure of a brine pond in El Dorado, Arkansas.

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Cash outlays for all remaining reserves are expected to be substantially complete by the end of 2005. Operating cash flows are expected to be sufficient to fund the remaining repositioning activities.

Acquisitions

As part of the Company's growth strategy in the consumer products market, BioLab Inc., a part of the Company's Specialty Products business unit, acquired all of the outstanding shares of Lime-O-Sol Company on February 28, 2003 for approximately $65 million in cash. The acquisition included the Lime-O-Sol brand of specialty household cleaning products marketed under the trade name The Works®. The transaction combines BioLab's and Lime-O-Sol's strengths in brand and channel management, consumer marketing and product innovation to expand Specialty Products' ability to offer its new and existing products beyond its current markets. Goodwill and intangibles assets of $43 million and $14 million, respectively, were recorded as a result of this acquisition. Lime-O-Sol's operating results have been included in the Company's consolidated financial statements from the date of acquisition.

Additionally, BioLab Inc. acquired all of the outstanding shares of A&M Cleaning Products, Inc. (A&M), on July 10, 2003 for $41 million in cash and assumed liabilities. The acquisition included A&M's line of multipurpose cleaners sold under the trade names Greased Lightning™ and Orange Blast™. Goodwill and intangibles assets of $25 million and $19 million, respectively, were recorded as a result of this acquisition. The operating results of A&M have been included in the Company's consolidated financial statements from the date of acquisition.

On December 3, 2002, the Company acquired certain assets of Flexsys America's non-staining phenolic antioxidants business for approximately $11 million in cash. Assets acquired included inventory, other intangibles and the process technology associated with Santonox® TBMC, Santovar® TAHQ and Santowhite® BBMC. Great Lakes will market these products under the Company's established line of Lowinox® non-staining antioxidants. Goodwill resulting from the acquisition amounted to approximately $3 million.

On February 14, 2001, the Company acquired the Optical Monomers business from Akzo Nobel Polymer Chemicals LLC for approximately $30 million in cash. The Optical Monomers business operates at a leased manufacturing site in Pasadena, Texas, and has sales and support networks throughout the United States, Europe and Asia. The results of operations have been included in the Company's consolidated financial statements from the date of acquisition. Goodwill resulting from the acquisition amounted to $11.5 million.

Dispositions

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

In each of the first and second quarters of 2001, the Company sold a portion of its holding in OSCA pursuant to Rule 144 of the Securities Act of 1933 resulting in net proceeds of $11.7 million and a related gain of $9.4 million.

Environmental

The Company is subject to various U.S. and international federal, state and local environmental, health and safety laws and regulations. The Company is also subject to liabilities arising under the

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Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA") and similar state and international laws that impose responsibility for remediation of hazardous substances and hazardous waste constituents released into the environment.

The Company provides reserves for environmental liabilities that management considers probable and for which a reasonable estimate of the liability can be made. Accordingly, the Company's reserves for environmental liabilities, including reserves associated with restructuring charges, were $43.8 million and $45.2 million at December 31, 2003 and 2002, respectively, and are recorded in accrued expenses and other non-current liabilities. While it is difficult to predict or determine the outcome of actions brought against the Company or the ultimate cost of environmental matters, management believes that the ultimate cost, if any, in excess of the amounts already provided is not likely to have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.

The Company's operating costs relating to environmental compliance and safety charged directly to expense were approximately $27 million, $30 million and $40 million in 2003, 2002 and 2001, respectively.

Inflation

Inflation has not been a significant factor for the Company over the last several years. Management believes that the effect of inflation on Company operations will continue to be moderate for the foreseeable future.

New Accounting Standards

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition to SFAS 123's fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 requires disclosure in the Summary of Significant Accounting policies of the effects of the Company's accounting policy with respect to stock-based employee compensation on net income and earnings per share in annual and interim financial statements accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinon (APB) 25, "Accounting for Stock Issued to Employees." The Company adopted the disclosure requirements of SFAS 148 as of December 31, 2002 and the remaining requirements as of December 31, 2003.

In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires that a liability for costs associated with exit or disposal activities be recognized when the liability is incurred rather than when an entity commits to an exit plan. SFAS 146 also provides that the liability be initially measured at fair value. The standard, which was adopted by the Company on January 1, 2003, has had an impact on the timing of recognition of restructuring charges.

In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." The statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, the cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The Company adopted the new rules on asset retirement obligations on January 1, 2003. The Company currently has legal obligations to plug bromine supply and disposal wells as well as waste disposal wells at the end of the assets' useful lives. On January 1, 2003, the Company recorded an increase in plant and equipment, net of accumulated depreciation of $0.6 million, and recognized an asset retirement obligation of $5.7 million, resulting in a cumulative

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effect from a change in accounting principle that reduced net income and stockholders' equity by $3.3 million, net of income taxes.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The interpretation expands on the disclosure requirements to be made in interim and annual financial statements. The interpretation also requires that a liability measured at fair value be recognized for guarantees even if the probability of payment on the guarantee is remote. The recognition provisions apply on a prospective basis for guarantees issued or modified after December 31, 2002. The Company's adoption of the interpretation on January 1, 2003 did not have a material effect on the Company's accounting or reporting of its guarantees.

In January 2003, the FASB released Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The interpretation established standards under which a Variable Interest Entity should be consolidated by the primary beneficiary. The requirements are effective immediately for Variable Interest Entities created after January 31, 2003 and for Variable Interest Entities in which the Company obtains an interest after January 31, 2003. A company with a variable interest in a Variable Interest Entity created before February 1, 2003 shall apply the provisions of the interpretation to that entity no later than the beginning of the first interim or annual period beginning after December 15, 2003. The Company is not the primary beneficiary of its variable interest entities and therefore consolidation of these entities is not required.

ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

The Company's operations are exposed to market risk from changes in foreign currency exchange rates, interest rates and natural gas prices that could impact its results of operations and financial condition. The Company manages its exposure to these market risks through its regular operations and financing activities and, when deemed appropriate, by using derivative financial instruments in accordance with established policies and procedures. The derivative financial instruments generally used include swaps, forward contracts and options. The derivative financial instruments utilized by the Company in its hedging activities are considered risk management tools and are not used for trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to limit the exposure of nonperformance on such instruments.

International operations, including U.S. export sales, constitute a significant portion of the Company's revenues and identifiable assets. These operations result in a large volume of foreign currency commitment and transaction exposures and foreign currency net asset exposures. At December 31, 2003 and 2002, the Company's primary net foreign currency market exposures were dispersed through various countries and primarily included the euro, the British pound and the Japanese yen. Exposure to variability in currency exchange rates is mitigated, when possible, through the use of natural hedges, whereby purchases and sales in the same foreign currency and with similar maturity dates offset one another. The amount of hedging activity and management of commitment and transaction exposures is coordinated at the corporate level. Hedges are set to mature concurrently with the estimated timing of settlement of the underlying transactions.

Considering the Company's operating profile, at December 31, 2003, the result of a uniform 10% change in the value of the dollar relative to the currencies in which the Company's sales are denominated would result in a change in operating income of approximately $0.7 million. A similar change in 2002 would have had approximately a $4.5 million effect on operating income. This

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calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar, and does not factor in any potential changes in sales levels or local currency prices that may result from changes in exchange rates.

The Company uses commercial paper as a source of financing, which exposes the Company to changes in short-term interest rates. The Company manages its ratio of fixed to floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this mix in a cost effective manner, the Company, from time to time, enters into interest rate swap agreements in which it agrees to exchange various combinations of fixed and/or variable interest rates based on agreed-upon notional amounts that are supported by the Company's current debt position. In the first quarter of 2002, the Company entered into fixed-to-variable interest rate swaps to manage interest expense on $75 million of fixed rate debt. In the third quarter of 2003, the Company entered into an additional fixed-to-variable interest rate swap on $50 million of fixed rate debt bringing the combined amount to $125 million. Based on the Company's debt position at December 31, 2003, a hypothetical change in interest rates of 1 percentage point for a one-year period would change income (loss) from continuing operations before income taxes by approximately $1.0 million. This analysis does not consider any effect that a change in interest rates would have on overall economic activity or management actions to mitigate interest rate changes.

As of December 31, 2003, the Company had investments of $87.2 million representing investment securities with maturities of three months or less. A hypothetical change in interest rates of 1 percentage point earned on these deposits for a one-year period would change income before income taxes by $0.8 million.

Since the second quarter of 2001, as part of its risk management strategy, the Company has entered into fixed price swap and option contracts, including caps and floors, to manage its exposure to changes in natural gas prices. These natural gas contracts obligate the Company to make or receive a payment equal to the net change in the value of the contracts at their maturity. Such contracts are designated as hedges of the Company's forecasted purchases through 2004 and are effective in hedging the Company's exposure to changes in natural gas prices during this period.

The natural gas contracts that qualify as cash flow hedges under SFAS 133 are marked to market with unrealized gains and losses deferred through other comprehensive income (loss) and recognized in earnings when realized as an adjustment to cost of products sold. The fair values of these contracts at December 31, 2003 and 2002 were immaterial to the Company's consolidated financial position.

Based on the Company's natural gas exposure at December 31, 2003, a hypothetical 10% change in natural gas prices for a one-year period would change income before income taxes by approximately $1.2 million. This figure does not take into account the Company's hedging programs.

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ITEM 8.    Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS