SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

   (Mark One)
x xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28,May 31, 2003

OR

   
ooTRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to .__________.

Commission file number 333-49957-01

EaglePicher Holdings, Inc.

A Delaware Corporation

I.R.S. Employer Identification

No. 13-3989553

11201 North Tatum Blvd. Suite 110, Phoenix, Arizona 85028

Registrant’s telephone number, including area code:
602-923-7200602-652-9600

Former Name

Eagle-Picher Holdings, Inc.

EAGLEPICHER HOLDINGS, INC. IS FILING THIS REPORT VOLUNTARILY IN ORDER TO COMPLY WITH THE REQUIREMENTS OF THE TERMS OF ITS 9 3/8% SENIOR SUBORDINATED NOTES AND 11 3/4% SERIES B CUMULATIVE EXCHANGEABLE PREFERRED STOCK AND IS NOT REQUIRED TO FILE THIS REPORT PURSUANT TO EITHER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yeso Nox (See explanatory note immediately above.)

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

     Yeso Nox

1,000,000 shares of common capital stock, $0.01 par value each, were issued and outstanding at July 9, 2003

1


TABLE OF ADDITIONAL REGISTRANTS

   
Yes   Jurisdictiono   No   xIRS Employer
Incorporation orCommissionIdentification
NamesOrganizationFile NumberNumber




EaglePicher IncorporatedOhio333-4995731-0268670
Daisy Parts, Inc.Michigan333-49957-0238-1406772
EaglePicher Development Co., Inc.Delaware333-49957-0331-1215706
EaglePicher Far East, Inc.Delaware333-49957-0431-1235685
EaglePicher Filtration and Minerals, Inc.Nevada333-49957-0631-1188662
EaglePicher Technologies, LLCDelaware333-49957-0931-1587660
Hillsdale Tool & Manufacturing Co.Michigan333-49957-0738-0946293
EPMR Corporation (f/k/a Michigan
Automotive Research Corp.)
Michigan333-49957-0838-2185909

930,500 shares of common capital stock, $.01 par value each, were outstanding at April 14, 2003

1


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market RiskRisk.
Item 4. Controls and ProceduresProcedures.
PART II. OTHER INFORMATION
Item 1. Legal ProceedingsProceedings.
Item 6. Exhibits and Reports on Form 8-K8-K.
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
EX-10.66
EX-10.67
EX-12.1


TABLE OF ADDITIONAL REGISTRANTSCONTENTS

         
      JurisdictionIRS EmployerPage
 Incorporation orCommissionIdentification
NamesFormer NamesOrganizationFile NumberNumber





EaglePicher IncorporatedEagle-Picher Industries, IncOhio333-4995731-0268670
Daisy Parts, Inc.N/AMichigan333-49957-0238-1406772
EaglePicher Development Co., Inc.Eagle-Picher Development Co.,IncDelaware333-49957-0331-1215706
EaglePicher Far East, Inc.Eagle-Picher Far East, IncDelaware333-49957-0431-1235685
EaglePicher Filtration and Minerals, Inc.Eagle-Picher Minerals, IncNevada333-49957-0631-1188662
EaglePicher Technologies, LLCEagle-Picher Technologies, LLCDelaware333-49957-0931-1587660
Hillsdale Tool & Manufacturing Co.N/AMichigan333-49957-0738-0946293
EPMR Corporation (f/k/a Michigan
Automotive Research Corp.)
N/AMichigan333-49957-0838-2185909

TABLE OF CONTENTS

Page
     Number
     
  
PART I. FINANCIAL INFORMATION
    
Item 1.Financial Statements (unaudited)    
 Condensed Consolidated Balance Sheets  3 
 Condensed Consolidated Statements of Income (Loss)  4 
 Condensed Consolidated Statements of Cash Flows  5 
 Notes to Condensed Consolidated Financial Statements  6 
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations  1924 
Item 3.Quantitative and Qualitative Disclosures About Market Risk  3043 
Item 4.Controls and Procedures  3143 
   
PART II. OTHER INFORMATION
    
Item 1.Legal Proceedings  3143 
Item 6.Exhibits and Reports on Form 8-K  3143 
Signatures  3244 
Certifications  4153 
Exhibit Index  4355 

2


PART I.FINANCIAL INFORMATION

Item 1.Financial Statements.

EaglePicher Holdings, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, 2002 and February 28,May 31, 2003
(unaudited) (in thousands of dollars)

                  
 November 30, February 28, November 30, 
 2002 2003 2002 May 31, 2003
 
 
 
 
ASSETS
 
 
ASSETS
 
Current Assets:Current Assets: Current Assets: 
 Cash and cash equivalents $31,522 $32,290 Cash and cash equivalents $31,522 $13,508 
 Receivables, net 23,704 24,373 Receivables, net 21,473 23,568 
 Retained interest in EaglePicher Funding Corporation, net 29,400 29,409 Retained interest in Eagle-Picher Funding Corporation, net 29,400 49,540 
 Costs and estimated earnings in excess of billings 16,942 20,142 Insurance claim receivable  5,198 
 Inventories 54,718 54,447 Costs and estimated earnings in excess of billings 16,942 20,307 
 Net assets of operations to be sold 643 494 Inventories 54,118 55,065 
 Prepaid expenses and other assets 15,667 18,861 Assets of discontinued operations 9,974 6,951 
 Deferred income taxes 10,798 10,798 Prepaid expenses and other assets 15,437 10,348 
   
 
 Deferred income taxes 10,798 10,798 
 183,394 190,814   
 
 
 189,664 195,283 
Property, Plant and Equipment, netProperty, Plant and Equipment, net 183,405 176,524 Property, Plant and Equipment, net 177,135 164,705 
Goodwill, net 163,940 163,940 
GoodwillGoodwill 163,940 163,940 
Prepaid PensionPrepaid Pension 54,796 54,613 Prepaid Pension 54,796 54,108 
Other Assets, netOther Assets, net 27,506 25,777 Other Assets, net 27,506 30,214 
   
 
   
 
 
 $613,041 $611,668   $613,041 $608,250 
   
 
   
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
 
Current Liabilities:Current Liabilities: Current Liabilities: 
Accounts payable $83,621 $80,636 
 Accounts payable $85,055 $74,987 Current portion of long-term debt 18,625 137,162 
 Current portion of long-term debt 18,625 150,393 Compensation and employee benefits 20,208 15,741 
 Compensation and employee benefits 21,044 18,385 Billings in excess of costs and estimated earnings 944 950 
 Billings in excess of costs and estimated earnings 944 1,048 Accrued divestiture reserve 17,662 13,572 
 Accrued divestiture reserve 17,662 15,198 Liabilities of discontinued operations 3,417 2,713 
 Other accrued liabilities 37,653 37,955 Other accrued liabilities 36,506 31,746 
   
 
   
 
 
 180,983 297,966   180,983 282,520 
Long-Term Debt, net of current portionLong-Term Debt, net of current portion 355,100 233,600 Long-Term Debt, net of current portion 355,100 233,600 
Postretirement Benefits Other Than PensionsPostretirement Benefits Other Than Pensions 17,635 17,476 Postretirement Benefits Other Than Pensions 17,635 18,266 
Other Long-Term LiabilitiesOther Long-Term Liabilities 8,928 9,506 Other Long-Term Liabilities 8,928 10,433 
   
 
   
 
 
 562,646 558,548   562,646 544,819 
   
 
   
 
 
11.75% Cumulative Redeemable Exchangeable Preferred Stock11.75% Cumulative Redeemable Exchangeable Preferred Stock 137,973 141,910 11.75% Cumulative Redeemable Exchangeable Preferred Stock 137,973 146,079 
   
 
   
 
 
Commitments and Contingencies Shareholders’ Equity (Deficit): 
Commitments and ContingenciesCommitments and Contingencies 
Shareholders’ Equity (Deficit):Shareholders’ Equity (Deficit): 
 Common stock 10 10 Common stock 10 10 
 Additional paid-in capital 99,991 99,991 Additional paid-in capital 99,991 92,803 
 Accumulated deficit  (175,112)  (177,881)Accumulated deficit  (175,112)  (174,364)
 Accumulated other comprehensive loss  (4,376)  (2,819)Accumulated other comprehensive loss  (4,376)  (1,097)
 Treasury stock  (8,091)  (8,091)Treasury stock  (8,091)  
   
 
   
 
 
  (87,578)  (88,790)   (87,578)  (82,648)
   
 
   
 
 
 $613,041 $611,668   $613,041 $608,250 
   
 
   
 
 

The accompanying notes are an integral part of these consolidated balance sheets.

3


EaglePicher Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three and Six Months Ended February 28,May 31, 2002 and 2003
(unaudited) (in thousands of dollars, except share and per share amounts)

          
   2002 2003
   
 
Net Sales $163,229  $170,310 
   
   
 
Operating Costs and Expenses:        
 Cost of products sold (exclusive of depreciation)  129,772   133,112 
 Selling and administrative  13,482   14,551 
 Depreciation and amortization of intangibles  11,038   11,607 
 Goodwill amortization  3,956    
 Loss from divestitures  125    
   
   
 
   158,373   159,270 
   
   
 
Operating Income  4,856   11,040 
 Interest expense  (11,081)  (9,409)
 Other income, net  403   433 
   
   
 
Income (Loss) Before Taxes  (5,822)  2,064 
 Income Taxes  385   896 
   
   
 
Net Income (Loss)  (6,207)  1,168 
Preferred Stock Dividends Accreted  3,512   3,937 
   
   
 
Loss Applicable to Common Shareholders $(9,719) $(2,769)
   
   
 
Basic and Diluted Net Loss per Share Applicable to Common Shareholders $(10.04) $(2.98)
   
   
 
Weighted Average Number of Common Shares  968,417   930,500 
   
   
 
                   
    Three Months Ended May 31, Six Months Ended May 31,
    
 
    2002 2003 2002 2003
    
 
 
 
Net Sales $181,878  $178,709  $340,555  $345,610 
Operating Costs and Expenses:                
 Cost of products sold (exclusive of depreciation)  141,137   135,974   267,253   266,285 
 Selling and administrative  20,681   15,669   33,797   29,797 
 Depreciation and amortization  12,035   11,112   22,864   22,458 
 Goodwill amortization  3,956      7,912    
 Restructuring  2,998      2,998    
 Management compensation- special  2,381   424   2,381   424 
 Insurance related losses (gains)  3,100   (5,736)  3,100   (5,736)
 Loss from divestitures  5,845      5,970    
   
   
   
   
 
   192,133   157,443   346,275   313,228 
   
   
   
   
 
Operating Income (Loss)  (10,255)  21,266   (5,720)  32,382 
 Interest expense  (10,915)  (9,043)  (21,696)  (18,146)
 Other income (expense), net  467   (251)  918   73 
   
   
   
   
 
Income (Loss) from Continuing Operations Before Taxes  (20,703)  11,972   (26,498)  14,309 
 Income taxes  (820)  (1,150)  (1,205)  (2,046)
   
   
   
   
 
Income (Loss) from Continuing Operations  (21,523)  10,822   (27,703)  12,263 
Discontinued Operations:                
 Loss from operations of discontinued businesses, net of zero (benefit) provision for income taxes  (445)  (158)  (472)  (431)
 Loss on disposal of discontinued business, net of $600 benefit from income taxes     (2,978)     (2,978)
   
   
   
   
 
Net Income (Loss)  (21,968)  7,686   (28,175)  8,854 
 Preferred stock dividends accreted or accrued  (3,719)  (4,169)  (7,231)  (8,106)
   
   
   
   
 
Income (Loss) Applicable to Common Shareholders $(25,687) $3,517  $(35,406) $748 
   
   
   
   
 
Basic and Diluted Net Income (Loss) per Share Applicable to Common Shareholders:                
  Income (Loss) from Continuing Operations $(26.17) $6.98  $(36.14) $4.41 
  Loss from Discontinued Operations  (0.46)  (3.29)  (0.49)  (3.62)
   
   
   
   
 
  Net Income (Loss) $(26.63) $3.69  $(36.63) $0.79 
   
   
   
   
 
Weighted Average Number of Common Shares  964,500   953,667   966,458   942,083 
   
   
   
   
 

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

4


EaglePicher Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-MonthsSix Months Ended February 28,May 31, 2002 and 2003
(unaudited) (in thousands of dollars)

                    
 2002 2003 2002 2003
 
 
 
 
Cash Flows From Operating Activities:Cash Flows From Operating Activities: Cash Flows From Operating Activities: 
Net income (loss) $(28,175) $8,854 
Net income (loss) $(6,207) $1,168 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:  Depreciation and amortization 32,028 24,024 
 Depreciation and amortization 15,649 12,390  Loss from divestitures 5,970  
 Loss from divestitures 125   Provisions from discontinued operations  2,978 
 Changes in assets and liabilities:  Insurance related losses (gains) 3,100  (5,736)
 Sale of receivables, net (See Note F) 43,775   Changes in assets and liabilities, net of effect of divestitures: 
 Receivables and retained interest in EaglePicher Funding Corporation, net 2,897  (678) Sale of receivables, net (See Note H) 52,350  
 Inventories 5,507 271  Retained interest in Eagle-Picher Funding Corporation, net (See Note H)   (20,140)
 Prepaid expenses 171  (3,194) Receivables, net  (2,820)  (1,557)
 Other assets  (1,323) 126  Inventories 8,508  (947)
 Accounts payable  (9,527)  (10,068) Accounts payable  (1,879)  (2,985)
 Accrued liabilities 6,332  (4,717) Accrued liabilities  (4,822)  (12,717)
 Other, net  (7,118)  (2,883) Other, net  (2,684)  (3,615)
  
 
   
 
 
 Net cash provided by (used in) operating activities 50,281  (7,585) Net cash provided by (used in) operating activities 61,576  (11,841)
  
 
   
 
 
Cash Flows From Investing Activities:Cash Flows From Investing Activities: Cash Flows From Investing Activities: 
Proceeds from sales of divisions 6,300  Proceeds from the sale of property and equipment  1,155 
Proceeds from the sale of property and equipment, and other, net  329 Capital expenditures  (8,516)  (8,808)
Capital expenditures  (5,106)  (3,903)Other, net 1,082  
Other, net 122    
 
 
  
 
  Net cash used in investing activities  (7,434)  (7,653)
 Net cash provided by (used in) investing activities 1,316  (3,574)  
 
 
  
 
 
Cash Flows From Financing Activities:Cash Flows From Financing Activities: Cash Flows From Financing Activities: 
Reduction of long-term debt  (12,800)  (4,232)Reduction of long-term debt  (18,566)  (8,463)
Net borrowings (repayments) under revolving credit agreements  (36,088) 14,500 Net borrowings (repayments) under revolving credit agreements  (43,946) 5,500 
Acquisition of treasury stock 156  Proceeds from issuance of treasury stock  903 
  
 
 Other, net  (788)  
 Net cash (used in) provided by financing activities  (48,732) 10,268   
 
 
  
 
  Net cash used in financing activities  (63,300)  (2,060)
  
 
 
Net Cash Provided by (Used in) Discontinued OperationsNet Cash Provided by (Used in) Discontinued Operations 5,306  (874)
  
 
 
Effect of Exchange Rates on CashEffect of Exchange Rates on Cash 151 1,659 Effect of Exchange Rates on Cash 1,320 4,414 
  
 
   
 
 
Net Increase in Cash and Cash Equivalents 3,016 768 
Net Decrease in Cash and Cash EquivalentsNet Decrease in Cash and Cash Equivalents  (2,532)  (18,014)
Cash and Cash Equivalents, beginning of periodCash and Cash Equivalents, beginning of period 24,620 31,522 Cash and Cash Equivalents, beginning of period 24,620 31,522 
  
 
   
 
 
Cash and Cash Equivalents, end of periodCash and Cash Equivalents, end of period $27,636 $32,290 Cash and Cash Equivalents, end of period $22,088 $13,508 
  
 
   
 
 
Supplemental Cash Flow Information:Supplemental Cash Flow Information: Supplemental Cash Flow Information: 
Interest paid $5,003 $3,068 Interest paid $19,832 $18,008 
  
 
   
 
 
Income taxes paid (refunded), net $267 $ Income taxes refunded, net $(4,801) $(4,282)
  
 
   
 
 

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

5


EaglePicher Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

A.BASIS OF REPORTING FOR INTERIM FINANCIAL STATEMENTS

     OurThe accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with our financial statements and notes thereto for the fiscal year ended November 30, 2002 presented in our Form 10-K, filed with the SEC on March 3, 2003.

     The financial statements presented herein reflect all adjustments (consisting of normal and recurring adjustments), which, in our opinion are necessary to fairly state the results of operations for the three and six month periods ended February 28,May 31, 2002 and 2003. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.

     In the fourth quarter of fiscal 2002, we restated our financial statements to reflect the appropriate adoption of EITF 00-10, “Accounting for Shipping and Handling Fees and Costs,” which we should have adopted in 2001. EITF 00-10 states that all amounts billed to a customer in a sale transaction related to shipping and handling represent revenues earned for the goods provided and should be classified as revenue. Prior to the adoption of EITF 00-10, some of the costs billed to our customers for shipping and handling costs (our transportation expenses) were included as an offset to our costs. This restatement had no impact on operating income, net income, or cash flows. The impactsimpact to the financial statements for the three months ended February 28,May 31, 2002 was an increase in Net Sales and Cost of Products Sold by $3.9$4.1 million. The impact to the financial statements for the six months ended May 31, 2002 was an increase in Net Sales and Cost of Products Sold by $8.0 million. In addition, certain amounts in 2002 have been reclassified to conform to the 2003 financial statement presentation.

     As discussed in Note G to these financial statements, the accompanying 2002 financial statements have been restated to reflect our Hillsdale U.K. Automotive operation as a discontinued business. Our Hillsdale U.K. Automotive operation was sold on June 11, 2003.

InventoriesB.     INVENTORIES

     Inventories consisted of the following at November 30, 2002 and February 28,May 31, 2003 (in thousands of dollars):

                
 2002 2003 2002 2003
 
 
 
 
Raw materials and supplies $25,365 $28,124  $25,365 $26,320 
Work-in-process 14,058 13,331  14,058 17,226 
Finished goods 15,295 12,992  14,695 11,519 
 
 
  
 
 
 $54,718 $54,447  $54,118 $55,065 
 
 
  
 
 

6


Comprehensive Income (Loss)C.     COMPREHENSIVE INCOME (LOSS)

     During the three and six months ended February 28,May 31, 2002 and 2003 our comprehensive lossincome (loss) was as follows (in thousands of dollars):

              
 Three Months Ended May 31, Six Months Ended May 31,
         
 
 2002 2003 2002 2003 2002 2003
 
 
 
 
 
 
Net income (loss) $(6,207) $1,168  $(21,968) $7,686 $(28,175) $8,854 
Gain (loss) on interest rate swap agreements 45 545 
Gain (loss) on forward foreign currency contracts 323  (647)
Gain on interest rate swap agreements 421 907 466 1,452 
Loss on forward foreign currency contracts  (696)  (1,890)  (373)  (2,537)
Change in currency translation adjustment  (217) 1,659  1,467 2,755 1,250 4,364 
 
 
  
 
 
 
 
 $(6,056) $2,725  $(20,776) $9,458 $(26,832) $12,133 
 
 
  
 
 
 
 

6


B.D.     GOODWILL

     On December 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” The ratable amortization of goodwill and other intangible assets with indefinite lives was replaced with an annual test for impairment. Accordingly, we ceased amortization of goodwill on December 1, 2002. We have determined that we have six reporting units, as defined in SFAS No. 142, within our three reportable business segments. The following goodwill amounts by reporting unit were recorded as of November 30, 2002 and February 28,May 31, 2003 (in thousands of dollars):

         
Reporting Unit Segment Amount

 
 
Hillsdale Division Automotive $34,816 
Wolverine Division Automotive  47,268 
Power Group Technologies  44,486 
Specialty Materials Group Technologies  31,398 
Pharmaceutical Services (formerly ChemSyn) Technologies  2,929 
Filtration and Minerals Filtration and Minerals  3,043 
       
 
      $163,940 
       
 

     We have completed our initial impairment test as of December 1, 2002, and determined that no impairment charge exists. Our fair values for each reporting unit were determined based on our estimate of future cash flows by reporting unit, which were derived from our annual forecasting process.

     The following pro forma disclosure presents our net income (loss) applicable to common shareholders and our basic and diluted netper share income (loss) per share applicable to common shareholders for the three-monthsthree and six months ended February 28,May 31, 2002 and 2003 as if SFAS No. 142 had been adopted on December 1, 2001 (in thousands of dollars, except per share amounts):

          
   2002 2003
   
 
Reported Net Income (Loss) $(6,207) $1,168 
 Goodwill amortization  3,956    
   
   
 
As Adjusted Net Income (Loss) $(2,251) $1,168 
   
   
 
Reported Basic and Diluted Net Income (Loss) per Share Applicable to Common Shareholders $(10.04) $2.98 
 Goodwill amortization  4.09    
   
   
 
As Adjusted Basic and Diluted Net Income (Loss) per Share Applicable to Common Shareholders $(5.95) $2.98 
   
   
 
                  
   Three Months Ended May 31, Six Months Ended May 31,
   
 
   2002 2003 2002 2003
   
 
 
 
Reported Income (Loss) Applicable to Common Shareholders $(25,687) $3,517  $(35,406) $748 
Goodwill amortization  3,956      7,912    
   
   
   
   
 
As Adjusted Income (Loss) Applicable to Common Shareholders $(21,731) $3,517  $(27,494) $748 
   
   
   
   
 
Reported Basic and Diluted Income (Loss) per share Applicable to Common Shareholders $(26.63) $3.69  $(36.63) $0.79 
Goodwill amortization per share  4.10      8.19    
   
   
   
   
 
As Adjusted Basic and Diluted Income (Loss) per share Applicable to Common Shareholders $(22.53) $3.69  $(28.44) $0.79 
   
   
   
   
 

7


C.E.     RECENTLY RELEASED OR ADOPTED ACCOUNTING STANDARDS

     In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived assets and depreciated over their estimated useful life while the liability is accreted to its expected obligation amount upon retirement. We adopted SFAS No. 143 on December 1, 2002. The adoption did not have a material impact on our financial condition or results of operations.

     In September 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which superceded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.” The primary difference is that goodwill and certain intangibles with indefinite lives have been removed from the scope of SFAS No. 144, as they are covered by SFAS No. 142, as described in Note D above. It also broadens the presentation of discontinued operations to include a component of an entity rather than a segment of a business. A component of an entity comprises operations and cash flows that can clearly be distinguished operationally and for financial accounting purposes from the rest of the entity. We adopted SFAS No. 144 on December 1, 2002. The adoption did not have a material impact on2002 and accounted for the sale of our financial condition or results of operations.

7


Hillsdale U.K. Automotive operation as discussed in Note G in accordance with this statement.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or disposalDisposal Activities,” which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The adoption of this statement didwill not have a material impact on our financial condition or results of operations.

     On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 20, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. We will adopt SFAS No. 149 on a prospective basis at its effective date on July 1, 2003. We do not expect the adoption of this statement will have a material impact on our financial condition or results of operations.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, except for mandatorily redeemable financial instruments. Mandatorily redeemable financial instruments are subject to the provisions of this statement beginning on January 1, 2004. We do not expect the adoption of this statement will have a material impact on our financial condition or results of operations.

     In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”) “Guarantor’s Accounting and Disclosure requirementsRequirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. FIN 45 does not affect the accounting for guarantees issued prior to the effective date, unless the guarantee is modified subsequent to December 31, 2002. We adopted the disclosure requirements on December 1, 2002, and the initial recognition and measurement provisions in our February 28, 2003

8


financial statements. The adoption of FIN 45 did not have a material impact on our financial condition or results of operations.

     In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”) “Consolidation of Variable Interest Entities.” Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest in after that date. A public entity with a variable interest in a variable interest entity created before February 1, 2003, shall apply the provisions of this interpretation (other than the transition disclosure provisions in paragraph 26) to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The related disclosure requirements arewere effective immediately. The impact of this interpretation is not expected to have a material impact on our financial condition or results of operations.

     In November 2002, the EITF issued EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 prescribes a method to account for contracts that have multiple elements or deliverables. It provides guidance on how to allocate the value of a contract to its different deliverables, as well as guidance on when to recognize revenue allocated to each deliverable over its performance period. We are required to adopt EITF 00-21 on December 1, 2003. We are evaluating the impact EITF 00-21 will have on us, but do not expect it to have a material impact on our financial condition or results of operations.

D.F.     RESTRUCTURING

     During 2001, we recorded asset write-downs and other charges totaling $14.1 million in connection with a restructuring plan (the “Plan”) announced in November 2001. The Plan primarily relocated our corporate headquarters from Cincinnati, Ohio to Phoenix, Arizona and closed three plants in theour Technologies Segment as a result of the elimination of certain product lineslines. During the second quarter of 2002, we determined that a portion of the assets in our over-funded pension plan could be made available to pay severance costs related to the Plan. We amended the pension plan and provided new or amended severance plans to allow for such payments. Approximately $2.5 million of severance was expected to be paid out of the pension plan. Accordingly, during the second quarter of 2002, we reduced our restructuring provision originally recorded in the Power Group business.fourth quarter of 2001 by $2.5 million.

     In Maythe second quarter of 2002, we announced we would exit the Gallium business in our Technologies Segment due to the downturn in the fiber-optic, telecommunication and semiconductor markets, the primary markets for our Gallium products. This action resulted in a $5.5 million charge to restructuring expense.

8


     The remaining balance of $2.2$1.4 million as of February 28,May 31, 2003, is included in Other Accrued Liabilities in our balance sheets. An analysis of the facilities, severance and other costs incurred related to restructuring reserves since November 30, 2002 is as follows (in thousands of dollars):

                 
     Other                 
 Facilities Severance Costs Total Facilities Severance Other Costs Total
 
 
 
 
 
 
 
 
Balance at November 30, 2002Balance at November 30, 2002 $1,629 $314 $1,340 $3,283  $1,629 $314 $1,340 $3,283 
Amounts spent  (666)  (162)  (1,043)  (1,871)
Amounts spent  (271)  (55)  (745)  (1,071) 
 
 
 
 
Balance at May 31, 2003 $963 $152 $297 $1,412 
 
 
 
 
  
 
 
 
 
Balance at February 28, 2003 $1,358 $259 $595 $2,212 
 
 
 
 
 

9


E.G.     DIVESTITURES AND DISCONTINUED OPERATIONS

Divestitures

     We have indemnified buyers of our former divisions and subsidiaries for certain liabilities related to items such as environmental remediation and warranty issues on divisions sold in previous years. We had previously recorded liabilities for these exposures; however, from time to time, as additional information becomes available, additional amounts need to be recorded.

     In the second quarter of 2002, we signed a letter of intent to sell certain assets and liabilities of the Precision Products business in our Technologies Segment to a group of employees and management personnel. We recorded a $2.8 million estimated loss on sale in Loss from Divestitures in the Statements of Income (Loss). In addition, during 2002, we recorded approximately $3.2 million in additional accruals for costs related to certain litigation issues and environmental remediation.

     An analysis of the liabilities related to divestitures is as follows (in thousands of dollars):

          
Balance at November 30, 2002Balance at November 30, 2002 $17,662 Balance at November 30, 2002 $17,662 
Amounts spent  (2,464)Amounts spent  (4,090)
 
   
 
Balance at February 28, 2003 $15,198 
Balance at May 31, 2003Balance at May 31, 2003 $13,572 
 
   
 

Discontinued Operations

     Effective December 14, 2001, we sold certain of the assets of our former Construction Equipment Division. This division represented our entire former Machinery Segment. The sale price was $6.1 million in cash, plus an estimated working capital adjustment of $1.0 million, and the assumption of approximately $6.7 million of current liabilities. We retained the land and buildings of the Construction Equipment Division’s main facility in Lubbock, Texas and leased the facility to the buyer for a five-year term. The buyer has an option to buy the facility for $2.5 million, increasing $100,000 per year over the term of the lease. We also retained $900,000 of accounts receivable, and approximately $2.3 million of raw materials inventory, which the buyer was required to purchase within one year. TheAt May 31, 2003, the buyer failed to purchase approximately $400,000$182,000 of the inventory.inventory, which is included in Assets of Discontinued Operations in the accompanying balance sheets. We are pursuing collection actions. The Net Assets

     During the second quarter of Operations2003, we reached an agreement in principle for the sale of certain assets at our Hillsdale U.K. Automotive operation (a component of our Automotive Segment) for cash of $1.1 million. This sale closed on June 11, 2003. In addition, we will be winding down the remaining operations of our Hillsdale U.K. Automotive operation during 2003. Accordingly, effective May 31, 2003, upon receipt of authority from our Board of Directors, we discontinued the operations of our Hillsdale U.K. Automotive operation and restated all prior period financial statements. In addition, in the second quarter of 2003, we recognized a Loss on Disposal of Business of $3.0 million, which is net of a $600,000 tax benefit related to be Sold at November 30, 2002 and February 28,this sale. At May 31, 2003, are primarily the remaining balance in Assets of Discontinued Operations was primarily accounts receivable, inventory and fixed assets, and the inventory,remaining balance in Liabilities of Discontinued Operations was primarily accounts payable and accrued liabilities. We expect to incur the following shutdown costs during 2003 which have not been accrued as the liabilities associated with this transaction, totaling $2.9 million and representing primarily environmental liabilities, had been transferredof May 31, 2003 related to the Accrued Divestitures reserve at November 30, 2002.our Hillsdale U.K. Automotive operation (in thousands of dollars):

     
One-time termination benefits $642 
Contract termination costs  100 
Facility closure and other  420 
   
 
  $1,162 
   
 

10


F.H. ACCOUNTS RECEIVABLE ASSET-BACKED SECURITIZATION (QUALIFYING SPECIAL PURPOSE ENTITY)

          During the first quarter of 2002, we entered into an agreement with a major U.S. financial institution to sell an interest in certain receivables through an unconsolidated qualifying special purpose entity, EaglePicherEagle-Picher Funding Corporation (“EPFC”). Initially $47.0 million of proceeds from this new facility were used primarily to payoff amounts outstanding under our existing Receivables Loan Agreement with our wholly owned subsidiary, EaglePicher Acceptance Corporation. This agreement provides for the sale of certain receivables to EPFC, which in turn sells an interest in a revolving pool of receivables to the financial institution. EPFC has no recourse against us for failure of the debtors to pay when due. The agreement provides for the continuation of the program on a revolving basis until the earlier of a) the maturity of our senior credit facility, or b) assuming we are able to refinance our senior credit facility, the fourth quarter of 2004.

          We account for the securitization of these sold receivables in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities—a Replacement of FASB Statement No. 125.” Under this

9


guidance, at the time the receivables are sold, the balances are removed from our financial statements. For purposes of calculating our debt covenant compliance under our Credit Agreement, we include the debt outstanding on EPFC.

          In conjunction with the initial transaction during 2002, we sold $82.5 million of receivables to EPFC, and we incurred charges of $1.5 million, which arewere included in Interest Expense in the accompanying condensed consolidated statements of income (loss) for the three-monthssix-months ended February 28,May 31, 2002. We continue to service sold receivables and receive a monthly servicing fee from EPFC of approximately 1% per annum of the receivable pool’s average balance. As this servicing fee approximates our cost to service, no servicing asset or liability has been recorded at November 30, 2002 or February 28,May 31, 2003. We retain an interest in a portion of the receivables transferred, representing an over collateralization on the securitization. Our involvement with both this over collateralization interest and the transferred receivables is generally limited to the servicing performed. The carrying value of our interest in the receivables is carriedrecorded at fair value, which is estimated as its net realizable value due to the short duration of the receivables transferred. The net realizable value considers the collection period and includes an estimated provision for credit losses and returns and allowances, which is based on our historical results and probable future losses.

          At November 30, 2002, our interest in EPFC including a service fee receivable, was $29.4 million and the revolving pool of receivables that we serviced totaled $77.5 million. At November 30, 2002, the outstanding balance of the interest sold to the financial institution recorded on EPFC’s financial statements was $46.5 million. During the three months ended February 28,May 31, 2002, we sold, outside of the initial sale, $109.0$165.4 million of accounts receivable to EPFC. DuringEPFC, and during the same period, EPFC collected $104.5$153.5 million of cash that was reinvested in new securitizations. During the six months ended May 31, 2002, we sold, outside of the initial sale, $274.5 million of accounts receivable to EPFC, and during the same period, EPFC collected $258.0 million of cash that was reinvested in new securitizations.

          As of May 31, 2003, we reduced the amount due to the financial institution by EPFC, and as a result our cash and cash equivalents balance decreased and our retained interest in Eagle-Picher Funding Corporation increased from November 30, 2002. At February 28,May 31, 2003, our interest in EPFC including a service fee receivable, was $29.4$49.5 million and the revolving pool of receivables that we serviced totaled $75.0$77.2 million. At February 28,May 31, 2003, the outstanding balance of the interest sold to the financial institution recorded on EPFC’s financial statements was $43.8$26.2 million. During the three months ended February 28,May 31, 2003, we sold $138.6$147.0 million of accounts receivable to EPFC. DuringEPFC, and during the same period, EPFC collected $130.9$140.0 million of cash that was reinvested in new securitizations. During the six months ended May 31, 2003, we sold $285.6 million of accounts receivable to EPFC, and during the same period, EPFC collected $270.9 million of cash that was reinvested in new securitizations. The effective interest rate as of February 28,for the six month period ended May 31, 2003 in the securitization was approximately 2.5%.

G.LEGAL MATTERS11


I.INSURANCE RELATED LOSSES (GAINS)

          In the second quarter of 2002, we recorded a provision of $3.1 million primarily related to a dispute with an insurance carrier over the coverage on a fire during 2001 at our Harrisonville, Missouri bulk pharmaceutical plant.

          In the second quarter of 2003, we recorded a $5.7 million gain primarily related to the settlement of a claim with our insurance carrier over the coverage on a fire during 2002 at our Seneca, Missouri non-operating facility.

J.SHAREHOLDERS’ EQUITY (DEFICIT)

          During the second quarter of 2003, we sold to our controlling common shareholder, Granaria Holdings B.V.; Bert Iedema, one of our directors and an executive officer of Granaria Holdings B.V.; and certain of our executive officers the 69,500 shares of common stock held in our Treasury for $13.00 per share, or $0.9 million. In connection with this stock issuance, we reclassified the balance in our Treasury, or $7.2 million, to Additional Paid in Capital in our accompanying balance sheets.

K.LEGAL MATTERS

          On January 25, 1996, Richard Darrell Peoples, a former employee, filed a lawsuit in the United States District Court for the Western District of Missouri claiming that we violated the federal False Claims Act based on alleged irregularities in testing procedures in connection with certain U.S. Government contracts. Mr. Peoples filed this lawsuit under a procedure which gives a private individual the right to file a lawsuit for a violation of a Federal statute and be awarded up to 30% of any recovery. The government has the right to intervene and take control of such a lawsuit. Following an extensive investigation, the U.S. Government declined the opportunity to intervene or take control of this suit. The allegations in the lawsuit are similar to allegations made by Mr. Peoples, and investigated by our outside counsel, prior to the filing of the lawsuit. Our outside counsel’s investigation found no evidence to support any of Mr. Peoples’ allegations, except for some inconsequential expense account matters. The case is in a discovery phase. Recently the court disqualified Mr. Peoples’ lawyer from the case after he read some of our attorney-client privileged documents that Mr. Peoples took from our lawyers’ offices without authorization. We intend to contest this suit vigorously and do not believe that the resolution of this lawsuit will have a material adverse effect on our financial condition, results of operations or cash flows.

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

10


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

H.BUSINESS SEGMENT INFORMATION12


L.BUSINESS SEGMENT INFORMATION

          Our Automotive Segment provides mechanical and structural parts and raw materials for passenger cars, trucks, vans and sport utility vehicles for original equipment manufacturers and replacement markets. Resources are concentrated in serving the North American, European and Pacific Rim markets. Our Hillsdale operation is a precision-machined components business, and our Wolverine operation is a rubber coated metal products business.

          Our Technologies Segment is a diverse group of businesses with a broad spectrum of technologies and capabilities. It is a major supplier of batteries and power systemssystem components for aerospace, defense and telecommunications applications. In addition, it produces high-purity specialty material compounds and rare metals, industrial chemicals, bulk pharmaceuticals and super-clean containers, which meet strict EPA protocols, for environmental sampling. This segment serves the commercial aerospace, nuclear, telecommunication electronics and other industrial markets globally. Some of these products are also used in defense applications.

          Our Filtration and Minerals Segment mines and refines diatomaceous earth products, which are used globally in high purity filtration applications, primarily by the food and beverage industry. These products are also used as industrial absorbents.

          Sales between segments were not material.

          The following data represents financial information about our reportable business segments for the three-monthsthree months and six months ended February 28,May 31, 2002 and 2003. During 2002, we elected to modify our internal methodology of allocating certain expenses from the corporate segment to the operating segments. In the following tables, the financial information for the three-monthsthree and six months ended February 28,May 31, 2002 has been restated to conform to the new presentation (in thousands of dollars).

          
   2002 2003
   
 
Net Sales
        
Hillsdale Division $85,834  $83,282 
Wolverine Division  17,648   20,718 
   
   
 
 Automotive  103,482   104,000 
   
   
 
Power Group  22,870   32,283 
Precision Products- divested July 17, 2002  1,215    
Specialty Materials Group  13,031   13,219 
Pharmaceutical Services (formerly ChemSyn)  3,405   1,902 
   
   
 
 Technologies  40,521   47,404 
   
   
 
Filtration and Minerals  19,226   18,906 
   
   
 
  $163,229  $170,310 
   
   
 
Operating Income (Loss)
        
Automotive $3,516  $5,141 
Technologies  668   8,046 
Filtration and Minerals  1,306   (111)
Divested Divisions  (125)   
Corporate/ Intersegment  (509)  (2,036)
   
   
 
  $4,856  $11,040 
   
   
 

1113


                      
 2002 2003  Three Months Ended May 31, Six Months Ended May 31,
 
 
  
 
Depreciation and Amortization of Intangibles
 
 2002 2003 2002 2003
 
 
 
 
Net Sales
Net Sales
 
Hillsdale DivisionHillsdale Division $93,524 $85,064 $174,806 $164,937 
Wolverine DivisionWolverine Division 19,707 23,189 37,355 43,907 
 
 
 
 
 
Automotive 113,231 108,253 212,161 208,844 
 
 
 
 
 
Power GroupPower Group 25,173 34,097 47,800 66,137 
Precision Products- divested July 17, 2002Precision Products- divested July 17, 2002 1,388  2,603  
Specialty Materials GroupSpecialty Materials Group 17,501 13,211 30,775 26,672 
Pharmaceutical Services (formerly ChemSyn)Pharmaceutical Services (formerly ChemSyn) 3,776 3,383 7,181 5,286 
 
 
 
 
 
Technologies 47,838 50,691 88,359 98,095 
 
 
 
 
 
Filtration and MineralsFiltration and Minerals 20,809 19,765 40,035 38,671 
 
 
 
 
 
 $181,878 $178,709 $340,555 $345,610 
 
 
 
 
 
Operating Income (Loss)
Operating Income (Loss)
 
Automotive $9,801 $8,946 Automotive $3,898 $6,696 $7,093 $11,913 
Technologies 3,659 1,616 Technologies  (8,626) 14,976  (7,955) 23,022 
Filtration and Minerals 1,420 1,258 Filtration and Minerals 3,589 1,621 4,895 1,510 
Divested DivisionsDivested Divisions  (5,845)   (5,970)  
Corporate/ Intersegment 114  (213)Corporate/ Intersegment  (3,271)  (2,027)  (3,783)  (4,063)
 
 
   
 
 
 
 
 $14,994 $11,607   $(10,255) $21,266 $(5,720) $32,382 
 
 
   
 
 
 
 
Depreciation and Amortization (excluding Goodwill amortization)
Depreciation and Amortization (excluding Goodwill amortization)
 
AutomotiveAutomotive $9,056 $8,588 $16,887 $17,273 
TechnologiesTechnologies 1,712 1,895 3,467 3,511 
Filtration and MineralsFiltration and Minerals 1,253 1,268 2,599 2,526 
CorporateCorporate 14  (639)  (89)  (852)
 
 
 
 
 
 $12,035 $11,112 $22,864 $22,458 
 
 
 
 
 

I.SUBSEQUENT EVENT
M.SUBSEQUENT EVENTS

          We are currently negotiating a new senior secured credit facility in the approximate amount of $275.0 million to replace our current credit facility, which provided for an original term loan of $75.0 million, as amended, and a $220.0 million revolving facility.

          In AprilJuly 2003, we reachedalso announced the commencement of a cash tender offer and consent solicitation for our 9 3/8% Senior Subordinated Notes Due 2008 (the “Notes”). We are seeking to acquire any and all of our approximately $220.0 million of Notes outstanding. The consent solicitation seeks consent of the holders of the Notes to amend the indenture governing the Notes to eliminate certain of the restrictive covenants and other contractual obligations. The tender offer and consent solicitation are being made in accordance with and subject to the terms and conditions stated in EaglePicher Incorporated’s Offer to Purchase and Consent Solicitation Statement dated July 9, 2003. EaglePicher Incorporated intends to finance the tender offer and consent solicitation with the proceeds of its offering of approximately $220.0 million aggregate principal amount of senior unsecured notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), together with other funds. The securities to be offered have not been offered or sold in the United States, absent registration or an agreement in principle for the sale of certain assets at our Hillsdale U.K. Automotive operation for cash of $1.1 million. In addition, weapplicable exemption from such registration requirements. There is no assurance that this offering will be winding down the remaining operations of our Hillsdale U.K. Automotive operation and expect to incur $1.5 million to $2.0 million of shutdown costs during 2003. In addition to the shutdown costs, we believe we will realize a loss of approximately $2.0 million to $3.0 million during the second quarter of 2003 related to this sale. We also believe we will realize net cash proceeds from the sale of this operation of $1.5 million to $2.0 million (including the $1.1 million above related to the sale of the operation) during 2003. We will account for this sale as a Discontinued Operation when we file our second quarter of 2003 Form 10-Q. During the year ended November 30, 2002, our Hillsdale U.K. Automotive operation had $13.9 million in revenues, and as of November 30, 2002, had $11.5 million in total assets, which were comprised of primarily inventory, accounts receivable, and property, plant and equipment. During the three months ended February 28, 2003, the Hillsdale U.K. Automotive operation had $3.4 million in revenues.successful.

J.SUBSIDIARY GUARANTORS AND NON-GUARANTORS14


N.SUBSIDIARY GUARANTORS AND NON-GUARANTORS

          Our Credit Agreement and the Senior Subordinated Notes were issued by our wholly owned subsidiary, EaglePicher Incorporated (“EPI”), and are guaranteed on a full, unconditional, and joint and several basis by us and certain of our wholly-owned domestic subsidiaries (“Subsidiary Guarantors”). We have determined that full financial statements and other disclosures concerning EPI or the Subsidiary Guarantors would not be material to investors, and such financial statements are not presented. EPI and the Subsidiary Guarantors are subject to restrictions on the payment of dividends under the terms of both the Credit Agreement and the Senior Subordinated Notes. The following supplemental condensed combining financial statements present information regarding EPI, as the Issuer, the Subsidiary Guarantors and Non-Guarantor Subsidiaries.

1215


EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
AS OF NOVEMBER 30, 2002
(in thousands of dollars)

                                      
 Guarantors  Guarantors 
 
 Non-Guarantors  
 Non-Guarantors 
 EaglePicher Subsidiary Foreign  EaglePicher Subsidiary Foreign 
 Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS  
Current Assets:  
Cash and cash equivalents $27,694 $1 $(4,895) $7,902 $820 $31,522  $27,694 $1 $(4,895) $7,902 $820 $31,522 
Receivables and retained interest, net 2,535  31,472 19,097  53,104  2,535  31,472 16,866  50,873 
Costs and estimated earnings in excess of billings   16,942   16,942    16,942   16,942 
Intercompany accounts receivable 1,997  6,228 2,037  (10,262)   1,997  6,228 2,037  (10,262)  
Inventories 3,957  39,394 13,283  (1,916) 54,718  3,957  39,394 12,683  (1,916) 54,118 
Net assets of operations to be sold 643     643 
Prepaid expenses 7,840  4,755 4,686  (1,614) 15,667 
Assets of discontinued operations 643   9,331  9,974 
Prepaid expenses and other assets 7,840  4,755 4,456  (1,614) 15,437 
Deferred income taxes 10,798     10,798  10,798     10,798 
 
 
 
 
 
 
  
 
 
 
 
 
 
 55,464 1 93,896 47,005  (12,972) 183,394  55,464 1 93,896 53,275  (12,972) 189,664 
Property, Plant and Equipment, net 24,016  129,052 30,337  183,405  24,016  129,052 24,067  177,135 
Investment in Subsidiaries 239,864 58,509 18,286   (316,659)   239,864 58,509 18,286   (316,659)  
Goodwill, net 37,339  116,586 13,154  (3,139) 163,940 
Goodwill 37,339  116,586 13,154  (3,139) 163,940 
Prepaid Pension 54,796     54,796  54,796     54,796 
Other Assets 14,296  (8,091) 21,744 11,070  (11,513) 27,506 
Other Assets, net 14,296  (8,091) 21,744 11,070  (11,513) 27,506 
 
 
 
 
 
 
  
 
 
 
 
 
 
 $425,775 $50,419 $379,564 $101,566 $(344,283) $613,041  $425,775 $50,419 $379,564 $101,566 $(344,283) $613,041 
 
 
 
 
 
 
  
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY(DEFICIT) 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) 
Current Liabilities:  
Accounts payable $15,398 $ $53,151 $15,686 $820 $85,055  $15,398 $ $53,151 $14,252 $820 $83,621 
Intercompany accounts payable 3,171  5,887 1,184  (10,242)   3,171  5,887 1,184  (10,242)  
Long-term debt-current portion 18,625     18,625 
Current portion of long-term debt 18,625     18,625 
Liabilities of discontinued operations    3,417  3,417 
Other accrued liabilities 46,313 �� 25,128 5,862  77,303  46,313  25,128 3,879  75,320 
 
 
 
 
 
 
  
 
 
 
 
 
 
 83,507  84,166 22,732  (9,422) 180,983  83,507  84,166 22,732  (9,422) 180,983 
Long-term Debt, less current portion 355,100   11,491  (11,491) 355,100 
Long-term Debt, net of current portion 355,100   11,491  (11,491) 355,100 
Postretirement Benefits Other Than Pensions 17,635     17,635  17,635     17,635 
Deferred Income Taxes       
Other Long-term Liabilities 8,687   216 25 8,928  8,687   216 25 8,928 
 
 
 
 
 
 
  
 
 
 
 
 
 
 464,929  84,166 34,439  (20,888) 562,646  464,929  84,166 34,439  (20,888) 562,646 
Intercompany Accounts  (282,707) 24 269,573 23,930  (10,820)    (282,707) 24 269,573 23,930  (10,820)  
Preferred Stock  137,973    137,973   137,973    137,973 
Shareholders’ Equity(Deficit) 243,553  (87,578) 25,825 43,197  (312,575)  (87,578)
Shareholders’ Equity (Deficit) 243,553  (87,578) 25,825 43,197  (312,575)  (87,578)
 
 
 
 
 
 
  
 
 
 
 
 
 
 $425,775 $50,419 $379,564 $101,566 $(344,283) $613,041  $425,775 $50,419 $379,564 $101,566 $(344,283) $613,041 
 
 
 
 
 
 
  
 
 
 
 
 
 

1316


EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
AS OF FEBRUARY 28,MAY 31, 2003
(in thousands of dollars)

                                      
 Guarantors  Guarantors 
 
 Non-Guarantors  
 Non-Guarantors 
 EaglePicher Subsidiary Foreign  EaglePicher Subsidiary Foreign 
 Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS  
Current Assets:  
Cash and cash equivalents $19,714 $1 $2,178 $10,397 $ $32,290  $5,520 $1 $483 $7,504 $ $13,508 
Receivables and retained interest, net 2,427  30,187 21,168  53,782  5,737  46,457 20,914  73,108 
Insurance claim receivable   5,198   5,198 
Costs and estimated earnings in excess of billings   17,485 2,657  20,142    17,596 2,711  20,307 
Intercompany accounts receivable 2,783  5,863 132  (8,778)   2,118  6,535 820  (9,473)  
Inventories 4,353  39,219 12,917  (2,042) 54,447  5,368  38,019 14,395  (2,717) 55,065 
Net assets of operations to be sold 494     494 
Prepaid expenses 9,163  5,813 3,885  18,861 
Assets of discontinued operations 182   6,769  6,951 
Prepaid expenses and other assets 1,707  5,131 3,510  10,348 
Deferred income taxes 10,798     10,798  10,798     10,798 
 
 
 
 
 
 
  
 
 
 
 
 
 
 49,732 1 100,745 51,156  (10,820) 190,814  31,430 1 119,419 56,623  (12,190) 195,283 
Property, Plant and Equipment, net 23,761  121,671 31,092  176,524  22,759  116,229 25,717  164,705 
Investment in Subsidiaries 237,685 61,229 17,467 1  (316,382)   241,335 67,366 19,459   (328,160)  
Goodwill, net 37,339  116,586 13,154  (3,139) 163,940 
Goodwill 37,339  116,586 13,154  (3,139) 163,940 
Prepaid Pension 54,613     54,613  54,108     54,108 
Other Assets 22,517  (8,091) 22,868 13,082  (24,599) 25,777 
Other Assets, net 19,457  (7,214) 22,426 19,844  (24,299) 30,214 
 
 
 
 
 
 
  
 
 
 
 
 
 
 $425,647 $53,139 $379,337 $108,485 $(354,940) $611,668  $406,428 $60,153 $394,119 $115,338 $(367,788) $608,250 
 
 
 
 
 
 
  
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)  
Current Liabilities:  
Accounts payable $13,310 $ $52,473 $9,204 $ $74,987  $16,450 $ $55,830 $8,356 $ $80,636 
Intercompany accounts payable   124 8,453  (8,577)     802 8,661  (9,463)  
Long-term debt - current portion 150,393     150,393 
Current portion of long-term debt 137,162     137,162 
Liabilities of discontinued operations    2,713  2,713 
Other accrued liabilities 44,136  21,920 6,530  72,586  35,838  19,508 6,663  62,009 
 
 
 
 
 
 
  
 
 
 
 
 
 
 207,839  74,517 24,187  (8,577) 297,966  189,450  76,140 26,393  (9,463) 282,520 
Long-term Debt, less current portion 233,600   12,941  (12,941) 233,600 
Long-term Debt, net of current portion 233,600   9,982  (9,982) 233,600 
Postretirement Benefits Other Than Pensions 17,476     17,476  17,425   841  18,266 
Other Long-term Liabilities 7,861  131 1,514  9,506  9,765   668  10,433 
 
 
 
 
 
 
  
 
 
 
 
 
 
 466,776  74,648 38,642  (21,518) 558,548  450,240  76,140 37,884  (19,445) 544,819 
Intercompany Accounts  (286,286) 19 281,711 25,902  (21,346)    (273,800) 904 263,283 33,399  (23,786)  
Preferred Stock  141,910    141,910   146,079    146,079 
Shareholders’ Equity (Deficit) 245,157  (88,790) 22,978 43,941  (312,076)  (88,790) 229,988  (86,830) 54,696 44,055  (324,557)  (82,648)
 
 
 
 
 
 
  
 
 
 
 
 
 
 $425,647 $53,139 $379,337 $108,485 $(354,940) $611,668  $406,428 $60,153 $394,119 $115,338 $(367,788) $608,250 
 
 
 
 
 
 
  
 
 
 
 
 
 

1417


EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS)
THREE MONTHS ENDED FEBRUARY 28,MAY 31, 2002
(in thousands of dollars)

                                           
 Guarantors  Guarantors 
 
 Non-Guarantors  
 Non-Guarantors 
 EaglePicher Subsidiary Foreign  EaglePicher Subsidiary Foreign 
 Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
 
 
 
 
 
 
 
 
 
 
 
 
Net Sales:Net Sales: Net Sales: 
Customers $11,635 $ $130,645 $20,949 $ $163,229 Customers $13,065 $ $149,556 $19,257 $ $181,878 
Intercompany 3,623  2,826 2  (6,451)  Intercompany 3,987  3,531 2  (7,520)  
  
 
 
 
 
 
   
 
 
 
 
 
 
 15,258  133,471 20,951  (6,451) 163,229   17,052  153,087 19,259  (7,520) 181,878 
  
 
 
 
 
 
   
 
 
 
 
 
 
Operating Costs and Expenses:Operating Costs and Expenses: Operating Costs and Expenses: 
Cost of products sold (exclusive of depreciation) 8,512  110,775 16,936  (6,451) 129,772 Cost of products sold (exclusive of depreciation) 10,140  123,411 15,106  (7,520) 141,137 
Selling and administrative 6,295  5,317 1,917  (47) 13,482 Selling and administrative 5,867 2 13,231 1,634  (53) 20,681 
Intercompany charges  (2,650)  2,466 137 47  Intercompany charges  (3,210)  2,516 641 53  
Depreciation and amortization 1,147  9,125 766  11,038 Depreciation and amortization 765  10,571 699  12,035 
Goodwill amortization 934  2,775 247  3,956 Goodwill amortization 934  2,775 247  3,956 
Divestitures 125     125 Management compensation-special 2,381     2,381 
  
 
 
 
 
 
 Insurance related losses   3,100   3,100 
 14,363  130,458 20,003  (6,451) 158,373 Restructuring  (2,483)  5,481   2,998 
  
 
 
 
 
 
 Loss from Divestitures 3,039  2,806   5,845 
 
 
 
 
 
 
 
 17,433 2 163,891 18,327  (7,520) 192,133 
 
 
 
 
 
 
 
Operating Income (Loss)Operating Income (Loss) 895  3,013 948  4,856 Operating Income (Loss)  (381)  (2)  (10,804) 932   (10,255)
Other Income (Expense):Other Income (Expense): Other Income (Expense): 
Interest (expense) income  (2,931)   (7,522)  (1,273) 645  (11,081)Interest (expense) income  (3,394)   (6,534)  (1,300) 313  (10,915)
Other income (expense), net 478  404 166  (645) 403 Other income (expense), net 283  400 97  (313) 467 
Equity in earnings (losses) of consolidated subsidiaries  (4,070)  (6,207) 579  9,698  Equity in earnings (losses) of consolidated subsidiaries  (15,742)  (21,966) 589  37,119  
  
 
 
 
 
 
   
 
 
 
 
 
 
Income (Loss) Before Taxes  (5,628)  (6,207)  (3,526)  (159) 9,698  (5,822)
Income (Loss) from Continuing Operations Before TaxesIncome (Loss) from Continuing Operations Before Taxes  (19,234)  (21,968)  (16,349)  (271) 37,119  (20,703)
Income TaxesIncome Taxes   12 373  385 Income Taxes     (820)   (820)
 
 
 
 
 
 
 
Income (Loss) from Continuing OperationsIncome (Loss) from Continuing Operations  (19,234)  (21,968)  (16,349)  (1,091) 37,119  (21,523)
Discontinued OperationsDiscontinued Operations     (445)   (445)
  
 
 
 
 
 
   
 
 
 
 
 
 
Net Income (Loss)Net Income (Loss) $(5,628) $(6,207) $(3,538) $(532) $9,698 $(6,207)Net Income (Loss) $(19,234) $(21,968) $(16,349) $(1,536) $37,119 $(21,968)
  
 
 
 
 
 
   
 
 
 
 
 
 

1518


EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS)
THREE MONTHS ENDED FEBRUARY 28,MAY 31, 2003
(in thousands of dollars)

                                              
 Guarantors  Guarantors 
 
 Non-Guarantors  
 Non-Guarantors 
 EaglePicher Subsidiary Foreign  EaglePicher Subsidiary Foreign 
 Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
 
 
 
 
 
 
 
 
 
 
 
 
Net Sales:Net Sales: Net Sales: 
 Customers $12,714 $ $128,647 $28,949 $ $170,310  Customers $14,212 $ $136,690 $27,807 $ $178,709 
 Intercompany 4,516  4,450 314  (9,280)   Intercompany 6,340  3,964 1,027  (11,331)  
   
 
 
 
 
 
   
 
 
 
 
 
 
 17,230  133,097 29,263  (9,280) 170,310   20,552  140,654 28,834  (11,331) 178,709 
   
 
 
 
 
 
   
 
 
 
 
 
 
Operating Costs and Expenses:Operating Costs and Expenses: Operating Costs and Expenses: 
 Cost of products sold (exclusive of depreciation) 11,085  107,192 24,114  (9,279) 133,112  Cost of products sold (exclusive of depreciation) 12,564  110,757 23,503  (10,850) 135,974 
 Selling and administrative 6,399 1 6,144 2,007  14,551  Selling and administrative 6,661 2 7,219 1,787  15,669 
 Intercompany charges  (1,656)  1,615 41    Intercompany charges  (1,797)  1,718 79   
 Depreciation and amortization 947  9,260 1,400  11,607  Management compensation — special 100  324   424 
   
 
 
 
 
 
  Insurance related losses (gains) 724   (6,460)    (5,736)
 16,775 1 124,211 27,562  (9,279) 159,270  Depreciation and amortization 530  9,186 1,396  11,112 
   
 
 
 
 
 
   
 
 
 
 
 
 
 18,782 2 122,744 26,765  (10,850) 157,443 
 
 
 
 
 
 
 
Operating Income (Loss)Operating Income (Loss) 455  (1) 8,886 1,701  (1) 11,040 Operating Income (Loss) 1,770  (2) 17,910 2,069  (481) 21,266 
Other Income (Expense):Other Income (Expense): Other Income (Expense): 
 Interest (expense) income 3,273   (12,653)  (29)   (9,409) Interest (expense) income  (9,043)      (9,043)
 Other income (expense), net 55  420  (42)  433  Other income (expense), net  (793)  528 14   (251)
 Equity in earnings (losses) of consolidated subsidiaries  (2,179) 1,169 510  500   Equity in earnings (losses) of consolidated subsidiaries 3,650 7,688 663   (12,001)  
   
 
 
 
 
 
   
 
 
 
 
 
 
Income (Loss) Before Taxes 1,604 1,168  (2,837) 1,630 499 2,064 
Income (Loss) from Continuing Operations Before TaxesIncome (Loss) from Continuing Operations Before Taxes  (4,416) 7,686 19,101 2,083  (12,482) 11,972 
Income TaxesIncome Taxes   10 886  896 Income Taxes  (208)   (36)  (906)   (1,150)
 
 
 
 
 
 
 
Income (Loss) From Continuing OperationsIncome (Loss) From Continuing Operations  (4,624) 7,686 19,065 1,177  (12,482) 10,822 
Discontinued OperationsDiscontinued Operations  (434)    (2,702)   (3,136)
   
 
 
 
 
 
   
 
 
 
 
 
 
Net Income (Loss)Net Income (Loss) $1,604 $1,168 $(2,847) $744 $499 $1,168 Net Income (Loss) $(5,058) $7,686 $19,065 $(1,525) $(12,482) $7,686 
   
 
 
 
 
 
   
 
 
 
 
 
 

1619


EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWSINCOME (LOSS)
THREESIX MONTHS ENDED FEBRUARY 28,MAY 31, 2002
(in thousands of dollars)

                          
       Guarantors            
       
 Non-Guarantors        
       EaglePicher Subsidiary Foreign        
   Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
   
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net income (loss) $(5,628) $(6,207) $(3,538) $(532) $9,698  $(6,207)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:                        
 Equity in (earnings) loss of consolidated subsidiaries  4,070   6,207   (579)     (9,698)   
 Depreciation and amortization  2,891      11,745   1,013      15,649 
 Loss from Divestitures  125               125 
 Changes in assets and liabilities, net of effect of non-cash items  36,959   312   59,229   (2,990)  (52,796)  40,714 
   
   
   
   
   
   
 
   38,417   312   66,857   (2,509)  (52,796)  50,281 
   
   
   
   
   
   
 
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Proceeds from sales of divisions  6,300               6,300 
Capital expenditures  (232)     (4,608)  (266)     (5,106)
Other  5      1,401   (1,284)     122 
   
   
   
   
   
   
 
   6,073      (3,207)  (1,550)     1,316 
   
   
   
   
   
   
 
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Reduction of long-term debt  (12,800)     (42,452)     42,452   (12,800)
Net borrowings (repayments) under revolving credit agreements  (22,000)     (14,246)  158      (36,088)
Other     (312)  483   (15)     156 
   
   
   
   
   
   
 
   (34,800)  (312)  (56,215)  143   42,452   (48,732)
   
   
   
   
   
   
 
Effect of exchange rates on cash           151      151 
   
   
   
   
   
   
 
Net increase (decrease) in cash and cash equivalents  9,690      7,435   (3,765)  (10,344)  3,016 
Intercompany accounts  (6,113)     (6,452)  2,288   10,277    
Cash and cash equivalents, beginning of period  17,145   1   471   6,936   67   24,620 
   
   
   
   
   
   
 
Cash and cash equivalents, end of period $20,722  $1  $1,454  $5,459  $  $27,636 
   
   
   
   
   
   
 
                          
       Guarantors            
       
 Non-Guarantors        
       EaglePicher Subsidiary Foreign        
   Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
   
 
 
 
 
 
Net Sales:                        
 Customers $24,700  $  $280,201  $35,654  $  $340,555 
 Intercompany  7,610      6,357   4   (13,971)   
   
   
   
   
   
   
 
   32,310      286,558   35,658   (13,971)  340,555 
   
   
   
   
   
   
 
Operating Costs and Expenses:                        
 Cost of products sold (exclusive of depreciation)  18,652      234,186   28,386   (13,971)  267,253 
 Selling and administrative  12,162   2   18,548   3,185   (100)  33,797 
 Intercompany charges  (5,860)     4,982   778   100    
 Depreciation and amortization  1,912      19,696   1,256      22,864 
 Goodwill amortization  1,868      5,550   494      7,912 
 Management compensation-special  2,381               2,381 
 Insurance related losses        3,100         3,100 
 Restructuring  (2,483)     5,481         2,998 
 Loss from divestitures  3,164      2,806         5,970 
   
   
   
   
   
   
 
   31,796   2   294,349   34,099   (13,971)  346,275 
   
   
   
   
   
   
 
Operating Income (Loss)  514   (2)  (7,791)  1,559      (5,720)
Other Income (Expense):                        
 Interest (expense) income  (6,325)     (14,056)  (2,273)  958   (21,696)
 Other income (expense), net  761      804   311   (958)  918 
 Equity in earnings (losses) of consolidated subsidiaries  (19,812)  (28,173)  1,168      46,817    
   
   
   
   
   
   
 
Income (Loss) from Continuing Operations Before Taxes  (24,862)  (28,175)  (19,875)  (403)  46,817   (26,498)
Income Taxes        (12)  (1,193)     (1,205)
   
   
   
   
   
   
 
Income (Loss) from Continuing Operations  (24,862)  (28,175)  (19,887)  (1,596)  46,817   (27,703)
Discontinued Operations           (472)     (472)
   
   
   
   
   
   
 
Net Income (Loss) $(24,862) $(28,175) $(19,887) $(2,068) $46,817  $(28,175)
   
   
   
   
   
   
 

1720


EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWSINCOME (LOSS)
THREESIX MONTHS ENDED FEBRUARY 28,MAY 31, 2003
(in thousands of dollars)

                          
       Guarantors            
       
 Non-Guarantors        
       EaglePicher Subsidiary Foreign        
   Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
   
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net income (loss) $1,604  $1,168  $(2,847) $744  $499  $1,168 
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:                        
 Equity in (earnings) loss of consolidated subsidiaries  2,179   (1,169)  (510)     (500)   
 Depreciation and amortization  1,730      9,260   1,400       12,390 
 Changes in assets and liabilities, net of effect of non-cash items  (30,577)  24   (393)  (1,133)  10,936   (21,143)
   
   
   
   
   
   
 
   (25,064)  23   5,510   1,011   10,935   (7,585)
   
   
   
   
   
   
 
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Capital expenditures  (422)     (2,437)  (1,044)     (3,903)
Proceeds from sale of property and equipment, and other, net        329         329 
   
   
   
   
   
   
 
   (422)     (2,108)  (1,044)     (3,574)
   
   
   
   
   
   
 
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Reduction of long-term debt  (4,232)              (4,232)
Net borrowings (repayments) under revolving credit agreements  14,500               14,500 
   
   
   
   
   
   
 
   10,268               10,268 
   
   
   
   
   
   
 
Effect of exchange rates on cash           1,659      1,659 
   
   
   
   
   
   
 
Net increase (decrease) in cash and cash equivalents  (15,218)  23   3,402   1,626   10,935   768 
Intercompany accounts  7,238   (23)  3,671   869   (11,755)   
Cash and cash equivalents, beginning of period  27,694   1   (4,895)  7,902   820   31,522 
   
   
   
   
   
   
 
Cash and cash equivalents, end of period $19,714  $1  $2,178  $10,397  $  $32,290 
   
   
   
   
   
   
 
                           
        Guarantors            
        
 Non-Guarantors        
        EaglePicher Subsidiary Foreign        
    Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
    
 
 
 
 
 
Net Sales:                        
  Customers $26,926  $  $265,337  $53,347  $   345,610 
  Intercompany  10,856      8,414   1,341   (20,611)   
   
   
   
   
   
   
 
   37,782      273,751   54,688   (20,611)  345,610 
   
   
   
   
   
   
 
Operating Costs and Expenses:                        
  Cost of products sold (exclusive of depreciation)  23,649      217,949   44,816   (20,129)  266,285 
  Selling and administrative  13,060   3   13,363   3,371      29,797 
  Intercompany charges  (3,453)     3,333   120       
  Management compensation — special  100      324         424 
  Insurance related losses (gains)  724      (6,460)        (5,736)
  Depreciation and amortization  1,477      18,446   2,535      22,458 
   
   
   
   
   
   
 
   35,557   3   246,955   50,842   (20,129)  313,228 
   
   
   
   
   
   
 
Operating Income (Loss)  2,225   (3)  26,796   3,846   (482)  32,382 
Other Income (Expense):                        
  Interest (expense) income  (18,146)              (18,146)
  Other income (expense), net  (738)     948   (137)   �� 73 
  Equity in earnings (losses) of consolidated subsidiaries  1,471   8,857   1,173      (11,501)   
   
   
   
   
   
   
 
Income (Loss) from Continuing Operations Before Taxes  (15,188)  8,854   28,917   3,709   (11,983)  14,309 
Income Taxes  (208)     (46)  (1,792)     (2,046)
   
   
   
   
   
   
 
Income (Loss) From Continuing Operations  (15,396)  8,854   28,871   1,917   (11,983)  12,263 
Discontinued Operations  (434)        (2,975)     (3,409)
   
   
   
   
   
   
 
Net Income (Loss) $(15,830) $8,854  $28,871  $(1,058) $(11,983) $8,854 
   
   
   
   
   
   
 

1821


EAGLEPICHER HOLDINGS, INC
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 2002
(in thousands of dollars)

                          
       Guarantors            
       
 Non-Guarantors        
       EaglePicher Subsidiary Foreign        
   Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
   
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net income (loss) $(24,862) $(28,175) $(19,887) $(2,068) $46,817  $(28,175)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:                        
 Equity in (earnings) loss of consolidated subsidiaries  19,812   28,173   (1,168)     (46,817)   
 Depreciation and amortization  5,385      24,892   1,751      32,028 
 Loss from Divestitures  3,164      2,806         5,970 
 Insurance related losses        3,100         3,100 
 Changes in assets and liabilities, net of effect of non-cash items  44,016   162   54,875   (3,389)  (47,011)  48,653 
   
   
   
   
   
   
 
   47,515   160   64,618   (3,706)  (47,011)  61,576 
   
   
   
   
   
   
 
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Capital expenditures  (251)     (7,494)  (771)     (8,516)
Other  268      1,675   (861)     1,082 
   
   
   
   
   
   
 
   17      (5,819)  (1,632)     (7,434)
   
   
   
   
   
   
 
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Reduction of long-term debt  (18,520)     (42,452)  (46)  42,452   (18,566)
Net borrowings (repayments) under revolving credit agreements  (30,500)     (13,522)  76      (43,946)
Other     (160)  658   (1,286)     (788)
   
   
   
   
   
   
 
   (49,020)  (160)  (55,316)  (1,256)  42,452   (63,300)
   
   
   
   
   
   
 
Net Cash (Used In) Provided by Discontinued Operations  6,300         (994)     5,306 
   
   
   
   
   
   
 
Effect of exchange rates on cash           1,320      1,320 
   
   
   
   
   
   
 
Net increase (decrease) in cash and cash equivalents  4,812      3,483   (6,268)  (4,559)  (2,532)
Intercompany accounts  (4,671)     (3,514)  3,693   4,492    
Cash and cash equivalents, beginning of period  17,145   1   471   6,936   67   24,620 
   
   
   
   
   
   
 
Cash and cash equivalents, end of period $17,286  $1  $440  $4,361  $  $22,088 
   
   
   
   
   
   
 

22


EAGLEPICHER HOLDINGS, INC
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 2003
(in thousands of dollars)

                          
       Guarantors            
       
 Non-Guarantors        
       EaglePicher Subsidiary Foreign        
   Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total
   
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net income (loss) $(15,830) $8,854  $28,871  $(1,058) $(11,983) $8,854 
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:                        
 Equity in (earnings) loss of consolidated subsidiaries  1,471   8,857   1,173      (11,501)   
 Depreciation and amortization  3,043      18,446   2,535       24,024 
 Provision for discontinued operations  434         2,544      2,978 
 Insurance related losses (gains)  724      (6,460)        (5,736)
 Changes in assets and liabilities, net of effect of non-cash items  (16,990)  (877)  (23,837)  (11,375)  11,118   (41,961)
   
   
   
   
   
   
 
   (27,148)  16,834   18,193   (7,354)  (12,366)  (11,841)
   
   
   
   
   
   
 
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Capital expenditures  (1,199)     (4,367)  (3,242)     (8,808)
Proceeds from sale of property and equipment        1,155         1,155 
   
   
   
   
   
   
 
   (1,199)     (3,212)  (3,242)     (7,653)
   
   
   
   
   
   
 
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Reduction of long-term debt  (8,463)              (8,463)
Net borrowings (repayments) under revolving credit agreements  5,500               5,500 
Proceeds from issuance of treasury stock  903               903 
   
   
   
   
   
   
 
   (2,060)              (2,060)
   
   
   
   
   
   
 
Net cash used in discontinued operations           (874)     (874)
   
   
   
   
   
   
 
Effect of exchange rates on cash           4,414      4,414 
   
   
   
   
   
   
 
Net increase (decrease) in cash and cash equivalents  (30,407)  16,834   14,981   (7,056)  (12,366)  (18,014)
Intercompany accounts  8,233   (16,834)  (9,603)  6,658   11,546    
Cash and cash equivalents, beginning of period  27,694   1   (4,895)  7,902   820   31,522 
   
   
   
   
   
   
 
Cash and cash equivalents, end of period $5,520  $1  $483  $7,504  $  $13,508 
   
   
   
   
   
   
 

23


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies

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

     Environmental Reserves

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

     We are involved in various stages of investigation and remediation related to environmental remediation projects at a number of sites as a result of past and present operations, including currently-owned and formerly-owned plants. Also, we have received notice that we may have liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as a potentially responsible party at a number of sites (“Superfund Sites”).

     The ultimate cost of site remediation is difficult to predict given the uncertainties regarding the extent of the required remediation, the interpretation of applicable laws and regulations and alternative remediation methods. Based on our experience with environmental remediation matters, we have accrued reserves for our best estimate of remediation costs, and we do not believe that remediation activities will have a material adverse impact on our financial condition, results of operations or cash flows. In addition, in the course of our bankruptcy described in Item 3 of our Form 10-K for the year ended November 30, 2002, filed on March 3, 2003, we obtained an agreement with the U.S. Environmental Protection Agency and the states of Arizona, Michigan and Oklahoma whereby we are limited in our responsibility for environmental sites not owned by us that allegedly arise from pre-bankruptcy activities. We retain all of our defenses, legal or factual, at such sites. However, if we are found liable at any of these sites, we would only be required to pay as if such claims had been resolved in our bankruptcy and therefore our liability is paid at approximately 37%.

     As of November 30, 2002, we had $17.7 million accrued primarily for sold divisions or businesses related to legal and environmental remediation matters, and $2.4 million recorded in other accrued liabilities related to environmental liabilitiesremediation matters for our on-going businesses. As of February 28,May 31, 2003, we had $15.2$13.6 million accrued primarily for sold divisions or businesses related to legal and environmental remediation matters, and $2.2$1.6 million recorded in other accrued liabilities related to environmental liabilitiesremediation matters for our on-going businesses. We believe such reserves to be adequate under the current circumstances.

     Impairment of Long-Lived Assets, including Goodwill

     We review for impairment the carrying value of our long-lived assets held for use and assets to be disposed of. For all assets excluding goodwill, the carrying value of a long-lived asset is considered impaired if the sum of the undiscounted cash flows is greaterless than the carrying value of the asset. If this occurs, an impairment charge is recorded for the amount by which the carrying value of the long-lived assets exceeds its fair value. Effective December 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under this new accounting standard, we no longer amortize our goodwill and will be required to complete an annual impairment test. We have determined that we have six reporting units, as defined in SFAS No. 142, within our three reportable business segments. We have completed our initial impairment test required by this accounting standard and have determined there was no impairment charge related to the adoption of this accounting standard on December 1, 2002. These impairment tests require us to forecast our future cash flows, which requires significant judgment. As of November 30, 2002 and February 28,May 31, 2003, we had recorded $163.9 million of

24


goodwill. In addition as of November 30, 2002, we had recorded $183.4$177.1 million of property, plant, and equipment, net (our primary long-lived asset), and as of February 28,May 31, 2003 we had recorded $176.5$164.7 million of property, plant, and equipment, net.

19


     Revenue Recognition

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

     Under the percentage-of-completion method, contract costs include direct material, labor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling and administrative expenses are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes to job performance, job conditions, and estimated profitability may result in revisions to contract revenue and costs and are recognized in the period in which the revisions are made. We provided for estimated losses on uncompleted contracts of $0.5 million at November 30, 2002 and February 28,May 31, 2003. The percentage of completion method requires a higher degree of judgment and use of estimates than other revenue recognition methods. The primary judgments and estimates involved include our ability to accurately estimate the contracts’ percent complete and the reasonableness of the estimated costs to complete as of each financial reporting period.

     Pension and Postretirement Benefit Plan Assumptions

     We sponsor pension plans covering substantially all employees who meet certain eligibility requirements. We also sponsor postretirement benefit plans that make health care and life insurance benefits available for certain employees. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liability related to these plans. These factors include key assumptions, such as discount rate, expected return on plan assets, rate of increase of health care costs and rate of future compensation increases. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension or postretirement benefits expenses we have recorded or may record in the future. Assuming a constant employee base, the most important estimate associated with our post retirement plan is the assumed health care cost trend rate. As of November 30, 2002, a 100 basis point increase in this estimate would increase the expense by approximately $0.2 million. A similar analysis for the expense associated with our pension plans is more difficult due to the variety of assumptions;assumptions, plan types and regulatory requirements for these plans around the world. However, for example, our U.S. plans, which represent approximately 90% of the consolidated projected benefit obligation at November 30, 2002, a 25 basis point change in the discount rate, would change the annual pension expense by approximately $0.8 million, and the annual post-retirement expense by approximately $0.1 million. Additionally, a 25 basis point change in the expected return on plan assets would change the pension expense by approximately $0.6 million.

     Deferred Stripping Costs

     In our Filtration and Minerals Segment, we generally charge our mining costs to Cost of Products Sold as sales are incurred. However, we defer and amortize certain mining costs on a units-of-production basis over the estimated life of the particular section of a mine, based on estimated recoverable cubic yards of ore in that section. These mining costs, which are commonly referred to as “deferred stripping” costs, are incurred in mining activities that are normally associated with the removal of waste rock. The deferred stripping accounting method is generally accepted in the mining industry where mining operations have diverse grades and waste-to-ore ratios; however industry practice does vary. By deferring stripping costs, we match the costs of production when the sale of diatomaceous earth occurs with an appropriate amount of waste removal cost. If we were to expense deferred stripping costs as incurred, there could be

25


greater volatility in our period-to-period operating results. Deferred stripping costs recorded in our accompanying balance sheets totaled $3.7 million at November 30, 2002 and $5.7 million at May 31, 2003.

Legal Contingencies

     We are a defendant in numerous litigation and regulatory matters including those involving environmental law, employment law and patent law, as discussed in NoteNotes K and G to the condensed consolidated financial statements.statements in Item 1 of this report. As required by SFAS No. 5, we determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We analyze our litigation and regulatory matters based on available information to assess potential liability. We develop our views on estimated losses in consultation with outside counsel and environmental experts handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should these matters result in an adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such judgment or settlement occurs.

     Estimates Used Relating to Restructuring, Divestitures and Asset Impairments

     Over the last several years we have engaged in significant restructuring actions and divestitures, which have required us to develop formalized plans as they relate to exit activities. These plans have required us to utilize significant estimates related to

20


salvage values of assets that were made redundant or obsolete. In addition, we have had to record estimated expenses for severance and other employee separation costs, lease cancellation and other exit costs. Given the significance of, and the timing of the execution of such actions, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. Our policies, as supported by current authoritative guidance, require us to continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. As we continue to evaluate the business, there may be supplemental charges for new plan initiatives as well as changes in estimates to amounts previously recorded as payments are made or actions are completed.

     Income Taxes and Tax Valuation Allowances

     We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our balance sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions, as we have in the United States, or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.

     Risk Management Activities

     We are exposed to market risk including changes in interest rates, currency exchange rates and commodity prices. We use derivative instruments to manage our interest rate and foreign currency exposures. We do not use derivative instruments for speculative or trading purposes. Generally, we enter into hedging relationships such that changes in the fair values or cash flows of items and transactions being hedged are expected to be offset by corresponding changes in the values of the derivatives. Accounting for derivative instruments is complex, as evidenced by the significant interpretations of the primary accounting standard, and continues to evolve. As of November 30, 2002 we had a notional amount of $13.5 million and at February 28,May 31, 2003 we had $12.9a notional amount of $23.6 million of foreign forward

26


exchange contracts. In addition, at November 30, 2002 and February 28,May 31, 2003, we had notional amounts of $90.0 million of interest rate swap contracts to hedge our interest rate risks. The impact of a 1.0% increase in interest rates would result in additional interest expense of approximately $0.7 million on an annual basis.

     Other Significant Accounting Policies

     Other significant accounting policies, not involving the same level of uncertainties as those discussed above, are nevertheless important to an understanding of our financial statements. See Note B to the consolidated financial statements, Summary of Significant Accounting Policies, included in our Form 10-K for the year ended November 30, 2002, filed on March 3, 2003, which discusses accounting policies that must be selected by us when there are acceptable alternatives.

Results of Operations

     The following summary financial information about our industry segment data is presented to gain a better understanding of the narrative discussion below about our business segments. See Note O in our Form 10-K for the year ended November 30, 2002, filed on March 3, 2003, for additional financial information by segment. All references herein to years are to the three-months ended February 28 unless otherwise indicated (in thousands of dollars).

     As discussed in Note Q to our financial statements for the year ended November 30, 2002, the accompanying 2002 financial statements haveinformation has been restated to reflect the appropriate adoption of EITF 00-10 which resulted in an increase to Net Sales and Cost of Products Sold for transportation costs billed to our customers. This restatement had no impact on operating income, net income or cash flows. The following discussion and analysis gives effect to the restatement.

21     As discussed in Note G to our financial statements in Item 1 of this report, the accompanying 2002 financial information has been restated to reflect our Hillsdale U.K. Automotive operation as a discontinued business. The operation was sold on June 11, 2003. The following discussion and analysis gives effect to the restatement (in thousands of dollars).

                  
   Three Months Ended May 31,
   
   2002 2003 Variance %
   
 
 
 
Net Sales
                
Hillsdale Division $93,524  $85,064  $(8,460)  (9.1)
Wolverine Division  19,707   23,189   3,482   17.7 
   
   
   
     
 Automotive  113,231   108,253   (4,978)  (4.4)
   
   
   
     
Power Group  25,173   34,097   8,924   35.5 
Precision Products-divested July 17, 2002  1,388      (1,388)  (100.0)
Specialty Materials Group  17,501   13,211   (4,290)  (24.5)
Pharmaceutical Services (formerly ChemSyn)  3,776   3,383   (393)  (10.4)
   
   
   
     
 Technologies  47,838   50,691   2,853   6.0 
   
   
   
     
Filtration and Minerals  20,809   19,765   (1,044)  (5.0)
   
   
   
     
  $181,878  $178,709  $(3,169)  (1.7)
   
   
   
     
Operating Income (Loss)
                
Automotive $3,898  $6,696  $2,798   71.8 
Technologies  (8,626)  14,976   23,602   N/A 
Filtration and Minerals  3,589   1,621   (1,968)  (54.8)
Divested Divisions  (5,845)     5,845   100.0 
Corporate/Intersegment  (3,271)  (2,027)  1,244   38.0 
   
   
   
     
  $(10,255) $21,266  $31,521   N/A 
   
   
   
     

27


             
 Six Months Ended May 31,
               
 2002 2003 Variance % 2002 2003 Variance %
 
 
 
 
 
 
 
 
Net Sales
Net Sales
 
Net Sales
 
Hillsdale DivisionHillsdale Division $85,834 $83,282 $(2,552)  (3.0)Hillsdale Division $174,806 $164,937 $(9,869)  (5.7)
Wolverine DivisionWolverine Division 17,648 20,718 3,070 17.4 Wolverine Division 37,355 43,907 6,552 17.5 
 
 
 
   
 
 
 
Automotive 103,482 104,000 518 0.5 Automotive 212,161 208,844  (3,317)  (1.6)
 
 
 
   
 
 
 
Power GroupPower Group 22,870 32,283 9,413 41.2 Power Group 47,800 66,137 18,337 38.4 
Precision Products- divested July 17, 2002 1,215   (1,215)  (100.0)
Precision Products-divested July 17, 2002Precision Products-divested July 17, 2002 2,603   (2,603)  (100.0)
Specialty Materials GroupSpecialty Materials Group 13,031 13,219 188 1.4 Specialty Materials Group 30,775 26,672  (4,103)  (13.3)
Pharmaceutical Services (formerly ChemSyn)Pharmaceutical Services (formerly ChemSyn) 3,405 1,902  (1,503)  (44.1)Pharmaceutical Services (formerly ChemSyn) 7,181 5,286  (1,895)  (26.4)
 
 
 
   
 
 
 
Technologies 40,521 47,404 6,883 17.0 Technologies 88,359 98,095 9,736 11.0 
 
 
 
   
 
 
 
Filtration and MineralsFiltration and Minerals 19,226 18,906  (320)  (1.7)Filtration and Minerals 40,035 38,671  (1,364)  (3.4)
 
 
 
   
 
 
 
 $163,229 $170,310 $7,081 4.3   $340,555 $345,610 $5,055 1.5 
 
 
 
   
 
 
 
Operating Income (Loss)
Operating Income (Loss)
 
Operating Income (Loss)
 
AutomotiveAutomotive $3,516 $5,141 $1,625 46.2 Automotive $7,093 $11,913 $4,820 68.0 
TechnologiesTechnologies 668 8,046 7,378 1,104.5 Technologies  (7,955) 23,022 30,977 N/A 
Filtration and MineralsFiltration and Minerals 1,306  (111)  (1,417)  (108.5)Filtration and Minerals 4,895 1,510  (3,385)  (69.2)
Divested DivisionsDivested Divisions  (125)  125 100.0 Divested Divisions  (5,970)  5,970 100.0 
Corporate/ Intersegment  (509)  (2,036)  (1,527)  (300.0)
Corporate/IntersegmentCorporate/Intersegment  (3,783)  (4,063)  (280)  (7.4)
 
 
 
   
 
 
 
 $4,856 $11,040 $6,184 127.3   $(5,720) $32,382 $38,102 N/A 
 
 
 
   
 
 
 

     Automotive Segment

     Sales in our Automotive Segment increased $0.5decreased $5.0 million, or 0.5%4.4%, to $104.0$108.3 million in the second quarter of 2003 from $103.5$113.2 million in the second quarter of 2002, and decreased $3.3 million, or 1.6%, to $208.8 million in the first six months of 2003 from $212.2 million in the first six months of 2002. The

     In the second quarter of 2003, our Wolverine divisiondivision’s sales increased $3.1$3.5 million, or 17.4%17.7%, and in the first six month of 2003, they increased $6.6 million, or 17.5%. These increases are due primarily to an 11%approximate 10% year over year volume increase as a result ofdespite lower North American automotive production levels, driven by increased penetration of the aftermarket and small engine markets, and new programs with original equipment manufacturers through Federal Mogul and Taiho. The balance of the increase was favorable foreign currency as a result of the strengthening of the Euro. Approximately 38% of our Wolverine division’s sales are from Europe.

     Offsetting our Wolverine division’s sales increase was a decrease in our Hillsdale division’s sales during the second quarter of 2003 of $8.5 million, or 9.1%, and a decrease in the first six months of 2003 of $9.9 million, or 5.7%. Our Hillsdale division’s sales were lower due to (a) a $3.5 million decline in the second quarter of 2003 ($6.3 million in the first six months of 2003) in transmission pump sales related to a Ford Company program phase-out, (b) price decreases of $0.9 million, or 1.0%, in the second quarter of 2003 ($1.7 million, or 1.0%,, in the first six months of 2003), and (c) $4.1 million, or 4.4%, decline in the second quarter of 2003 ($1.9 million, or 1.0%, in the first six months of 2003) in volume related to other mature program phase outs and reduced North American automotive builds. These volume declines related to the North American automotive build are below the industry estimated averages of approximately 7-8% in the second quarter of 2003 (3-4% in the first six months of 2003) due to our strong position with Japanese automotive manufacturers which represent approximately 35% of our Hillsdale division’s sales, and a strong presence on General Motors light truck platforms.

     Operating income increased $2.8 million, or 71.8%, to $6.7 million in the second quarter of 2003 from $3.9 million in the second quarter of 2002, and increased $4.8 million, or 68.0%, to $11.9 million in the first six months of 2003 from $7.1 million in the first six months of 2002. In the second quarter of 2003, this improved performance was primarily due to the following favorable/(unfavorable) items:

a.$2.3 million reduction in costs due to productivity improvements;
b.($0.9) million in price decreases;

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c.$2.0 million reduction in goodwill amortization expense in 2003 compared to 2002 (due to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which no longer requires the amortization of goodwill);
d.$0.3 million less depreciation expenses; and
e.($0.9) million in higher operating costs, primarily energy costs, and wage and benefits expenses at our unionized facilities.

     Also in the second quarter of 2003, the impact on margins due to decreased volumes was offset by favorable sales mix and favorable foreign currency as a result of the strengthening of the Euro. Approximately 38.8%

     In the first six months of the Wolverine division’s sales are from Europe. Partially offsetting the Wolverine division’s sales increase was a $2.6 million, or 3.0%, decline in our Hillsdale division’s sales due to (a) a $2.8 million decline in transmission pump sales related to a program phase-out, and (b) a $1.3 million decline in sales of our Hillsdale U.K. Automotive operation, which is in the process of being sold. These decreases are partially offset by a modest increase in North American sales due to the increase in automotive builds in 2003, compared to 2002. The pending sale of the Hillsdale U.K. Automotive operation is discussed in Note I of Item 1 of this report. We anticipate that the net charge to our earnings related to this divestiture will be approximately $3.5 million to $5.0 million in 2003, with net cash proceeds of approximately $1.5 million to $2.0 million.

     Operating income increased $1.6 million, or 46.2%, to $5.1 million in 2003 from $3.5 million in 2002. This improved performance was primarily due to a $0.9 million reduction in depreciation and amortization expense due to the elimination of $2.0 million of goodwill amortization expense in 2003 compared to 2002 (due to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which no longer requires the amortization of goodwill), which was partially offset by a $1.1 million increase in tooling amortization expenses. The remaining $0.7 million of operating income improvement was primarily due to favorable foreign currency exchange rates. Productivity improvements and improved sales mix were largely offset by price decreases ($0.9 million) and higher wage and benefit costs in unionized facilities ($0.8 million).following favorable/(unfavorable) items:

a.$4.4 million reduction in costs due to productivity improvements;
b.$1.4 million increase in margin due primarily to favorable sales mix and favorable foreign currency as a result of the strengthening of the Euro, partially offset by decreases in sales volume in our Hillsdale division;
c.($1.7) million in price decreases;
d.$4.0 million of reduction in goodwill amortization expense in 2003 compared to 2002 (due to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which no longer requires the amortization of goodwill);
e.($0.9) million more depreciation expenses;
f.($1.0) million increase in energy costs; and
g.($1.4) million in higher operating costs, primarily related to wage and benefits expenses at our unionized facilities.

     Technologies Segment

     Sales in our Technologies Segment increased $6.9$2.9 million, or 17.0%6.0%, to $47.4$50.7 million in the second quarter of 2003 from $40.5$47.8 million in the second quarter of 2002, and increased $9.7 million, or 11.0%, to $98.1 million in the first six months of 2003 from $88.4 million in the first six months of 2002. Excluding sales from our Precision Products business, which we divested in July 2002, this segment’s sales increased $8.1$4.2 million, or 20.6%.9.1% in the second quarter of 2003, and increased $12.3 million, or 14.4% in the first six months of 2003.

     Sales in the Power Group increased $9.4$8.9 million, or 41.2%35.5%, duringin the second quarter of 2003, compared to 2002, which was partially offset by a decreaseand $18.3 million, or 38.4%, in the first six months of $1.5 million in our Pharmaceutical Services businesses.2003. The increase in our Power Group sales is primarily related to new programs, improved pricing, and increased spending in our defense power business,spending, as well as a $1.0an increase of $0.6 million, or 43%24.7%, increasein the second quarter of 2003 (and a $1.6 million, or 33.2%, in the first six months of 2003) in our commercial power sales, as a result of new sales initiatives in the commercial market. Decreased salesPartially offsetting the strong increase in our Pharmaceutical Services business is the result of lowerPower Group sales to our larger customers and short-term operational issues. Sales increased $0.2 millionwere declines in our Specialty Materials Group and our Pharmaceutical Services businesses. In our Specialty Materials Group, sales decreased $4.3 million in the second quarter of 2003 and $4.1 million in the first six months of 2003. The second quarter decrease was due primarily to continued strong demand for(a) $3.7 million decrease in enriched Boron related

22


products which increased $2.2 million, or 50.7%, partially offset by the continued decline of Germanium and the exiting of our Gallium-based products solddue to the timing of customer orders and (b) $0.6 million decrease primarily related to decreased Germanium based products due to the weak telecommunications, fiber optics, and semiconductor markets. The decrease in our Specialty Materials Group’s sales in the first six months of 2003 was due to (a) $1.7 million decrease in enriched Boron related products due to the timing of customer orders, (b) $2.0 million decrease related to decreased Germanium based products due to the weak telecommunications, fiber optics, and semiconductor markets and (c) $0.4 million of less product sales for products exited as part of our restructuring announced in November 2001. In addition, Pharmaceutical Services sales decreased $0.4 million in the second quarter of 2003 and $1.9 million in the first six months of 2003 due to a cancellation of a drug program with one of its largest customers, and a general softening in the market.

     Operating income increased $7.4improved $23.6 million to income of $15.0 million in the second quarter of 2003 from a loss of $8.6 million in the second quarter of 2002, and improved $31.0 million to income of $23.0 million in the first six months of 2003 from a loss of $8.0 million in 2003 from $0.6the first six months of 2002. Included in the second quarter of 2002

29


amounts were the following unusual items:

a.$4.5 million of legal expenses and legal settlement charges ($5.7 million in the first six months of 2002) recorded in Selling and Administrative expenses as described in Item 3 of our Form 10-K for the year ended November 30, 2002;
b.$3.1 million loss for an insurance receivable primarily related to inventories damaged in a fire during the third quarter of 2001 at our Missouri bulk pharmaceutical manufacturing plant;
c.$5.5 million charge in Restructuring expense associated with our decision to exit our Gallium-based specialty material business due to continued soft demand from customers in the telecommunications and semi-conductor markets. The $5.5 million restructuring charge included an inventory write-down of $2.9 million, representing the estimated loss incurred from the liquidation of current inventory. An additional $2.4 million was recorded in other accrued liabilities primarily related to the estimated loss of inventory to be purchased under a firm purchase commitment. Finally, a $0.2 million asset impairment charge was recorded against property, plant and equipment; and
d.$1.2 million of income related to the reversal of a portion of our fourth quarter 2001 Restructuring expense related to severance payments made by the pension plan.

     The following favorable items totaling $11.7 million in 2002. This improved performance resulted primarily from operational improvementsthe second quarter of $5.52003 (and $17.9 million related to higher sales volumes, productivity initiatives, improved sales mix and pricing, as well as $1.2 millionin the first six months of lower legal expenses and settlement charges in 2003 compared to 2002. In addition, the elimination of $1.9 million of goodwill amortization expense during 2003 compared to 2002 due to our adoption of SFAS No. 142, Goodwill and Other Intangible Assets,2003) contributed to the improved performance.improvement in operating income:

a.$1.3 million in the second quarter of 2003 ($3.6 million in the first six months of 2003) related to productivity initiatives;
b.$2.0 million in the second quarter of 2003 ($4.0 million in the first six months of 2003) related to increased volumes, favorable sales mix, and improved pricing;
c.$1.9 million in the second quarter of 2003 ($3.8 million in the first six months of 2003) of less goodwill amortization expense due to our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on December 1, 2002; and
d.$6.5 million insurance gain in the second quarter of 2003 and the first six months of 2003 primarily related to the settlement of a claim with our insurance carrier over the coverage on a fire which occurred at one of our facilities during 2002.

     Filtration and Minerals Segment

     Sales in our Filtration and Minerals Segment decreased $0.3$1.0 million, or 1.7%5.0%, to $18.9$19.8 million in the second quarter of 2003 from $19.2$20.8 million in 2002.

     Operating resultsthe second quarter of 2002, and decreased $1.4 million, or 3.4%, to a loss of $0.1$38.7 million in the first six months of 2003 from income of $1.3$40.0 million in the first six months of 2002. TheThese decreased results were due primarily to lower volumes, which were partially offset by favorable foreign currency as a result of the strengthening of the Euro. During the fourth quarter of 2002, we were, but are no longer, exploring the possible sale of our Filtration and Minerals business. This potential sale diverted a significant amount of divisional management attention from operational focus, which has had a negative impact on 2003 performance. In the past two months, new divisional leadership has been put in place, including a divisional president.

     Operating income decreased $2.0 million, or 54.8%, to $1.6 million in the second quarter of 2003 from $3.6 million in the second quarter of 2002, and decreased $3.4 million, or 69.2%, to $1.5 million in the first six months of 2003 from $4.9 million in the first six months of 2002. These decreased earnings wereare due to lower volumes, severance and recruiting costs of $0.5 million related to restructuring the segment’s management team and additional freight costs of $0.8 million largely related to the resolution of disputed freight claims with a former carrier.carrier, which were partially offset by favorable foreign currency as a result of the strengthening of the Euro.

     Company Discussion

     Net Sales.Net sales increased $7.1Sales decreased $3.2 million, or 4.3%1.7%, to $170.3$178.7 million in the second quarter of 2003 from $163.2$181.9 million in the second quarter of 2002, and increased $5.1 million, or 1.5%, to $345.6 million in the first six months of 2003 from $340.6 million in the first six months of 2002. Excluding the salesales from our Precision Products

30


business within our Technologies Segment, which we divested in July 2002, net sales decreased $1.8 million, or 1.0%, in the second quarter of 2003, and increased $7.7 million, or 2.3%, in the first six months of 2003.

     In the second quarter of 2003, the decrease was due to sales decreases of 9.1% in our Precision ProductsAutomotive Segment’s Hillsdale business includedand 5.0% in our Filtration and Minerals Segment, partially offset by strong increases of 17.7% in our Automotive Segment’s Wolverine business and 35.5% in our Technologies Segment, our net sales increased $8.3 million, or 5.1%, inSegment’s Power Group. See above for a discussion of the individual segments’ results. In the first six months of 2003, compared to 2002. Thisthe increase was primarily driven by a $9.4 million increasedue to strong increases of 17.5% in our Automotive Segment’s Wolverine business and 38.4% in our Technologies Segment’s Power Group, due primarily to new programs, improved pricing, and increased spending in our defense power business, as well as a $1.0 million, or 43%, increase in our commercial power sales, as a result of new initiatives in the commercial market, and a $3.1 million increase in our Automotive Segment’s Wolverine division due primarily to the penetration of the aftermarket and small engine markets. These increases were partially offset by reduced salesdecreases of $2.6 million5.7% in our Automotive Segment’s Hillsdale division due tobusiness and 3.4% in our Filtration and Minerals Segment. See above for a discussion of the continued phase out of an automotive transmission pump program and lower sales at our Hillsdale U.K. Automotive operation, which is in the process of being sold.individual segments’ results.

     Cost of Products Sold (exclusive of depreciation). Costs of products sold decreased $5.2 million, or 3.7%, to $136.0 million in the second quarter of 2003 from $141.1 million in the second quarter of 2002, and decreased $1.0 million, or 0.4%, to $266.3 million in the first six months of 2003 from $267.3 million in the first six months of 2002. Our gross margins increased by $3.7$2.0 million from $33.5to $42.7 million in 2002 to $37.2the second quarter of 2003 from $40.7 million in 2003the second quarter of 2002, and the gross margin percentage increased 1.5 points to 23.9% from 22.4%, despite an increase of $1.2 million (0.7 points) in pension costs, and a $0.5 million increase as a result of higher volumes, improved sales mix, and productivity improvements.energy costs. Our gross margins increased $6.0 million to $79.3 million in the first six months of 2003 from $73.3 million in the first six months of 2002, and the gross margin percentage increased 1.31.5 points to 21.8% in 200323.0% from 20.5% in 2002,21.5%, despite a negative impactan increase of $0.5$2.0 million (0.3(0.6 points) in pension costs, and a $0.7 million increase as a result of higher energy costs. TheThese margin rate improvement wasimprovements are primarily athe result of productivity improvements in our Automotive and Technologies Segments, improved sales mix and price increases in our Technologies Segment, improved sales mix in our Automotive Segment, and favorable foreign currency as a result of the strengthening of the Euro in the Automotive and Filtration and Minerals Segments.

     Selling and Administrative.Selling and administrative expenses increased $1.1expense decreased $5.0 million, or 7.9%24.2%, to $14.6$15.7 million in the second quarter of 2003 from $13.5$20.7 million in the second quarter of 2002, and decreased $4.0 million, or 11.8%, to $29.8 million in the first six months of 2003 from $33.8 million in the first six months of 2002. The increase isThese decreases were primarily attributabledue to $0.7$4.8 million of legal expenses and legal settlement charges included in the second quarter of 2002 ($6.3 million in the first six months of 2002) as described in Item 3 of our Form 10-K for the year ended November 30, 2002. In addition, selling and administrative expense also increased $0.3 million in the second quarter of 2003 and $1.0 million in the first six months of 2003 due to increased compensation costs related to our long-term and annual management bonus plans, higher insurance costs, wage increases, and increased selling costs due to higher sales volumes.plan.

     Goodwill Amortization.Due to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, no goodwill amortization expense was recorded in 2003 while 2002 included $3.9$4.0 million of goodwill amortization expense.expense in the second quarter of 2002 and $7.9 million in the first six months of 2002. This new accounting standard required that we cease the amortization of goodwill, effective December 1, 2002, and complete an annual impairment test to determine if an impairment charge has occurred. We have completed our initial impairment test as required by this accounting standard and have determined that our goodwill was not impaired at the time of we adopted this accounting standard.

Restructuring.On May 31, 2002 we announced we would exit our Gallium business in our Technologies Segment due to the downturn in the fiber-optic, telecommunication and semiconductor markets. This resulted in a $5.5 million charge recorded to Restructuring expense during the second quarter of 2002. We also reduced the amounts previously expensed and accrued as Restructuring expense in 2001 by $2.5 million primarily to reflect severance payments made from our over-funded pension plan at November 30, 2001 to eligible employees.

Management Compensation – Special. Management compensation- special expenses of $2.4 million in the second quarter of 2002 and $0.4 million in the second quarter of 2003 relate to compensation for former officers upon their separation of employment. In 2002, these amounts related to two (2) former officers and in 2003, these amounts related to three (3) former officers.

Insurance Related Losses/ (Gains). During the second quarter of 2002, we recorded a $3.1 million loss for an insurance receivable primarily related to inventories damaged in a fire during the third quarter of 2001 at our Missouri

31


bulk pharmaceutical manufacturing plant. We recorded this charge to fully reserve the receivable because the insurance underwriter is contesting the coverage on these assets. We are disputing the insurance carrier’s position and are vigorously pursuing efforts to collect on our claims, but the recovery of our claim is uncertain. In the second quarter of 2003, we recorded a $5.7 million gain primarily related to the settlement of a claim with our insurance carrier over the coverage on a fire during 2002 at our Seneca, Missouri non-operating facility.

Loss from Divestitures.During 2002, we recorded approximately $3.2 million in additional accruals for costs related to certain litigation issues and environmental remediation related to operations divested prior to November 30, 2001. In addition, during 2002 we signed a letter of intent to sell certain assets and liabilities of our Precision Products business in our Technologies segment to a group of employees and management personnel. We recorded a $2.8 million loss on sale, which was completed in July 2002.

     Interest Expense.Interest expense was $11.1$10.9 million in the second quarter of 2002 and $9.4$9.0 million in 2003. Includedthe second quarter of 2003 (not including $0.3 million in interestthe second quarter of 2002 and 2003 which was allocated to discontinued operations). Interest expense was $21.7 million in the first six months of 2002 areand $18.1 million in the first six months of 2003 (not including $0.6 million in first six months of 2002 and 2003 which was allocated to discontinued operations). Also included in the first six months of 2002, but not the second quarter of 2002, was $1.5 million in fees and other costs, primarily related to establishing our accounts receivable asset-backed securitizationfacility (see Accounts Receivable Asset-Backed Securitization under Liquidity and Capital Resources). Excluding these $1.5 million in fees and other costs in 2002, our 2002 interest expense was $9.6 million. This represents a decrease of 2.1%, or $0.2 million, in 2003 compared to 2002. The decrease inOur year over year reduced interest expense is due to lower interest rates and lower debt levels.

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     Income (Loss) from Continuing Operations Before Taxes. Income (Loss) from Continuing Operations Before Taxes improved $7.9$32.7 million in the second quarter of 2003 to income of $2.1$12.0 million, and improved $40.8 million in the first six months of 2003 compared to a lossincome of $14.3 million. These changes were primarily the result of the following decreases in operating costs and expenses (in thousands of dollars):

         
  Second First Six
  Quarter of Months of
  2003 2003
  
 
a. Management compensation-special $1,957  $1,957 
b. Loss from divestitures  5,845   5,970 
c. Restructuring  2,998   2,998 
d. Legal and Settlement costs (included in Selling and Administrative)  4,800   6,250 
e. Insurance related losses (gains)  8,836   8,836 
f. Depreciation adjustment related to equipment useful lives  1,100   1,100 
g. Goodwill amortization  3,956   7,912 
   
   
 
  $29,492  $35,023 
   
   
 

     The remaining improvements of $3.2 million in the second quarter of 2003 and $5.8 million in 2002. This improvement isthe first six months of 2003 are primarily related to:

a.$3.7 million of higher gross margin due to increased sales volume and a 1.3 point gross margin rate improvement for the reasons discussed above,
b.$3.9 million of goodwill amortization expense in 2002 which we are no longer required to expense with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on December 1, 2002,
c.$1.5 million of additional interest expense in 2002 related to our accounts receivable asset-backed securitization (see Accounts Receivable Asset-Backed Securitization under Liquidity and Capital Resources), and
d.$1.1 million increase in Selling and Administrative expense, as discussed above.
to productivity initiatives, improved pricing, favorable sales mix, and lower interest expense. The impact of foreign currency gains on a consolidated basis is not material as the gains in our operating segments are offset by losses at the Corporate Segment as a result of foreign currency forward contract hedges.

     Income Taxes.Income tax provision was $0.9$0.8 million in 2003the second quarter of 2002 compared to $0.4$1.2 million in 2002.the second quarter of 2003. Income tax provision was $1.2 million in the first six months of 2002 compared to $2.0 million in the first six months of 2003 (not including a $0.6 million tax benefit in the second quarter of 2003 which was allocated to discontinued operations). The provision in 20032002 and 20022003 relates to the allocation of income and loss between the United States and foreign jurisdictions and primarily represents the estimated tax that will be due in certain jurisdictions where no tax benefit can be assured from utilizing previous losses. There is no U.S. Federal or state net tax benefit or provision recorded during 2002 and 2003.

     Discontinued Operations.During the second quarter of 2003, we accounted for our Hillsdale U.K. Automotive operation as a discontinued operation and restated our prior period financial statements to conform to the discontinued operations presentation. The Hillsdale U.K. Automotive operation was sold on June 11, 2003. See Note G in our financial statements in Item 1 of this report.

Net Income (Loss).The net income (loss)Net Income (Loss) improved $7.4$29.7 million in the second quarter of 2003 to net income of $1.2$7.7 million, and improved $37.0 million in the first six months of 2003 fromto income of $8.9 million as a net loss of $6.2 million in 2002. The improved net income (loss) is the result of the items discussed above.

     Preferred stock dividend accretion of $3.9 million in 2003 decreased our net income of $1.2 million to a net loss applicable to common shareholders of $2.8 million. In 2002, preferred stock dividend accretion of $3.5 million increased the net loss of $6.2 million to a net loss applicable to common shareholders of $9.7 million.

     Company Outlook.Projected sales for 2003 are estimated to be in the range of $670.0$690.0 million to $700.0 million compared to $696.8$682.8 million in 2002.2002, which is restated to exclude our Hillsdale U.K. Automotive operation, which was accounted for as a discontinued operation in the second quarter of 2003. The 2003 sales range is primarily attributed to the current uncertainty regarding industry forecasted automotive builds for 2003. Also, the sales estimate for 2003 reflects the anticipated decrease in sales of approximately $15.0 million related to the phase-out of ana Ford Company automotive transmission pump program in our Hillsdale Division as well as our decision to sell our Hillsdale U.K. Automotive operation, which will have approximately $10.0 million less sales in 2003 compared to 2002.and the current uncertainty regarding industry forecasted automotive builds for 2003.

     We are projecting 2003 Operating Income to be in the range of $53.5$59.2 million to $57.5 million.$63.2 million, which excludes the insurance gain of $5.7 million that we recorded in the second quarter of 2003. This amount includes $45.0 million of depreciation and amortization, of intangibles, and excludes $0.5 million of non-operating income. These Operating Income estimates also include $3.0 million of expense related to non-cash provisions for our long-term bonus program, which are added back to Operating Income for purposes of determining our debt covenant calculations. In 2002, ourcalculations are added back to Operating Income was $5.3 million, which included $64.0 million in depreciation and amortization of intangibles expense, and excluded $1.6 million of non-operating income. This projected improved Operating Income, despite lower sales, primarily reflects:Income.

a.the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which eliminated the amortization of goodwill, effective December 1, 2002 (approximately $16.0 million)
b.a reduction of special charges of approximately $26.0 million in 2002 related to legal expenses and legal settlements, divestitures, restructuring expenses and other unusual charges,
c.improved sales mix in our Technologies and Automotive Segments, and improved pricing in our Technologies Segment,
d.cost reductions and productivity initiatives across all businesses,
e.an approximate $4.8 million increase in our pension expense, from $3.8 million of income in 2002 (excluding special termination benefits incurred in 2002) to an estimated $1.0 million of expense in 2003, and
f.approximately $2.0 million in increased compensation costs related to our long-term and annual management bonus plans.
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     On the basis of these projections, we believe we will be in compliance with all covenants under our various credit facilities during 2003.

Liquidity and Capital Resources

     Our cash flows from operations and availability under our credit facilities are considered adequate to fund our short-term

24


capital needs. As of February 28,May 31, 2003, we had $43.8$71.5 million unused under our seniorvarious credit agreement.facilities. However, due to various financial covenant limitations under our senior credit agreement measured at the end of each quarter, on February 28,May 31, 2003, we could only incur an additional $39.9$66.8 million of indebtedness.

     We are currently negotiating a new senior secured credit facility in the approximate amount of $275.0 million to replace our current credit facility, which provided for an original term loan of $75.0 million, as amended, and a $220.0 million revolving facility.

     In July 2003, we also announced the commencement of a cash tender offer and consent solicitation for our 9 3/8% Senior Subordinated Notes Due 2008 (the “Notes”). We are seeking to acquire any and all of our approximately $220.0 million of Notes outstanding. The consent solicitation seeks consent of the holders of the Notes to amend the indenture governing the Notes to eliminate certain of the restrictive covenants and other contractual obligations. The tender offer and consent solicitation are being made in accordance with and subject to the terms and conditions stated in EaglePicher Incorporated’s Offer to Purchase and Consent Solicitation Statement dated July 9, 2003. EaglePicher Incorporated intends to finance the tender offer and consent solicitation with the proceeds of its offering of approximately $220.0 million aggregate principal amount of senior unsecured notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), together with other funds. The securities to be offered have not been offered or sold in the United States, absent registration or an applicable exemption from such registration requirements. There is no assurance that this offering will be successful.

At February 28,May 31, 2003, we were in compliance with all of our debt covenants. Also, based on our projections for 2003, weWe expect to remain in compliance with all covenants.our debt covenants for the remainder of fiscal year 2003. Our senior secured credit agreement expiresfacility matures in February 2004. We will need to replace2004, by which time we must either refinance this credit facility or extend this facility before thatits maturity date. Although therewe are currently negotiating a new credit facility, as described above, we can make no guarantees thisassurances that we can be accomplished,successfully refinance or extend the maturity date of our senior secured credit facility. However, even if we do not consummate the new credit facility we are currently negotiating, we believe we can obtain a new credit facility on terms and conditions that are sufficient to meet our long-term capital requirements based onupon discussions with potential lenders and the projections described in the Company Outlook section under the Results of Operations above and discussion with potential lenders, we believe we can obtain a new credit facility sufficient to meet our long-term capital requirements. As described below underabove.

     Our Accounts Receivable Asset-Backed Securitization, our qualifying special purpose entity, whichas described below, also is an important element ofin managing our liquidity and capital resourcesresources. The Accounts Receivable Asset Backed-Securitization will terminate upon the expirationmaturity date of our senior secured credit agreementfacility unless we refinance our senior secured credit facility, in which case it will mature in the senior credit agreement is refinanced.fourth quarter of 2004.

     During the second quarter of 2003, we sold to our controlling common shareholder, Granaria Holdings B.V.; Bert Iedema, one of our directors and an executive officer of Granaria Holdings B.V.; and certain of our executive officers the 69,500 shares of common stock held in our Treasury for $13.00 per share, or $0.9 million.

Cash Flows

     All references herein to years are to the three-monthssix-months ended February 28May 31 unless otherwise indicated.

Cash Flows34


     Operating Activities.NetOperating activities used $11.8 million in cash usedduring 2003 compared to providing $61.6 million in 2002. In 2002, cash flows from operating activities during 2003were impacted by our net loss of $28.2 million, which was $7.6offset by non-cash charges of $32.0 million from depreciation and amortization, $6.0 million from losses from divestitures, and $3.1 million from insurance related losses, which results in cash sources of $12.9 million compared to a similarly calculated amount in 2003 of $30.2 million. The 2003 amount of $30.2 million, an improvement of $17.3 million over 2002, is comprised of our net income of $8.9 million, and non-cash charges of $24.0 million from depreciation and amortization, $3.0 million from provisions from discontinued operations, and $5.7 million from insurance related gains. The cash flow for 2002 was also increased by $48.7 million due to changes in certain assets and liabilities, resulting in net cash provided by operating activities of $50.3$61.6 million in 2002, which includes $43.8primarily due to $52.4 million as a result of selling certainproceeds from the sale of our receivables to anour unconsolidated qualifying special purpose entity as discussed below in(see Accounts Receivable Asset-Backed Securitization.Securitization below). The remaining difference betweencash flow for 2003 was reduced by $42.0 million due to changes in certain assets and 2002liabilities, resulting in net cash used in operating activities isof $11.8 million, primarily due to $20.1 million of payments to reduce the use of cashamounts outstanding under our accounts receivable asset-backed facility (see Accounts Receivable Asset-Backed Securitization below), approximately $12.0 million for our accrued liabilities of $4.7 million in 2003, compared to a source of cash of $6.3 million in accrued liabilities in 2002. This change is primarily related to 2003 spendingpayments on restructuring and legal settlement matters which were expensed during 2002. Approximately $8.0 million ofin 2002, litigation settlements were paidand other working capital uses, primarily increases in the first quarter of 2003.accounts receivable and inventory and decreases in accounts payable.

     Investing Activities.Investing activities used $3.6$7.7 million in cash during 2003 compared to providing $1.3using $7.4 million in 2002. During 2002, $6.3 million was provided by proceeds from the sale of our Construction Equipment Division, which represented our former Machinery Segment, which was offset by capital expenditures of $5.1 million in 2002. During 2003, our net cash used in investing activities wasThese amounts primarily forrelate to capital expenditures. We expect our capital expenditures during 2003 will be approximately $22.0$20.0 million to $25.0 million, with the largest increase in our Technologies Segment.

     Financing Activities.Financing activities provided $10.3used $2.1 million during 2003 compared to using $48.7$63.3 million during 2002. During 2002, we used $36.1$43.9 million to reduce our revolving credit facility, primarily from proceeds associated with the sale of our receivables to an unconsolidated qualifying special purpose entity, as discussed below under Accounts Receivable Asset-Backed Securitization. BothAlso during 2002, regularly scheduled debt payments and the proceeds from the sale of CEDdivestitures resulted in a $12.8an $18.6 million decline in our long-term debt during 2002.debt. During 2003, we used $14.5$5.5 million underwas provided by our revolving credit facility to pay off $4.2$8.5 million of long-term debt, and to fund our capital expenditures and reductions in accounts payable and accrued liabilities. During the second quarter of 2003, we sold to our controlling common shareholder, Granaria Holdings B.V.; Bert Iedema, one of our directors and an executive officer of Granaria Holdings B.V.; and certain of our executive officers the 69,500 shares of common stock held in our Treasury for $13.00 per share, or $0.9 million.

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     Accounts Receivable Asset-Backed Securitization (Qualifying Special Purpose Entity)

     During the first quarter of 2002, we entered into an agreement with a major U.S. financial institution to sell an interest in certain receivables through an unconsolidated qualifying special purpose entity, EaglePicherEagle-Picher Funding Corporation (“EPFC”). Initially $47.0 million of proceeds from this new facility were used primarily to payoff amounts outstanding under our existing Receivables Loan Agreement with our wholly ownedwholly-owned subsidiary, EaglePicher Acceptance Corporation. This agreement provides for the sale of certain receivables to EPFC, which in turn sells an interest in a revolving pool of receivables to the financial institution. EPFC has no recourse against us for failure of the debtors to pay when due. The agreement provides for the continuation of the program on a revolving basis until the earlier of a) the maturity of our senior credit facility, or b) assuming we are able to refinance our senior credit facility, the fourth quarter of 2004.2004.

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

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     In conjunction with the initial transaction during 2002, we sold $82.5 million of receivables to EPFC, and we incurred charges of $1.5 million, which arewere included in Interest Expense in the accompanying condensed consolidated statements of income (loss) for the three-monthssix-months ended February 28,May 31, 2002. We continue to service sold receivables and receive a monthly servicing fee from EPFC of approximately 1% per annum of the receivable pool’s average balance. As this servicing fee approximates our cost to service, no servicing asset or liability has been recorded at November 30, 2002 or February 28,May 31, 2003. We retain an interest in a portion of the receivables transferred, representing an over collateralization on the securitization. Our involvement with both this over collateralization interest and the transferred receivables is generally limited to the servicing performed. The carrying value of our interest in the receivables is carriedrecorded at fair value, which is estimated as its net realizable value due to the short duration of the receivables transferred. The net realizable value considers the collection period and includes an estimated provision for credit losses and returns and allowances, which is based on our historical results and probable future losses.

     At November 30, 2002, our interest in EPFC including a service fee receivable, was $29.4 million and the revolving pool of receivables that we serviced totaled $77.5 million. At November 30, 2002, the outstanding balance of the interest sold to the financial institution recorded on EPFC’s financial statements was $46.5 million.

     As of May 31, 2003, we reduced the amount due to the financial institution by EPFC, and as a result our cash and cash equivalents balance decreased and our retained interest in Eagle-Picher Funding Corporation increased from November 30, 2002. At February 28,May 31, 2003, our interest in EPFC including a service fee receivable, was $29.4$49.5 million and the revolving pool of receivables that we serviced totaled $75.0$77.2 million. At February 28,May 31, 2003, the outstanding balance of the interest sold to the financial institution recorded on EPFC’s financial statements was $43.8$26.2 million. The effective interest rate as of February 28, 203for the six month period ended May 31, 2003 in the securitization was approximately 2.5%.

     We believe that EPFC is an important element of our ability to manage our liquidity, capital resources and credit risk with certain major customers.

     Accounts Receivable Asset-Backed Securitization (Qualifying Special Purpose Entity) Financial Covenants

     EPFC has two financial covenants contained in its asset-backed securitization agreement. They are a minimum fixed charge coverage ratio (the ratio of total EBITDA (earnings before interest, taxes, depreciation and amortization) minus capital expenditures to the sum of interest expense, scheduled payments of principal on debt, cash income taxes, and cash dividends, all as defined in the agreement), and a minimum EBITDA (as defined in the agreement) amount. These ratios and amounts are calculated based on the financial statement amounts of EaglePicher Holdings, Inc. and EPFC, which is not consolidated in our financial statements as EPFC is an off balance sheet qualifying special purpose entity.

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     As of February 28,May 31, 2003, we were in compliance with the covenant calculations described above. Additionally, based on the required calculations, we could have had $30.6$60.7 million less in EBITDA (as calculated above) minus actual capital expenditures, or $22.5$70.6 million more of interest expense, scheduled payments of principal on debt, cash income taxes, and cash dividends, and continued to remain in compliance with EPFC’s financial covenants.

     In the event that EPFC failed to meet one of the financial covenants listed above, we would not be required to buy back any receivables from EPFC that had not been collected; however, we would no longer be able to sell any future receivables to EPFC. In addition, if EPFC fails to meet one of these financial covenants, we would be in default under our senior credit facility. This could have a significant impact on our liquidity and capital resources. We believe that based on our projected 2003 results, EPFC will remain in compliance with its financial debt covenants; however, there is no assurance this will occur.

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     Capitalization

     Our capitalization, which excludes the debt of $46.5 million at November 30, 2002 and $26.2 million at May 31, 2003 of our off-balance sheet qualifying special purpose entity, consisted of the following at (in thousands of dollars):

       
 November 30, February 28,         
 2002 2003 November 30, 2002 May 31, 2003
 
 
 
 
Credit Agreement:Credit Agreement: Credit Agreement: 
Revolving credit facility, due February 27, 2004 $121,500 $136,000 Revolving credit facility, due February 27, 2004 $121,500 $127,000 
Term loan, due 2003 16,925 12,693 Term loan, due 2003 16,925 8,462 
Senior Subordinated Notes, 9.375% interest, due 2008Senior Subordinated Notes, 9.375% interest, due 2008 220,000 220,000 Senior Subordinated Notes, 9.375% interest, due 2008 220,000 220,000 
Industrial Revenue Bonds, 1.8% to 2.2% interest, due 2005Industrial Revenue Bonds, 1.8% to 2.2% interest, due 2005 15,300 15,300 Industrial Revenue Bonds, 1.8% to 2.2% interest, due 2005 15,300 15,300 
 
 
   
 
 
 373,725 383,993   373,725 370,762 
Preferred StockPreferred Stock 137,973 141,910 Preferred Stock 137,973 146,079 
Shareholders’ DeficitShareholders’ Deficit  (87,578)  (88,790)Shareholders’ Deficit  (87,578)  (82,648)
 
 
   
 
 
 $424,120 $437,113   $424,120 $434,193 
 
 
   
 
 

     Credit Agreement.We have a syndicated senior secured loan facility (“Credit Agreement”) providing an original term loan (“Term Loan”) of $75.0 million, as amended, and a $220.0 million revolving credit facility (“Facility”). The Facility and the Term Loan bear interest, at our option, at LIBOR rate plus 2.75%, or the bank’s prime rate plus 1.5%. Interest is generally payable quarterly on the Facility and Term Loan. We have entered into interest rate swap agreements to manage our variable interest rate exposure.

     At February 28,May 31, 2003, we had $40.2$40.4 million in outstanding letters of credit under the Facility, which together with borrowings of $136.0$127.0 million, made our available borrowing capacity $43.8$52.6 million. However, due to various financial covenant limitations under the Credit Agreement, we could only incur an additional $39.9 million of indebtedness at February 28, 2003. The Credit Agreement also contains certain fees. There are fees for letters of credit equal to 2.75% per annum for all issued letters of credit, and there is a commitment fee on the Facility equal to 0.5% per annum of the unused portion of the Facility. If we meet or fail to meet certain financial benchmarks, the interest rate spreads on the borrowing, the commitment fees and the fees for letters of credit may be reduced or increased.

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

     The Credit Agreement contains covenants that restrict our ability to declare dividends or redeem capital stock, incur additional debt or liens, alter existing debt agreements, make loans or investments, form joint ventures, undergo a change in control or engage in mergers, acquisitions or asset sales. These covenants also limit the annual amount of capital expenditures and require us to meet certain minimum financial ratios.

     For purposes of calculating our debt compliance under our Credit Agreement, we include the debt outstanding on EPFC, our off-balance sheet qualifying special purpose entity. See Accounts Receivable Asset-Backed Securitization above

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for a detailed discussion of EPFC. Also, see Credit Agreement Financial Covenants below for a summary of the debt covenant requirements. We were in compliance with all covenants at February 28,May 31, 2003.

     We are currently negotiating a new senior secured credit facility in the approximate amount of $275.0 million to replace our current credit facility, which provided for an original term loan of $75.0 million, as amended, and a $220.0 million revolving facility.

     Senior Subordinated Notes.Our Senior Subordinated Notes, due in 2008, require semi-annual interest payments on September 1 and March 1. The Senior Subordinated Notes, which are unsecured, are redeemable at our option, in whole or in part, any time after February 28, 2003 at set redemption prices. We are required to offer to purchase the Senior Subordinated Notes at a set redemption price should there be a change in control. The Senior Subordinated Notes contain covenants which restrict or limit our ability to declare or pay dividends, incur additional debt or liens, issue stock, engage in affiliate transactions, undergo a change in control or sell assets. We are in compliance with these covenants at February 28,May 31, 2003. The Senior Subordinated Notes are guaranteed by us and certain of our subsidiaries.

     In July 2003, we also announced the commencement of a cash tender offer and consent solicitation for our 9 3/8% Senior Subordinated Notes Due 2008 (the “Notes”). We are seeking to acquire any and all of our approximately $220.0 million of Notes outstanding. The consent solicitation seeks consent of the holders of the Notes to amend the indenture governing the Notes to eliminate certain of the restrictive covenants and other contractual obligations. The tender offer and consent solicitation are being made in accordance with and subject to the terms and conditions stated in EaglePicher Incorporated’s Offer to Purchase and Consent Solicitation Statement dated July 9, 2003. EaglePicher Incorporated intends to finance the tender offer and consent solicitation with the proceeds of its offering of approximately $220.0 million aggregate principal amount of senior unsecured notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), together with other funds. The securities to be offered have not been offered or sold in the United States, absent registration or an applicable exemption from such registration requirements. There is no assurance that this offering will be successful.

     Industrial Revenue Bonds.Our industrial revenue bonds require monthly interest payments at variable interest rates based on the market for similar issues and are secured by letters of credit issued under the Facility described above.

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     Preferred Stock.Our preferred stock increased $3.9$8.1 million during 2003 as a result of mandatory dividend accretion.accretion and the accrual for preferred dividends. Commencing March 1, 2003, dividends on our Cumulative Redeemable Exchangeable Preferred Stock became cash payable at 11.75% per annum; the first semiannual dividend payment of $8.3 million is due September 1, 2003. If we do not pay cash dividends on the preferred stock, then holders of the preferred stock become entitled to elect a majority of our Board of Directors. Dakruiter S.A. and Harbourgate B.V., a companyboth companies controlled by Granaria Holdings B.V., our controlling common shareholder, holds a majorityhold approximately 78% of our preferred stock, and therefore Granaria Holdings B.V. would continue to be able to elect our entire Board of Directors.

     Granaria Holdings B.V. and certain executive officers have agreed to buy the 69,500 shares of our Common Stock held in our Treasury for $13.00 per share, or a total price of $0.9 million. This transaction is expected to be completed in the second quarter of 2003. In addition, Granaria Holdings B.V. and certain executive officers have agreed to purchase for $13.00 per share any future common stock re-purchases by us.

     Shareholders’Shareholders’ Deficit.Our shareholders’ deficit increasedimproved in 2003 primarily due to our comprehensive income of $12.1 million and the required accretionissuance of common shares from our preferred stock discussed above,Treasury of $0.9 million, which was partially offset by the accrual and accretion of preferred stock dividends of $8.1 million.

Credit Agreement EBITDA

     In our comprehensivesenior credit facility, we have certain financial covenants, as discussed below in Credit Agreement Financial Covenants, which we believe are significant and material in the context of our capital structure. We believe these financial covenants are a material piece of information for the readers of our reports. To support our readers understanding of these financial covenants and our compliance with them, we have provided below a reconciliation from Generally Accepted

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Accounting Principles (GAAP) Net Income (Loss) to Credit Agreement EBITDA. For purposes of calculating our credit agreement financial covenants, Credit Agreement EBITDA is based on the last twelve months of operating results, which is summarized below.

     Our senior secured credit facility has several financial covenants which are based on Credit Agreement EBITDA as defined. Credit Agreement EBITDA is defined in the credit agreement as earnings before interest expense, income taxes, depreciation and amortization, determined (A) without giving effect to (i) any extraordinary gains or losses but with giving effect to gains or losses from sales of $2.7 million.assets sold in the ordinary course of business, (ii) any impact from the LIFO method of inventory accounting, (iii) any non-cash charge other than routine recurring non-cash charges that result in an accrual of a reserve for cash charges in any future period deducted in determining consolidated net income for such period, (iv) amounts paid to present or future officers or employees in connection with their separation from employment, up to a limit, (v) a $16.0 million gain from the receipt of insurance proceeds in 2000, (vi) the loss from disposal of discontinued operations, and (B) with giving effect to proforma pre-acquisition consolidated EBITDA attributable to businesses acquired during the year.

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

                   
    Quarter Ended
    
    August November February May 31,
    31, 2002 30, 2002 28, 2003 2003
    
 
 
 
Net Income (Loss) $(3,571) $(5,086) $1,168  $7,686 
  Loss from discontinued business, net  902   228   273   158 
  Loss on disposal of discontinued business, net           2,978 
  Income taxes  750   646   896   1,150 
  Interest expense  9,378   8,948   9,103   9,043 
  Depreciation and amortization  15,991   16,354   11,346   11,112 
 Restructuring expense     2,900       
 Loss from divestitures  161   366       
 Management compensation – special  524   552      424 
 Severance  18   191       
 Long-term bonus and share appreciation plans  450   420   600   700 
 Insurance related losses (gains)           (5,736)
 LIFO provision (benefit)  105   (1,272)      
 Legal and litigation costs     (200)      
 EBITDA impact from discontinued operations  (415)  292   294   403 
   
   
   
   
 
Quarterly Credit Agreement EBITDA $24,293  $24,339  $23,680  $27,918 
   
   
   
   
 
Last Twelve Months Credit Agreement                
 EBITDA             $100,230 
               
 

     Credit Agreement EBITDA may not be comparable to similarly titled measures reported by other companies and should not be construed as an alternative to operating income, as determined by GAAP, as an indicator of our operating performance, or to cash flows from operating activities, as determined by GAAP, or as a measure of liquidity. Funds depicted by Credit Agreement EBITDA are not available for our discretionary use to the extent they are required for debt service and other commitments.

     Credit Agreement Financial Covenants

     There are three financial covenants contained in our senior secured credit agreement. They are a leverage ratio (the ratio of total debt less cash on the balance sheet to Credit Agreement EBITDA, as defined in the agreement)agreement and as calculated above under Credit Agreement EBITDA), an interest coverage ratio (the ratio of Credit Agreement EBITDA as defined in the agreement, to interest

39


expense) and a fixed charge coverage ratio (the ratio of Credit Agreement EBITDA as defined in the agreement, to the sum of interest expense plus required principal payments plus cash dividends paid plus income taxes paid). For purposes of determining outstanding debt under our Credit Agreement, we include the debt outstanding on EPFC, our off-balance sheet qualifying special purpose entity. See Accounts Receivable Asset-Backed Securitization above for a detailed discussion of EPFC.

     As of February 28,May 31, 2003, we were in compliance with the covenant calculations described above. Additionally, for purposes of the leverage ratio defined above, we could have had $15.2$14.8 million less in Credit Agreement EBITDA, or $72.2$66.8 million more in total debt less cash on the balance sheet and continued to remain in compliance with the Credit Agreement’s financial covenants.

     As discussed above under our Accounts Receivable Asset-Backed Securitization (Qualifying Special Purpose Entity) Financial Covenants, as of February 28,May 31, 2003, we were in compliance with the covenants in our securitization Additionally, based on the required calculations of the securitization, we could have had $30.6$60.7 million less in EBITDA (as calculated above in accordance with the securitization) minus actual capital expenditures, or $22.5$70.6 million more of interest expense, scheduled payments of principal on debt, cash income taxes, and cash dividends, and continued to remain in compliance with the securitization’s financial covenants.

     The following table presents the required ratios and the actual ratios.

                      
 Minimum Minimum
 Minimum Fixed Charge Minimum Fixed Charge
 Maximum Interest Coverage Maximum Interest Coverage
 Leverage Ratio Coverage Ratio Ratio Leverage Ratio Coverage Ratio Ratio
 (not more than) (not less than) (not less than) (not more than) (not less than) (not less than)
 
 
 
 
 
 
November 30, 2002November 30, 2002 November 30, 2002 
Required 4.75 2.00 1.25 Required 4.75 2.00 1.25 
Actual 4.02 2.63 1.65 Actual 4.02 2.63 1.65 
February 28, 2003February 28, 2003 February 28, 2003 
Required 4.75 2.25 1.35 Required 4.75 2.25 1.35 
Actual 4.02 2.75 1.74 Actual 4.02 2.75 1.74 
May 31, 2003May 31, 2003 May 31, 2003 
Required 4.50 2.25 1.35 Required 4.50 2.25 1.35 
Actual 3.83 2.93 1.84 
August 31, 2003August 31, 2003 August 31, 2003 
Required 4.25 2.25 1.40 Required 4.25 2.25 1.40 
November 30, 2003November 30, 2003 November 30, 2003 
Required 4.25 2.50 1.40 Required 4.25 2.50 1.40 

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     Based on our projections for 2003, which are described under the Company Outlook section under the Results of Operations above, we expect to remain in compliance with all covenants. However, any adverse changes in actual results from projections, along with the contractual tightening of the covenants under the Credit Agreement, would place us at risk of not being able to comply with all of the covenants of the Credit Agreement. In the event we cannot comply with the terms of the Credit Agreement as currently written, it would be necessary for us to obtain a waiver or renegotiate our loan covenants, and there can be no assurance that such negotiations will be successful. In addition, EPFC would be in default under our accounts receivable asset-backed securitization, described above, and we would need to obtain a waiver. Any agreements to amend the covenants and/or obtain waivers would likely require us to pay a fee and increase the interest rate payable under the Credit Agreement. The amount of such fee and increase in interest rate would be determined in the negotiations of the amendment.

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     Contractual Obligations and Other Commercial Commitments

     We have included a summary of our Contractual Obligations and Other Commercial Commitments in our annual report on Form 10-K for the year ended November 30, 2002, filed on March 3, 2003. There have been no material changes to the summary provided in that report.

     Earnings to Fixed Charges and Preferred Stock Dividends

     During the second quarter of 2003, our ratio of earnings were insufficient to cover fixed charges and preferred stock dividends by $1.9 million,was 1.57x, and in the second quarter of 2002, our earnings were insufficient to cover fixed charges and preferred stock dividends by $9.3$24.4 million. This improvement isDuring the first six months of 2003, our ratio of earnings to fixed charges and preferred stock dividends was 1.23x, and during the first six months of 2002, our earnings were insufficient to cover fixed charges and preferred stock dividends by $33.7 million. These improvements are primarily related to our improved operating performance, and our adoption of SFAS No. 142 on December 1, 2002, which no longer requires us to recognize goodwill amortization expense.

Recently Released or Adopted Accounting Standards

     In June 2001, the FASB issued SFAS No. 142, “Goodwill and Intangible Assets” and effective December 1, 2002, we adopted this standard. This standard addresses goodwill and other intangible assets that have indefinite useful lives and, as such, prescribes that these assets will not be amortized, but rather tested, at least annually, for impairment. This standard also provides specific guidance on performing the annual impairment test for goodwill and intangibles with indefinite lives. Under this new accounting standard, we no longer amortize our goodwill and are required to complete an annual impairment test. We have had approximately $16.0 million of goodwill amortization per year that is no longer recognized as expense. We have determined that we have six reporting units, as defined in SFAS No. 142, within our three reportable business segments. We have completed our initial impairment test as of December 1, 2002 and determined that no impairment charge exists.

     In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived assets and depreciated over their estimated useful life while the liability is accreted to its expected obligation amount upon retirement. We adopted SFAS No. 143 on December 1, 2002. The adoption did not have a material impact on our financial condition or results of operations.

     In September 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which superceded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.” The primary difference is that goodwill and certain intangibles with indefinite lives have been removed from the scope of SFAS No. 144, as they are covered by SFAS No. 142, as described above.“Goodwill and other Intangible Assets.” It also broadens the presentation of discontinued operations to include a component of an entity rather than a segment of a business. A component of an entity comprises operations and cash flows that can clearly be distinguished operationally and for financial accounting purposes from the rest of the entity. We adopted SFAS No. 144 on December 1, 2002. The adoption did not have a material impact on2002 and accounted for the sale of our financial condition or results of operations.Hillsdale U.K. Automotive operation in accordance with this statement.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or disposalDisposal Activities,” which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The adoption of this statement didwill not have a material impact on our financial condition or results of operations.

29     On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 20, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. We will adopt SFAS No. 149 on a prospective basis at its effective date on July 1, 2003. We do not expect the adoption of this statement will have a material impact on our financial condition or results of operations.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, except for mandatorily redeemable financial

41


instruments. Mandatorily redeemable financial instruments are subject to the provisions of this statement beginning on January 1, 2004. We do not expect the adoption of this statement will have a material impact on our financial condition or results of operations.

     In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”) “Guarantor’s Accounting and Disclosure requirementsRequirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. FIN 45 does not affect the accounting for guarantees issued prior to the effective date, unless the guarantee is modified subsequent to December 31, 2002. We adopted the disclosure requirements on December 1, 2002, and the initial recognition and measurement provisions in our February 28, 2003 financial statements. The adoption of FIN 45 did not have a material impact on our financial condition or results of operations.

     In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”) “Consolidation of Variable Interest Entities.” Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest in after that date. A public entity with a variable interest in a variable interest entity created before February 1, 2003, shall apply the provisions of this interpretation (other than the transition disclosure provisions in paragraph 26) to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The related disclosure requirements arewere effective immediately. The impact of this interpretation is not expected to have a material impact on our financial condition or results of operations.

     In November 2002, the EITF issued EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 prescribes a method to account for contracts that have multiple elements or deliverables. It provides guidance on how to allocate the value of a contract to its different deliverables, as well as guidance on when to recognize revenue allocated to each deliverable over its performance period. We are required to adopt EITF 00-21 on December 1, 2003. We are evaluating the impact EITF 00-21 will have on us, but do not expect it to have a material impact on our financial condition or results of operations.

Forward Looking Statements

     This report contains statements which, to the extent that they are not statements of historical fact, constitute “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “anticipate,” “project,” “intend,” “believe,” “expect,” and similar expressions are intended to identify forward-looking statements. Forward looking statements in this report include, but are not limited to, any statements under the “Company Outlook” heading. Such forward-looking information involves risks and uncertainties that could cause actual results to differ materially from those expressed in any such forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to maintain existing relationships with customers, demand for our products, our ability to successfully implement productivity improvements and/or cost reduction initiatives, our ability to develop, market and sell new products, our ability to obtain raw materials, increased government regulation or changing regulatory policies resulting in conditions, acquisitions and divestitures, technological developments and changes in the competitive environment in which we operate. Persons reading this report are cautioned that such forward-looking statements are only predictions and that actual events or results may differ materially.

42


Item 3.Quantitative and Qualitative Disclosures About Market RiskRisk.

     We have included a summary of our Quantitative and Qualitative Disclosure About Market Risk in our annual report on Form 10-K for the year ended November 30, 2002, filed on March 3, 2003. There have been no material changes to the summary provided in that report.

30


Item 4.Controls and ProceduresProcedures.

     Our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures within 90 days of the filing of this report as required by the rules of the Securities and Exchange Commission. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be filed in this report has been made known to them in a timely manner. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date our Chief Executive Officer and our Chief Financial Officer completed their evaluation.

PART II. OTHER INFORMATION

Item 1.Legal ProceedingsProceedings.

     Please refer to Note GK regarding Legal Matters contained in Part I, Item 1 of this report, which is incorporated by reference in this Part II, as its Item 1.

Item 6.Exhibits and Reports on Form 8-K8-K.

(a)  Exhibits:
(a)Exhibits:

     
10.6612.1 EaglePicher Incorporated (formerly Eagle-Picher Industries, Inc.)2002 Long-term Bonus Program
10.67Amended and Restated Executive Employment Agreement dated December 1, 2002 between EaglePicher Incorporated and John W. Weber
12.1 Ratios of Earnings to Fixed Charges and Preferred Stock Dividends

(b)  Reports on Form 8-K

(b) Reports on Form 8-K, filed January 16, 2003, concerning our press release dated January 16, 2003
Form 8-K, filed January 31, 2003, concerning our press release dated January 31, 2003
Form 8-K, filed March 4, 2003, concerning our press release dated March 3, 20038-K:

31

Form 8-K, filed April 14, 2003, concerning our press release dated April 14, 2003

43


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  EAGLEPICHER HOLDINGS, INC.
 
 
 
  /s/ Thomas R. Pilholski


Thomas R. Pilholski
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

DATE: April 14,July 9, 2003

3244


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  EAGLEPICHER INCORPORATED
 
 
 
  /s/ Thomas R. Pilholski


Thomas R. Pilholski
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

DATE: April 14,July 9, 2003

3345


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  DAISY PARTS, INC.
 
 
 
  /s/ Thomas R. Pilholski


Thomas R. Pilholski
Vice President
(Principal Financial Officer)

DATE: April 14,July 9, 2003

3446


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  EAGLEPICHER DEVELOPMENT CO., INC.
 
 
 
  /s/ Thomas R. Pilholski


Thomas R. Pilholski
Vice President
(Principal Financial Officer)

DATE: April 14,July 9, 2003

3547


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  EAGLEPICHER FAR EAST, INC.
 
 
 
  /s/ Thomas R. Pilholski


Thomas R. Pilholski
Vice President
(Principal Financial Officer)

DATE: April 14,July 9, 2003

3648


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  EAGLEPICHER FILTRATION AND MINERALS, INC.
 
 
 
  /s/ Thomas R. Pilholski


Thomas R. Pilholski
Vice President
(Principal Financial Officer)

DATE: April 14,July 9, 2003

3749


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  EAGLEPICHER TECHNOLOGIES, LLC
 
 
 
  /s/ Bradley J. Waters


Bradley J. Waters
Vice President and Chief Financial Officer
(Principal Financial Officer)

DATE April 14,July 9, 2003

3850


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  HILLSDALE TOOL & MANUFACTURING CO.
 
 
 
  /s/ Thomas R. Pilholski


Thomas R. Pilholski
Vice President
(Principal Financial Officer)

DATE: April 14,July 9, 2003

3951


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
  EPMR CORPORATION
 
 
 
  /s/ Thomas R. Pilholski


Thomas R. Pilholski
Vice President
(Principal Financial Officer)

DATE: April 14,July 9, 2003

4052


CERTIFICATIONS

I, John H. Weber, President and Chief Executive Officer, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of EaglePicher Holdings, Inc. , EaglePicher Incorporated, Daisy Parts, Inc., EaglePicher Development Co., Inc., EaglePicher Far East, Inc., EaglePicher Filtration and Minerals, Inc., EaglePicher Technologies, LLC, Hillsdale Tool & Manufacturing Co. and EPMR Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

   
/s/ JOHN H. WEBERDate: April 14, 2003


John H. Weber, President and Chief Executive Officer Date: July 9, 2003

53


I, Thomas R. Pilholski, Senior Vice President and Chief Financial Officer, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of EaglePicher Holdings, Inc. , EaglePicher Incorporated, Daisy Parts, Inc., EaglePicher Development Co., Inc., EaglePicher Far East, Inc., EaglePicher Filtration and Minerals, Inc., EaglePicher Technologies, LLC, Hillsdale Tool & Manufacturing Co. and EPMR Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

   
/s/ THOMAS R. PILHOLSKIDate: April 14, 2003


Thomas R. Pilholski, Senior Vice President
and Chief Financial Officer
 Date: July 9, 2003

54


EXHIBIT INDEX

     
Exhibit    
Number    

    
10.66EaglePicher Incorporated (formerly Eagle-Picher Industries, Inc.) 2002 Long-term Bonus Program
10.67Amended and Restated Executive Employment Agreement dated December 1, 2002 between EaglePicher Incorporated and John W. Weber
12.1  Ratios of Earnings to Fixed Charges and Preferred Stock Dividends

55