Eastman Chemical Co – ‘DEFS14A’ for 12/18/01

On:  Friday, 11/9/01   ·   For:  12/18/01   ·   Accession #:  950144-1-508658   ·   File #:  1-12626

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Definitive Proxy Solicitation Material — Special Meeting   —   Schedule 14A
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: DEFS14A     Eastman Chemical Corporation                         273   1.33M 

Document Table of Contents

DEFS14A
1st Page of 273
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 
SCHEDULE 14A
(RULE 14A-101)

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES 
EXCHANGE ACT OF 1934

Filed by the Registrant [X]                                                     

Filed by a Party other than the Registrant [ ]                                  

Check the appropriate box:                                                      

                                                        [Enlarge/Download Table]
                                                                                           
[ ]  Preliminary Proxy Statement               [ ]  Confidential, for Use of the Commission
                                                    Only (as permitted by Rule 14a-6(e)(2))
[X]  Definitive Proxy Statement                                                            
[ ]  Definitive Additional Materials                                                       
[ ]  Soliciting Material Pursuant to Rule 14a-12                                           

EASTMAN CHEMICAL COMPANY
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

N/A 
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):                              

[ ]  No fee required.                                                           

[ ]  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.   

(1)  Title of each class of securities to which transaction applies:  

        ------------------------------------------------------------------------

(2)  Aggregate number of securities to which transaction applies:     

        ------------------------------------------------------------------------

(3)  Per unit price or other underlying value of transaction computed 
         pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):  

        ------------------------------------------------------------------------

(4)  Proposed maximum aggregate value of transaction:                 

        ------------------------------------------------------------------------

(5)  Total fee paid:                                                  

        ------------------------------------------------------------------------

[X]  Fee paid previously with preliminary materials.                            

    ----------------------------------------------------------------------------

[ ]  Check box if any part of the fee is offset as provided by Exchange Act Rule
  0-11(a)(2) and identify the filing for which the offsetting fee was paid
    previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.                   

(1)  Amount Previously Paid:                                          

        ------------------------------------------------------------------------

(2)  Form, Schedule or Registration Statement No.:                    

        ------------------------------------------------------------------------

(3)  Filing Party:                                                    

        ------------------------------------------------------------------------

(4)  Date Filed:                                                      

        ------------------------------------------------------------------------

DEFS14A
2nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 2nd
EASTMAN LOGO                                                                    

November 9, 2001

Dear Fellow Shareowner:                                                         

  The board of directors of Eastman Chemical Company has approved a spin-off
which would result in Eastman Chemical becoming two independent, publicly-traded
companies:                                                                      

- Eastman Company, which will be a global manufacturer of specialty     
chemicals and plastics, including the coatings, adhesives, specialty
    polymers and inks, performance chemicals and intermediates and specialty
    plastics businesses of Eastman Chemical, and which will continue Eastman
      Chemical's strategic initiatives in less capital intensive businesses; and

- Voridian Company, which will be a global manufacturer of polyethylene 
    terephthalate polymers, or PET polymers, acetate fibers and polyethylene
products.                                                           

  The separation of these businesses will be accomplished through a pro rata
distribution of 100% of the outstanding common stock of Eastman Company to      
shareowners of Eastman Chemical, which we refer to as the Distribution, on the  
record date for the Distribution. As a result of the Distribution, each Eastman 
Chemical shareowner will:                                                       

- receive one share of Eastman Company common stock for every share of  
Eastman Chemical common stock they own; and                         

- retain their shares in Eastman Chemical (whose name will be changed to
Voridian Company).                                                  

 We are seeking your approval, as a shareowner of Eastman Chemical, of the
Distribution. We believe that the Distribution will allow the management of the 
two companies, which have distinctly different businesses and operational and   
strategic requirements, to better focus on the strategic considerations, growth 
opportunities and resource needs of each respective company. The Distribution   
will also result in shareowners holding two distinct investments, each with its 
own investment profile and characteristics. Your board of directors has         
unanimously approved and recommended, and is seeking your approval of, the      
Distribution.                                                                   

   The special meeting of shareowners will be held at the Toy F. Reid Employee
Center, 400 South Wilcox Drive, Kingsport, Tennessee 37660, on December 18,     
2001, at 11:00 a.m., eastern time, to consider and vote upon the Distribution.  
Details of this proposal are explained in the accompanying proxy statement.     

YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
SIGNING AND RETURNING A PROXY CARD OR SUBMITTING YOUR PROXY VIA THE INTERNET OR 
BY TELEPHONE WILL NOT PREVENT YOU FROM ATTENDING THE SPECIAL MEETING AND VOTING 
IN PERSON, BUT WILL ASSURE THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND
THE MEETING. WHETHER YOU CHOOSE TO VOTE BY PROXY CARD, INTERNET OR TELEPHONE, IT
WOULD HELP IF YOU VOTED AS SOON AS POSSIBLE. IF YOU DO NOT SUBMIT A PROXY OR    
VOTE IN PERSON, IT WILL HAVE THE EFFECT OF A VOTE AGAINST THE DISTRIBUTION.     

    This proxy statement is dated November 9, 2001 and is first being mailed and
delivered electronically to shareowners, and made available on the Internet, on 
or about November 9, 2001. If you are a record holder of shares, an admission   
ticket for the special meeting is included with your proxy card. If you received
our proxy materials from a broker or bank and do not have an admission ticket   
but you wish to attend the meeting, please call (423) 229-4647.                 

              Sincerely,

                                  /s/ EARNEST W. DEAVENPORT, JR.

                              Earnest W. Deavenport, Jr.
                                        Chairman and Chief Executive Officer
                            Eastman Chemical Company

DEFS14A
3rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 3rd
EASTMAN CHEMICAL COMPANY
100 NORTH EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(423) 229-2000

--------------------- 

NOTICE OF SPECIAL MEETING OF SHAREOWNERS
TO BE HELD ON DECEMBER 18, 2001 
--------------------- 

To Our Shareowners:                                                             

   A special meeting of shareowners of Eastman Chemical Company will be held
at the Toy F. Reid Employee Center, 400 South Wilcox Drive, Kingsport, Tennessee
37660, on December 18, 2001, at 11:00 a.m., eastern time, for the following     
purposes:                                                                       

  1. to consider and vote upon a proposal to approve a special dividend to
        the owners of the outstanding shares of Eastman Chemical common stock of
   all of the outstanding shares of common stock of Eastman Company, a
       wholly-owned subsidiary of Eastman Chemical, on a pro rata basis, to be
  completed in accordance with the terms of a distribution agreement
      entered into between Eastman Chemical and Eastman Company, referred to
as the Distribution; and                                        

   2. to transact any other business as may properly come before the special
meeting.                                                        

Eastman Chemical's board of directors has unanimously approved the    
Distribution and determined that it is in the best interests of Eastman         
Chemical's shareowners, and unanimously recommends that you vote FOR the        
Distribution.                                                                   

     Only shareowners of record at the close of business on November 2, 2001 are
entitled to notice of, and to vote at, the special meeting. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL MEETING. Please vote by     
proxy in one of these ways:                                                     

       - USE THE TOLL-FREE TELEPHONE NUMBER shown on your proxy card or voting
        instruction form (if you received the proxy materials by mail from a
broker or bank);                                            

   - BY INTERNET at the web address shown on your proxy card or voting
instruction form; or                                        

- MARK, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY CARD OR VOTING
INSTRUCTION FORM in the postage-paid envelope provided.     

Signing and returning the proxy card or submitting your proxy via the 
Internet or by telephone does not affect your right to vote in person if you    
attend the special meeting.                                                     

                                      By order of the Board of Directors

                      /s/ Theresa K. Lee

                  Theresa K. Lee
                                 General Counsel and Secretary
                            Eastman Chemical Company

November 9, 2001                                                                

DEFS14A
4th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 4th
JOINT PROXY STATEMENT/INFORMATION STATEMENT 

TABLE OF CONTENTS 

                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS........    1 
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION................    2 
SUMMARY.....................................................    5 
EASTMAN COMPANY SUMMARY FINANCIAL DATA......................    9 
EASTMAN CHEMICAL SUMMARY FINANCIAL DATA.....................   11 
RISK FACTORS................................................   13 
  Risks Relating to the Distribution........................   13 
  Risks Relating to Eastman Company.........................   17 
  Risks Relating to Voridian................................   21 
INFORMATION REGARDING THE SPECIAL MEETING...................   27 
THE DISTRIBUTION PROPOSAL...................................   29 
  Background and Reasons for the Distribution...............   29 
  Reasons for the Recommendation of Eastman Chemical's Board      
     of Directors...........................................   29 
  Review of Financial Advisors..............................   31 
  Eastman Chemical Common Stock Information.................   32 
THE DISTRIBUTION............................................   33 
  Background................................................   33 
  Form of Transaction.......................................   33 
  Manner of Effecting the Distribution......................   33 
  No Issuance of Fractional Shares..........................   34 
  Material United States Federal Income Tax Consequences....   34 
  Listing and Trading of Voridian Common Stock and Eastman        
     Company Common Stock...................................   36 
  Regulatory Approvals......................................   37 
  Change of Corporate Name Effective Upon the                     
     Distribution...........................................   37 
  Conditions to the Distribution............................   37 
BUSINESS OF EASTMAN COMPANY.................................   38 
  Overview..................................................   38 
  Industry Overview.........................................   38 
  Strategy..................................................   39 
  Competitive Strengths.....................................   40 
  Coatings, Adhesives, Specialty Polymers and Inks Segment        
     (CASPI)................................................   41 
  Performance Chemicals and Intermediates Segment (PCI).....   44 
  Specialty Plastics Segment (SP)...........................   46 
  Strategic Initiatives.....................................   48 
  Sales, Marketing and Distribution.........................   49 
  Research and Development..................................   50 
  Intellectual Property and Trademarks......................   50 
  Sources and Availability of Raw Materials and Energy......   50 
  Seasonality...............................................   51 
  Environmental.............................................   51 
  Employees.................................................   52 
  Properties................................................   52 
  Legal Proceedings.........................................   53 
EASTMAN COMPANY SELECTED CONSOLIDATED FINANCIAL DATA........   54 
EASTMAN COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF           
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............   56 
EASTMAN COMPANY UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL        
  INFORMATION...............................................   69 

 i

DEFS14A
5th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 5th
                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
EASTMAN COMPANY CAPITALIZATION..............................   75 
BUSINESS OF VORIDIAN........................................   76 
  Overview..................................................   76 
  Industry Overview.........................................   76 
  Strategy..................................................   77 
  Competitive Strengths.....................................   78 
  Polymers Segment (Polymers)...............................   78 
  Fibers Segment (Fibers)...................................   81 
  Sales, Marketing and Distribution.........................   83 
  Research and Development..................................   83 
  Intellectual Property and Trademarks......................   83 
  Sources and Availability of Raw Materials and Energy......   83 
  Seasonality...............................................   84 
  Environmental.............................................   84 
  Employees.................................................   85 
  Properties................................................   85 
  Legal Proceedings.........................................   86 
EASTMAN CHEMICAL SELECTED CONSOLIDATED FINANCIAL DATA.......   87 
EASTMAN CHEMICAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF          
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............   88 
EASTMAN CHEMICAL UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL       
  INFORMATION...............................................  106 
EASTMAN CHEMICAL CAPITALIZATION.............................  115 
DIVIDEND POLICIES...........................................  116 
RELATIONSHIP BETWEEN VORIDIAN AND EASTMAN COMPANY AFTER THE       
  DISTRIBUTION..............................................  117 
  Agreements Related to Effecting the Distribution..........  117 
     Distribution Agreement.................................  117 
     Tax Matters Agreement..................................  118 
  Agreements Related to Operations After the Distribution...  119 
     Administrative Services Agreements.....................  119 
     Procurement and Supply Agreements......................  119 
     Intellectual Property Transfer and License Agreement...  120 
     Operating Agreements...................................  120 
     Employee Matters Agreement.............................  120 
MANAGEMENT OF EASTMAN COMPANY...............................  125 
  Eastman Company Executive Officers and Directors..........  125 
  Compensation of Eastman Company Directors.................  127 
  Compensation of Eastman Company Named Executive                 
     Officers...............................................  127 
  Severance and Change in Control Arrangements..............  127 
MANAGEMENT OF VORIDIAN......................................  130 
  Voridian Executive Officers and Directors.................  130 
SECURITY OWNERSHIP OF SPECIFIED BENEFICIAL OWNERS AND             
  MANAGEMENT OF EASTMAN COMPANY.............................  132 
SECURITY OWNERSHIP OF SPECIFIED BENEFICIAL OWNERS AND             
  MANAGEMENT OF EASTMAN CHEMICAL............................  135 
DESCRIPTION OF EASTMAN COMPANY CAPITAL STOCK................  138 
  General...................................................  138 
  Common Stock..............................................  138 
  Preferred Stock...........................................  138 

  ii

DEFS14A
6th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 6th
                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
  Anti-Takeover Provisions of Eastman Company's Certificate       
     of Incorporation and Bylaws and Delaware Law...........  139 
     General................................................  139 
     Certificate of Incorporation and Bylaw Provisions......  139 
     Section 203 of the Delaware General Corporation Law....  141 
  Rights Plan...............................................  141 
  Transfer Agent and Registrar..............................  143 
INDEMNIFICATION AND LIMITATION OF LIABILITY FOR EASTMAN           
  COMPANY DIRECTORS AND OFFICERS............................  144 
  Indemnification of Liability for Directors and Officers...  144 
  Limitation of Liability of Directors......................  145 
SUBMISSION OF SHAREOWNER PROPOSALS..........................  145 
AVAILABLE INFORMATION.......................................  145 
INDEX TO FINANCIAL STATEMENTS...............................  F-1 
APPENDIX A -- DISTRIBUTION AGREEMENT........................  A-1 
APPENDIX B -- SOLVENCY OPINION..............................  B-1 

 iii

DEFS14A
7th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 7th
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This joint proxy statement/information statement, which is referred to as
the proxy statement, contains statements relating to the future results of      
Eastman Chemical Company and, giving effect to the Distribution, Voridian       
Company and Eastman Company, including projections and business trends that are 
"forward-looking" in nature as defined in the Private Securities Litigation     
Reform Act of 1995. Forward-looking statements made in this proxy statement     
relate to matters such as planned capacity increases and utilization;           
anticipated capital spending; expected depreciation and amortization;           
environmental matters; legal proceedings; effects of hedging raw material and   
energy costs and foreign currencies; global and regional economic conditions;   
competition; growth opportunities; markets for common stock; supply and demand; 
volume, price, cost, margin and sales; earnings, cash flow, dividends and other 
expected financial conditions; expectations and strategies for individual       
products, segments and businesses, as well as for Eastman Company and Voridian, 
each as a whole; cash requirements and uses of available cash; financing plans; 
cost reduction targets; development, production, commercialization and          
acceptance of new products, services and technologies; and assets and product   
portfolio changes.                                                              

   Forward-looking statements include all statements that are not historical
facts, and can be identified by the words "believe," "anticipate," "hope,"      
"estimate," "project," "intend" or "expect," or the negative of these terms or  
similar expressions. Any forward-looking statements contained in this proxy     
statement should not be relied upon as predictions of future events. No         
assurance can be given that the expectations expressed in these forward-looking 
statements will prove to be correct. Actual results could differ materially from
expectations expressed in the forward-looking statements if one or more of the  
underlying assumptions or expectations proves to be inaccurate or is unrealized.
Some important factors that could cause actual results to differ materially from
those in the forward-looking statements are included with such forward-looking  
statements and in the section entitled "Risk Factors" in this proxy statement.  

  Readers are cautioned not to place undue reliance on the forward-looking
statements contained in this proxy statement, which represent Eastman Chemical's
management's best judgment as of the date hereof. Except as required by law,    
neither Eastman Chemical nor, giving effect to the Distribution, Voridian or    
Eastman Company undertakes responsibility to update these forward-looking       
statements, whether as a result of new information, future events or otherwise. 
You are advised, however, to consult any further public disclosures made by any 
of the companies, such as filings made with the Securities and Exchange         
Commission or press releases, on related subjects.                              

AmberGuard(TM), Aqua(TM), Chromspun(R), DuraStar(R),        
Eastar(R), Eastar Bio(R), Eastotac(R), Elegante(TM),        
Embrace(TM), Energx(SM), EpB(R), Epolene(R), Estrobond(R),  
Estron(R), Heatwave(TM), Hifor(TM), Kelvx(TM), Mxsten(R),   
Provista(R), Spectar(R), Texanol(R), Titan(TM) and          
VersaTray(R) are currently trademarks or registered         
trademarks of Eastman Chemical Company. In connection with  
the Distribution, trademarks related to the business of     
Eastman Company will be transferred to Eastman Company.     

 1

DEFS14A
8th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 8th
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION

Q:  WHAT IS THE DISTRIBUTION?                                                   

A:   The Distribution is the method by which Eastman Chemical will be separated 
into two independent, publicly-traded companies:                      

- Eastman Company, which will be a global manufacturer of specialty   
  chemicals and plastics, including the coatings, adhesives, specialty
      polymers and inks, performance chemicals and intermediates and specialty
      plastics businesses of Eastman Chemical, and which will continue Eastman
    Chemical's strategic initiatives in less capital intensive businesses;
and                                                               

  - Voridian Company, which will be the new name of Eastman Chemical after
the Distribution, will be a global manufacturer of polyethylene   
      terephthalate polymers, or PET polymers, acetate fibers and polyethylene
products.                                                         

As part of the Distribution, Eastman Chemical will distribute to its  
  shareowners one share of Eastman Company common stock for every share of
Eastman Chemical common stock they own on the record date for the     
Distribution. Immediately after the Distribution, Eastman Chemical's  
  shareowners will still own all of Eastman Chemical's current businesses,
   but they will do so through ownership of separate investments in Voridian
and Eastman Company.                                                  

Q:   WHAT IS EASTMAN COMPANY?                                                   

A:   Eastman Company is currently a subsidiary of Eastman Chemical and will be  
 spun-off if the Distribution is completed. Eastman Company will own the
   specialty chemicals and plastics businesses currently operated by Eastman
Chemical, which include the following business segments:              

- coatings, adhesives, specialty polymers and inks;                   

- performance chemicals and intermediates; and                        

- specialty plastics.                                                 

     Eastman Company will also include Eastman Chemical's strategic investments,
 including its investment in Genencor International, Inc., and ShipChem,
    Inc. The businesses that will be owned and operated by Eastman Company are
referred to as the Eastman Company Business throughout this proxy     
statement.                                                            

Q:   WHAT IS VORIDIAN COMPANY?                                                  

A:   Voridian Company will be the name of Eastman Chemical after the            
   Distribution. Voridian will continue to manufacture PET polymers, acetate
 fibers and polyethylene products. The businesses that will be owned and
     operated by Voridian after the Distribution are referred to as the Voridian
Business throughout this proxy statement.                             

Q:   WHY IS EASTMAN CHEMICAL SEPARATING ITS BUSINESSES?                         

A:   Eastman Chemical believes that separating its businesses will result in    
greater long-term value for each company because:                     

- the two businesses are substantially different;                     

     - the Distribution should allow each company to more effectively tailor its
capital resources toward its individual operating needs; and      

    - each company will be able to pursue unique, focused corporate strategies
and incentives.                                                   

Eastman Chemical further expects that the separation into two         
publicly-traded companies will enhance investor choices by offering   
investment opportunities in two highly-focused entities.              

 2

DEFS14A
9th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 9th
Q:   WHY IS THIS TRANSACTION STRUCTURED AS A DISTRIBUTION?                      

A:   Eastman Chemical believes that the Distribution is an effective and        
tax-efficient way to separate Eastman Chemical's distinctly different 
businesses. Eastman Chemical has received a ruling from the Internal  
Revenue Service, or IRS, that, for federal income tax purposes, the   
Distribution will be tax-free to Eastman Chemical and its shareowners.

Q:   WHEN AND WHERE IS THE SPECIAL MEETING?                                     

A:   The special meeting will take place at the Toy F. Reid Employee Center, 400
 South Wilcox Drive, Kingsport, Tennessee 37660, on December 18, 2001 at
11:00 a.m., eastern time.                                             

Q:   WHAT WILL EASTMAN CHEMICAL SHAREOWNERS RECEIVE IN THE DISTRIBUTION?        

A:   In the Distribution, Eastman Chemical shareowners will receive one share of
 Eastman Company common stock for every share of Eastman Chemical common
 stock they own. At that time, Eastman Chemical will be renamed Voridian
     Company. Immediately after the Distribution, Eastman Chemical's shareowners
  will own shares of both Voridian and Eastman Company common stock, which
  will continue to comprise all of Eastman Chemical's businesses, but they
will own them as two separate investments.                            

Q:   WHAT WILL HAPPEN TO MY "OLD" EASTMAN CHEMICAL SHARE CERTIFICATES?          

A:   After the Distribution, certificates representing the "old" Eastman        
Chemical common stock will represent Voridian common stock.           

Q:   WHAT DO I NEED TO DO NOW?                                                  

A:   After reviewing this proxy statement, you should submit your proxy in one  
of the following ways so that your shares will be represented at the  
special meeting:                                                      

 - use the toll-free telephone number shown on your proxy card or voting
  instruction form (if you received the proxy materials by mail from a
broker or bank);                                                  

- by Internet at the web address shown on your proxy card or voting   
instruction form; or                                              

- mark, sign, date and promptly return your proxy card or voting      
instruction form in the postage-paid envelope provided.           

 If a proxy card is signed and returned without an indication of how you
would like to vote, the proxy will be voted FOR the Distribution.     

Q:   IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?                                                        

A:   Your broker will only be permitted to vote your shares if you provide      
instructions to your broker on how to vote. You should follow the     
    procedures provided by your broker regarding the voting of your shares and
be sure to provide your broker with instructions on how to vote your  
     shares. If you do not give voting instructions to your broker, you will, in
effect, be voting against the Distribution.                           

Q:   WHAT IF I WANT TO REVOKE MY PROXY OR CHANGE MY VOTE AFTER I HAVE MAILED MY 
SIGNED PROXY CARD OR VOTED VIA THE INTERNET OR BY TELEPHONE?          

A:   You can revoke your proxy or change your vote by sending in a later-dated, 
     signed proxy card or a written revocation to Eastman Chemical Company, P.O.
    Box 511, Kingsport, Tennessee 37662-5075, Attention: Secretary, so that it
 is received before the special meeting. Or you can submit a later-dated
proxy via the Internet or by telephone before the special meeting, or 
attend the special meeting in person and vote. Your attendance at the 
special meeting will not, by itself, revoke your proxy. If you have   
 instructed a broker to vote your shares, you must follow the directions
received from your broker to change those voting instructions.        

 3

DEFS14A
10th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 10th
Q:   WHAT HAPPENS IF I DO NOT VOTE IN PERSON OR BY PROXY, IF I DO NOT INSTRUCT  
MY BROKER TO VOTE MY SHARES OR IF I ABSTAIN FROM VOTING?              

A:   If you do not vote in person or by proxy, or do not instruct your broker to
vote your shares, or if you abstain from voting, it will have the same
effect as a vote against the Distribution.                            

Q:   WHEN WILL THE DISTRIBUTION BE COMPLETED?                                   

A:   Assuming the Distribution is approved by our shareowners and that all of   
 the other conditions are met or waived, we expect that the Distribution
will be completed on or about December 31, 2001.                      

Q:   WHERE CAN I GET MORE INFORMATION?                                          

A:   Eastman Chemical shareowners with additional questions related to the      
Distribution should contact shareowner services at Eastman Chemical   
     Company, P. O. Box 511, Kingsport, Tennessee 37662, telephone number: (423)
229-4647.                                                             

 4

DEFS14A
11th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 11th
SUMMARY 

   This summary and the preceding question and answer section highlight some
of the information in this proxy statement but may not contain all of the       
information that is important to you. To better understand the terms of the     
Distribution and the matter you are being asked to vote upon, you should read   
this entire proxy statement carefully, as well as the additional documents      
referred to in this summary and elsewhere. In this proxy statement, "Eastman    
Chemical" refers to Eastman Chemical Company on or prior to the date of the     
Distribution, "Eastman Company" refers to the entity named Eastman Company whose
shares will be distributed to Eastman Chemical shareowners in the Distribution, 
and "Voridian" refers to Voridian Company, which will be the name of Eastman    
Chemical following the Distribution. Unless otherwise indicated, this proxy     
statement assumes that the Eastman Company Business has been operated by Eastman
Company during applicable time periods.                                         

PARTIES INVOLVED IN THE DISTRIBUTION                                            

Eastman Chemical Company (to be renamed Voridian Company following the          
Distribution)                                                                   
100 North Eastman Road                                                          
Kingsport, Tennessee 37660                                                      
(423) 229-1000                                                                  

  Eastman Chemical currently owns and operates the businesses that will be
owned and operated by Voridian and Eastman Company following the Distribution.  
As part of the Distribution, Eastman Chemical will distribute to its shareowners
100% of the outstanding shares of Eastman Company common stock and change its   
name to Voridian. Following the Distribution, the Voridian Business will consist
of the following business segments of Eastman Chemical:                         

- polymers, which manufactures a broad line of PET polymers and       
polyethylene products; and                                        

     - fibers, which manufactures acetate tow, Estrobond triacetin plasticizers,
acetate yarn, acetate flake and acetyl raw materials.             

Building on Eastman Chemical's market-leading PET polymers business,  
Voridian expects to remain a market and cost position leader in PET polymers.   
Additionally, its fibers business is characterized by stable cash flows and     
long-term customer relationships based on superior customer service.            

Eastman Company                                                                 
Building 280                                                                    
200 South Wilcox Drive                                                          
Kingsport, Tennessee 37660                                                      
(423) 229-2000                                                                  

   The Eastman Company Business will include the following business segments
of Eastman Chemical:                                                            

- coatings, adhesives, specialty polymers and inks;                   

- performance chemicals and intermediates; and                        

- specialty plastics.                                                 

     Eastman Company will also include Eastman Chemical's strategic investments,
including its investment in Genencor, and ShipChem. Eastman Company believes it 
maintains a sales leadership position across the specialty chemicals and        
plastics industry and intends to continue its emphasis on providing innovative  
customer solutions. In addition, Eastman Company intends to continue to reduce  
its cost structure and take advantage of growth opportunities in less capital   
intensive businesses.                                                           

 5

DEFS14A
12th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 12th
DATE, TIME AND PLACE OF THE SPECIAL MEETING (PAGE 27)                           

     The special meeting of shareowners will be held at the Toy F. Reid Employee
Center, 400 South Wilcox Drive, Kingsport, Tennessee 37660, on December 18,     
2001, at 11:00 a.m., eastern time.                                              

THE PROPOSAL (PAGE 29)                                                          

     At the special meeting, the board of directors of Eastman Chemical will ask
you to vote FOR the proposal to approve a special dividend to the owners of the 
outstanding shares of Eastman Chemical common stock of all of the outstanding   
shares of common stock of Eastman Company, a wholly-owned subsidiary of Eastman 
Chemical, on a pro-rata basis, to be completed in accordance with the terms of a
distribution agreement entered into between Eastman Chemical and Eastman        
Company.                                                                        

SPECIAL MEETING RECORD DATE (PAGE 27)                                           

    The board of directors of Eastman Chemical has fixed the close of business
on November 2, 2001 as the record date for determining the holders of record of 
Eastman Chemical common stock entitled to receive notice of, and to vote at, the
special meeting.                                                                

VOTING RIGHTS; VOTE REQUIRED (PAGE 27)                                          

     Each Eastman Chemical shareowner of record is entitled to one vote for each
share they hold as of the special meeting record date. Approval of the          
Distribution requires the affirmative vote of the holders of a majority of the  
shares of Eastman Chemical common stock outstanding. Abstentions and broker non-
votes will have the same effect as votes against the Distribution.              

REASONS FOR THE DISTRIBUTION (PAGE 29)                                          

  The board of directors of Eastman Chemical, after consulting with, among
others, its financial advisors, determined that in order to increase management 
focus and allow its business units to pursue independent strategies, it should  
explore strategic alternatives. Eastman Chemical's board of directors determined
that it is in the best interests of shareowners to separate its businesses into 
two independent companies based on the following primary reasons:               

- the businesses of Voridian and Eastman Company are substantially    
different, with different customers, growth plans and competitive 
characteristics;                                                  

- the Distribution should allow Voridian and Eastman Company to more  
effectively tailor each company's capital resources towards its   
individual operating needs; and                                   

    - Voridian and Eastman Company will each be able to pursue unique, focused
corporate strategies and incentives.                              

DISTRIBUTION OF EASTMAN COMPANY SHARES (PAGE 33)                                

    The Distribution is the method by which Eastman Chemical will be separated
into two independent, publicly-traded companies, Voridian and Eastman Company.  
As part of the Distribution, Eastman Chemical will distribute to its shareowners
one share of Eastman Company common stock for each share of Eastman Chemical    
common stock they own on the record date for the Distribution, and will change  
its name to Voridian. Immediately after the Distribution, Eastman Chemical's    
shareowners will own shares of both Voridian and Eastman Company common stock,  
which will continue to comprise all of Eastman Chemical's businesses, but they  
will own them as two separate investments.                                      

EFFECT ON SHAREOWNERS (PAGE 33)                                                 

    Upon the Distribution, each Eastman Chemical shareowner will retain his or
her shares of Eastman Chemical common stock and, for each share of Eastman      
Chemical common stock owned by that                                             

 6

DEFS14A
13th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 13th
shareowner on the record date for the Distribution, will receive one share of   
Eastman Company common stock.                                                   

 Following the Distribution, certificates representing the "old" Eastman
Chemical common stock will represent Voridian common stock.                     

RECOMMENDATION OF THE BOARD (PAGE 29)                                           

   The Eastman Chemical board of directors believes that the Distribution is
in the best interests of Eastman Chemical shareowners, has unanimously approved 
the Distribution and recommends that shareowners vote FOR this proposal.        

MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 34)                              

   Eastman Chemical has received from the IRS a ruling that the Distribution
will be tax-free to Eastman Chemical and its shareowners for United States      
federal income tax purposes. Eastman Chemical expects that its shareowners will 
apportion their tax basis in Eastman Chemical common stock held immediately     
before the Distribution among the Voridian common stock and the Eastman Company 
common stock to be received in the Distribution based on the relative fair      
market values of each stock.                                                    

NO APPRAISAL RIGHTS                                                             

 Under Delaware law and Eastman Chemical's certificate of incorporation,
Eastman Chemical shareowners have no right of appraisal of the value of their   
shares in connection with the Distribution.                                     

CONDITIONS TO THE DISTRIBUTION (PAGE 37)                                        

 Eastman Chemical's obligation to complete the Distribution is dependent
upon a number of conditions, including:                                         

- the approval of the Distribution by Eastman Chemical shareowners;   

  - the receipt of a solvency opinion from a qualified valuation firm; and

- the receipt of a ruling from the IRS that the Distribution will be  
tax-free to Eastman Chemical and its shareowners.                 

The distribution agreement also provides that Eastman Chemical may    
terminate and abandon, or defer, the Distribution at any time prior to its      
completion, either before or after approval by its shareowners, if, in the      
opinion of Eastman Chemical's board of directors, such action would be in the   
best interests of Eastman Chemical and its shareowners.                         

DIVIDENDS AFTER THE DISTRIBUTION (PAGE 116)                                     

     Following the Distribution, based upon an assumed distribution ratio of one
for one, Voridian intends to pay an initial annual cash dividend of between     
$0.28 and $0.32 per share, and Eastman Company intends to pay an initial annual 
cash dividend of between $0.80 and $0.88 per share, which, taken together, will 
be substantially less than the annual rate of the cash dividends currently paid 
on Eastman Chemical common stock of $1.76 per share. Because many factors can   
contribute to a limitation on the ability to pay, or advisability of paying,    
dividends, the payment and level of any cash dividends by Voridian or Eastman   
Company after the Distribution will ultimately be subject to the discretion of  
each company's board of directors.                                              

LISTING OF VORIDIAN AND EASTMAN COMPANY COMMON STOCK (PAGE 36)                  

 Voridian's common stock (i.e., the "old" Eastman Chemical common stock)
will continue to trade on the New York Stock Exchange, but, because Eastman     
Chemical will change its name to Voridian as part of the Distribution, the      
symbol under which it trades will change from "EMN" to "VR." As a result of     

 7

DEFS14A
14th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 14th
the Distribution, the trading market for Voridian's common stock may be         
significantly different from that of Eastman Chemical's common stock before the 
Distribution.                                                                   

  There is currently no public trading market for Eastman Company's common
stock. Eastman Company has applied to list its shares of common stock on the New
York Stock Exchange under the symbol "EMN," which is the current trading symbol 
of Eastman Chemical.                                                            

RISK FACTORS (PAGE 13)                                                          

   You should carefully evaluate the matters set forth under "Risk Factors,"
in addition to the other information in this proxy statement, when deciding     
whether to vote for the Distribution.                                           

 8

DEFS14A
15th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 15th
EASTMAN COMPANY 

SUMMARY FINANCIAL DATA

   The following summary historical financial data of Eastman Company, as of
December 31, 2000 and 1999 and for the three years ended December 31, 2000 have 
been derived from the consolidated financial statements of Eastman Company,     
which have been audited by PricewaterhouseCoopers LLP, independent accountants, 
and are included elsewhere in this proxy statement. The summary historical      
financial data of Eastman Company as of and for the six months ended June 30,   
2001 and 2000 are derived from the unaudited consolidated financial statements  
of Eastman Company, which, in the opinion of management, include all adjustments
necessary for a fair presentation of such data in conformity with accounting    
principles generally accepted in the United States of America. Operating results
for the six months ended June 30, 2001 are not necessarily indicative of the    
results that may be achieved for the year ending December 31, 2001.             

     The following summary pro forma consolidated financial and other data as of
and for the six months ended June 30, 2001 and for the year ended December 31,  
2000 have been derived by the application of pro forma adjustments to Eastman   
Company's historical consolidated financial statements included elsewhere in    
this proxy statement.                                                           

   These data should be read in conjunction with, and are qualified in their
entirety by, the information under "Eastman Company Selected Consolidated       
Financial Data," "Eastman Company Management's Discussion and Analysis of       
Financial Condition and Results of Operations," "Eastman Company Unaudited      
Consolidated Pro Forma Financial Information" and Eastman Company's consolidated
financial statements and the related notes, which are included elsewhere in this
proxy statement.                                                                

                                                        [Enlarge/Download Table]

                                                     FOR THE YEAR ENDED                                                   
                                                        DECEMBER 31,                       SIX MONTHS ENDED JUNE 30,      
                                          ----------------------------------------   -------------------------------------
                                                                           PRO          PRO                               
                                                  HISTORICAL              FORMA        FORMA             HISTORICAL       
                                          --------------------------   -----------   ----------   ------------------------
                                           2000      1999      1998       2000          2001         2001          2000   
                                          -------   -------   ------   -----------   ----------   -----------   ----------
                                                              (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                     
                                                                                                                          
COMBINED STATEMENT OF EARNINGS (LOSS)                                                                                     
  DATA:                                                                                                                   
Sales.................................... $3,665    $3,187    $2,987     $3,654        $1,909       $1,919        $1,733  
Net earnings (loss)......................    162        70       180        172           (34)         (41)           83  
UNAUDITED PRO FORMA EARNINGS (LOSS) PER                                                                                   
  SHARE:                                                                                                                  
Basic.................................... $ 2.11    $ 0.91    $ 2.35     $ 2.24        $(0.44)      $(0.53)       $ 1.08  
Diluted..................................   2.10      0.91      2.33       2.23         (0.44)       (0.53)         1.07  
Shares used in calculating unaudited pro                                                                                  
  forma earnings (loss) per share:                                                                                        
  Basic(1)...............................   76.7      76.7      76.7       76.7          76.7         76.7          76.7  
  Diluted(1).............................   77.3      77.3      77.3       77.3          76.7         76.7          77.3  

                                                        [Enlarge/Download Table]

                                                             AS OF DECEMBER 31,   AS OF JUNE 30, 2001
                                                                 HISTORICAL       -------------------
                                                             ------------------    PRO               
                                                              2000       1999     FORMA    HISTORICAL
                                                             -------    -------   ------   ----------
                                                                          (IN MILLIONS)              
                                                                                                     
CONSOLIDATED BALANCE SHEET DATA:                                                                     
Working capital............................................. $  170     $  161    $  429     $  456  
Total assets................................................  4,415      3,952     4,575      4,580  
Total debt..................................................     --         --     1,300         --  
Eastman Chemical equity.....................................  2,858      2,634     1,869      3,163  

 9

DEFS14A
16th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 16th
                                                        [Enlarge/Download Table]

                                                      FOR THE YEAR ENDED                                                   
                                                         DECEMBER 31,                       SIX MONTHS ENDED JUNE 30,      
                                            ---------------------------------------   -------------------------------------
                                                                            PRO          PRO                               
                                                   HISTORICAL              FORMA        FORMA             HISTORICAL       
                                            -------------------------   -----------   ----------   ------------------------
                                             2000      1999     1998       2000          2001         2001          2000   
                                            -------   -------   -----   -----------   ----------   -----------   ----------
                                                                             (IN MILLIONS)                                 
                                                                                                                           
OTHER DATA:                                                                                                                
EBITDA excluding nonrecurring                                                                                              
  charges(2)(3)...........................   $ 623     $ 524    $ 584      $ 636        $ 226         $ 223        $ 325   
EBIT excluding nonrecurring                                                                                                
  charges(2)(3)...........................     335       272      356        348           76            73          183   
Cash flows provided by (used in) operating                                                                                 
  activities..............................     462       467      578         --           --           (22)         232   
Cash flows used in investing activities...    (390)     (588)    (385)        --           --          (344)         (77)  
Cash flows provided by (used in) financing                                                                                 
  activities..............................     (72)      121     (193)        --           --           366         (155)  
Capital expenditures......................     156       191      358        156           80            80           55   

---------------                                                                 

(1) Shares used in calculating basic pro forma earnings per share is based on   
   the number of shares expected to be outstanding at the date of distribution
  (assumed to be equal to the 76.7 million shares of Eastman Chemical common
stock outstanding on June 30, 2001). Shares used in calculating diluted 
    earnings per share is based on the number of shares expected to be issued in
the Distribution and the dilutive effect of stock options and other     
stock-based instruments of Eastman Company expected to be issued in the 
Distribution.                                                           
(2) Nonrecurring charges for the first six months of 2001 include charges       
   related to asset impairments and restructurings; the write-off of a prepaid
asset related to a supply agreement; and the write-off of in-process    
  research and development related to the Hercules acquisition. Nonrecurring
  charges for 2000 include charges related to the phase-out of operations at
   Eastman Company's plants at Rochester, New York and Chocolate Bayou, Texas;
 write-off of in-process research and development related to the McWhorter
  acquisition; certain litigation; and a gain on the initial public offering
  of common stock of Genencor. Nonrecurring charges for 1999 include charges
related to employee separations; the phase-out of operations at Eastman 
Company's plants at Rochester, New York and Chocolate Bayou, Texas;     
discontinued capital projects; write-off of in-process research and     
development related to the Lawter acquisition; certain litigation; and  
reimbursement of previously expensed pension costs related to Holston   
  Defense Corporation. Nonrecurring charges for 1998 include charges related
 to certain underperforming assets and discontinued capital projects and a
fine paid for a violation of the Sherman Act. These items are more fully
described in notes 6, 7, 14, 15 and 19 to Eastman Company's consolidated
financial statements, contained elsewhere in this proxy statement.      
(3) EBITDA excluding nonrecurring charges is defined as earnings before         
deducting net interest expense (interest expense less interest income), 
 income taxes, depreciation, amortization and other income (charges), net,
    and adding back any applicable nonrecurring charges as discussed in the note
above. EBIT excluding nonrecurring charges is defined as earnings before
deducting net interest expense (interest expense less interest income), 
income taxes, and other income (charges), net, and adding back any      
applicable nonrecurring charges as discussed in the note above. Although
EBITDA and EBIT are not measures of performance calculated in accordance
with accounting principles generally accepted in the United States of   
 America, Eastman Company's management believes that they are useful to an
  investor in evaluating Eastman Company because they are widely used in the
    chemicals industry as measures to evaluate a company's operating performance
before its debt expense and cash flow. EBITDA and EBIT do not purport to
represent cash generated by operating activities and should not be      
 considered in isolation or as a substitute for measures of performance in
accordance with accounting principles generally accepted in the United  
  States of America. In addition, because EBITDA and EBIT are not calculated
    identically by all companies, the presentation here may not be comparable to
other similarly titled measures of other companies. Management's        
discretionary use of funds depicted by EBITDA and EBIT may be limited by
 working capital, debt service and capital expenditure requirements and by
  restrictions related to legal requirements, commitments and uncertainties.
On a pro forma basis, Eastman Company had amortization expense of $25   
 million and $35 million for the first six months of 2001 and for the year
   ended December 31, 2000, respectively. In connection with the Distribution,
all of Eastman Chemical's goodwill and other intangible assets will be  
contributed to Eastman Company.                                         

  10

DEFS14A
17th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 17th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

SUMMARY FINANCIAL DATA

    The following summary historical financial data of Eastman Chemical, as of
December 31, 2000 and 1999 and for the three years ended December 31, 2000 have 
been derived from the consolidated financial statements of Eastman Chemical     
which have been audited by PricewaterhouseCoopers LLP, independent accountants, 
and are included elsewhere in this proxy statement. The summary historical      
financial data of Eastman Chemical as of and for the six months ended June 30,  
2001 and 2000 are derived from the unaudited consolidated financial statements  
of Eastman Chemical, which, in the opinion of management, include all           
adjustments necessary for a fair presentation of such data in conformity with   
accounting principles generally accepted in the United States of America.       
Operating results for the six months ended June 30, 2001 are not necessarily    
indicative of the results that may be achieved for the year ending December 31, 
2001.                                                                           

     The following summary pro forma consolidated financial and other data as of
and for the six months ended June 30, 2001 and for the years ended December 31, 
2000, 1999 and 1998 have been derived by the application of pro forma           
adjustments to Eastman Chemical's historical consolidated financial statements  
included elsewhere in this proxy statement.                                     

   These data should be read in conjunction with, and are qualified in their
entirety by, the information under "Eastman Chemical Selected Consolidated      
Financial Data," "Eastman Chemical Management's Discussion and Analysis of      
Financial Condition and Results of Operations," "Eastman Chemical Unaudited     
Consolidated Pro Forma Financial Information" and Eastman Chemical's            
consolidated financial statements and the related notes, which are included     
elsewhere in this proxy statement.                                              

                                                        [Enlarge/Download Table]

                                     FOR THE YEAR ENDED            FOR THE YEAR ENDED          SIX MONTHS ENDED JUNE 30,    
                                        DECEMBER 31,                  DECEMBER 31,          --------------------------------
                                 ---------------------------   --------------------------    PRO                            
                                         HISTORICAL                    PRO FORMA            FORMA          HISTORICAL       
                                 ---------------------------   --------------------------   ------   -----------------------
                                  2000      1999      1998      2000      1999      1998     2001       2001         2000   
                                 -------   -------   -------   -------   -------   ------   ------   ----------   ----------
                                                           (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                          
                                                                                                                            
CONSOLIDATED STATEMENT OF                                                                                                   
  EARNINGS (LOSS) DATA:                                                                                                     
Sales........................... $5,292    $4,590    $4,481    $2,406    $2,103    $2,174   $1,243     $2,746       $2,533  
Net earnings (loss).............    303        48       249       132       (16)       84      (76)      (110)         154  
EARNINGS (LOSS) PER SHARE:                                                                                                  
Basic........................... $ 3.95    $ 0.61    $ 3.15    $ 1.72    $(0.20)   $ 1.06   $(0.99)    $(1.44)      $ 2.00  
Diluted.........................   3.94      0.61      3.13      1.71     (0.20)     1.06    (0.99)     (1.44)        2.00  
Shares used in calculating                                                                                                  
  earnings (loss) per share:                                                                                                
  Basic.........................   76.8      78.2      78.9      76.8      78.2      78.9     76.7       76.7         77.0  
  Diluted.......................   77.0      78.4      79.5      77.0      78.2      79.5     76.7       76.7         77.2  

                                                        [Enlarge/Download Table]

                                                                  AS OF                           
                                                              DECEMBER 31,                        
                                                             ---------------      JUNE 30, 2001   
                                                               HISTORICAL      -------------------
                                                             ---------------    PRO               
                                                              2000     1999    FORMA    HISTORICAL
                                                             ------   ------   ------   ----------
                                                                         (IN MILLIONS)            
                                                                                                  
CONSOLIDATED BALANCE SHEET DATA:                                                                  
Working capital............................................. $  265   $ (119)  $   71     $  509  
Total assets................................................  6,550    6,303    1,904      6,434  
Total debt..................................................  2,020    2,105    1,064      2,364  
Shareowners' equity (deficit)...............................  1,812    1,759     (268)     1,610  

  11

DEFS14A
18th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 18th
                                                        [Enlarge/Download Table]

                                        FOR THE YEAR ENDED    FOR THE YEAR ENDED     SIX MONTHS ENDED JUNE 30,   
                                           DECEMBER 31,          DECEMBER 31,     -------------------------------
                                       --------------------   ------------------   PRO                           
                                            HISTORICAL            PRO FORMA       FORMA         HISTORICAL       
                                       --------------------   ------------------  -----   -----------------------
                                        2000    1999   1998   2000   1999   1998  2001       2001         2000   
                                       ------   ----   ----   ----   ----   ----  -----   ----------   ----------
                                                                (IN MILLIONS)                                    
                                                                                                                 
OTHER DATA:                                                                                                      
EBITDA excluding nonrecurring                                                                                    
  charges(1)(2)....................... $1,002   $699   $832   $367   $175   $248  $183      $ 409        $ 517   
EBIT excluding nonrecurring                                                                                      
  charges(1)(2).......................    584    316    478    237     44    122   119        195          314   
Cash flows provided by operating                                                                                 
  activities..........................    831    744    731     --     --     --    --         64          378   
Cash flows used in investing                                                                                     
  activities..........................   (465)  (715)  (545)    --     --     --    --       (385)        (102)  
Cash flows provided by (used in)                                                                                 
  financing activities................   (451)   128   (186)    --     --     --    --        290         (293)  
Capital expenditures..................    226    292    500     91    125    167    35        117           78   

---------------                                                                 

(1) Nonrecurring charges for the first six months of 2001 include charges       
   related to asset impairments and restructurings; the write-off of a prepaid
asset related to a supply agreement; and the write-off of in-process    
  research and development related to the Hercules acquisition. Nonrecurring
  charges for 2000 include charges related to the phase-out of operations at
Rochester, New York and Chocolate Bayou, Texas; write-off of in-process 
research and development related to the McWhorter acquisition; certain  
 litigation; and a gain on the initial public offering of common shares of
   Genencor. Nonrecurring charges for 1999 include charges related to employee
separations; the phase-out of operations at Rochester, New York and     
Chocolate Bayou, Texas; discontinued capital projects; write-off of     
in-process research and development related to the Lawter acquisition;  
  certain litigation; and reimbursement of previously expensed pension costs
related to Holston Defense. In addition, a charge for the write-off of  
    construction in progress related to a PTA plant project is described in note
8 to Eastman Chemical's consolidated financial statements, included     
 elsewhere in this proxy statement. Nonrecurring charges for 1998 included
  charges related to certain underperforming assets and discontinued capital
    projects and a fine paid for a violation of the Sherman Act. These items are
more fully described in notes 6, 7, 14, 15 and 19 to Eastman Company's  
consolidated financial statements, included elsewhere in this proxy     
statement.                                                              
(2) EBITDA excluding nonrecurring charges is defined as earnings before         
deducting net interest expense (interest expense less interest income), 
 income taxes, depreciation, amortization and other income (charges), net,
    and adding back any applicable nonrecurring charges as discussed in the note
above. EBIT excluding nonrecurring charges is defined as earnings before
deducting net interest expense (interest expense less interest income), 
    income taxes and other income (charges), net, and adding back any applicable
nonrecurring charges as discussed in the note above. Although EBITDA and
EBIT are not measures of performance calculated in accordance with      
 accounting principles generally accepted in the United States of America,
  Eastman Chemical's management believes that they are useful to an investor
    in evaluating Eastman Chemical because they are widely used in the chemicals
 industry as measures to evaluate a company's operating performance before
   its debt expense and cash flow. EBITDA and EBIT do not purport to represent
cash generated by operating activities and should not be considered in  
   isolation or as a substitute for measures of performance in accordance with
    accounting principles generally accepted in the United States of America. In
addition, because EBITDA and EBIT are not calculated identically by all 
 companies, the presentation here may not be comparable to other similarly
   titled measures of other companies. Management's discretionary use of funds
   depicted by EBITDA and EBIT may be limited by working capital, debt service
 and capital expenditure requirements and by restrictions related to legal
   requirements, commitments and uncertainties. On a pro forma basis, Voridian
    has no amortization expense for any of the periods presented as all goodwill
  and other intangibles will be contributed to Eastman Company in connection
with the Distribution.                                                  

RECENT DEVELOPMENTS 

   On October 25, 2001, Eastman Chemical announced its financial results for
the quarter ended September 30, 2001. Sales revenue for the quarter was $1.4    
billion, a decrease of 1% from the quarter ended September 30, 2000. This       
decrease in revenue was due to lower selling prices in all of Eastman Chemical's
business segments, partially offset by revenue from recent acquisitions.        

  Earnings for the quarter ended September 30, 2001 were $0.55 per diluted
share excluding nonrecurring items, as compared to $1.05 per diluted share      
excluding nonrecurring items in the comparable period in 2000. Including        
nonrecurring items, earnings for the quarter ended September 30, 2001 were $0.31
per diluted share as compared to $1.27 per diluted share in the comparable      
period in 2000. This decline in earnings was due to lower capacity utilization  
as a result of weaker global demand, an unfavorable product mix and higher      
expenses related to the integration of acquisitions and costs related to        
ShipChem. Nonrecurring items for the third quarter primarily related to the     
closure of the Moundville, Alabama, plant, charges related to the ongoing       
restructuring of Eastman Chemical's fine chemicals product line, costs related  
to the Distribution and the adjustment of a previously recognized write-off of  
in-process research and development in connection with a recent acquisition.    

  12

DEFS14A
19th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 19th
RISK FACTORS

     Eastman Chemical shareowners should consider the following factors, as well
as the other information described in this proxy statement, before voting on the
Distribution.                                                                   

RISKS RELATING TO THE DISTRIBUTION                                              

AFTER THE DISTRIBUTION, VORIDIAN AND EASTMAN COMPANY WILL HAVE SUBSTANTIAL  
BUSINESS ARRANGEMENTS WITH ONE ANOTHER, WHICH MAY ADVERSELY IMPACT THE      
BUSINESS OF EITHER OR BOTH COMPANIES.                                       

     Following the Distribution, Eastman Company will supply significant amounts
of raw materials and energy and significant services to Voridian, and Eastman   
Company will derive a substantial portion of its revenues from Voridian for the 
provision of these products and services. The contracts governing these         
relationships generally have terms of two years. If and when these contracts    
expire or are otherwise terminated, or if there is otherwise any unfavorable    
development in the business of either Voridian or Eastman Company so that these 
obligations cannot be met, there can be no assurance that the other company will
be able to find comparable or replacement customers or comparable sources of raw
materials, energy or services. This inability to obtain raw materials or        
services necessary to produce the products or energy or services necessary to   
run the plant sites, or the inability to sell inventory or provide services,    
would have an adverse impact on the results of operations of both companies.    

AFTER THE DISTRIBUTION, VORIDIAN WILL OWN FACILITIES LOCATED WITHIN PLANT   
SITES OWNED BY EASTMAN COMPANY, WHICH MAY ADVERSELY IMPACT THE BUSINESS OF  
EITHER COMPANY OR BOTH.                                                     

Due to the significant levels of production integration and physical  
proximity within some of the plant sites owned by Eastman Chemical, after the   
Distribution Voridian will own facilities located within plant sites owned by   
Eastman Company. Eastman Company will own a majority of the facilities and real 
estate at the Kingsport, Tennessee and Longview, Texas plant sites. The         
remaining facilities located within those plant sites will be owned by Voridian,
and Voridian and Eastman Company will establish easements, restrictions and     
other arrangements designed to provide both parties with access to, and the     
ability to operate, their businesses at each location, and will enter into      
operating agreements to ensure the provision of some fundamental services. If   
these provisions or agreements are ineffective for any reason, there can be no  
assurance that Voridian or Eastman Company will be able to fully access or      
conduct operations at its facilities. The inability to gain effective access to,
or to operate, all or any portion of these facilities could have an adverse     
impact on the results of operations of either or both companies.                

NEITHER VORIDIAN NOR EASTMAN COMPANY HAS AN OPERATING HISTORY AS A SEPARATE 
ENTITY, WHICH MAKES IT DIFFICULT TO ASSESS HISTORICAL PERFORMANCE, AND MAY  
MAKE IT DIFFICULT TO ACCURATELY FORECAST THEIR FUTURE REVENUES AND OTHER    
OPERATING RESULTS.                                                          

  Following the Distribution, Voridian and Eastman Company will operate as
separate, publicly-traded companies. Neither of these companies has an operating
history as a separate entity, and each has historically been able to rely on the
results of operations, assets and cash flow of the other's business segments.   
Because the financial information does not reflect changes that are expected to 
occur as a result of the Distribution, and contains assumptions about Voridian's
expenses that may change in the future, neither the historical nor the pro forma
financial information included in this proxy statement necessarily reflect the  
results of operations and financial condition that would have been achieved had 
the companies operated as independent companies during the periods presented nor
are they necessarily indicative of what the companies' future results of        
operations will be. Their lack of operating histories as separate entities may  
make it difficult or impossible for analysts or investors to accurately forecast
their future revenues and other operating results, which could result in lower  
stock prices.                                                                   

  13

DEFS14A
20th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 20th
AFTER THE DISTRIBUTION, VORIDIAN AND EASTMAN COMPANY WILL BE SMALLER, LESS  
DIVERSIFIED COMPANIES THAN EASTMAN CHEMICAL WAS PRIOR TO THE DISTRIBUTION,  
WHICH MAY RESULT IN FLUCTUATIONS IN RESULTS OF OPERATIONS AND MAY ADVERSELY 
IMPACT THE BUSINESS OF EITHER COMPANY.                                      

 The Distribution will separate Eastman Chemical's historical businesses
into the Voridian Business and the Eastman Company Business. As a result, each  
of Voridian and Eastman Company will be less diversified and have a narrower    
business focus than that of Eastman Chemical before the Distribution. This      
narrow focus means each company will be more dependent on its own, more limited 
business segments, and will be more vulnerable to changing market conditions,   
which could have an adverse impact on the business of either company.           

AFTER THE DISTRIBUTION, VORIDIAN AND EASTMAN COMPANY WILL EACH HAVE LESS    
  FINANCIAL STRENGTH, FLEXIBILITY AND PURCHASING POWER THAN EASTMAN CHEMICAL HAD
PRIOR TO THE DISTRIBUTION, WHICH MAY RESULT IN INCREASED BORROWING COSTS OR 
LESS FAVORABLE RAW MATERIAL CONTRACTS.                                      

After the Distribution, Voridian and Eastman Company may each seek to 
obtain financing in the bank and/or commercial paper markets, or through public 
or private issuances of debt securities. These markets are volatile and rates,  
terms and availability fluctuate based on conditions in the markets and lenders'
perceptions of a company's business and financial stability. As smaller, less   
diversified companies, Voridian and Eastman Company will each have less         
financial strength and flexibility due to potential increased volatility in     
earnings and cash flow. These financial risks may result in higher borrowing    
costs for Voridian or Eastman Company.                                          

In addition, as separate companies, Voridian and Eastman Company will 
independently negotiate contracts for raw materials. Each company will be       
smaller than Eastman Chemical was before the Distribution and will most likely  
purchase smaller quantities of raw materials than Eastman Chemical did. This    
lessened purchasing power may result in Voridian or Eastman Company receiving   
less favorable raw material contracts and paying higher prices for raw          
materials, which may adversely impact that company's results of operations.     

THE MARKET PRICE OF VORIDIAN'S AND EASTMAN COMPANY'S COMMON STOCK MAY       
EXPERIENCE FLUCTUATIONS AND VOLATILITY FOLLOWING THE DISTRIBUTION.          

   There is currently no public market for Eastman Company common stock, and
there can be no assurance as to its trading prices following the Distribution.  
Until Eastman Company common stock is fully distributed, receives adequate      
securities research analyst coverage and an orderly trading market develops, its
price may fluctuate significantly. There can be no assurance, however, that     
Eastman Company common stock will receive adequate, or any, research analyst    
coverage or that an orderly trading market will develop.                        

    Because of the significant changes that will take place as a result of the
Distribution, the trading market for Voridian common stock after the            
Distribution may be significantly different from that of Eastman Chemical common
stock prior to the Distribution. The market may view Voridian as a "new" company
after the Distribution, and it may not be covered by research analysts in the   
same manner as Eastman Chemical has been. There can be no assurance of the      
market price of Voridian common stock before or after the Distribution and,     
until an orderly trading market in Voridian common stock is restored following  
the Distribution, its common stock price may fluctuate significantly. There can,
however, be no assurance that an orderly trading market will develop for        
Voridian common stock.                                                          

     Market prices for each of Voridian and Eastman Company common stock will be
determined in the marketplace and may be influenced by many factors, including: 

- the depth and liquidity of the market for each company's shares;    

- each company's results of operations;                               

     - investors' evaluations of the future prospects for each company and their
respective industries;                                            

  14

DEFS14A
21st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 21st
- each company's dividend policy; and                                 

- general economic and market conditions.                             

THERE MAY BE SUBSTANTIAL CHANGES IN THE SHAREOWNER BASE OF THE TWO NEW      
COMPANIES, WHICH MAY CAUSE THE PRICE OF EACH COMPANY'S COMMON STOCK TO      
DECREASE.                                                                   

    Investors holding Eastman Chemical common stock may hold that common stock
because of a decision to invest in a company that operates in multiple markets  
within the chemicals industry, that pays dividends with a requisite yield or    
that is included in broad stock market indices, such as the Standard & Poor's   
500 Index. Following the Distribution, shares of Eastman Chemical common stock  
(which will become Voridian common stock) will represent an investment in a     
smaller company with its business concentrated in PET polymers and acetate      
fibers. Similarly, shares of Eastman Company will represent an investment in    
primarily a specialty chemicals company. It is expected that the aggregate      
dividend to be paid by Voridian and Eastman Company will be substantially lower 
than the historical dividend paid by Eastman Chemical. These changes may not    
match some holders' investment strategies or meet minimum criteria for inclusion
in stock market indices, which could cause investors to sell the shares of      
either company's common stock. Excessive selling pressure could cause the market
price of each company's common stock to decrease.                               

THERE ARE TAX RISKS RELATING TO THE DISTRIBUTION, WHICH COULD HARM THE      
FINANCIAL CONDITION, OPERATIONS AND CASH FLOWS OF VORIDIAN AND/OR EASTMAN   
 COMPANY AND CAUSE SHAREOWNERS OF VORIDIAN AND/OR EASTMAN COMPANY TO INCUR TAX
LIABILITIES.                                                                

   Eastman Chemical has received from the IRS a ruling that the Distribution
will qualify as a tax-free spin-off under Sections 355 and 368(a)(1)(D) of the  
Internal Revenue Code of 1986, as amended, or the Code.                         

   The IRS ruling is based on certain representations that have been made by
Eastman Chemical. The ruling may not be relied upon if those representations are
incorrect or incomplete in any material respect.                                

If the Distribution does not qualify as a tax-free spin-off, then, in 
general, a federal corporate tax (which would be very substantial) would be     
payable by Eastman Chemical. This corporate tax would be based on the excess, if
any, of the fair market value of Eastman Company's common stock at the time of  
the Distribution over Eastman Chemical's tax basis for the common stock. This   
tax, if incurred, would harm the financial condition, operations and cash flows 
of Voridian and/or Eastman Company, depending on how the companies allocate the 
burden of the tax.                                                              

  In addition, if the Distribution fails to qualify for tax-free treatment
for the shareowners, each Eastman Chemical shareowner who receives Eastman      
Company's common stock in the Distribution would generally be treated as        
receiving a taxable distribution in an amount equal to the fair market value of 
the common stock of Eastman Company received. That distribution would be taxable
as a dividend to the extent of Eastman Chemical's current and accumulated       
earnings and profits.                                                           

   Even if the Distribution otherwise qualifies for tax-free treatment under
Sections 355 and 368(a)(1)(D) of the Code, the Distribution may become taxable  
to Eastman Chemical under Section 355(e) of the Code if 50% or more of the stock
of Voridian or Eastman Company is acquired, directly or indirectly, as part of a
plan or series of related transactions that include the Distribution. For this  
purpose, acquisitions (including acquisitions which are neither planned nor     
accepted or recommended by the management of the company whose stock is         
acquired) of Voridian's or Eastman Company's stock within two years before or   
after the Distribution are presumed to be part of this plan, although Voridian  
or Eastman Company may be able to rebut that presumption. If an acquisition of  
Voridian's or Eastman Company's stock triggers the application of Section       
355(e), Eastman Chemical would recognize taxable gain to the extent that the    
fair market value of Eastman Company's stock at the time of the Distribution    
exceeded Eastman Chemical's tax basis for that stock.                           

  15

DEFS14A
22nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 22nd
    Although any United States federal income taxes imposed in connection with
the Distribution generally would be imposed on Eastman Chemical and its         
shareowners, Voridian and Eastman Company may be liable for all or a portion of 
these taxes. First, as part of the Distribution, Voridian and Eastman Company   
will enter into a tax matters agreement. This agreement will generally allocate 
between the companies the taxes and liabilities relating to a failure of the    
Distribution to be tax-free. Further, aside from the tax matters agreement,     
under United States federal income tax laws, Voridian and Eastman Company would 
be jointly and severally liable for Eastman Chemical's federal income taxes     
resulting from the Distribution being taxable. This means that even if Eastman  
Company indemnifies Voridian for a part of the tax liability, either company may
still be held liable for the whole amount if the other company fails to fund its
share of the entire tax liability.                                              

VORIDIAN AND/OR EASTMAN COMPANY MAY NOT PAY OR MAY REDUCE DIVIDENDS ON THEIR
  RESPECTIVE COMMON STOCK, WHICH COULD RESULT IN A DECREASE IN THE PRICE OF EACH
 COMPANY'S COMMON STOCK. ALTERNATIVELY, THE CONTINUED PAYMENT OF DIVIDENDS MAY
REDUCE THE CASH AVAILABLE TO FUND OTHER OPPORTUNITIES.                      

The initial annual cash dividends to be paid by Voridian and Eastman  
Company, in the aggregate, are anticipated to be between $1.08 and $1.20 per    
share, which is substantially less than the amount historically paid to         
shareowners of Eastman Chemical. Of this amount, Voridian intends to pay an     
initial annual cash dividend of between $0.28 and $0.32 per share, and Eastman  
Company intends to pay an initial annual cash dividend of between $0.80 and     
$0.88 per share. However, there can be no guarantee that these, or any,         
dividends will be paid by either company following the Distribution. Each       
company will continue to evaluate its own dividend policy following the         
Distribution, recognizing its particular needs to finance its future plans. The 
actual amount of any dividends will depend on the companies' respective         
operating results, financial requirements and other factors as they develop over
time. Investors may invest in the common stock of Voridian and Eastman Company  
because of each company's desire and ability to pay dividends. If either company
is unwilling or unable to maintain its anticipated dividend in the future, some 
investors may choose to sell their shares of that company's common stock, which 
could result in a decrease in the market price of that company's common stock.  

VORIDIAN AND/OR EASTMAN COMPANY MAY NOT BE ABLE TO SATISFY THEIR            
  INDEMNIFICATION OBLIGATIONS RELATED TO THE DISTRIBUTION, WHICH COULD RESULT IN
THE OTHER COMPANY INCURRING ADDITIONAL COSTS OF THE DISTRIBUTION AND COULD  
  HARM EACH COMPANY'S FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS.

     The distribution agreement and other agreements related to the Distribution
entered into between Eastman Chemical and Eastman Company allocate              
responsibility between Voridian and Eastman Company for various debts,          
liabilities and obligations. The distribution agreement provides that Eastman   
Company will indemnify Voridian for the liabilities assumed by Eastman Company  
under these agreements (including specified liabilities related to the Eastman  
Company Business which will be contingent liabilities of Voridian by virtue of  
the structure of the Distribution) and Voridian will indemnify Eastman Company  
with respect to the liabilities retained by Voridian. However, the availability 
of any indemnities will depend upon the future financial strength of the        
indemnifying party. No assurance can be given that either company will be in a  
financial position to fund its indemnity obligations. If either company is      
forced to pay costs that otherwise should have been covered by the indemnity    
obligation of the other, the financial condition, results of operations and cash
flows of the paying company could be harmed.                                    

 THERE ARE TAX RISKS ARISING FROM THE DISTRIBUTION THAT COULD DELAY OR PREVENT
 A SUBSEQUENT CHANGE OF CONTROL OR ACQUISITION OF VORIDIAN OR EASTMAN COMPANY.

  Under Section 355(e) of the Code, the Distribution would be treated as a
taxable transaction to Voridian if one or more persons acquire directly or      
indirectly 50% or more of Eastman Company or Voridian common stock, measured by 
vote or value, as part of a plan that includes the Distribution. For this       
purpose, any acquisitions of Voridian's or Eastman Company's stock within two   
years before or after the Distribution are presumed to be part of that plan,    
although this presumption is rebuttable. If an acquisition of Eastman Company   
triggers the application of Section 355(e), under the tax matters               

  16

DEFS14A
23rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 23rd
agreement, Eastman Company would be required to indemnify Voridian for all or   
part of the resulting tax. This tax risk and the related indemnification        
obligation might discourage, delay or prevent a change of control of either     
company that the shareowners may otherwise consider favorable.                  

RISKS RELATING TO EASTMAN COMPANY                                               

EASTMAN COMPANY'S MARKETS ARE HIGHLY COMPETITIVE AND REQUIRE EASTMAN COMPANY
TO CONTINUALLY UPDATE ITS PRODUCTS AND SERVICES THROUGH EXPENDITURES IN     
RESEARCH AND DEVELOPMENT, WHICH EXPENDITURES MAY NOT PROVE TO BE SUCCESSFUL 
AND MAY ADVERSELY IMPACT ITS RESULTS OF OPERATIONS.                         

The specialty chemicals and plastics markets in which Eastman Company 
operates are highly competitive, dominated by a number of multinational         
companies and are characterized by substantial investments in research and      
development, technological change, new product introductions, evolving industry 
standards and changing customer needs. Eastman Company expects intense          
competition to continue in its markets, presenting significant challenges to its
ability to achieve strong growth rates and acceptable profit margins. In order  
to remain competitive, Eastman Company must continually innovate, providing     
customers with new value-added solutions in a timely manner. These projects     
carry the risks associated with any research and development effort, including  
cost overruns, delays in delivery and performance problems. Any performance     
issue that arises with a new product or service could result in loss of         
customers and may have an adverse impact on Eastman Company's credibility and   
reputation in the marketplace, as well as result in increased expenses or a loss
of revenues.                                                                    

IF EASTMAN COMPANY'S MARKETS BECOME MORE PRICE SENSITIVE OR IF IT IS        
UNSUCCESSFUL IN ENTERING NEW MARKETS AND DEVELOPING NEW SOURCES OF REVENUE, 
ITS RESULTS OF OPERATIONS MAY SUFFER AND ITS COMMON STOCK PRICE MAY DECLINE.

To the extent Eastman Company fails to differentiate its products from
those of its competitors, it will be forced to compete primarily on price rather
than product performance, which may decrease product prices and revenues and    
adversely affect its results of operations.                                     

    In addition, Eastman Company's growth depends, in significant part, on its
ability to successfully enter new markets and develop new sources of revenues to
complement its core chemicals business. Eastman Company's strategy includes     
integrating recently-acquired technologies and products into its existing       
product lines as well as internally developing new value-added products and     
services. If Eastman Company is unsuccessful in these initiatives, its results  
of operations may be adversely impacted and its common stock price may decline. 

SOME OF THE MARKETS IN WHICH EASTMAN COMPANY COMPETES ARE CYCLICAL, WHICH   
EXPOSES EASTMAN COMPANY TO POTENTIALLY SIGNIFICANT FLUCTUATIONS IN ITS      
FINANCIAL CONDITION AND COMMON STOCK PRICE.                                 

    Eastman Company sells some of its products into markets that are generally
cyclical, and therefore experiences significant fluctuations in prices due to   
factors beyond Eastman Company's control, such as the amount of industry        
capacity and the related utilization rates. Eastman Company may not be able to  
increase or maintain its levels of revenues in periods where incremental        
capacity additions are not offset by corresponding increases in demand. As a    
result, Eastman Company is exposed to potentially significant fluctuations in   
its results of operations, which in turn could adversely affect its financial   
condition and common stock price.                                               

 EASTMAN COMPANY MAY NOT REALIZE ANY ADDITIONAL BENEFITS FROM ITS COST SAVINGS
INITIATIVES AND/OR PRICE INCREASES.                                         

Eastman Company has undertaken, and will continue to undertake,       
productivity and cost reduction initiatives related to its recent acquisitions  
and organizational restructurings to improve performance and generate cost      
savings. There can be no assurance that these will be completed as planned or   
that the estimated cost savings from these activities will be realized.         

  17

DEFS14A
24th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 24th
   In addition to cost reduction initiatives, Eastman Company is striving to
improve margins on its products through price increases, where warranted and    
accepted by the market; however, Eastman Company's earnings could be negatively 
impacted should these increases be unrealized, be insufficient to cover         
increased raw materials costs or have a negative impact on demand and volume.   

THE LOSS OF VORIDIAN AS A CUSTOMER, OR ANY OTHER OF EASTMAN COMPANY'S       
SIGNIFICANT CUSTOMERS, COULD HAVE AN ADVERSE IMPACT ON ITS REVENUES AND     
RESULTS OF OPERATIONS.                                                      

   Although Eastman Company has an extensive customer base, it relied on its
largest 35 customers for approximately 40% of its historical sales in 2000,     
excluding sales to Voridian. Sales to Voridian represented approximately 17% of 
Eastman Company's historical sales in 2000. The loss of Voridian as a customer  
would adversely affect revenues and results of operations, and the loss of any  
other significant customers could adversely affect revenues and results of      
operations unless and until the lost business is replaced. Eastman Company      
believes that it is unlikely that it could replace Voridian as a customer,      
particularly with respect to the sale of ethylene.                              

AS A RESULT OF THE DISTRIBUTION, EASTMAN COMPANY WILL BE REQUIRED TO ENTER  
INTO NEW FINANCIAL ARRANGEMENTS PRIOR TO THE DISTRIBUTION AND, IF THE NEW   
ARRANGEMENTS ARE UNFAVORABLE, EASTMAN COMPANY'S RESULTS OF OPERATIONS OR    
FINANCIAL CONDITION MAY BE ADVERSELY IMPACTED.                              

Upon the Distribution, Eastman Company will be required to secure new 
financing to fund its working capital needs after the Distribution. Based on    
this need, Eastman Company is in the process of obtaining a revolving credit    
facility, which is expected to be implemented simultaneously with the           
Distribution. If Eastman Company executes an agreement on terms that are        
generally less favorable than are generally available through Eastman Chemical's
current financing arrangements, Eastman Company's results of operations or      
financial condition may be adversely affected.                                  

FOLLOWING THE DISTRIBUTION, EASTMAN COMPANY WILL BE MORE LEVERAGED THAN     
EASTMAN CHEMICAL WAS PRIOR TO THE DISTRIBUTION, WHICH MAY RESULT IN GREATER 
RISK OF FINANCIAL DISTRESS AND/OR INSTABILITY.                              

 Assuming the Distribution had occurred on June 30, 2001, on a pro forma
basis Eastman Company would have had total long-term debt of $1.3 billion. On a 
pro forma basis, Eastman Company's annual net interest expense would have been  
$86 million in fiscal 2000 had the Distribution occurred on January 1, 2000.    
Following the Distribution, Eastman Company will be more leveraged on a relative
basis than Eastman Chemical was prior to the Distribution, which may subject    
Eastman Company to greater risk of financial distress and/or instability.       

  EASTMAN COMPANY MAY NOT BE ABLE TO PROTECT ITS INTELLECTUAL PROPERTY, WHICH IS
INTEGRAL TO ITS MAINTAINING A COMPETITIVE ADVANTAGE.                        

    Eastman Company invests significant resources in developing and protecting
intellectual property assets, including patents and trademarks such as Spectar  
and DuraStar copolyesters, which Eastman Company believes provide it with       
significant competitive advantages. Eastman Company primarily relies on United  
States and foreign intellectual property laws to protect its intellectual       
property assets, but these laws provide only limited protection, and in many    
foreign countries where intellectual property laws are not well developed or    
poorly enforced, Eastman Company may not be able to adequately protect these    
rights. If Eastman Company is unable to protect its intellectual property       
assets, for whatever reason, it may lose its competitive position in the markets
in which it competes and its results of operations may be harmed.               

BECAUSE A SIGNIFICANT PERCENTAGE OF EASTMAN COMPANY'S REVENUES COMES FROM   
SALES OUTSIDE THE UNITED STATES, EASTMAN COMPANY IS SUBJECT TO MARKET       
FLUCTUATIONS IN FOREIGN CURRENCIES, WHICH COULD HARM RESULTS OF OPERATIONS. 

   Eastman Company has manufacturing and marketing operations throughout the
world, with approximately 31% of its 2000 historical sales attributable to sales
outside the United States. Economic                                             

  18

DEFS14A
25th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 25th
factors, including foreign currency exchange rates, could cause products to     
become relatively more expensive for customers outside of the United States and 
reduce demand for products, which could affect its revenues and results of      
operations. Although Eastman Company utilizes risk management tools to mitigate 
market fluctuations in foreign currencies, any changes in strategy with regard  
to risk management tools could also affect results of operations, and there can 
be no assurance that any measures will result in cost savings or that all market
fluctuation exposure will be eliminated.                                        

 EASTMAN COMPANY IS SUBJECT TO A NUMBER OF RISKS SPECIFIC TO THE INTERNATIONAL
MARKETS IN WHICH IT OPERATES, WHICH COULD HARM EASTMAN COMPANY'S RESULTS OF 
OPERATIONS AND FINANCIAL CONDITION.                                         

Eastman Company's businesses are subject to risks specific to the     
international markets in which it operates, such as changing economic and       
political conditions, many of which are beyond Eastman Company's control. In    
particular, the specialty chemicals and plastics businesses are global and are  
affected by market conditions outside of the United States. These businesses are
often subject to, among other matters, foreign government policies and          
regulations, embargoes, United States government policies relating to           
international markets and international hostilities. In addition, changes in    
laws, regulations, or other political factors, such as unexpected changes in    
regulatory requirements, changes in import or export licensing requirements or  
political instability in any of the countries in which Eastman Company operates 
could affect business in that country or region. Although Eastman Company tries 
to reduce exposure to uncertain international market conditions, it is unable to
completely predict or control its amount and mix of business and revenues. To   
the extent that international businesses are affected by unexpected             
international market conditions, Eastman Company's results of operations and    
financial condition could be adversely affected.                                

 In addition, sales to international markets carry risks in that Eastman
Company may face difficulty in enforcing its rights and agreements through      
foreign legal systems. In particular, Eastman Company faces reduced protection  
for intellectual property rights in some countries. Further, Eastman Company may
face longer accounts receivable collection periods and difficulties and costs of
staffing and managing foreign operations. Each of these factors exposes Eastman 
Company to risk and could increase Eastman Company's costs or reduce its        
revenues from international sales, which would harm Eastman Company's results of
operations.                                                                     

EASTMAN COMPANY MAY SUFFER SIGNIFICANT LOSSES RESULTING FROM GENERAL PRODUCT
  LIABILITY, WHICH MAY HARM EASTMAN COMPANY'S FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.                                                                 

   As a manufacturer of specialty chemicals and plastics, Eastman Company is
at risk for potentially significant product liability and associated losses.    
Eastman Company cannot predict or protect against all potential losses or       
liabilities that may arise relating to its products. Eastman Company maintains  
insurance against many, but not all, potential losses and liabilities, in       
accordance with customary industry practice and in amounts it believes to be    
prudent. If any losses or liabilities are not covered by insurance, or if the   
insurance is insufficient, Eastman Company would be required to satisfy these   
losses and liabilities and Eastman Company's financial condition and results of 
operations may be adversely affected.                                           

EASTMAN COMPANY'S OPERATIONS ARE SUBJECT TO MANY ENVIRONMENTAL, SAFETY AND  
HEALTH LAWS, REGULATIONS AND REQUIREMENTS THAT ARE CONTINUALLY CHANGING, AND
COMPLIANCE MAY REQUIRE ADDITIONAL EXPENSE, WHICH COULD ADVERSELY AFFECT     
EASTMAN COMPANY'S RESULTS OF OPERATIONS.                                    

    Eastman Company's facilities and businesses are subject to complex health,
safety and environmental laws and regulations relating to the use, storage,     
handling, generation, transportation, emission, discharge, disposal and         
remediation of, and exposure to, hazardous and non-hazardous substances and     
wastes in all of the countries in which it does business. The nature of Eastman 
Company's existing and historical operations exposes it to the risk of          
liabilities or claims with respect to environmental matters, including on-site  
and off-site releases and emissions of hazardous and non-hazardous substances   
and wastes. These liabilities or claims may include costs associated with       
environmental investigations and remediation                                    

  19

DEFS14A
26th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 26th
activities, as well as plant closure and restoration projects. Further, these   
liabilities or claims may include capital and other costs associated with       
environmental compliance matters at its numerous facilities.                    

These laws and regulations require, and will continue to require,     
significant expenditures to remain in compliance, both currently and in the     
future. Ongoing operations can be affected by unanticipated government          
enforcement action, which in turn is influenced by the nature of an allegation  
and the complexity of the site. Likewise, changes in chemical control           
regulations and testing requirements can increase costs or result in product    
discontinuation. Remedial requirements at contaminated sites are dependent on   
the nature of the remedy, the outcome of negotiations with regulatory agencies  
and other potentially responsible parties at multi-party sites, as well as the  
number and financial viability of other potentially responsible parties. While  
Eastman Company and Voridian have agreed to indemnification arrangements that   
apply to environmental matters, Eastman Company cannot be assured that any      
claim, if asserted, would be enforceable or that Voridian could pay, which could
further increase its costs and obligations.                                     

Further, it is impossible to predict the nature and impact of future  
judicial, legislative or regulatory developments relating to the environmental  
protection, health and safety requirements applicable to Eastman Company's      
operations. Changes in existing laws or regulations, or the discovery of        
additional environmental liabilities associated with Eastman Company's existing 
or historical operations, could require Eastman Company to incur material costs 
or could otherwise significantly harm Eastman Company's business, results of    
operations or financial condition. The requirements to be met, as well as the   
technology and length of time available to meet those requirements, continue to 
develop and change. To the extent that the costs associated with meeting any of 
these requirements are substantial and not adequately provided for, there could 
be a material adverse effect on Eastman Company's results of operations and     
financial condition.                                                            

EASTMAN COMPANY'S STRATEGIC INITIATIVES MAY NOT ACHIEVE THE COMPANY'S       
OBJECTIVES OR MAY LOSE VALUE.                                               

  As a result of the Distribution, Eastman Company will own some assets in
the form of equity investments in other companies, including joint ventures,    
alliances and other investments. These initiatives, some of which are minority  
investments in companies that are not managed or controlled by Eastman Company, 
are subject to all of the risks associated with changes in value of investments,
including the market valuation of those companies whose shares are publicly     
traded. Eastman Company intends to continue its strategic initiatives, including
the formation of joint ventures and alliances and to invest in additional       
businesses, in order to broaden its business capabilities. Additional objectives
in pursuing these initiatives are to obtain access to new technologies and      
service methodologies or an expanded customer base, but these objectives may    
fail due to undercapitalization, ineffective technology or other factors. There 
can be no assurance that any of these initiatives will achieve Eastman Company's
objectives or that they will benefit Eastman Company's results of operations.   

UNCERTAINTY IN RAW MATERIAL COSTS COULD RESULT IN HIGHER MANUFACTURING      
EXPENSES AND LOWER REVENUES AND NET INCOME FOR EASTMAN COMPANY.             

  Eastman Company relies on strategic raw materials for its operations and
utilizes risk management tools, including hedging, as appropriate, to mitigate  
short-term market fluctuations in raw materials costs. Eastman Company expects  
to continue to enter into contracts for the purchase of raw materials at prices 
that are designed to protect it against raw material price increases during     
their term. These hedging arrangements and purchase contracts could cause       
Eastman Company to incur higher total costs related to its raw materials than   
would otherwise be incurred at the time it utilizes the raw materials, and there
can be no assurance that any of these measures will result in cost savings or   
that all market fluctuation exposure will be eliminated. Further, Eastman       
Company expects to purchase a substantial portion of its raw materials from     
Voridian and through long-term contracts with a limited number of other         
suppliers. While Eastman Company plans to take measures to ensure that it       
maintains an adequate supply of raw materials, there can be no assurance that   
this supply of raw materials will not be delayed or interrupted, which may      
result in production delays and decreased revenues.                             
  20

DEFS14A
27th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 27th
EASTMAN COMPANY MAY NOT BE ABLE TO FULLY INTEGRATE ANY OR ALL OF ITS RECENT 
ACQUISITIONS IN A COST-EFFICIENT MANNER, WHICH MAY ADVERSELY AFFECT ITS     
RESULTS OF OPERATIONS.                                                      

   Over the past three years, Eastman Chemical has made acquisitions as part
of its growth strategy, which have added new business operations to the Eastman 
Company Business. Eastman Company expects to continue to integrate these        
acquired businesses into its processes to take advantage of cost-saving and     
synergy opportunities. However, the process of integrating these acquisitions   
may take significant time and resources and there can be no assurance that any  
acquired company or technology will be successfully integrated on a timely and  
cost-efficient basis or that the acquired company or technology will achieve    
projected operating earnings targets.                                           

DELAWARE LAW CONTAINS, AND EASTMAN COMPANY'S CERTIFICATE OF INCORPORATION,  
 BYLAWS AND RIGHTS PLAN WILL CONTAIN, PROVISIONS THAT COULD DELAY OR PREVENT A
CHANGE IN CONTROL OF EASTMAN COMPANY.                                       

  Provisions of Eastman Company's certificate of incorporation, bylaws and
rights plan, and provisions of applicable Delaware law, may discourage, delay or
prevent a merger or other change of control that shareowners may consider       
favorable. The provisions of Eastman Company's certificate of incorporation and 
bylaws, among other things, will:                                               

   - provide for a classified board of directors, with members of each class
to be elected in staggered three-year terms;                      

- prevent Eastman Company's shareowners from acting without a meeting;

    - regulate how shareowners may present proposals or nominate directors for
election at annual meetings; and                                  

    - authorize Eastman Company's board of directors to issue up to 50,000,000
shares of preferred stock with rights, preferences, privileges and
     restrictions, including voting rights, that could be senior to those of
its common stock, without shareowner approval.                    

   These provisions may make some corporate actions more difficult and might
delay or prevent a change in control of Eastman Company or may make acquiring   
control of Eastman Company more difficult.                                      

   In addition, Eastman Company's rights plan is designed to protect Eastman
Company shareowners in the event of an unsolicited offer and other takeover     
tactics, which in the opinion of Eastman Company's board of directors could     
impair the board of directors' ability to represent the interests of            
shareowners. The provisions of the rights plan may make an unsolicited tender   
offer more difficult or less likely to occur, or might delay, deter or prevent a
takeover. Eastman Company is also subject to provisions of Delaware law, which  
may restrict or deter a change in control. For a discussion of the applicable   
provisions of Delaware law, please refer to "Description of Eastman Company     
Capital Stock -- Anti-Takeover Provisions of Eastman Company's Certificate of   
Incorporation and Bylaws and Delaware Law" in this proxy statement.             

RISKS RELATING TO VORIDIAN                                                      

VORIDIAN WILL INCUR ADDITIONAL COSTS AND EXPENSES TO DEVELOP INTERNAL HUMAN 
RESOURCES AND ADMINISTRATIVE FUNCTIONS AFTER THE DISTRIBUTION, WHICH MAY    
ADVERSELY IMPACT ITS RESULTS OF OPERATIONS, AND IF THESE EFFORTS ARE        
UNSUCCESSFUL OR DELAYED, VORIDIAN'S REPUTATION IN THE MARKETPLACE MAY BE    
HARMED.                                                                     

   Although Eastman Chemical has operated as a public company, a significant
portion of its management and employees will become employees of Eastman Company
after the Distribution. Voridian will be required to incur additional costs and 
expenses associated with developing the necessary internal human resources and  
administrative functions to address the needs of its customers and employees and
the requirements of its public company status. If Voridian is unsuccessful or   
delayed in developing these resources, it may lose credibility in the           
marketplace.                                                                    

  21

DEFS14A
28th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 28th
    In addition, except as provided for in agreements between Eastman Chemical
and Eastman Company relating to the Distribution, Eastman Company will not be   
required to provide assistance or services to Voridian. Some of this assistance 
or these services are only being provided for short periods of time and may be  
terminated upon the occurrence of specified events. When this assistance or     
these services are no longer available from Eastman Company, Voridian must      
obtain them from its own personnel or third parties. This assistance or these   
services may not be available or, if available, may result in additional costs  
and expenses to Voridian.                                                       

  VORIDIAN WILL NOT HAVE THE RIGHT TO USE THE EASTMAN NAME EXCEPT DURING A BRIEF
  TRANSITION PERIOD, WHICH WILL REQUIRE VORIDIAN TO MAKE SUBSTANTIAL INVESTMENTS
  IN MARKETING AND BRAND NAME DEVELOPMENT, WHICH MAY NOT PROVE TO BE SUCCESSFUL.

    Voridian has previously had the benefit of the Eastman name and reputation
in marketing its products and in dealing with government officials. One of the  
challenges facing Voridian will be to develop an identity for itself that is    
independent of the Eastman name. Voridian will have to make additional          
advertising and promotion expenditures to position its new name in its markets  
and cannot predict whether the substitution of a new name will adversely affect 
its acquisition and retention of customers, its relations with governmental     
agencies or its financial performance.                                          

AS A RESULT OF THE DISTRIBUTION, VORIDIAN WILL BE REQUIRED TO ENTER INTO NEW
 FINANCIAL ARRANGEMENTS PRIOR TO THE DISTRIBUTION, AND IF THE NEW ARRANGEMENTS
ARE UNFAVORABLE, VORIDIAN'S RESULTS OF OPERATIONS OR FINANCIAL CONDITION MAY
BE ADVERSELY IMPACTED.                                                      

     Upon the Distribution, Voridian will be required to secure new financing to
retire debt of Eastman Chemical and to fund its working capital needs after the 
Distribution. Based on this need, Eastman Chemical is in the process of         
negotiating new credit arrangements for Voridian, which are expected to be      
implemented in connection with the Distribution. If Voridian enters into        
arrangements on terms that are significantly less favorable than the current    
financing terms, Voridian's results of operations or financial condition may be 
adversely affected.                                                             

  FOLLOWING THE DISTRIBUTION, VORIDIAN WILL BE SUBSTANTIALLY MORE LEVERAGED THAN
EASTMAN CHEMICAL WAS PRIOR TO THE DISTRIBUTION, WHICH MAY RESULT IN GREATER 
RISK OF FINANCIAL DISTRESS AND/OR INSTABILITY.                              

 Assuming the Distribution had occurred on June 30, 2001, on a pro forma
basis Voridian would have had total debt of $1.064 billion and negative         
shareowners' equity of $302 million. On a pro forma basis, Voridian's annual net
interest expense would have been $49 million in fiscal 2000 had the Distribution
occurred on January 1, 2000. Following the Distribution, Voridian will be       
substantially more leveraged on a relative basis than Eastman Chemical was prior
to the Distribution, which may subject Voridian to greater risk of financial    
distress and/or instability.                                                    

  THE LOSS OF EASTMAN COMPANY, OR ANY OTHER OF VORIDIAN'S SIGNIFICANT CUSTOMERS,
COULD HAVE AN ADVERSE IMPACT ON ITS REVENUES AND RESULTS OF OPERATIONS.     

  Voridian relied on its largest 15 customers for approximately 40% of the
total sales attributable to the Voridian Business in 2000, excluding sales to   
Eastman Company. Sales to Eastman Company represented approximately 5% of the   
total sales attributable to the Voridian Business in 2000. The loss of any one  
of these customers, including Eastman Company, could adversely affect its       
financial condition and results of operations until that business is replaced.  

THE PET POLYMERS MARKET IS CYCLICAL, WHICH EXPOSES VORIDIAN TO POTENTIALLY  
SIGNIFICANT FLUCTUATIONS IN ITS RESULTS OF OPERATIONS.                      

    The PET polymers market is cyclical and experiences periods of incremental
increased capacity which are greater than corresponding incremental increases in
demand. These periods result in fluctuations in industry capacity utilization   
and other factors beyond Voridian's control. Voridian may not be able to        

  22

DEFS14A
29th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 29th
maintain its prices and level of overall PET polymers sales in periods of excess
capacity. Voridian expects this trend to continue in the near future. As a      
result, Voridian may be unable to maintain sales volumes at desired price       
levels, which in turn could adversely affect Voridian's financial condition,    
results of operations and common stock price.                                   

 VORIDIAN'S MARKETS ARE HIGHLY COMPETITIVE AND REQUIRE VORIDIAN TO CONTINUALLY
UPDATE ITS PRODUCTS AND SERVICES THROUGH EXPENDITURES IN RESEARCH AND       
DEVELOPMENT, WHICH EXPENDITURES MAY NOT PROVE TO BE SUCCESSFUL AND MAY      
ADVERSELY IMPACT ITS RESULTS OF OPERATIONS.                                 

The PET polymers market in which Voridian competes is characterized by
technological change, new product introductions, evolving industry standards and
changing customer needs and preferences. In order to remain competitive,        
Voridian must continually be innovative. These projects carry the risks         
associated with any research and development effort, including cost overruns,   
delays in delivery and performance problems. Any performance issue that arises  
with a new product or service, particularly in the PET polymers market where    
reliability of supply is a major competitive factor, could result in loss of    
customers and may have an adverse impact on Voridian's credibility and          
reputation in the marketplace, as well as result in a loss of revenues.         

VORIDIAN MAY NOT REALIZE ANY ADDITIONAL BENEFITS FROM ITS COST SAVINGS      
INITIATIVES AND/OR PRICE INCREASES.                                         

   Voridian has undertaken, and will continue to undertake, productivity and
cost reduction initiatives and organizational restructurings to improve         
performance and generate cost savings. There can be no assurance that these will
be completed as planned or that the estimated cost savings from these activities
will be realized.                                                               

    In addition to cost reduction initiatives, Voridian is striving to improve
margins on its products through price increases, where warranted and accepted by
the market; however, Voridian's earnings could be negatively impacted should    
these increases be unrealized, not be sufficient to cover increased raw         
materials costs or have a negative impact on demand and volume.                 

VORIDIAN MAY NOT BE ABLE TO PROTECT ITS OWNED OR LICENSED INTELLECTUAL      
PROPERTY, WHICH IS INTEGRAL TO ITS MAINTAINING A COMPETITIVE ADVANTAGE.     

  Voridian invests significant resources in developing and protecting, and
procuring licenses for, intellectual property assets which it believes provide  
it with significant competitive advantages. Voridian primarily relies on United 
States and foreign intellectual property laws to protect its intellectual       
property assets, but these laws provide only limited protection, and in many    
foreign countries where intellectual property laws are not well developed or    
poorly enforced, Voridian may not be able to adequately protect these rights. If
Voridian is unable to protect its intellectual property assets, for whatever    
reason, or is unable to obtain or maintain licenses, it may lose its competitive
position in the markets in which it competes and its results of operations may  
be harmed.                                                                      

UNCERTAINTY IN RAW MATERIAL COSTS COULD RESULT IN HIGHER MANUFACTURING      
EXPENSES AND LOWER REVENUES AND NET INCOME FOR VORIDIAN.                    

    Voridian relies on strategic raw materials for its operations and utilizes
risk management tools, including hedging, as appropriate, to mitigate short-term
market fluctuations in raw material costs. Voridian expects to continue to enter
into contracts for the purchase of raw materials at prices that are designed to 
protect it against raw material price increases during their term. These hedging
arrangements and purchase contracts could cause Voridian to incur higher total  
costs related to its raw materials than would otherwise be incurred at the time 
it utilizes the raw materials and there can be no assurance that any of these   
measures will result in cost savings or that all market fluctuation exposure    
will be eliminated. Further, Voridian purchases a substantial portion of its raw
materials from a limited number of suppliers, including Eastman Company, which  
will be Voridian's largest supplier, primarily with respect to ethylene for     
polyethylene. While Voridian takes measures to ensure that it maintains an      
adequate supply of raw                                                          

  23

DEFS14A
30th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 30th
materials, there can be no assurance that supply of raw materials will not be   
delayed or interrupted, resulting in production delays and decreased revenues.  

VORIDIAN MAY SUFFER SIGNIFICANT LOSSES RESULTING FROM GENERAL PRODUCT       
LIABILITY, WHICH MAY HARM VORIDIAN'S FINANCIAL CONDITION AND RESULTS OF     
OPERATIONS.                                                                 

Voridian is at risk for potentially significant product liability and 
associated losses. Voridian cannot predict or protect against all potential     
losses or liabilities that may arise relating to its products. Voridian         
maintains insurance against many, but not all, potential losses and liabilities,
in accordance with customary industry practice and in amounts it believes to be 
prudent. If any losses or liabilities are not covered by insurance, or if the   
insurance is insufficient, Voridian would be required to satisfy these losses   
and liabilities and Voridian's financial condition and results of operations    
would be adversely affected.                                                    

VORIDIAN'S OPERATIONS ARE SUBJECT TO MANY ENVIRONMENTAL, SAFETY AND HEALTH  
LAWS, REGULATIONS AND REQUIREMENTS THAT ARE CONTINUALLY CHANGING, AND       
COMPLIANCE MAY REQUIRE ADDITIONAL EXPENSE, WHICH COULD ADVERSELY AFFECT     
VORIDIAN'S RESULTS OF OPERATIONS.                                           

    Voridian's facilities and businesses are subject to complex health, safety
and environmental laws and regulations relating to the use, storage, handling,  
generation, transportation, emission, discharge, disposal and remediation of,   
and exposure to, hazardous and non-hazardous substances and wastes in all of the
countries in which it does business. The nature of Voridian's existing and      
historical operations exposes it to the risk of liabilities or claims with      
respect to environmental matters, including on-site and off-site releases and   
emissions of hazardous and non-hazardous substances and wastes. These           
liabilities or claims may include costs associated with environmental           
investigations and remediation activities, as well as plant closure and         
restoration projects. Further, these liabilities or claims may include capital  
and other costs associated with environmental compliance matters at its numerous
facilities.                                                                     

These laws and regulations require, and will continue to require,     
significant expenditures to remain in compliance, both currently and in the     
future. Ongoing operations can be affected by unanticipated government          
enforcement action, which in turn is influenced by the nature of an allegation  
and the complexity of the site. Likewise, changes in chemical control           
regulations and testing requirements can increase costs or result in product    
discontinuation. Remedial requirements at contaminated sites are dependent on   
the nature of the remedy, the outcome of negotiations with regulatory agencies  
and other potentially responsible parties at multi-party sites, as well as the  
number and financial viability of other potentially responsible parties. While  
Voridian and Eastman Company have agreed to indemnification arrangements that   
apply to environmental matters, Voridian cannot be assured that any claim, if   
asserted, would be enforceable or that Eastman Company could pay, which could   
further increase its costs and obligations.                                     

Further, it is impossible to predict the nature and impact of future  
judicial, legislative or regulatory developments relating to the environmental  
protection, health and safety requirements applicable to Voridian's operations. 
Changes in existing laws or regulations, or the discovery of additional         
environmental liabilities associated with Voridian's existing or historical     
operations, could require Voridian to incur material costs or could otherwise   
significantly harm Voridian's business, results of operations or financial      
condition. The requirements to be met, as well as the technology and length of  
time available to meet those requirements, continue to develop and change. To   
the extent that the costs associated with meeting any of these requirements are 
substantial and not adequately provided for, there could be a material adverse  
effect on Voridian's results of operations and financial condition.             

BECAUSE A SIGNIFICANT PERCENTAGE OF VORIDIAN'S REVENUES COMES FROM SALES    
OUTSIDE THE UNITED STATES, VORIDIAN IS SUBJECT TO MARKET FLUCTUATIONS IN    
FOREIGN CURRENCIES, WHICH COULD HARM RESULTS OF OPERATIONS.                 

   Voridian has manufacturing and marketing operations throughout the world,
with approximately 53% of the total sales attributable to the Voridian Business 
in 2000 derived from sales outside the United                                   

  24

DEFS14A
31st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 31st
States. Economic factors, including foreign currency exchange rates, could cause
products to become relatively more expensive for customers outside the United   
States and reduce demand for products, which could affect its revenues and      
results of operations. Although Voridian utilizes risk management tools to      
mitigate market fluctuations in foreign currencies, any changes in strategy with
regard to risk management could also affect results of operations, and there can
be no assurance that any measures will result in cost savings or that all market
fluctuation exposure will be eliminated.                                        

  VORIDIAN IS SUBJECT TO A NUMBER OF RISKS SPECIFIC TO THE INTERNATIONAL MARKETS
IN WHICH IT OPERATES, WHICH COULD HARM VORIDIAN'S RESULTS OF OPERATIONS AND 
FINANCIAL CONDITION.                                                        

  Voridian's businesses are subject to risks specific to the international
markets in which it operates, such as changing economic and political           
conditions, many of which are beyond Voridian's control. In particular, the     
polymers and acetate fibers businesses are global and are affected by market    
conditions outside of the United States. These businesses are often subject to, 
among other matters, foreign government policies and regulations, embargoes,    
United States government policies relating to international markets and         
international hostilities. In addition, changes in laws, regulations, or other  
political factors, such as unexpected changes in regulatory requirements,       
changes in import or export licensing requirements or political instability in  
any of the countries in which Voridian operates could affect business in that   
country or region. Although Voridian tries to reduce exposure to uncertain      
international market conditions, it is unable to completely predict or control  
its amount and mix of business and revenues. To the extent that international   
businesses are affected by unexpected international market conditions,          
Voridian's results of operations and financial condition could be adversely     
affected.                                                                       

     In addition, sales to international markets carry risk in that Voridian may
face difficulty in enforcing its rights and agreements through foreign legal    
systems. In particular, Voridian faces reduced protection for intellectual      
property rights in some countries. Further, Voridian may face longer accounts   
receivable collection periods and difficulties and costs of staffing and        
managing foreign operations. Each of these factors expose Voridian to risk and  
could increase Voridian's costs and reduce its revenues from international      
sales, which would harm Voridian's results of operations.                       

VORIDIAN HAS SIGNIFICANT OBLIGATIONS FOR HEALTH, WELFARE, PENSION AND       
POST-RETIREMENT BENEFITS FOR ITS EMPLOYEES AND RETIREES OF EASTMAN CHEMICAL,
  WHICH COULD HAVE AN ADVERSE EFFECT ON VORIDIAN'S BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.                                                  

Voridian provides various unfunded health, welfare, pension and       
post-retirement benefits to inactive and retired employees, and has agreed to   
retain all of that liability following the Distribution for those employees who 
retired from Eastman Chemical prior to the Distribution. On a pro forma basis,  
assuming the Distribution had occurred on June 30, 2001, Voridian would have    
recorded $636 million relating to these liabilities. If Voridian's estimate is  
proven inaccurate, cash expenditures and costs could be materially greater than 
those reflected in its financial statements. This could have an adverse effect  
on Voridian's business, financial condition and results of operations.          

DELAWARE LAW, AND VORIDIAN'S CERTIFICATE OF INCORPORATION, BYLAWS AND 
RIGHTS PLAN, CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL 
OF VORIDIAN.                                                                    

  Provisions of Voridian's certificate of incorporation, bylaws and rights
plan, and provisions of applicable Delaware law, may discourage, delay or       
prevent a merger or other change of control that shareowners may consider       
favorable. The provisions of Voridian's certificate of incorporation and bylaws,
among other things:                                                             

   - provide for a classified board of directors, with members of each class
to be elected in staggered three-year terms;                      

- prevent Voridian's shareowners from acting without a meeting;       

    - regulate how shareowners may present proposals or nominate directors for
election at annual meetings; and                                  
  25

DEFS14A
32nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 32nd
    - authorize Voridian's board of directors to issue up to 50,000,000 shares
       of preferred stock with rights, preferences, privileges and restrictions,
  including voting rights, that could be senior to those of its common
stock, without shareowner approval.                               

   These provisions may make some corporate actions more difficult and might
delay or prevent a change in control of Voridian or may make acquiring control  
of Voridian more difficult.                                                     

In addition, Voridian's rights plan is designed to protect Voridian   
shareowners in the event of an unsolicited offer and other takeover tactics,    
which in the opinion of Voridian's board of directors could impair the board of 
directors' ability to represent the interests of shareowners. The provisions of 
the rights plan may make an unsolicited tender offer more difficult or less     
likely to occur, or might delay, deter or prevent a takeover. Voridian is also  
subject to provisions of Delaware law, which may restrict or deter a change in  
control.                                                                        

  26

DEFS14A
33rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 33rd
INFORMATION REGARDING THE SPECIAL MEETING 

DATE, TIME AND PLACE OF THE SPECIAL MEETING                                     

     The special meeting relating to the Distribution will be held at the Toy F.
Reid Employee Center, 400 South Wilcox Drive, Kingsport, Tennessee 37660, on    
December 18, 2001, at 11:00 a.m., eastern time.                                 

MATTER FOR CONSIDERATION AT THE SPECIAL MEETING                                 

   At the special meeting, the shareowners of Eastman Chemical will be asked
to consider and vote on the proposal to approve a special dividend to the owners
of the outstanding shares of Eastman Chemical common stock of all of the        
outstanding shares of common stock of Eastman Company, a wholly-owned subsidiary
of Eastman Chemical, on a pro rata basis, to be completed in accordance with the
terms of the distribution agreement entered into between Eastman Chemical and   
Eastman Company.                                                                

THE BOARD OF DIRECTORS OF EASTMAN CHEMICAL UNANIMOUSLY RECOMMENDS THAT
SHAREOWNERS VOTE FOR THE DISTRIBUTION.                                          

RECORD DATE; SHAREOWNERS ENTITLED TO VOTE; VOTING RIGHTS                        

  Eastman Chemical's board of directors has fixed the close of business on
November 2, 2001 as the record date for the determination of shareowners        
entitled to receive notice of, and to vote at, the special meeting. Only holders
of record of shares of common stock as of the record date will be entitled to   
notice of, and to vote at, the special meeting.                                 

 As of the record date, there were 77,105,150 shares of Eastman Chemical
common stock issued and outstanding. Holders of common stock are entitled to one
vote for each share of common stock they hold as of the record date.            

QUORUM                                                                          

  The presence, in person or by proxy, of the holders of a majority of the
shares of common stock of Eastman Chemical entitled to vote at the special      
meeting is necessary to constitute a quorum to conduct business at the special  
meeting. Abstentions and broker non-votes will be counted as present and        
entitled to vote for purposes of determining a quorum. A broker non-vote occurs 
when a nominee (like a broker or bank) holding shares in "street name" as the   
registered holder for a beneficial owner does not vote on the proposal because  
the nominee has not received voting instructions from the beneficial owner.     

REQUIRED VOTE                                                                   

     The affirmative vote of the holders of a majority of the outstanding shares
of Eastman Chemical common stock is required to approve the Distribution. If the
Distribution is not approved by the holders of at least a majority of the       
outstanding shares of Eastman Chemical common stock, the Distribution will not  
be completed. If you execute and return your proxy without indicating how you   
want to vote, your shares will be voted by proxy FOR the Distribution.          
Abstentions and broker non-votes will have the effect of votes cast against the 
Distribution.                                                                   

VOTING BY PROXY                                                                 

   By executing and returning your proxy (either by returning the proxy card
or by submitting your proxy electronically via the Internet or by telephone),   
you appoint James P. Rogers, Eastman Chemical's Chief Financial Officer, and    
Theresa K. Lee, Eastman Chemical's General Counsel and Secretary, to represent  
you at the special meeting and direct them to vote your shares at the special   
meeting. Shares of common stock represented by proxy will be voted by the proxy 
holders at the special meeting in accordance with the instructions indicated in 
the proxy appointment.                                                          

  27

DEFS14A
34th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 34th
Shareowners of record may vote by proxy in one of three ways:         

  - by telephone: call (800) 542-1160 and use the control number listed on
your proxy card;                                                  

    - via the Internet: visit the www.proxyvoting.com/eastman web site and use
the control number listed on your proxy card; or                  

- by mail: mark, sign, date and mail your proxy card in the enclosed  
postage-paid envelope.                                            

   The Internet and telephone voting procedures are designed to authenticate
shareowner identities, to allow shareowners to give voting instructions and to  
confirm that shareowners' instructions have been recorded properly. Shareowners 
voting by Internet should understand that there may be costs associated with    
electronic access, like usage charges from Internet access and telephone or     
cable service providers, that must be borne by the shareowner.                  

  If your shares are held in "street name" through a broker, bank or other
holder of record, you will receive instructions from the registered holder that 
you must follow in order for your shares to be voted for you by that record     
holder. Telephone and Internet voting is also offered to shareowners who own    
their Eastman Chemical shares through certain banks and brokers.                

HOW TO REVOKE YOUR PROXY                                                        

  You may revoke your proxy at any time before its exercise at the special
meeting by either:                                                              

     - giving written notice of revocation to the Secretary of Eastman Chemical;

     - executing and delivering a later-dated, signed proxy card or submitting a
   later-dated proxy via the Internet or by telephone before the special
meeting; or                                                       

- voting in person at the special meeting.                            

Any written notices of revocation or other communications relating to 
revocation of proxies should be sent to Eastman Chemical Company, P.O. Box 511, 
Kingsport, Tennessee 37662-5075, Attention: Secretary, so that they are received
before the special meeting.                                                     

OTHER MATTERS                                                                   

Eastman Chemical's board of directors is not currently aware of any   
business to be acted upon at the special meeting other than as described in this
proxy statement. If, however, other matters are properly brought before the     
special meeting, the persons appointed as proxies will have discretion to vote  
or act thereon according to their best judgment.                                

PROXY SOLICITATION COSTS                                                        

   Eastman Chemical will bear the cost of soliciting proxies. In addition to
the solicitation of shareowners by mail and electronic delivery, proxies may be 
solicited by telephone, facsimile, personal contact and similar means by        
directors, officers or employees of Eastman Chemical, none of whom will be      
specially compensated for those activities. Upon request, Eastman Chemical will 
reimburse brokers, dealers, banks or similar entities acting as nominees for    
their reasonable expenses incurred in forwarding copies of the proxy materials  
to the beneficial owners of the shares of common stock they hold of record.     
Georgeson Shareholder Communications has been retained by Eastman Chemical to   
aid in the solicitation of proxies, at a cost of $25,000 plus expenses.         

  28

DEFS14A
35th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 35th
THE DISTRIBUTION PROPOSAL 

BACKGROUND AND REASONS FOR THE DISTRIBUTION                                     

    Eastman Chemical, directly and through its subsidiaries, currently engages
in:                                                                             

 - the global manufacture of specialty chemicals and plastics, including
     coatings, adhesives, specialty polymers and inks, performance chemicals
and intermediates and specialty plastics, as well as strategic    
initiatives in less capital intensive businesses, all of which is 
      referred to as the Eastman Company Business in this proxy statement; and

   - the global manufacture of PET polymers, acetate fibers and polyethylene
   products, which is referred to as the Voridian Business in this proxy
statement.                                                        

 The board of directors of Eastman Chemical has decided, for the reasons
below, to distribute to Eastman Chemical's shareowners all of the outstanding   
common stock of Eastman Company. After the completion of the Distribution,      
Eastman Company will conduct the Eastman Company Business, and Eastman Chemical 
will be renamed Voridian Company and will conduct the Voridian Business.        

Beginning in late 2000, Eastman Chemical's board of directors began   
considering strategic options regarding the businesses of Eastman Chemical.     
During January 2001, Eastman Chemical's management and advisors continued to    
consider alternatives that might be available to Eastman Chemical. At a meeting 
in January 2001, Eastman Chemical's board of directors discussed the various    
strategic options considered by Eastman Chemical in the past months and analyzed
the possibility of separating Eastman Chemical into two independent companies   
through a potential spin-off transaction.                                       

     Throughout January 2001, Eastman Chemical's management continued to explore
the concept of a spin-off, and at the February 2001 Eastman Chemical board of   
directors' meeting, the board authorized management to pursue a spin-off        
transaction, subject to the board of directors' absolute discretion to abandon  
the proposed transaction, and authorized the chief executive officer to explore 
this possibility by hiring an investment banker and outside legal counsel. On   
February 5, 2001, Eastman Chemical publicly announced its intention to pursue a 
spin-off, although the ultimate structure of the spin-off was not yet           
determined. Since that time, Eastman Chemical's management and legal and        
financial advisors have addressed business, legal and financial issues and      
prepared the necessary documentation to effect a spin-off, which will take the  
form of the Distribution. Specifically, at the regularly scheduled August 2001  
Eastman Chemical board of directors' meeting, the board determined that it was  
in the best interests of the shareowners that management continue to pursue a   
plan that would result in the Distribution, subject to the board's continued    
discretion to abandon the plan. At a special meeting in August 2001, Eastman    
Chemical's board of directors received updates on the company's progress in     
pursuit of this plan. Throughout this period, management, along with its legal  
and financial advisors, continued to address issues and prepare the             
documentation relating to the Distribution. On October 25, 2001, the board of   
directors formally approved the Distribution pursuant to the terms of the       
distribution agreement, and recommended that the shareowners approve it, as     
being in the best interests of Eastman Chemical shareowners, and authorized     
management to take all actions to complete the Distribution.                    

REASONS FOR THE RECOMMENDATION OF EASTMAN CHEMICAL'S BOARD OF DIRECTORS         

    Eastman Chemical's board of directors believes that the Distribution is in
the best interests of Eastman Chemical's shareowners and that the separation of 
Eastman Company from Eastman Chemical, which will be renamed Voridian, will     
enable the respective management teams to focus more closely on their core      
businesses and provide flexibility for each of the separate companies to grow in
the way best suited for its business. After the Distribution, Voridian and      
Eastman Company will each be able to pursue separate business strategies that   
are appropriate for their respective businesses.                                

  29

DEFS14A
36th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 36th
   For the following reasons, Eastman Chemical's board of directors believes
that the Distribution will provide greater long-term value for each business,   
which will benefit Eastman Chemical's shareowners through their ownership in two
independent companies:                                                          

  The Voridian Business and the Eastman Company Business are substantially
different, requiring distinct strategies that are best managed independently.   

       - The Voridian Business has exhibited different growth characteristics,
          capital requirements, customer needs and competitive dynamics than the
  Eastman Company Business and these differences are expected to
continue in the future; and                                 

- The different businesses require inherently different growth  
  strategies in order to maximize their long-term value, and the
          operation of both of these businesses within a single corporate entity
         does not provide sufficient flexibility to design and implement these
strategies.                                                 

The Voridian Business has exhibited the following characteristics:    

        - cyclicality driven by changing supply and demand dynamics for both PET
polymers and polyethylene;                                  

       - strong growth in demand for PET polymers and low growth in demand for
acetate tow; and                                            

- competition based primarily on price.                         

  Success in the Voridian Business requires distinct strategies, including
the following:                                                                  

        - being a low-cost manufacturer through attaining scale-related benefits
at high levels of capacity utilization;                     

  - expanding PET polymers capacity in a capital efficient manner in
response to increased demand; and                           

- effective management of cash flows through the cycles.        

By contrast, the Eastman Company Business has exhibited the following 
characteristics:                                                                

- numerous, diversified products sold to a broad customer base; 

       - competition based on product performance characteristics and customer
needs; and                                                  

- emphasis on technical and customer service.                   

Success in the Eastman Company Business requires distinct strategies, 
including the following:                                                        

    - superior customer service through close customer relationships and
solutions to benefit specific customers' needs;             

       - product innovation and breadth through use of technology to regularly
introduce new and enhanced products; and                    

     - growth through the development of less capital intensive businesses
  that leverage Eastman Company's capabilities in technology and
services.                                                   

    The Distribution is expected to allow each of Voridian and Eastman Company
to more effectively implement their respective strategies.                      

  - Instead of each company competing for the capital resources of Eastman
 Chemical to promote its growth, each will be free to tailor its own
      capital resources to the areas each believes have the greatest potential
to produce attractive returns. Thus, the creation of two separate,
      publicly-traded entities should facilitate the more effective deployment
of capital by each of Voridian and Eastman Company.               

- By separating Eastman Chemical into two independent companies, the  
      management of each company will be able to focus its attention wholly on
its respective business, enabling it to respond                   
  30

DEFS14A
37th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 37th
solely to the characteristics and competitive disciplines of its  
    particular industries. The separation of the two companies should also
encourage more targeted relationships with customers and potential
strategic partners.                                               

- Voridian and Eastman Company will be better able to align management
     incentives with the performance of their respective businesses, as well
    as promote management focus, discipline and individual accountability.
       Eastman Chemical has tried in the past to structure management incentives
      that encourage management to focus on a particular business, rather than
 on overall corporate performance, by rewarding managers in a manner
     directly related to the performance of the applicable business. Eastman
    Chemical's stock-based compensation generally provides management with
       proper incentives to enhance shareowner value, but to the extent that the
       overall financial performance, and therefore the stock price performance,
       of Eastman Chemical is based in part on factors that are unrelated to the
 performance of any manager's particular business, this incentive is
      diluted and less effective. The value and effectiveness of stock options
       and similar compensation plans in creating the desired incentives will be
       enhanced by providing management of each company with incentives based on
the performance of the particular business.                       

In addition, there are several other benefits that are expected to be 
achieved through the Distribution, including the following:                     

    - enhancing the ability for each of Voridian and Eastman Company to pursue
acquisitions and other investment opportunities by providing      
    differentiated access to the capital markets for each operation and by
   creating more focused acquisition currencies for each business (i.e.,
separately traded common stock); and                              

  - creating a separately-focused common stock for each company which will
   encourage separate investment analyst and other research coverage for
      Eastman Company as a focused specialty chemicals company and Voridian as
     a more price-competitive, capital efficient company, each of which will
       be easier to analyze and compare to other companies within its respective
industry sector.                                                  

   Eastman Chemical's board of directors considered all of these factors, as
well as the advice of its financial advisors referred to below, in connection   
with its decision to proceed with the Distribution and in determining that the  
Distribution is in the best interests of Eastman Chemical shareowners. In this  
regard, Eastman Chemical's board of directors did not assign any particular     
weight to specific factors, and individual directors may have assigned different
weights to different factors.                                                   

EASTMAN CHEMICAL'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT     
SHAREOWNERS VOTE FOR THE DISTRIBUTION AT THE SPECIAL MEETING.                   

REVIEW OF FINANCIAL ADVISORS                                                    

    As described below, in connection with its evaluation of the Distribution,
Eastman Chemical's board of directors received advice from its financial        
advisor, J.P. Morgan Securities, Inc., or JPMorgan, and received a solvency     
opinion from Houlihan, Lokey, Howard & Zukin Financial Advisors, Inc., or       
Houlihan Lokey.                                                                 

FINANCIAL REVIEW OF JPMORGAN                                          

    JPMorgan reviewed with Eastman Chemical's board of directors, and assisted
Eastman Chemical's management in its evaluation of, financial aspects related to
the potential separation of the Eastman Company Business from the Voridian      
Business, including the stand-alone capital structures of each business.        
JPMorgan also assisted Eastman Chemical's management in its evaluation of the   
potential advantages and disadvantages of various alternatives to the           
Distribution. Evaluation criteria for these alternatives included its           
feasibility, the potential for each of the management teams to focus more       
closely on their core businesses and whether the alternative would provide the  
financial flexibility necessary for future growth for each business.            
Additionally, JPMorgan reviewed with Eastman Chemical's management              
  31

DEFS14A
38th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 38th
and board of directors the trading prices and multiples of selected companies in
Eastman Chemical's businesses and other spin-off transactions.                  

SOLVENCY OPINION                                                            

  Houlihan Lokey delivered an opinion to the board of directors of Eastman
Chemical on October 25, 2001 to the effect that, assuming the Distribution is   
completed as proposed, immediately after and giving effect to the Distribution: 

 (i) the fair value and present fair saleable value of Eastman
   Company's and Voridian's assets, respectively, would exceed each of their
stated liabilities and identified contingent liabilities;             

          (ii) Eastman Company and Voridian, respectively, should be able to pay
their debts and liabilities as they become absolute and mature; and   

        (iii) the capital remaining in each of Eastman Company and Voridian,
  respectively, after the Distribution would not be unreasonably small for
    the business in which each company is engaged, as management has indicated
it is now conducted and is proposed to be conducted following the     
completion of the Distribution.                                       

  The full text of the solvency opinion is set forth in Appendix B to this
proxy statement, and this summary is qualified in its entirety by reference to  
the text of that opinion. Houlihan Lokey has consented to the inclusion of this 
summary in, and the attachment of its opinion to, this proxy statement. In      
addition, Houlihan Lokey has agreed to update its opinion to the Eastman        
Chemical board of directors as of the date that the board of directors declares 
the Distribution.                                                               

In rendering its opinion, Houlihan Lokey valued the assets of each of 
Voridian and Eastman Company as going-concerns (including goodwill), on a pro   
forma basis, immediately after and giving effect to the Distribution and the    
indebtedness incurred in connection therewith. The determination of the fair    
value and present fair saleable value of the assets of Voridian and Eastman     
Company after the completion of the Distribution were based on generally        
accepted valuation methodologies.                                               

In preparing its opinion, Houlihan Lokey relied on the accuracy and   
completeness of all information supplied or otherwise made available to it by   
Eastman Chemical, Voridian and Eastman Company, and did not independently verify
this information. Its opinion was based on business, economic, market and other 
conditions existing on the date that the opinion was rendered.                  

The opinion was also based on, among other things, a review of the    
agreements relating to the Distribution, historical and pro forma financial     
information and specified business information and assumptions relating to      
Eastman Chemical, Voridian and Eastman Company, including that information      
contained in this proxy statement, as well as financial forecasts and other data
provided by Eastman Chemical, Voridian and Eastman Company relating to the      
businesses and prospects of Voridian and Eastman Company. Houlihan Lokey also   
conducted discussions with management of Eastman Chemical, Voridian and Eastman 
Company relating to the businesses and prospects of Voridian and Eastman Company
and conducted those financial studies, analyses and investigations that it      
deemed appropriate in rendering its opinion.                                    

Houlihan Lokey was retained to render its opinion because of its      
familiarity with the businesses and assets of Eastman Chemical, Voridian and    
Eastman Company and its qualifications, expertise and reputation in appraising  
and valuing companies. Eastman Chemical has agreed to pay Houlihan Lokey a fee  
of $300,000 in connection with the delivery of its opinion.                     

EASTMAN CHEMICAL COMMON STOCK INFORMATION                                       

  The closing price of a share of Eastman Chemical common stock on the New
York Stock Exchange on February 2, 2001, the last trading day prior to the      
public announcement of the Distribution, and on November 8, 2001, the last      
trading day prior to the date of this proxy statement, was $47.34 and $37.29,   
respectively.                                                                   

  32

DEFS14A
39th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 39th
THE DISTRIBUTION

BACKGROUND                                                                      

    On February 5, 2001, Eastman Chemical publicly announced that its board of
directors had authorized management to pursue a plan that would result in       
Eastman Chemical becoming two separate, publicly-traded companies, and on       
October 25, 2001, Eastman Chemical's board of directors formally approved the   
Distribution. As a result of the Distribution, 100% of the outstanding shares of
Eastman Company will be owned by Eastman Chemical shareowners. On the date of   
the Distribution, the business of Eastman Company will consist of the businesses
that were previously in the coatings, adhesives, specialty polymers and inks,   
performance chemicals and intermediates and specialty plastics segments of      
Eastman Chemical, as well as Eastman Chemical's strategic initiatives, which    
have collectively been referred to as the Eastman Company Business in this proxy
statement. Eastman Chemical has received a tax ruling from the IRS that the     
receipt by Eastman Chemical shareowners of the Eastman Company common stock in  
the Distribution will be tax-free to Eastman Chemical and its shareowners for   
federal income tax purposes.                                                    

FORM OF TRANSACTION                                                             

    The Distribution is the method by which Eastman Chemical will be separated
into two publicly-traded companies, Voridian and Eastman Company. In the        
Distribution, Eastman Chemical will distribute to its shareowners shares of     
Eastman Company common stock, which will represent a continuing interest in the 
Eastman Company Business. After the Distribution, Eastman Chemical's remaining  
businesses will be those that were previously in the polymers and fibers        
segments of Eastman Chemical, and the shares of Eastman Chemical common stock   
owned by Eastman Chemical shareowners will represent a continuing ownership     
interest only in that business. In connection with the Distribution, Eastman    
Chemical will change its name to Voridian Company (and from and after the date  
of the Distribution, Eastman Chemical common stock will be referred to as       
Voridian common stock).                                                         

MANNER OF EFFECTING THE DISTRIBUTION                                            

    Each Eastman Chemical shareowner of record at the close of business on the
date that will be fixed by the Eastman Chemical board of directors as the record
date for the Distribution will receive one share of Eastman Company common stock
for every share of Eastman Chemical common stock owned. Based on the 77,105,150 
shares of Eastman Chemical common stock outstanding as of November 2, 2001, the 
Distribution will consist of 77,105,150 shares of Eastman Company common stock. 
On the date of the Distribution, Eastman Chemical will deliver a global         
certificate representing all of the outstanding shares of Eastman Company common
stock to American Stock Transfer & Trust Company, the distribution agent. As    
soon as practicable thereafter, the distribution agent will deliver the shares  
of Eastman Company common stock to Eastman Chemical shareowners as of the record
date for the Distribution. Eastman Chemical currently intends to distribute the 
shares of Eastman Company common stock by book entry. If you are a record holder
of Eastman Chemical common stock, instead of physical stock certificates, you   
will receive a statement of your book entry account for the shares of Eastman   
Company common stock distributed to you. Following the Distribution, you may    
request physical stock certificates if you wish, and instructions for making    
that request will be furnished with your book entry account statement.          

 If you hold your Eastman Chemical shares through a stockbroker, bank or
other nominee, your shares are likely held in "street name," and you are        
probably not a shareowner of record. In that case, your receipt of Eastman      
Company common stock depends on your arrangements with the nominee that holds   
your Eastman Chemical shares for you. Questions relating to the Distribution    
prior to the date of the Distribution or relating to transfers of Eastman       
Company common stock after the date of the Distribution should be directed to   
the distribution agent, American Stock Transfer & Trust Company, at (800)       
937-5449 inside the United States or (212) 936-5100 or (718) 921-8200 outside   
the United States.                                                              

  33

DEFS14A
40th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 40th
   IN ORDER TO BE ENTITLED TO RECEIVE SHARES OF EASTMAN COMPANY COMMON STOCK
IN THE DISTRIBUTION, EASTMAN CHEMICAL SHAREOWNERS MUST BE SHAREOWNERS AT THE    
CLOSE OF BUSINESS ON THE RECORD DATE FOR THE DISTRIBUTION.                      

NO ISSUANCE OF FRACTIONAL SHARES                                                

No certificates representing fractional interests in shares of Eastman
Company common stock will be issued to Eastman Chemical shareowners as part of  
the Distribution. After the Distribution, when regular trading in Eastman       
Company common stock has begun, the distribution agent, acting as agent for     
Eastman Chemical shareowners otherwise entitled to receive certificates         
representing fractional shares of Eastman Company common stock, will aggregate  
and sell all fractional shares in the open market at then prevailing market     
prices and distribute to each Eastman Chemical shareowner who is entitled to    
payment in respect of those fractional shares his or her proportionate interest 
in the proceeds from the sale of the aggregated fractional shares.              

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES                          

The following discussion summarizes specified material United States  
federal income tax consequences that should result from the Distribution. This  
discussion is based on currently operative provisions of the Code, Treasury     
regulations under the Code and administrative rulings and court decisions, all  
of which could change. Any change, which may or may not be retroactive, could   
alter the tax consequences to Eastman Chemical, Eastman Company or the Eastman  
Chemical shareowners as described herein.                                       

   Eastman Chemical has received from the IRS a ruling that the Distribution
will qualify as a tax-free spin-off under Sections 355 and 368(a)(1)(D) of the  
Code.                                                                           

 The ruling provides, in part, that for United States federal income tax
purposes:                                                                       

- no gain or loss will be recognized by Eastman Chemical upon the     
       distribution of its common stock in Eastman Company to the shareowners of
Eastman Chemical;                                                 

    - no gain or loss will be recognized by (and no amount will be included in
       the income of) Eastman Chemical's shareowners upon receipt of the Eastman
Company common stock;                                             

   - the aggregate basis of Voridian and Eastman Company common stock in the
hands of each shareowner of Eastman Chemical immediately after the
 Distribution will be the same as the aggregate basis of the Eastman
    Chemical common stock held by those shareowners immediately before the
      Distribution, with that aggregate basis being allocated between Voridian
     and Eastman Company common stock in proportion to their respective fair
market values; and                                                

- the holding period of the Eastman Company common stock received by  
     Eastman Chemical shareowners, in each instance, will include the period
    during which the Eastman Chemical shareowner has held Eastman Chemical
   common stock with respect to which the Distribution is made, provided
      that the Eastman Chemical common stock is held as a capital asset on the
date of the Distribution.                                         

  The receipt of the ruling from the IRS confirming these conclusions is a
condition to the Distribution. Receipt of the IRS ruling confirms that the      
Distribution is consistent with the requirements for a tax-free spin-off under  
Sections 355 and 368(a)(1)(D) of the Code and the rules and regulations         
promulgated thereunder.                                                         

   The IRS ruling is based on certain representations that have been made by
Eastman Chemical. The ruling may not be relied upon if those representations are
incorrect or incomplete in a material respect. Eastman Chemical is not aware of 
any facts or circumstances that would cause those representations to be         
incorrect or incomplete in a material respect.                                  

  34

DEFS14A
41st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 41st
     If the Distribution fails to qualify under Sections 355 and 368(a)(1)(D) of
the Code, then, in general, a corporate tax (which would be very substantial)   
would be payable by Eastman Chemical on the Distribution. This corporate tax    
would be based on the excess of the fair market value of Eastman Company's      
common stock at the time of the Distribution over Eastman Chemical's tax basis  
for the common stock. Under certain circumstances, Eastman Company may have an  
obligation to indemnify Voridian for part or all of that corporate tax. See the 
discussion in "Relationship Between Eastman Company and Voridian After the      
Distribution -- Tax Matters Agreement" and the discussion of Code Section 355(e)
below. This corporate tax, if incurred, would significantly harm the financial  
condition, operations and cash flow of Eastman Company and/or Voridian,         
depending upon which corporation or corporations bear the burden of the tax.    

  In addition, if the Distribution fails to qualify for tax-free treatment
for the shareowners, each Eastman Chemical shareowner who receives Eastman      
Company common stock in the Distribution will generally be treated as receiving 
a taxable distribution in an amount equal to the fair market value of the common
stock of Eastman Company received. That distribution would be taxable as a      
dividend to the extent of Eastman Chemical's current and accumulated earnings   
and profits (as increased to reflect Eastman Chemical's gain on a taxable       
distribution as discussed above). If the amount of the Distribution exceeds     
Eastman Chemical's current and accumulated earnings and profits (as so          
increased), each shareowner's allocable share of that excess (based on the      
number of shares held) would generally be treated first as a non-taxable        
reduction in the tax basis of the shareowner's Eastman Chemical common stock to 
the extent of that basis, and thereafter as short-term or long-term capital     
gain, provided that Eastman Chemical's common stock was held by the shareowner  
as a capital asset on the date of the distribution. Upon a taxable distribution,
the shareowner's tax basis in the common stock of Eastman Company received in   
the Distribution would equal the fair market value of that common stock on the  
date of the Distribution, and the shareowner's holding period for the shares of 
Eastman Company common stock would begin on the day after the date of the       
Distribution. Shareowners which are corporations may be subject to additional   
special provisions dealing with taxable distributions, such as the dividend     
received deduction and the extraordinary dividend rules. These shareowners      
should consult their tax advisors with respect to these matters in the event    
that the Distribution fails to qualify for tax-free treatment under Sections 355
and 368(a)(1)(D) of the Code.                                                   

   Even if the Distribution otherwise qualifies for tax-free treatment under
Sections 355 and 368(a)(1)(D) of the Code, the Distribution may become taxable  
to Eastman Chemical under Section 355(e) of the Code if 50% or more of the stock
of Eastman Company or Voridian (the renamed Eastman Chemical) is acquired,      
directly or indirectly, as part of a plan or series of related transactions that
include the Distribution. For this purpose, acquisitions (including acquisitions
which are neither planned nor accepted or recommended by the management of the  
company whose stock is acquired) of Eastman Company's stock or Voridian's stock 
within two years before or after the Distribution are presumed to be part of    
that plan, although Eastman Company or Voridian may be able to rebut that       
presumption. If an acquisition of Eastman Company's stock or Voridian's stock   
triggers the application of Section 355(e), Eastman Chemical would recognize    
taxable gain to the extent that the fair market value of Eastman Company's stock
at the time of the Distribution exceeded Eastman Chemical's tax basis for the   
common stock. Under the tax matters agreement between Eastman Chemical and      
Eastman Company, Voridian (as successor to Eastman Chemical) generally would be 
responsible for payment of the tax liability resulting from an acquisition of   
Voridian's stock, and Eastman Company generally would be required to reimburse  
Voridian for the payment of the tax liability resulting from an acquisition of  
Eastman Company's stock. This tax liability would be substantial, and there is  
no assurance that Voridian or Eastman Company would be able to satisfy its      
obligation under the tax matters agreement. However, since the application of   
Section 355(e) generates only a corporate level tax cost, it should not result  
in any adverse tax consequences to the shareowners.                             

     United States Treasury regulations require each Eastman Chemical shareowner
that receives Eastman Company stock in the Distribution to attach to the        
shareowner's United States federal income tax return for the year in which that 
stock is received a detailed statement setting forth data as may be appropriate 
to                                                                              

  35

DEFS14A
42nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 42nd
show the applicability of Section 355 of the Code to the Distribution.          
Subsequent to the Distribution, Voridian will provide shareowners who receive   
Eastman Company common stock in the Distribution with the information necessary 
to comply with this requirement.                                                

THE ABOVE SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES DOES NOT     
ADDRESS THE EFFECTS OF ANY STATE, LOCAL OR FOREIGN TAX LAWS. MOREOVER, THE      
SUMMARY MAY NOT BE APPLICABLE TO CERTAIN EASTMAN CHEMICAL SHAREOWNERS WHO, AMONG
OTHER CIRCUMSTANCES, ARE EXEMPT FROM FEDERAL INCOME TAX OR WHO ARE NEITHER      
CITIZENS NOR RESIDENTS OF THE UNITED STATES. ACCORDINGLY, EACH EASTMAN CHEMICAL 
SHAREOWNER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX   
CONSEQUENCES OF THE DISTRIBUTION TO SUCH SHAREOWNER, INCLUDING THE APPLICATION  
OF STATE, LOCAL AND FOREIGN TAX LAWS, AND POSSIBLE CHANGES IN TAX LAW THAT MAY  
AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.                                    

LISTING AND TRADING OF VORIDIAN COMMON STOCK AND EASTMAN COMPANY COMMON STOCK   

    Voridian common stock (i.e., the "old" Eastman Chemical common stock) will
continue to trade on the New York Stock Exchange after the Distribution, but    
because Voridian will change its name as part of the Distribution, the symbol   
under which it trades will change from "EMN" to "VR." In addition to changing   
its name to Voridian, Eastman Chemical will transfer its right to use the       
trading symbol "EMN" to Eastman Company. Because of the significant changes that
will take place as a result of the Distribution, the trading market for Voridian
common stock after the Distribution may be significantly different from that of 
Eastman Chemical's common stock before the Distribution. The market may view    
Voridian as a "new" company after the Distribution, and it may not be the       
subject of significant research analyst coverage.                               

     There is not currently any public trading market for Eastman Company common
stock. Eastman Company has applied for listing of its common stock on the New   
York Stock Exchange under the symbol "EMN", and trading may commence prior to   
the Distribution on a "when-issued" basis. The New York Stock Exchange allows   
when-issued trading of securities in specified circumstances prior to the actual
issuance of a security, provided that all of the corporate action requisite to  
an eventual distribution has been completed. Any trades made on a when-issued   
basis are made contingent on the actual distribution. Neither Eastman Chemical  
nor Eastman Company can provide any assurance as to the prices at which Eastman 
Company common stock will trade before (on a when-issued basis), on or after the
date of the Distribution. Until Eastman Company common stock is fully           
distributed and an orderly trading market develops, the price at which it trades
may fluctuate significantly and may be lower or higher than the price that would
be expected for a fully distributed issue. Prices for both Voridian and Eastman 
Company common stock will be determined in the marketplace and may be influenced
by many factors, including the depth and liquidity of the market, developments  
affecting the companies' businesses generally and general economic and market   
conditions.                                                                     

Shares of Eastman Company common stock distributed to Eastman Chemical
shareowners will generally be freely transferable, except for shares of Eastman 
Company common stock received by persons who may be deemed to be "affiliates" of
Eastman Company under the Securities Act of 1933, as amended. Persons who may be
deemed to be affiliates of Eastman Company after the Distribution generally     
include individuals or entities that control, are controlled by, or are under   
common control with, Eastman Company, and may include specified officers and    
directors of Eastman Company, as well as principal shareowners of Eastman       
Company. Affiliates of Eastman Company will be permitted to sell their shares of
Eastman Company common stock only under an effective registration statement     
under the Securities Act or an exemption from the registration requirements of  
the Securities Act.                                                             

  36

DEFS14A
43rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 43rd
REGULATORY APPROVALS                                                            

   Eastman Chemical does not believe that any material United States federal
or state or foreign regulatory approvals will be required by law to effect the  
Distribution. However, the Distribution is conditioned upon the receipt of a    
ruling from the IRS that the Distribution will generally be tax-free to Eastman 
Chemical and its shareowners for United States federal income tax purposes.     

CHANGE OF CORPORATE NAME EFFECTIVE UPON THE DISTRIBUTION                        

The proposed Distribution contemplates the separation of the Eastman  
Company Business from the Voridian Business. Eastman Chemical's board of        
directors believes that the "Eastman" name carries a great deal of brand        
recognition in the specialty chemicals and plastics industry and is important   
for the long-term success of Eastman Company. In order to avoid consumer        
confusion, Eastman Chemical and Eastman Company have agreed in the distribution 
agreement that Eastman Chemical will change its name from Eastman Chemical to   
Voridian Company upon the effectiveness of the Distribution.                    

CONDITIONS TO THE DISTRIBUTION                                                  

The Distribution will not occur unless the following conditions are   
satisfied or waived:                                                            

 - Eastman Company's registration statement on Form 10 has been declared
effective by the SEC, which occurred on November 9, 2001;         

    - this proxy statement has been mailed or otherwise distributed to Eastman
     Chemical shareowners on the record date for determining the shareowners
entitled to vote at the special meeting;                          

   - Eastman Company's common stock has been approved for listing on the New
    York Stock Exchange, which has occurred, subject to official notice of
issuance;                                                         

   - Eastman Company's restated certificate of incorporation and bylaws have
become effective;                                                 

- all material regulatory approvals necessary to consummate the       
Distribution have been received;                                  

     - the tax and employee matters agreements have been entered into by Eastman
Chemical and Eastman Company;                                     

- the Distribution has been approved by Eastman Chemical shareowners; 

     - Eastman Chemical has received a ruling from the IRS that the Distribution
      will be tax-free for federal income tax purposes to Eastman Chemical and
its shareowners, which ruling was received on November 1, 2001;   

   - Eastman Chemical's and Eastman Company's respective boards of directors
      have each received a solvency opinion, which is described in more detail
    in "Background and Reasons for the Distribution -- Review of Financial
Advisors -- Solvency Opinion" in this proxy statement;            

- there are no injunctions or other litigation pending against Eastman
   Chemical attempting to prevent the effectiveness of the Distribution;

- Eastman Chemical and Eastman Company have fully performed their     
obligations under the distribution agreement; and                 

     - the Distribution has been formally approved by Eastman Company's board of
directors.                                                        

The distribution agreement also provides that Eastman Chemical may    
terminate and abandon, or defer, the Distribution at any time prior to its      
completion, either before or after approval by its shareowners, if, in the      
opinion of Eastman Chemical's board of directors, such action would be in the   
best interests of Eastman Chemical and its shareowners.                         

Neither Eastman Chemical nor Eastman Company is currently aware of any
material condition that is not or will not be satisfied or waived in order to   
complete the Distribution.                                                      

  37

DEFS14A
44th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 44th
BUSINESS OF EASTMAN COMPANY 

OVERVIEW                                                                        

Eastman Company is a global manufacturer of a diverse portfolio of    
specialty chemicals and plastics that are used in a wide range of consumer and  
industrial markets. Eastman Company's competitive advantages arise from its     
broad product offerings, history of technological innovation, strong operational
capabilities and long-standing customer relationships.                          

  Eastman Company maintains a global presence through its 40 manufacturing
sites in 15 countries. The combination of its large, highly integrated          
manufacturing sites and the ability to standardize manufacturing and business   
processes at its smaller sites allows Eastman Company to maintain one of the    
industry's lowest cost positions. In 2000, Eastman Company had historical sales 
of $3.6 billion.                                                                

    Eastman Company's business consists of three strategic operating segments:

 - the CASPI segment, which refers to the coatings, adhesives, specialty
polymers and inks operating segment, manufactures raw materials,  
     additives and specialty polymers primarily for the paints and coatings,
   inks and graphic arts and adhesives markets. In 2000, CASPI generated
     historical sales of $1.2 billion, representing 33% of Eastman Company's
total sales;                                                      

- the PCI segment, which refers to the performance chemicals and      
      intermediates operating segment, manufactures chemicals for agricultural
      products, fibers, food and beverage ingredients, photographic chemicals,
     pharmaceutical intermediates, polymer compounding, custom synthesis and
     chemical manufacturing intermediates. In 2000, PCI generated historical
       sales of $1.7 billion, representing 47% of Eastman Company's total sales;
and                                                               

     - the SP segment, which refers to the specialty plastics operating segment,
   manufactures copolyesters and cellulosic plastics for value-added end
     uses such as consumer products, medical devices, electrical connectors,
       medical packaging, heavy gauge sheeting for signs and displays, specialty
      packaging films and tape. In 2000, SP generated historical sales of $700
million, representing 20% of Eastman Company's total sales.       

   As an overlay to its operating segments, Eastman Company will continue to
focus on the development of less capital intensive businesses to leverage its   
capabilities in both technology and services. For instance, Eastman Company     
currently owns a 42% equity interest in Genencor, a publicly traded             
biotechnology company, and is involved with Genencor in the development of      
complementary technologies and processes. Additionally, ShipChem, a wholly-owned
subsidiary, was launched in March 2000 to provide logistics outsourcing services
to small and mid-sized chemical companies. Eastman Company continuously         
evaluates and pursues a variety of additional growth opportunities that arise as
an extension of its core businesses. Among recent initiatives is the pending    
development of a service business model using Eastman Company's knowledge of    
coal gasification operations and technology.                                    

INDUSTRY OVERVIEW                                                               

Eastman Company operates in a variety of markets with varying growth  
prospects and competitive factors.                                              

   The CASPI business generally competes in the raw materials for paints and
coatings, inks and graphic arts and adhesives markets. Eastman Company estimates
the worldwide market for paints and coatings raw materials was approximately $24
billion in 2000, while the market for inks and graphic arts chemicals was       
approximately $5 billion. Growth in these markets in North America and Europe   
typically coincides with economic growth in general, due to the wide variety of 
end uses for these applications and the particular dependence on the economic   
conditions of the market for durable goods, one of this segment's primary end   
uses. Higher growth sub-markets exist within North America and Europe, driven   
primarily by increasing governmental regulation. Industry participants are      
promoting, for example, products and                                            

  38

DEFS14A
45th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 45th
technologies primarily designed to reduce air emissions. Growth outside of North
America and Europe is substantially higher, driven primarily by the increasing  
requirements of industrializing economies.                                      

    The adhesives raw materials market is an approximately $10 billion market,
according to Eastman Company estimates. Historically, this market's growth rate 
has been consistent with general economic growth. In addition to steady overall 
market growth, Eastman Company believes that greater growth opportunities exist 
for hot melt adhesives due to their superior performance characteristics and the
resulting ability to displace other adhesives.                                  

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

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

STRATEGY                                                                        

Following the Distribution, Eastman Company will be able to more      
effectively focus its resources on providing its customers with specialty       
chemicals and plastics products that meet their evolving needs. Eastman         
Company's objective is to accelerate revenues and earnings growth through       
exploiting growth opportunities in its core businesses, reducing its cost       
structure and developing businesses that are less capital intensive. To achieve 
these objectives, Eastman Company employs operational strategies on both a      
company-wide and segment by segment basis. The key elements of its company-wide 
strategy include:                                                               

- EXPLOIT GROWTH OPPORTUNITIES IN CORE BUSINESS                       

- DEVELOP NEW SPECIALTY PRODUCTS AND EXPAND INTO NEW MARKETS        

     Eastman Company believes it is a market leader based on sales in a number
    of its product lines and attempts to gain market share through continued
    innovation and displacement of competitive products with offerings that,
among other things, offer greater functionality or better value. For
example, Eastman Company is continually developing new products and 
entering new markets, with products such as DuraStar, Embrace and   
   Provista, all recently developed in the SP segment. In addition, within
   the CASPI segment, Eastman Company is aggressively introducing coatings
     products using waterborne, powder and radiation cure technologies to meet
  the growing requirement for environmentally friendly products. Eastman
 Company intends to continue to focus on the development of innovative
   products for its customers, expanding both its customer base and market
presence.                                                           

  39

DEFS14A
46th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 46th
- LEVERAGE OPPORTUNITIES CREATED BY THE BROAD CASPI PRODUCT LINE    

     Eastman Company has organized the CASPI segment as an integrated platform
   that combines its leading products and technologies in order to develop
      additional customer-specific applications. This integrated platform should
    allow Eastman Company to further benefit from, for instance, its ability
to use technology from the adhesives market in applications for the 
 coatings and inks market. Further, Eastman Company is able to offer a
     broad array of complementary products that customers would otherwise need
to obtain from multiple manufacturers, increasing cross selling     
opportunities.                                                      

- REDUCE COST STRUCTURE                                               

- REDUCE COSTS AND IMPROVE CAPACITY UTILIZATION                     

    Eastman Company intends to continue to implement historically successful
     initiatives to eliminate inefficiencies and unnecessary costs, as well as
improve manufacturing processes, all with the goal of improving its 
   overall cost structure. As a result of recent investments in additional
  capacity, particularly in oxo chemicals and coatings products, Eastman
 Company is well positioned to achieve benefits from improved capacity
utilizations without the need for significant incremental capital   
investment.                                                         

- INTEGRATE CASPI ACQUISITIONS                                      

Eastman Company recently completed a number of acquisitions and is  
   currently integrating these acquired businesses into its operations. As
part of its integration process, Eastman Company is applying its    
 historical expertise in manufacturing process improvements and supply
    chain management to these businesses. In particular, Eastman Company has
    completed the deployment of its management teams among the businesses it
      has acquired as part of the CASPI growth strategy, and expects to complete
    the worldwide implementation of its enterprise resource planning systems
among these operations in mid-2002.                                 

- DEVELOP BUSINESSES THAT ARE LESS CAPITAL INTENSIVE                  

- DEVELOP CUSTOMER SERVICE ORIENTED INITIATIVES TO LEVERAGE UNIQUE  
CAPABILITIES                                                    

  Eastman Company is expanding beyond its core business of chemicals and
plastics manufacturing to develop less capital intensive service    
    businesses that allow Eastman Company to take advantage of its long-term
      customer relationships, operational skills and technological capabilities.
One example is ShipChem, in which Eastman Company leverages its     
long-standing distribution and logistics capabilities, its strong   
 reputation and brand in the chemicals industry and recent information
  technologies to create a full-scale outsourcing logistics provider for
chemicals industry participants.                                    

- PURSUE OPPORTUNITIES FOR BUSINESS DEVELOPMENT AND DIVERSIFICATION 

Eastman Company currently has in place and continues to pursue      
     opportunities for joint ventures, equity investments and other alliances.
These strategic initiatives are expected to diversify and strengthen
Eastman Company's business by providing access to new markets and   
      high-growth areas as well as providing an efficient means of ensuring that
     Eastman Company is involved in and supportive of technological innovation
in or related to the chemicals industry.                            

COMPETITIVE STRENGTHS                                                           

     Eastman Company believes it is in a strong position to successfully execute
its business strategy due to its many competitive strengths, which include:     

EASTMAN COMPANY IS A RECOGNIZED INDUSTRY SALES LEADER.  The breadth of
Eastman Company's product lines, its global scope and its over 80-year history  
combine to make it a recognized sales leader in specialty chemicals and         
plastics. Eastman Company believes that it has the ability to provide one of the

  40

DEFS14A
47th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 47th
industry's broadest offerings of value-added products in the markets in which it
participates. With 40 manufacturing sites strategically located near key        
markets, Eastman Company can promptly and effectively respond to diverse        
customer needs on a global basis. Eastman Company's depth and breadth of product
offerings, combined with its customer service orientation, have been key to     
building a global reputation for customer satisfaction.                         

EASTMAN COMPANY IS ONE OF THE MOST VERTICALLY INTEGRATED CHEMICALS    
MANUFACTURERS.  Eastman Company's vertical integration allows it to leverage its
resources to achieve significant cost savings and minimize price volatility and 
supply risk for raw materials and intermediates.                                

   EASTMAN COMPANY HAS A GLOBAL MANUFACTURING BASE.  A significant amount of
Eastman Company's historical revenues were generated from sales in the North    
American region. Recent acquisitions have expanded Eastman Company's            
manufacturing base and have positioned Eastman Company to cost-effectively      
capitalize on higher growth rates in other regions through its global           
manufacturing presence.                                                         

EASTMAN COMPANY HAS DEVELOPED LONG-TERM RELATIONSHIPS WITH ITS        
CUSTOMERS.  Eastman Company has developed long-term relationships with the      
leading companies in each of the markets it serves based not only on the        
reliability of its supply but also on a dedication to customer service,         
technical assistance and innovation.                                            

EASTMAN COMPANY HAS A HISTORY OF SUCCESS IN PRODUCTIVITY AND PROCESS  
IMPROVEMENTS.  Productivity and process improvements are critical to Eastman    
Company's ability to further improve its cost structure. Eastman Company has    
been successful in the past in implementing improvements in manufacturing,      
supply chain and administrative areas.                                          

EASTMAN COMPANY IS A LEADER IN RESEARCH AND DEVELOPMENT               
CAPABILITIES.  Eastman Company has a history of successful product innovation   
and customer responsiveness that is a direct result of its industry-leading     
research and development capabilities. For example, in recent years, Eastman    
Company's research and development function has achieved success in developing  
new coatings technologies, such as environmentally friendly products for        
waterborne systems, allowing Eastman Company to derive revenues from previously 
underserved markets.                                                            

COATINGS, ADHESIVES, SPECIALTY POLYMERS AND INKS SEGMENT (CASPI)                

OVERVIEW                                                                    

Through CASPI, Eastman Company manufactures binders, liquid vehicles, 
pigment concentrates and additives, unsaturated polyester resins and polyester  
and acrylic emulsions, which are integral to the production of paints and       
coatings, inks and graphic arts, adhesives, textile sizes and other formulated  
products. Eastman Company focuses on raw materials rather than finished products
in order to develop long-term, strategic relationships and achieve preferred    
supplier status with its customers. In 2000, the CASPI segment had historical   
sales of approximately $1.2 billion, which represented approximately 33% of     
Eastman Company's total sales. The full year impact of operating results from   
the most recent acquisitions is expected to significantly increase CASPI        
reported sales and its proportion of Eastman Company's total sales.             

     Success in the CASPI segment is dependent upon Eastman Company's ability to
realize value from the successful integration of recent acquisitions and to     
capitalize on organic growth opportunities by offering existing products and    
technologies to new markets and new products and technologies to customers in   
multiple markets. For these reasons, activities within the CASPI segment are    
focused on capitalizing on the higher growth rates in environmentally friendly  
products such as waterborne, radiation curable and powder coating technologies, 
and on higher growth geographical markets, such as the Asia Pacific and Latin   
America regions. With the addition of its recent acquisitions, CASPI has        
stronger technology capabilities and an international presence that better      
position it to take advantage of new product growth and international           
opportunities.                                                                  

  41

DEFS14A
48th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 48th
PRODUCTS                                                                    

  CASPI's products consist of binders and resins, liquid vehicles, pigment
concentrates and additives, unsaturated polyester resins and polyester and      
acrylic emulsions. Binders and resins, such as alkyd and polyester resins,      
hydrocarbon resins and rosins and rosin esters, are used in adhesives as a key  
component and in paints and inks to form a protective coating or film and bind  
color to the substrate. Liquid vehicles, such as ester, ketone and alcohol      
solvents, maintain the binders in liquid form for ease of application. Pigment  
concentrates and additives, such as cellulosic polymers, Texanol coalescing aid 
and chlorinated polyolefins, provide different properties or performance        
enhancements to the end product. Unsaturated polyester resins are used primarily
in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions
are traditionally used as textile sizes to protect fibers during processing in  
textile manufacturing, and the technology is being extended for use in water    
based paints, coatings and inks. Additional products are developed in response  
to, or in anticipation of, new applications where significant value can be      
achieved. In 2000, sales to the paints and coatings market represented over 50% 
of CASPI's historical sales, while sales to each of the other markets did not   
represent more than 20% of CASPI's historical sales.                            

    The following table describes CASPI's major product groups and the primary
(P) and secondary (S) markets into which those products are sold:               

                                                        [Enlarge/Download Table]

                                                                        MARKETS                            
                                             --------------------------------------------------------------
                                                                     INKS AND                              
                                             PAINTS AND COATINGS   GRAPHIC ARTS   ADHESIVES   OTHER MARKETS
                                             -------------------   ------------   ---------   -------------
                                                                                                           
PRODUCT GROUPS                                                                                             
Binders and resins..........................           P                  P            P             S     
Liquid vehicles (solvents)..................           P                  P            S             S     
Pigment concentrates and additives..........           P                  P           --             S     
Unsaturated polyester resins................          --                 --           --             P     
Polyester and acrylic emulsions.............           P                  S            S             P     

GROWTH STRATEGY                                                       

     CASPI's market position has been enhanced through a combination of internal
product development and strategic acquisitions of products and technology.      

   A key element of CASPI's growth strategy is the continued development and
implementation of innovative product offerings in high-growth areas that meet   
customers' evolving needs and improve the quality and performance of customers' 
end products. Eastman Company believes that its ability to leverage its broad   
product line and research and development capabilities across the CASPI segment 
make it uniquely capable of offering a broad array of solutions for new and     
emerging markets. One example of this type of offering is CMCAB, a new product  
designed for use in water based coatings. This is an extension of Eastman       
Company's CAB product, which is an established additive used in solvent based   
coatings.                                                                       

Eastman Company also intends to focus on the expansion of the CASPI   
segment's product offerings into other high growth areas. These include areas   
with growth due to specific product developments, such as adhesion promoters,   
high solids coatings, powder coatings and water based products, as well as      
growth in geographic areas due to the level and timing of industrial            
development. Due to Eastman Company's global manufacturing presence, it is      
strategically positioned to take advantage of areas of high industrial growth.  

 Eastman Company also seeks to capitalize on the growth potential in the
consolidation of recent acquisitions. Beginning in 1996, Eastman Company has    
made numerous strategic acquisitions in the CASPI segment to strengthen its     
technology and asset position. Eastman Company acquired the assets of ABCO      
Industries, Ltd. to complement its existing polyester size business and provide 
capacity for acrylic emulsions that can be used in water based coatings, among  
other things. Eastman Company then acquired specified assets of coatings resins 
manufacturer Ernst Jager, Fabrik Chemischer Rohstoffe GmBH & Co.                

  42

DEFS14A
49th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 49th
in 1998, which provided greater access to specialty polymer and emulsion        
manufacturing capacity in Germany, while in 1999, Eastman Company acquired      
Lawter International, Inc. to strengthen its position in the inks and graphic   
arts market. In 2000, Eastman Company acquired McWhorter Technologies Inc. and  
Chemicke Zavody Sokolov to strengthen its position in specialty resins and      
colorants, waterborne polymers products, acrylic acid, acrylic esters and other 
specialty products. In 2001, the acquisition of specified assets of Hercules    
Incorporated made Eastman Company the most diversified manufacturer of adhesive 
raw materials worldwide. The integration of these acquisitions is expected to   
continue to be a fundamental component of Eastman Company's growth strategy for 
the CASPI segment, as Eastman Company believes integration will serve to provide
greater access to new customers, technologies and markets. Additionally,        
successful integration will continue to result in benefits from further         
operational efficiencies in areas such as manufacturing, supply chain and cost  
management.                                                                     

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

CUSTOMERS AND MARKETS                                                 

    As a result of the variety of end uses for its products, Eastman Company's
customer base in the CASPI segment is broad and diverse, consisting of over     
1,800 companies worldwide. Based on company estimates, Eastman Company believes 
that the customer base typically includes companies with the highest sales      
revenue in each of their respective markets. The largest 80 customers within the
CASPI segment accounted for approximately 80% of CASPI total sales in 2000 on a 
historical basis. Also on a historical basis in 2000, sales to Voridian         
represented 1.1%, and sales to no other individual customer represented more    
than 2%, of Eastman Company's total sales.                                      

Eastman Company focuses on establishing long-term, customer service   
oriented relationships with its strategic customers in order to become their    
preferred supplier. Eastman Company sees significant growth potential in its    
ability to leverage these relationships to provide sales opportunities in       
previously underserved markets, as well as expand the scope of its value-added  
services.                                                                       

COMPETITION                                                           

Competition within the CASPI segment varies widely depending on the   
specific product or product group. Because of the depth and breadth of its      
product offerings, Eastman Company does not believe that any one of its         
competitors presently offers all of the products that it manufactures within the
CASPI segment. Additionally, Eastman Company believes that, based on estimated  
sales revenue, it is the largest producer of raw materials for the inks and     
graphic arts market that it serves and the second largest producer of resins for
adhesives. However, many of Eastman Company's competitors within portions of its
CASPI segment are substantially larger companies, such as The Dow Chemical      
Company, BASF Corporation, Exxon Mobil Corporation and Rohm and Haas Company,   
with greater financial and other resources than those of Eastman Company.       
Additionally, within each market in this segment, Eastman Company competes with 
other smaller, regionally focused companies who may have advantages based on    
location, local market knowledge, manufacturing strength in a specific product  
or other factors. At any time, any one or more of these competitors could       
develop additional products to compete with, or that may make obsolete, some of 
Eastman Company's current product offerings.                                    

  Eastman Company does not believe that any of its competitors is dominant
within the CASPI segment. Further, Eastman Company attempts to maintain         
competitive advantages through its level of vertical integration, breadth of    
product and technology offerings, low-cost position, consistent product quality 
and process and market knowledge. In addition, Eastman Company attempts to      
leverage its strong customer base and long-standing customer relationships to   
promote substantial recurring business, further strengthening its competitive   
position.                                                                       

  43

DEFS14A
50th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 50th
PERFORMANCE CHEMICALS AND INTERMEDIATES SEGMENT (PCI)                           

OVERVIEW                                                              

  Eastman Company's PCI segment manufactures diversified products that are
used in a variety of environments, including chemicals for agricultural         
products, fibers, food and beverage ingredients, photographic chemicals,        
pharmaceutical intermediates, polymer compounding and custom synthesis and      
chemical manufacturing intermediates. Custom synthesis and photographic         
chemicals were historically managed as part of Eastman Chemical's fine chemicals
product line. Eastman Company believes it has one of the industry's broadest    
product offerings, offering custom manufacturing and high volume manufacturing  
of complex organic molecules for customers. In 2000, the PCI segment had        
historical sales of approximately $1.7 billion, which represented approximately 
47% of Eastman Company's total sales.                                           

    Because a substantial portion of PCI sales are derived from higher margin,
highly specialized products with niche applications, success in the PCI segment 
will require Eastman Company to continue to innovate and develop new products   
and find new applications for its existing products. Eastman Company is         
concentrating its efforts on new uses for existing products, such as food and   
nutritional formulations. Additionally, some of Eastman Company's products in   
this segment are more substitutable and price sensitive in nature, requiring    
Eastman Company to operate on a lower cost basis while maintaining high quality 
products and customer service.                                                  

PRODUCTS                                                              

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

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

     - OTHER CHEMICALS PRIMARILY FOR CHEMICAL MANUFACTURING, POLYMER COMPOUNDING
      AND PHARMACEUTICAL APPLICATIONS:  Eastman Company manufactures a variety
    of intermediate chemicals based on oxo and acetyl chemistries. Eastman
       Company is the largest marketer of acetic anhydride in the United States,
a critical component of analgesics and other pharmaceutical and   
   agricultural products, and is the only U.S. producer of acetaldehyde,
another key intermediate in the production of vitamins and other  
    specialty products. Eastman Company manufactures the broadest range of
 oxo aldehyde derivatives products in the world and owns proprietary
technology for the production of EpB oxirane, an intermediate with
growing use in pharmaceuticals and other small volume, high value 
specialty products. Eastman Company's other products include      
      plasticizers, glycols and polymer intermediates. Many of the products in
      this portion of the PCI segment are priced based on supply and demand of
   substitute and competing products. In order to maintain a competitive
position, Eastman Company strives to operate with a low cost      
manufacturing base.                                               

GROWTH STRATEGY                                                       

    Eastman Company has a two-pronged strategy for success in the PCI segment,
focusing on continuing to develop and access markets with high growth potential 
for its specialty organic chemicals, while maintaining its competitive advantage
as a low-cost, high-quality and customer service oriented supplier of products  
to other chemicals customers. Eastman Company engages in continual customer     
focused research and development initiatives in order to develop new products   
and find additional applications for existing products, both in response to, and
in anticipation of, customer needs. Eastman Company believes that this          

  44

DEFS14A
51st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 51st
strategy will enable it to remain a leader in application specific, high margin 
products. For example, Eastman Company is leveraging its expertise in chemicals 
manufacturing to jointly develop with Genencor a new process for making ascorbic
acid, or Vitamin C, which should significantly lower manufacturing costs over   
current processes. Additionally, Eastman Company has been successful in         
developing new applications for some of its existing PCI products. For instance,
SAIB, which has long been used as a coatings additive and for inks end-uses, has
a new application as a stabilizer in citrus flavored drinks. Food and Drug      
Administration regulations now allow the use of SAIB for this application and   
this market is beginning to emerge. In the future, Eastman Company expects to   
continue to capitalize on applications such as these in biotechnology and in    
other industries, and intends to seek additional opportunities to use its       
products in new and innovative ways.                                            

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

CUSTOMERS AND MARKETS                                                 

    Because of the niche applications of PCI's organic chemical products, each
individual product offering is tailored to specific end uses. Other performance 
chemicals and intermediates are more readily substitutable, and have a more     
identifiable potential customer base. In 2000, PCI had over 1,400 customers     
worldwide, and the largest 140 customers within the PCI segment accounted for   
approximately 80% of PCI's total sales on a historical basis. Also on a         
historical basis in 2000, sales to Voridian within the PCI segment represented  
11.2%, and sales to no other individual customer represented more than 4%, of   
Eastman Company's sales. Based upon indications from the largest customer of the
PCI segment that it does not intend to renew its contract for a custom synthesis
product beyond 2002, Eastman Company does not expect to pursue that product in  
the future. Sales of that product contributed slightly less than 10% of Eastman 
Company's operating earnings for 2000.                                          

   In order to obtain a better understanding of its customers' requirements,
which in turn allows it to focus on developing application-specific products,   
Eastman Company focuses on establishing long-term, partnership-oriented         
relationships with its customers. From time to time, customers decide to        
vertically integrate their own processes and internally develop products or     
diversify their sources of supply that had been provided by Eastman Company.    
Although historically Eastman Company has been able to replace business lost    
under these circumstances through expanding relationships with other customers  
or expanding product offerings, there can be no assurance that it will be able  
to continue to do so in a timely manner, or at all.                             

   The markets for products with market-based pricing in the PCI segment are
cyclical. This cyclicality is caused by periods of supply and demand imbalance, 
either when incremental capacity additions are not offset by corresponding      
increases in demand, or when demand exceeds existing supply. Demand, in turn, is
based on general economic conditions, energy prices, consumer demand and other  
factors beyond Eastman Company's control. Eastman Company may be unable to      
increase or maintain its level of sales in periods of economic stagnation or    
downturn, and its future financial results may experience fluctuations from     
period to period due to these economic conditions. Eastman Company believes     
these markets are currently in the "trough" of the cycle. Cyclicality is        
expected to remain a significant factor in the PCI segment, particularly in the 
near term, as existing capacity becomes absorbed and utilization rates increase 
from current levels. Eastman Company believes that, as excess capacity          
disappears, this market cycle will improve.                                     
  45

DEFS14A
52nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 52nd
COMPETITION                                                           

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

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

SPECIALTY PLASTICS SEGMENT (SP)                                                 

OVERVIEW                                                              

The SP segment produces highly specialized copolyesters and cellulosic
plastics that possess unique performance properties for value-added end uses    
such as consumer products, medical devices, electrical connectors, medical      
packaging, heavy gauge sheeting for signs and displays, specialty packaging     
films and tape. In 2000, the SP segment had historical sales of approximately   
$700 million, which represented approximately 20% of Eastman Company's total    
sales.                                                                          

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

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

  46

DEFS14A
53rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 53rd
Eastman Company has the ability within its SP segment to modify its   
polymers and plastics to control and customize their final properties, creating 
numerous opportunities for new application development, including the expertise 
to develop new materials and new applications starting from the molecular level 
in the research laboratory to the final designed application in the customer's  
plant. In addition, the SP segment has a long history of manufacturing          
excellence with strong process improvement programs providing continuing cost   
reduction. Manufacturing process models and information technology systems      
support global manufacturing sites and provide monitoring and information       
transfer capability that speeds up the innovation process.                      

PRODUCTS                                                              

SP's key products are:                                                

     - COPOLYESTERS.  Copolyesters combine the product strengths typically found
     in higher priced polycarbonates, such as impact strength, clarity, ease
  of fabrication and chemical resistance, with the price advantages of
acrylics to become a strong value plastic; and                    

    - CELLULOSIC PLASTICS.  Eastman Company's cellulosic plastics fill several
       niches in consumer products where clarity and chemical resistance are key
performance characteristics.                                      

    Typically, products in the SP segment progress through a "life cycle" from
introduction to maturity. At introduction, products are highly specialized, have
been created in response to customer desires for specific performance and have  
higher margins and lower volumes. As products progress into the growth phase,   
sales volumes accelerate and growth rates are maximized due to market acceptance
and lack of competitive products. As these products mature, competitive products
at lower prices or with superior performance characteristics are developed by   
Eastman Company and others, thereby reducing both volumes and margin on the     
original product.                                                               

  Currently, Eastar Bio for new film and packaging applications, Kelvx for
higher temperature sheet applications and Titan for electronic components are   
Eastman Company's primary emerging products, while Embrace for shrink label     
applications, Provista for retail displays and DuraStar for cosmetic and        
household appliance applications are Eastman Company's primary copolyesters in  
the growth phase. Eastman Company attempts to continuously develop and introduce
new products with enhanced performance characteristics to capitalize on high    
growth opportunities.                                                           

GROWTH STRATEGY                                                       

Eastman Company's growth strategy for the SP segment is focused on    
innovation and marketing.                                                       

 - CONTINUED INNOVATION.  Within the past 3 years, SP has commercialized
over 15 new products. Eastman Company believes that the continued 
     differentiation of its current products, as well as the introduction of
       new products, will provide access to previously underserved markets, such
      as its introduction of polymers with higher heat resistance and products
    designed to be environmentally friendly. Additionally, Eastman Company
specifically develops product enhancements in order to respond to 
   specific market needs, and expects this to result in increased market
penetration for existing products.                                

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

CUSTOMERS AND MARKETS                                                 

 The customer base in the SP segment is broad and diverse, consisting of
over 900 companies worldwide in a variety of industries. The largest 85         
customers accounted for 80% of SP's total sales in 2000 on a historical basis.  
These customers include plastics compounders, plastics processors and           

  47

DEFS14A
54th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 54th
manufacturers of plastics products who do their own compounding or processing.  
Also on a historical basis in 2000, sales to Voridian represented 5%, and sales 
to no other individual customer represented more than 3%, of Eastman Company's  
total sales.                                                                    

   Particularly in the SP segment, Eastman Company seeks to develop mutually
beneficial relationships with its customers throughout various stages of product
life cycles. By doing so, Eastman Company is better able to understand its      
customers' needs as those customers develop new products, and more effectively  
bring new solutions to market. Additionally, Eastman Company builds additional  
brand loyalty, lengthening the time before its products compete based entirely  
on price.                                                                       

COMPETITION                                                           

    As previously discussed, competition for Eastman Company's products in the
SP segment varies as a function of where the products are in their life cycle.  
For example, SP products in the introduction phase of the life cycle compete    
mainly on the basis of performance. As products begin to advance in the life    
cycle, and substitute products come into existence, the basis of competition    
begins to shift, taking into account factors such as price, customer service and
brand loyalty. At maturity, where one or more competitors may have equivalent   
products in the market, competition is based primarily on price. Many large,    
well recognized manufacturers produce substitute products of different          
materials, some of which may offer better performance characteristics than those
of Eastman Company, and some of which may be offered at a lower price. Eastman  
Company has a full array of products moving across the SP life cycle.           

    For example, two commonly used plastics materials in the heavy gauge sheet
market are acrylic and polycarbonate. In general, acrylics are lower in cost,   
but polycarbonates provide higher performance. Eastman Company's products       
capture both markets. Customers of the SP segment can select from products that 
offer improved performance over acrylics at a slightly higher cost, or products 
that are lower cost than polycarbonates while still possessing excellent        
performance properties. In this way, SP is able to meet the industry need for   
low cost, high performance plastics materials and maintain a significant        
advantage over its competitors.                                                 

    Eastman Company believes that it maintains competitive advantages over its
competitors in the SP segment throughout the product life cycle. At product     
introduction, Eastman Company's breadth of offerings combined with its research 
and development capabilities and customer service orientation enable it to      
quickly bring a wide variety of products to market. As products enter the growth
phase of the life cycle, Eastman Company is able to continue to leverage its    
product breadth by receiving revenues from multiple sources, as well as         
retaining customers from long term relationships. As products become price      
sensitive, Eastman Company can take advantage of its scale of operations and    
vertical integration to remain profitable as a low cost manufacturer.           

     Although Eastman Company believes it maintains these competitive advantages
and that none of its competitors in the SP segment are dominant, SK Corporation,
a Korean conglomerate, has recently begun commercial level production of CHDM, a
key raw material contained in certain of Eastman Company's specialty polymers.  
Until recently, Eastman Company believed it was the only company capable of     
commercial quantity CHDM and CHDM modified copolyesters production. While       
Eastman Company believes SK may be capable of producing CHDM at commercial      
grades and quantities, it does not believe SK can yet produce the wide variety  
of specialty polymers currently offered by Eastman Company or offer the same    
level of technical assistance. Additionally, Eastman Company believes that it   
continues to maintain cost advantages due to its scale of operations and        
production experience. There can be no assurance, however, that Eastman Company 
will be able to maintain this competitive advantage, and if it is unable to do  
so, its financial condition and results of operations could be adversely        
affected.                                                                       

STRATEGIC INITIATIVES                                                           

As an overlay to its three operating segments, Eastman Company deploys
resources into developing less capital intensive businesses through leveraging  
its existing capabilities in technology and customer service. Eastman Company is
committed to pursuing these initiatives in order to capitalize on new business  
  48

DEFS14A
55th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 55th
concepts that differentiate Eastman Company from other chemicals manufacturers  
and that will provide incremental growth beyond that which is inherent in the   
chemicals industry and at lesser capital investment requirements. These         
initiatives will include participating in opportunities that allow Eastman      
Company to realize benefits based on its technological leadership and customer  
service orientation that Eastman Company believes have significant growth       
prospects. Eastman Company's current initiatives include the following:         

- GENENCOR.  Eastman Company owns a 42% equity interest in Genencor, a
publicly-traded biotechnology company engaged in the discovery,   
      development, manufacture and marketing of biotechnology products for the
industrial chemicals, agricultural and health care markets, and a 
     developer of integrated genomics technology. Eastman Company, which was
 an early stage investor and held a 50% interest prior to Genencor's
    initial public offering in 2000, believes this investment provides the
   opportunity for a financial return as well as access to complementary
       technologies that may result in expanded product offerings and additional
market penetration.                                               

 - SHIPCHEM.  In 2000, Eastman Company launched ShipChem, a wholly-owned
      logistics provider for small to mid-sized chemicals manufacturers, which
provides greater efficiency in the management of transportation   
       activities and improved customer service. ShipChem allows Eastman Company
to leverage its logistics capabilities, and is expected to support
       substantially all of Eastman Company's and Voridian's worldwide logistics
      requirements, as well as provide logistics outsourcing services to other
 chemicals manufacturers in North America, by the beginning of 2002.

- Eastman Company is also developing a service business model for coal
gasification operations.                                          

    Eastman Company believes that these, and other, strategic initiatives will
provide Eastman Company with access to new markets, technologies and customers  
that would otherwise go undiscovered, strengthening Eastman Company's position  
in its traditional markets while also providing potential new sources of revenue
and areas of expertise. For example, through Eastman Company's business ventures
group, it has made a number of other strategic equity investments in            
non-chemicals businesses with technology that has potential applications in the 
chemicals industry. There can be no assurance, however, that any of these       
interests will produce the desired results, or will result in Eastman Company   
realizing any return on those initiatives.                                      

SALES, MARKETING AND DISTRIBUTION                                               

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

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

  In addition, Eastman Company is an industry leader in the implementation
and utilization of e-business technology for marketing products to customers and
was one of the first chemical companies to                                      

  49

DEFS14A
56th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 56th
offer this capability to its customers. Eastman Company views this as an        
opportunity to increase supply chain efficiency by having an enterprise resource
planning platform with connectivity to customers. These sales and marketing     
capabilities combine to reduce costs and provide a platform for growth          
opportunities for Eastman Company by providing potential customers new methods  
to access Eastman Company's products.                                           

Eastman Company's products are shipped to customers directly from its 
manufacturing plants as well as from distribution centers worldwide, with the   
method of shipment generally determined by the customer. In order to further    
capitalize on its expertise and minimize its costs, during 2000, Eastman Company
outsourced its bulk truck shipments to ShipChem, Eastman Company's logistics    
venture, and expects to transfer the remainder of its North American logistics  
needs to ShipChem by the end of 2001.                                           

RESEARCH AND DEVELOPMENT                                                        

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

     - improving existing products and processes to lower costs, improve product
quality and reduce environmental impact;                          

- developing new products and processes; and                          

   - developing new product lines and markets through applications research.

Achievements in research and development during the last several years
include enhancements of the oxo chemistry technology, development of new        
copolyesters for specific market applications, improved specialty polyester     
manufacturing expertise and a significant expansion in coatings technologies.   
More recently, Eastman Company has discovered and is developing a series of     
catalysts that produce single enantiomer molecules, either left or right handed,
that have large market potential in the pharmaceutical and other industries.    

  For each of 2000, 1999 and 1998, research and development expenses, on a
historical basis for Eastman Company, totaled $104 million, $123 million and    
$122 million, respectively.                                                     

INTELLECTUAL PROPERTY AND TRADEMARKS                                            

   Because Eastman Company believes that branding its products will increase
awareness and customer loyalty, and because Eastman Company is continually      
bringing new brands and products to market, Eastman Company considers its       
intellectual property portfolio to be a valuable corporate asset, which it      
expands and vigorously protects globally through a combination of patents that  
expire at various times, trademarks, copyrights and trade secrets. Eastman      
Company's primary strategy regarding its intellectual property portfolio is to  
protect all innovations that provide Eastman Company with a significant         
competitive advantage. Eastman Company also derives significant value from its  
intellectual property by actively licensing and selling patents and expertise   
worldwide and by donating patents to educational institutions. In addition, when
appropriate, Eastman Company licenses technology from third parties that        
complement its strategic business objectives. As the laws of many foreign       
countries do not protect intellectual property to the same extent as the laws of
the United States, Eastman Company cannot assure that it will be able to        
adequately protect its intellectual property assets.                            

SOURCES AND AVAILABILITY OF RAW MATERIALS AND ENERGY                            

  Eastman Company's main raw materials and energy requirements are propane
and ethane, cellulose, coal, natural gas and electricity. Other raw materials   
used by Eastman Company include a wide variety of precursors for specialty      
organic chemicals. Eastman Company purchases a substantial portion of its key   
raw materials and energy through long-term contracts that are generally of three
to five years initial duration, with renewal or cancellation options for each   
party based on long-term notification. Most of these supply agreements do not   
require Eastman Company to purchase materials or energy if its operations are   

  50

DEFS14A
57th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 57th
reduced or idle. The cost of raw materials and energy is generally based on     
market price at the time of purchase, although Eastman Company uses derivative  
financial instruments to mitigate the impact of short-term market price         
fluctuations.                                                                   

     Eastman Company maintains multiple suppliers for most key raw materials and
energy and uses quality management principles, such as the establishment of     
long-term relationships with suppliers and ongoing performance assessment and   
benchmarking, as part of its supplier selection process. When appropriate,      
Eastman Company purchases raw materials from a single source supplier to        
maximize quality and cost improvements. Voridian is a single source supplier to 
Eastman Company for its acetic anhydride and acetic acid, is Eastman Company's  
purchasing agent for paraxylene, and also provides other raw materials and      
energy to Eastman Company, all as more fully described in "Relationship Between 
Voridian and Eastman Company After the Distribution." Eastman Company has also  
developed contingency plans that will minimize the impact of any supply         
disruptions. For example, it is likely that sufficient quantities of acetic acid
would be available for purchase in the open market even with a supply disruption
at Voridian.                                                                    

While temporary shortages of raw materials and energy may occasionally
occur, these items are generally sufficiently available to cover current and    
projected requirements. However, their continuing availability and price are    
subject to unscheduled plant interruptions occurring during periods of high     
demand, or due to domestic or world market and political conditions, as well as 
to the direct or indirect effect of government regulations. Operations or       
products may, at times, be adversely affected by legislation, shortages or other
events.                                                                         

SEASONALITY                                                                     

Although seasonality is not a significant factor for Eastman Company  
overall, demand in the CASPI segment is typically higher in the second and third
quarters due to increased use of coatings products in the building and          
construction industries and weaker during the winter months because of seasonal 
construction downturns.                                                         

ENVIRONMENTAL                                                                   

Eastman Company is subject to laws, regulations and legal requirements
relating to the use, storage, handling, generation, transportation, emission,   
discharge, disposal and remediation of, and exposure to, hazardous and          
non-hazardous substances and wastes in all of the countries in which it does    
business. These health, safety and environmental considerations are a priority  
in Eastman Company's planning for all existing and new products and processes.  
Eastman Company's board of directors reviews Eastman Company's policies and     
practices concerning health, safety and the environment, and its processes for  
complying with related laws and regulations, as well as monitors related        
matters.                                                                        

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

    Eastman Company has made significant capital expenditures and has incurred
other costs and expenses arising from its compliance with environmental laws and
regulations, cleanup initiatives and development of environmentally responsible 
products and expects that it will continue to make these capital expenditures   
and incur these costs and expenses in the future. Eastman Company estimates that
capital expenditures and related expenses for environmental control facilities  
for 2001 will be approximately $25 million to $30 million. However, there can be
no assurance that this estimate will prove accurate or that Eastman Company will
not incur costs materially in excess of this estimate. Additionally, there can  
be no assurance that changes in existing laws or regulations, or the discovery  
of additional                                                                   
  51

DEFS14A
58th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 58th
environmental liabilities associated with Eastman Company's current or          
historical operations, will not require Eastman Company to incur material costs 
or will not otherwise adversely affect Eastman Company's business, results of   
operations or competitive position.                                             

In addition to compliance and cleanup activities, Eastman Company is  
actively engaged in the development and enhancement of environmentally friendly 
products, such as specialty copolyesters, water based emulsions and dispersions,
powder coating resins and resins for use in high solids coatings. Eastman       
Company is an active participant in Responsible Care(R), a chemicals industry   
initiative that focuses on improving performance in areas of community awareness
and emergency response, pollution prevention, process safety, distribution,     
employee health and safety and product stewardship.                             

EMPLOYEES                                                                       

Upon completion of the Distribution, Eastman Company expects to employ
approximately 13,000 men and women worldwide. Approximately 3% of the United    
States labor force is expected to be represented by unions.                     

PROPERTIES                                                                      

Operations of Eastman Company and its subsidiaries are conducted at 40
manufacturing sites in 15 countries. Unless otherwise indicated, all of the     
properties are owned. The locations and general character of the major          
manufacturing facilities are:                                                   

                                                                [Download Table]

                                                                SEGMENT USING  
                                                                MANUFACTURING  
                                                                  FACILITY     
                                                              -----------------
LOCATION                                                      CASPI   PCI   SP 
--------                                                      -----   ---   ---
                                                                               
USA AND CANADA                                                                 
  Batesville, Arkansas......................................    x      x       
  Lynwood, California.......................................    x              
  Columbus, Georgia.........................................    x              
  Forest Park, Georgia......................................    x              
  Savannah, Georgia**.......................................    x              
  Carpentersville, Illinois.................................    x              
  South Holland, Illinois...................................    x              
  Jefferson, Pennsylvania...................................    x              
  Columbia, South Carolina*.................................                 x 
  Roebuck, South Carolina...................................    x              
  Kingsport, Tennessee......................................    x      x     x 
  La Vergne, Tennessee......................................    x              
  Ennis, Texas..............................................    x              
  Longview, Texas...........................................    x      x       
  Franklin, Virginia**......................................    x              
  Pleasant Prairie, Wisconsin...............................    x              
  Rexdale, Ontario, Canada..................................    x              
EUROPE                                                                         
  Kallo, Belgium............................................    x              
  Sokolov, Czech Republic...................................    x      x       
  Banbury, England..........................................    x              
  Bury, England**...........................................    x              
  Hartlepool, England.......................................                 x 
  Stonehouse, England**.....................................    x              
  Dusseldorf, Germany.......................................    x              
  Hamburg, Germany..........................................    x              
  Waterford, Ireland........................................    x              

  52

DEFS14A
59th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 59th
                                                                [Download Table]

                                                                SEGMENT USING  
                                                                MANUFACTURING  
                                                                  FACILITY     
                                                              -----------------
LOCATION                                                      CASPI   PCI   SP 
--------                                                      -----   ---   ---
                                                                               
  Cola' di Lazise, Italy....................................    x              
  Sant' Albano, Italy.......................................    x              
  Middelburg, Netherlands...................................    x              
  San Roque, Spain*.........................................           x     x 
  Molndal, Sweden...........................................    x              
  Llangefni, Wales..........................................           x       
ASIA PACIFIC                                                                   
  Funing, China.............................................    x              
  Hong Kong, China***.......................................           x       
  Nanping, China............................................    x              
  Tianjin, China............................................    x              
  Kuantan, Malaysia***......................................                 x 
  Jurong Island, Singapore***...............................           x       
  Jurong Town, Singapore***.................................    x              
LATIN AMERICA                                                                  
  Uruapan, Mexico...........................................    x              

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

 Eastman Company also owns a 50% interest in a manufacturing facility in
Nanjing, People's Republic of China. This joint venture produces hydrocarbon    
resins for the CASPI segment. Eastman Company has distribution facilities at all
of its plant sites, as well as at other locations in the United States and      
foreign countries.                                                              

LEGAL PROCEEDINGS                                                               

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

  53

DEFS14A
60th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 60th
EASTMAN COMPANY 

SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data of Eastman Company, as
of December 31, 2000 and 1999 and for the three years ended December 31, 2000   
have been derived from the consolidated financial statements of Eastman Company,
which have been audited by PricewaterhouseCoopers LLP, independent accountants, 
and are included elsewhere in this proxy statement. The selected consolidated   
financial data of Eastman Company as of December 31, 1998, 1997 and 1996, for   
the two years ended December 31, 1997 and as of and for the six months ended    
June 30, 2001 and 2000 are derived from the unaudited consolidated financial    
statements of Eastman Company, which, in the opinion of management, include all 
adjustments necessary for a fair presentation of such data in conformity with   
accounting principles generally accepted in the United States of America.       
Operating results for the six months ended June 30, 2001 are not necessarily    
indicative of the results that may be achieved for the year ending December 31, 
2001.                                                                           

   Eastman Company was formed in August 2001 for the purpose of taking title
to the stock of Eastman Chemical's subsidiaries and the assets of Eastman       
Chemical relating solely or primarily to the Eastman Company Business. Eastman  
Company does not have an operating history as an independent company. The       
consolidated financial statements for Eastman Company contained in this proxy   
statement reflect periods during which neither Eastman Company nor any of its   
subsidiaries operated as an independent company, and specified assumptions were 
made in preparing these financial statements.                                   

     The financial information included below reflects the historical results of
operations and cash flows of Eastman Company with adjustments made for corporate
services provided to Eastman Company by Eastman Chemical and interest expense   
based on the percentage of Eastman Company assets to total Eastman Chemical     
assets. Operating costs and expenses reflect direct charges of the Eastman      
Company Business, together with specified allocations by Eastman Chemical for   
corporate services, communication and other shared services that have been      
charged to Eastman Company based on usage or other methodologies appropriate for
those expenses. In the opinion of management, these allocations have been made  
on a reasonable basis and approximate all material costs Eastman Company would  
have incurred had it been operating on a stand-alone basis.                     

   These historical data should be read in conjunction with "Eastman Company
Management's Discussion and Analysis of Financial Condition and Results of      
Operations," "Eastman Company Unaudited Consolidated Pro Forma Financial        
Information" and Eastman Company's consolidated financial statements and the    
related notes, which are included elsewhere in this proxy statement.            

  54

DEFS14A
61st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 61st
EASTMAN COMPANY 

SELECTED CONSOLIDATED FINANCIAL DATA

                                                        [Enlarge/Download Table]

                                                                                            SIX MONTHS ENDED  
                                                       YEAR ENDED DECEMBER 31,                  JUNE 30,      
                                              ------------------------------------------   ------------------ 
                                               2000     1999     1998     1997     1996     2001        2000  
                                              ------   ------   ------   ------   ------   ------      ------ 
                                                          (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)             
                                                                                                              
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)                                                                    
  DATA:                                                                                                       
Sales........................................ $3,665   $3,187   $2,987   $2,618   $2,519   $1,919      $1,733 
Earnings (loss) before taxes.................    253      112      271      362      402      (77)        124 
Net earnings (loss)..........................    162       70      180      233      251      (41)         83 
UNAUDITED PRO FORMA EARNINGS (LOSS) PER                                                                       
  SHARE:                                                                                                      
Basic(1)..................................... $ 2.11   $ 0.91   $ 2.35   $ 3.04   $ 3.27   $(0.53)     $ 1.08 
Diluted(1)...................................   2.10     0.91     2.33     3.01     3.25    (0.53)       1.07 
Shares used in calculating unaudited pro                                                                      
  forma earnings (loss) per share:                                                                            
  Basic......................................   76.7     76.7     76.7     76.7     76.7     76.7        76.7 
  Diluted....................................   77.3     77.3     77.3     77.3     77.3     76.7        77.3 
CONSOLIDATED BALANCE SHEET DATA:                                                                              
Current assets............................... $  863   $  740   $  777   $  814   $  745   $1,008      $  788 
Current liabilities..........................    693      579      639      549      496      552         581 
Working capital..............................    170      161      138      265      249      456         207 
Property, plant and equipment, net...........  2,609    2,527    2,532    2,469    2,228    2,605       2,409 
Total assets.................................  4,415    3,952    3,565    3,531    3,216    4,580       3,930 
OTHER DATA:                                                                                                   
EBITDA excluding nonrecurring                                                                                 
  charges(2)(3).............................. $  623   $  524   $  584   $  668   $  653   $  223      $  325 
EBIT excluding nonrecurring charges(2)(3)....    335      272      356      445      441       73         183 
Cash flows provided by (used in) operating                                                                    
  activities.................................    462      467      578      446      432      (22)        232 
Cash flows used in investing activities......   (390)    (588)    (385)    (481)    (411)    (344)        (77)
Cash flows provided by (used in) financing                                                                    
  activities.................................    (72)     121     (193)      35      (21)     366        (155)
Capital expenditures.........................    156      191      358      501      428       80          55 

---------------                                                                 

(1) Shares used in calculating basic pro forma earnings per share is based on   
the number of shares expected to be outstanding at the date of the      
Distribution (assumed to be equal to the 76.7 million shares of Eastman 
Chemical common stock outstanding on June 30, 2001). Shares used in     
calculating diluted earnings per share is based on the number of shares 
  expected to be issued in the Distribution and the dilutive effect of stock
   options and other stock-based instruments of Eastman Company expected to be
issued in the Distribution.                                             
(2) Nonrecurring charges are discussed in Eastman Company Summary Financial Data
 included elsewhere in this proxy statement. Nonrecurring charges for 1997
include a pre-tax charge of $62 million for the partial                 
settlement/curtailment of pension and other postemployment benefit      
    liabilities. This charge resulted from the retirement of approximately 1,700
  employees, a majority of whom chose to take their retirement benefits as a
lump sum. Eastman Company's portion of this charge was approximately $32
million.                                                                
(3) EBITDA excluding nonrecurring charges and EBIT excluding nonrecurring       
charges are discussed in Eastman Company Summary Financial Data included
elsewhere in this proxy statement.                                      

  55

DEFS14A
62nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 62nd
EASTMAN COMPANY 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
CONDITION AND RESULTS OF OPERATIONS 

SEPARATION FROM EASTMAN CHEMICAL                                                

     Eastman Company was incorporated under the laws of the State of Delaware in
August 2001 as a wholly-owned subsidiary of Eastman Chemical. Eastman Company   
will have no material assets or activities until the contribution to it by      
Eastman Chemical of the businesses comprising the coatings, adhesives, specialty
polymers and inks segment, the performance chemicals and intermediates segment  
and the specialty plastics segment of Eastman Chemical, as well as specified    
Eastman Chemical strategic investments, which is expected to occur immediately  
prior to the Distribution. Eastman Chemical currently conducts these businesses 
through various operating groups and subsidiaries. After the Distribution,      
Eastman Company will be an independent public company and Voridian will have no 
continuing stock ownership interest in Eastman Company.                         

In conjunction with the Distribution, Eastman Company will enter into 
various agreements with Eastman Chemical that address the allocation of assets  
and liabilities and that define Eastman Company's relationship with Voridian    
after the Distribution, including the distribution agreement, the tax matters   
agreement, the employee matters agreement and certain product supply, operating 
and service agreements. For further information on these arrangements, see      
"Relationship Between Voridian and Eastman Company After the Distribution" and  
"Eastman Company Unaudited Consolidated Pro Forma Financial Information."       

MATTERS AFFECTING ANALYSIS                                                      

     Eastman Company's financial statements have been prepared on the historical
cost basis in accordance with accounting principles generally accepted in the   
United States of America, and reflect the historical financial position, results
of operations and cash flows of the businesses to be transferred to Eastman     
Company from Eastman Chemical in connection with the Distribution. The financial
information included in this proxy statement, however, is not necessarily       
indicative of what Eastman Company's financial position, results of operations  
or cash flows would have been had it operated as an independent company during  
the periods presented, nor is it necessarily indicative of its future           
performance as an independent company.                                          

Eastman Company's sales revenues and costs of goods sold reflect      
corresponding increases from historical Eastman Chemical amounts as a result of 
the inclusion of sales to Eastman Chemical that otherwise would have been       
eliminated as intercompany transactions in Eastman Chemical's historical        
financial statements. Because both of these amounts are recorded at cost, there 
is no impact on earnings. Eastman Company has been allocated specified Eastman  
Chemical corporate expenses using various percentages based on actual measurable
results of operations and budgeted results of operations. These measurement     
bases include, but are not limited to, the percentage of Eastman Company sales  
revenue, sales volumes, employee hours incurred, and freight and duty costs to  
the total Eastman Chemical costs of these respective items. Eastman Company     
believes that these allocations have been made on a reasonable basis. Eastman   
Company believes that all other costs allocated to it are a reasonable          
representation of the costs that Eastman Company would have incurred if it had  
performed these functions as a stand-alone company.                             

   In this Eastman Company Management's Discussion and Analysis of Financial
Condition and Results of Operations, "existing businesses" refers to businesses 
whose results of operations are included for the entirety of both periods being 
compared. For a summary of the impact of acquisitions in the respective periods,
please refer to the table under the caption "-- Effect of Acquisitions on Sales 
Revenue and Volume." The following discussion should be read in conjunction with
"Eastman Company Selected Consolidated Financial Data" and Eastman Company's    
consolidated financial statements and the related notes included elsewhere in   
this proxy statement.                                                           
  56

DEFS14A
63rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 63rd
                                                        [Enlarge/Download Table]

                                                         SIX MONTHS                               
                                                            ENDED                                 
                                                          JUNE 30,       YEAR ENDED DECEMBER 31,  
                                                       ---------------   ------------------------ 
                                                        2001     2000     2000     1999     1998  
                                                       ------   ------   ------   ------   ------ 
                                                                     (IN MILLIONS)                
                                                                                                  
CONSOLIDATED STATEMENTS OF EARNINGS DATA                                                          
COATINGS, ADHESIVES, SPECIALTY POLYMERS, AND INKS:                                                
Sales................................................. $  748   $  502   $1,219   $  876   $  688 
Operating earnings including nonrecurring charges.....     --       77      123      121      147 
Operating earnings excluding nonrecurring charges.....     25       77      132      154      166 
Capital expenditures..................................     23       17       63       42       55 
EBITDA excluding nonrecurring charges(1)..............     84      129      241      243      240 
EBIT excluding nonrecurring charges(1)................     25       77      132      154      166 
Pro forma sales.......................................    748      N/A    1,219      N/A      N/A 
Pro forma EBITDA excluding nonrecurring charges(1)....     81      N/A      238      N/A      N/A 
Pro forma EBIT excluding nonrecurring charges(1)......     22      N/A      129      N/A      N/A 
PERFORMANCE CHEMICALS AND INTERMEDIATES:                                                          
Sales................................................. $  810   $  855   $1,708   $1,616   $1,644 
Operating earnings (loss) including nonrecurring                                                  
  charges.............................................    (55)      33       87       (2)      88 
Operating earnings excluding nonrecurring charges.....      8       42      100       32      113 
Capital expenditures..................................     32       25       55      104      217 
EBITDA excluding nonrecurring charges(1)..............     59       92      200      123      199 
EBIT excluding nonrecurring charges(1)................      8       42      100       32      113 
Pro forma sales.......................................    797      N/A    1,689      N/A      N/A 
Pro forma EBITDA excluding nonrecurring charges(1)....     66      N/A      214      N/A      N/A 
Pro forma EBIT excluding nonrecurring charges(1)......     15      N/A      114      N/A      N/A 
SPECIALTY PLASTICS:                                                                               
Sales................................................. $  361   $  376   $  738   $  695   $  655 
Operating earnings including nonrecurring charges.....     40       64      103       80       77 
Operating earnings excluding nonrecurring charges.....     40       64      103       86       77 
Capital expenditures..................................     25       13       38       45       86 
EBITDA excluding nonrecurring charges(1)..............     80      104      182      158      145 
EBIT excluding nonrecurring charges(1)................     40       64      103       86       77 
Pro forma sales.......................................    364      N/A      746      N/A      N/A 
Pro forma EBITDA excluding nonrecurring charges(1)....     79      N/A      184      N/A      N/A 
Pro forma EBIT excluding nonrecurring charges(1)......     39      N/A      105      N/A      N/A 
TOTAL:                                                                                            
Sales................................................. $1,919   $1,733   $3,665   $3,187   $2,987 
Operating earnings (loss) including nonrecurring                                                  
  charges.............................................    (15)     174      313      199      312 
Operating earnings excluding nonrecurring charges.....     73      183      335      272      356 
Capital expenditures..................................     80       55      156      191      358 
Cash provided by operating activities.................    (22)     232      462      467      578 
Cash used in investing activities.....................   (344)     (77)    (390)    (588)    (385)
Cash provided by financing activities.................    366     (155)     (72)     121     (193)
EBITDA excluding nonrecurring charges(1)..............    223      325      623      524      584 
EBIT excluding nonrecurring charges(1)................     73      183      335      272      356 
Pro forma sales.......................................  1,909      N/A    3,654      N/A      N/A 
Pro forma EBITDA excluding nonrecurring charges(1)....    226      N/A      636      N/A      N/A 
Pro forma EBIT excluding nonrecurring charges(1)......     76      N/A      348      N/A      N/A 

---------------                                                                 

(1) EBITDA excluding nonrecurring charges and EBIT excluding nonrecurring       
  charges are discussed in "Eastman Company Summary Financial Data" included
elsewhere in this proxy statement.                                      

  57

DEFS14A
64th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 64th
SUMMARY                                                                         

The chemicals industry has been challenged in recent years by global  
macroeconomic conditions including slowing product demand, pressure on selling  
prices, and higher, more volatile raw materials and energy costs. Eastman       
Company's operating earnings have been negatively impacted by these factors as  
well as declining capacity utilizations resulting from incremental capacity     
additions and lower global demand for its products. As demand for its products  
increases, Eastman Company expects capacity utilization, and therefore earnings,
to improve.                                                                     

     Eastman Company's sales revenue and sales volume growth in recent years has
been driven primarily by strategic acquisitions in the CASPI segment. These     
acquisitions mitigated the impact of weaker demand in other product lines.      
Acquisitions affecting the comparison of periods presented include the May 2001 
Hercules acquisition, the July 2000 acquisition of McWhorter, the February 2000 
acquisition of Sokolov, the June 1999 acquisition of Lawter and the 1998        
acquisition of Jager. Other initiatives from recent years that are expected to  
provide opportunities for future growth or efficiencies include the launch of   
ShipChem and the implementation of Eastman Company's enterprise resource        
planning software system.                                                       

SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000 

     Sales revenue for Eastman Company increased 11% for the first six months of
2001 over the first six months of 2000 primarily due to increased sales volume  
attributable to acquisitions in the CASPI segment. Sales volume increased 7%    
including acquisitions but decreased 7% excluding acquisitions. The decline in  
the value of the euro also negatively impacted sales revenue for the first six  
months of 2001.                                                                 

Although sales volumes were 7% higher in the first six months of 2001,
attributable to acquisitions, operating results were negatively impacted by     
lower capacity utilization due to lower sales volumes from existing businesses  
and higher raw material and energy costs of approximately $60 million, net of   
the impact of Eastman Company's feedstock and energy cost-hedging program.      
Eastman Company recorded nonrecurring pre-tax charges totaling approximately $94
million in the second quarter of 2001, which primarily related to the           
restructuring of the coatings operations, the write-off of in-process research  
and development related to the Hercules acquisition, and the restructuring of   
the custom synthesis and photographic chemicals product lines, which were       
historically managed as part of Eastman Chemical's overall fine chemicals       
product line.                                                                   

     Higher selling and general administrative expenses for the first six months
of 2001 reflected additional costs attributable to acquired businesses and costs
related to ShipChem's efforts to build its customer service capability. Eastman 
Company also incurred pre-tax charges totaling approximately $8 million for     
costs associated with restructuring of the coatings operations and costs related
to the Distribution.                                                            

Research and development costs increased but remained constant as a   
percentage of sales. Eastman Company recorded a nonrecurring pre-tax charge of  
approximately $8 million in the first six months of 2001 for the write-off of   
acquired in-process research and development related to the Hercules            
acquisition.                                                                    

Higher net interest expense reflected higher average commercial paper 
borrowings by Eastman Chemical used to finance its recent acquisitions.         

2000 COMPARED WITH 1999                                                     

In 2000, sales revenue increased $478 million over 1999 and operating 
earnings increased $114 million over 1999. Sales revenue grew primarily in the  
coatings, adhesives, specialty polymers and inks product lines attributable to  
acquisitions, which contributed approximately $360 million of the increase in   
sales revenue in 2000. Foreign currency exchange had a negative impact on sales 
revenue in 2000. Although the strength of the U.S. dollar against the euro      
resulted in decreased revenue of $62 million in Europe, Middle East and Africa, 
this impact was partially offset by Eastman Company's currency-hedging program, 
which had a positive impact on earnings for 2000 of approximately $20 million.  

  58

DEFS14A
65th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 65th
     Sales volume increased 10% in 2000, including volume related to the Lawter,
Sokolov and McWhorter acquisitions, but declined 1% excluding these             
acquisitions. The decline in Eastman Company's existing businesses reflected    
slowing economic demand during the last half of 2000 and Eastman Company's      
decision to discontinue sales of some products.                                 

Operating earnings were 57% higher in 2000 than 1999 due primarily to 
higher selling prices for performance chemicals and an ongoing emphasis on lower
cost structure. Costs for major raw materials and energy in 2000 increased      
approximately $160 million over 1999 levels, net of Eastman Company's feedstock 
and energy cost-hedging program. Operating earnings were positively affected by 
decreased pension expense of approximately $20 million in 2000 compared to 1999 
that resulted from the June 1999 amendments to Eastman Chemical's defined       
benefit pension plan. Employee separations that occurred late in 1999 and       
additional non-labor cost reductions implemented in 2000 resulted in lower cost 
structure in 2000. Certain nonrecurring items described below resulted in a $50 
million improvement in operating earnings for 2000 over 1999.                   

   Operating earnings for 2000 included pre-tax charges of approximately $13
million related to the shutdown of Eastman Company's facilities in Chocolate    
Bayou, Texas and Rochester, New York, and $9 million for the write-off of       
in-process research and development related to the McWhorter acquisition.       
Operating earnings for 1999 included net pre-tax charges totaling $72 million   
related to employee separations and pension settlement, write-off of in-process 
research and development related to the Lawter acquisition, phase-out of        
operations in Chocolate Bayou, Texas and Rochester, New York, write-off of a    
discontinued capital project, an increase in the reserve for sorbates civil     
litigation, write-off of purchased technology that was determined to have no    
future value and other items, all of which were partially offset by a           
reimbursement of previously expensed pension costs related to Holston Defense.  

Selling and general administrative expenses were unchanged as benefits
derived from a lower cost structure offset the addition of costs for acquired   
businesses and costs related to ShipChem.                                       

     Research and development costs were significantly lower in 2000 compared to
1999 due to Eastman Company's lower cost structure, although costs from acquired
businesses partially offset this decrease. A nonrecurring pre-tax charge of     
approximately $9 million for the write-off of in-process research and           
development related to the McWhorter acquisition was recorded in 2000.          
Similarly, in 1999, a pre-tax charge of $25 million was recorded for the        
write-off of in-process research and development related to the Lawter          
acquisition.                                                                    

  Higher net interest expense in 2000 compared to 1999 reflected decreased
capitalized interest resulting from the completion of certain capital expansion 
projects during 1999, higher average commercial paper borrowings by Eastman     
Company due to acquisitions and higher interest rates on commercial paper       
borrowings.                                                                     

 In 2000, a pre-tax gain of $38 million resulted from the initial public
offering of common stock of Genencor. Other charges, net, included litigation   
costs related to sorbates civil litigation and increased fees related to        
securitized receivables, offset partially by higher income from equity          
investments.                                                                    

1999 COMPARED WITH 1998                                                     

   Eastman Company recorded an increase in sales revenue of 7% for 1999 over
1998. Although 1999 sales volume was 12% higher than 1998 levels, lower selling 
prices, which had a 3% negative impact on sales revenue, and higher raw material
costs in 1999 of approximately $20 million, net of Eastman Company's feedstock  
and energy cost-hedging program, eroded margins for many products. Earnings were
36% lower in 1999 than in 1998, reflecting challenging market conditions and    
nonrecurring charges totalling $72 million incurred in 1999.                    

    Eastman Company implemented a program to decrease labor costs which led to
employee separations in late 1999 and which resulted in a pre-tax net charge of 
$29 million. Acquired in-process research and development related to the Lawter 
acquisition resulted in a pre-tax write-off of $25 million. A decision to       
discontinue production at Eastman Company's sorbates facilities in Chocolate    
Bayou, Texas resulted in a                                                      
  59

DEFS14A
66th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 66th
pre-tax charge of approximately $17 million. The phase-out of operations in     
Rochester, New York and the write-off of construction in progress related to an 
EpB plant project resulted in pre-tax charges totaling approximately $18        
million. Additional items netted to a pre-tax charge of approximately $4        
million. These nonrecurring charges were partially offset by a pre-tax gain of  
approximately $20 million that resulted from the reimbursement of previously    
expensed pension costs related to Holston Defense, a subsidiary which operated  
under a series of contracts with the Department of the Army to manage the       
government-owned Holston Army Ammunition Plant in Kingsport, Tennessee from 1949
until expiration of the contract at the end of 1998.                            

Operating earnings for 1999 were also negatively impacted by pre-tax  
charges totaling approximately $14 million related to the write-up of Lawter's  
inventory required by purchase accounting, a decrement recognized using the     
last-in, first-out inventory valuation method; loss on sales of excess spare    
parts; and two months of unplanned downtime at Eastman Company's Malaysia       
facility. Amendments to Eastman Chemical's defined benefit pension plan resulted
in a pre-tax decrease in pension expense for 1999 of approximately $26 million  
for Eastman Company. As a result of the adoption of AICPA Statement of Position 
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for  
Internal Use" ("SOP 98-1"), Eastman Company capitalized $18 million, of which $2
million was amortized, for certain internal-use software costs which otherwise  
would have been expensed.                                                       

Net earnings for 1999 included the effect of a pre-tax gain of        
approximately $8 million related to the sale of certain assets.                 

  Results for 1998 were negatively affected by several nonrecurring items,
including pre-tax charges of approximately $33 million related to certain       
underperforming assets and discontinued capital projects, an $11 million fine   
for violation of the Sherman Act, and pre-tax charges of approximately $4       
million related to a power outage at the Kingsport, Tennessee, manufacturing    
site. A lower tax rate resulting from a tax settlement increased net earnings by
$8 million.                                                                     

SUMMARY BY OPERATING SEGMENT                                                    

COATINGS, ADHESIVES, SPECIALTY POLYMERS AND INKS                            

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

    Sales revenue for the CASPI segment increased 49% for the first six months
of 2001. Sales revenue increased 46% due to higher sales volume resulting from  
acquisitions and 3% due to higher selling prices. For the first six months of   
2001, the Hercules, McWhorter and Sokolov acquisitions contributed approximately
$274 million to the increase in sales revenues. Excluding acquisitions, sales   
volume declined 9% and sales revenue declined 4% for the first six months of    
2001 due to weaker demand. Foreign currency exchange rates had a slightly       
negative effect on sales revenue for the first six months of 2001.              

  Despite higher sales volume from acquisitions and higher selling prices,
operating results for the first six months of 2001 declined significantly due to
lower capacity utilization from the existing businesses, higher costs for raw   
materials and energy and nonrecurring pre-tax charges of approximately $30      
million. The nonrecurring pre-tax charges primarily related to the restructuring
of the coatings operations and the write-off of in-process research and         
development related to the Hercules acquisition.                                

2000 COMPARED WITH 1999                                               

  Sales revenue for the CASPI segment was 39% higher in 2000 compared with
1999, reflecting higher sales volumes attributable to the Lawter, Sokolov and   
McWhorter acquisitions and overall higher selling prices. The increase in sales 
volume accounted for 38% of the increase in sales revenue and higher selling    
prices had a positive impact of 6% on sales revenue. The increase in selling    
prices was driven by increased raw materials costs. Excluding volume            
attributable to acquisitions, sales volumes in 2000 were level with 1999.       
Foreign currency exchange had a slightly negative impact on sales revenue in    
2000.                                                                           

    Raw materials cost increases in 2000 exceeded selling price increases, and
margins eroded for many products. Lower cost structure resulting from employee  
separations that occurred late in 1999 and non-                                 
  60

DEFS14A
67th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 67th
labor cost reductions implemented in 2000 did not offset the reduction in       
margins. Results for 2000 and 1999 also were impacted by several nonrecurring   
items, including a pre-tax charge of $9 million in 2000 for the write-off of    
in-process research and development related to the McWhorter acquisition. In    
1999, Eastman Company recorded pre-tax charges totaling $30 million primarily   
related to employee separations and pension settlement and the write-off of     
in-process research and development related to the Lawter acquisition.          

     Operating earnings were positively affected by decreased pension expense in
2000 and 1999 that resulted from the mid-1999 amendments to Eastman Chemical's  
defined benefit pension plan.                                                   

1999 COMPARED WITH 1998                                               

   Sales revenue for 1999 for the CASPI segment was 27% higher than in 1998.
Sales revenue increased 30% due to increased sales volume, mainly attributable  
to the Lawter acquisition, partially offset 2% by lower selling prices and the  
negative impact of foreign currency exchange rates. Operating earnings declined 
18% in 1999 as a result of lower selling prices and higher raw material costs,  
particularly for propane.                                                       

     In addition, operating earnings for 1999 were adversely impacted by pre-tax
charges of $25 million for the write-off of in-process research and development 
related to the Lawter acquisition and $8 million related to employee separations
and pension settlement, which were partially offset by a $3 million adjustment  
to a reserve for shutdown costs. Results for 1998 reflected a nonrecurring      
pre-tax charge of approximately $19 million related to certain underperforming  
assets and discontinued capital projects, and a pre-tax charge of approximately 
$1 million related to a power outage at the Kingsport, Tennessee, manufacturing 
site.                                                                           

   Selling and general administrative expenses increased in 1999 compared to
1998 as a result of increased costs related to the Lawter and Jager acquisitions
and expenses related to the development of e-businesses.                        

Net interest expense increased in 1999, reflecting increased debt as a
result of the Lawter acquisition.                                               

     Decreased pension expense resulting from the mid 1999 amendments to Eastman
Chemical's defined benefit pension plan had a positive impact on earnings in    
1999.                                                                           

PERFORMANCE CHEMICALS AND INTERMEDIATES                                     

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

    Although increased selling prices in the PCI segment had a positive impact
on sales revenue of 3% for the first six months of 2001, sales revenue declined 
5%. Sales revenue decreased 5% due to the negative impact of product mix and 3% 
due to lower sales volume attributed to weaker demand.                          

Nonrecurring pre-tax charges of approximately $64 million, primarily  
resulting from the restructuring of the custom synthesis and photographic       
chemicals product lines, which were historically managed as part of Eastman     
Chemical's overall fine chemicals product line, sharply impacted results for the
first six months of 2001. Higher selling prices did not offset the negative     
impact of lower capacity utilization due to lower sales volume, higher costs for
raw materials and energy, and the negative impact of product mix. Based upon    
indications from the largest customer of the PCI segment that it does not intend
to renew its contract for a custom synthesis product beyond 2002, Eastman       
Company does not expect to pursue that product in the future. Sales of that     
product contributed slightly less than 10% of Eastman Company's operating       
earnings for 2000.                                                              

2000 COMPARED WITH 1999                                               

     Sales revenue for the PCI segment was 6% higher in 2000 than in 1999 due to
higher selling prices which had a positive impact on sales revenue of 9%. The   
increase in selling prices was driven by higher raw materials costs. Sales      
revenue for fine chemicals declined in 2000, partially due to lower volume      

  61

DEFS14A
68th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 68th
associated with discontinued products that were part of the fine chemicals      
product line. Foreign currency exchange had a slightly negative impact on       
revenues in 2000.                                                               

     Lower cost structure in 2000, in part due to dependence on coal rather than
oil or natural gas for acetyl-based products, and higher selling prices,        
resulted in substantially increased operating earnings.                         

   Operating earnings in 2000 were negatively impacted by pre-tax charges of
approximately $13 million related to the shutdown of facilities in Chocolate    
Bayou, Texas and Rochester, New York, and other items. The operating loss for   
1999 included net pre-tax charges totaling $32 million related to exiting       
sorbates production at Chocolate Bayou, Texas; employee separations and pension 
settlement; phase-out of operations in Rochester, New York; the write-off of    
construction in progress related to an EpB plant project; and an adjustment to  
the reserve for sorbates civil litigation; partially offset by a gain resulting 
from the reimbursement of previously expensed pension costs related to Holston  
Defense, and other items.                                                       

     Operating earnings were positively affected by decreased pension expense in
2000 and 1999 that resulted from the mid-1999 amendments to Eastman Chemical's  
defined benefit pension plan.                                                   

1999 COMPARED WITH 1998                                           

  Sales revenue for the PCI segment in 1999 decreased 2% from 1998, due to
lower selling prices and product mix which each negatively impacted sales       
revenue by 3%. Increased sales volume had a positive impact on sales revenue of 
4%.                                                                             

   The operating loss in 1999 resulted from lower selling prices, higher raw
materials costs, particularly for propane, and several nonrecurring items       
totaling $32 million, including a pre-tax charge of $17 million related to      
exiting sorbates production at Chocolate Bayou, Texas, $15 million related to   
employee separations and pension settlement, $9 million related to phase-out of 
operations in Rochester, New York, $9 million for the write-off of construction 
in progress related to an EpB plant project and a $5 million adjustment to the  
reserve for sorbates civil litigation, which were partially offset by a pre-tax 
gain of approximately $20 million for the reimbursement of previously expensed  
pension costs related to Holston Defense, and other items. As a result of the   
adoption of SOP 98-1 in 1999, certain internal-use software costs were          
capitalized which otherwise would have been expensed.                           

Operating earnings for 1998 were negatively impacted by nonrecurring  
charges totaling $27 million. Nonrecurring charges included pre-tax charges of  
$14 million related to certain underperforming assets and discontinued capital  
projects, an $11 million charge related to a fine for violation of the Sherman  
Act and a pre-tax charge of $2 million related to a power outage at the         
Kingsport, Tennessee, manufacturing site.                                       

     Decreased pension expense in 1999 resulting from the mid-1999 amendments to
Eastman Chemical's defined benefit pension plan had a positive impact on        
earnings.                                                                       

SPECIALTY PLASTICS                                                          

SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30,
2000.                                                                           

  Sales revenue declined 4% for the SP segment for the first six months of
2001 with 3% of the decrease due to reduced sales volume. The decrease in sales 
volume was driven mainly by lower demand for the cellulosics product line.      

 Although operating earnings remained strong for the copolyester product
lines such as Spectar copolyester, results for the cellulosics product line     
declined as capacity utilization decreased due to weaker demand. Higher costs   
for raw materials and energy negatively impacted operating earnings.            

2000 COMPARED WITH 1999                                               

  Sales revenue for the SP segment was 6% higher in 2000 than 1999. Higher
sales volume had a positive impact of 6% on sales revenue in 2000, slightly     
offset by the negative effect of foreign currency exchange.                     

  62

DEFS14A
69th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 69th
Lower cost structure resulted in increased operating earnings for 2000
compared to 1999. Operating earnings for 1999 included pre-tax charges totaling 
$10 million related to employee separations and pension settlement, and the     
write-off of purchased technology that was determined to have no future value.  

     Operating earnings were positively affected by decreased pension expense in
2000 and 1999 resulting from the mid-1999 amendments to Eastman Chemical's      
defined benefit pension plan.                                                   

1999 COMPARED WITH 1998                                               

 Sales revenue for specialty plastics increased 6% in 1999 mainly due to
significantly higher sales volume, primarily for copolyester products, such as  
Spectar copolymer. Increased sales volume had a positive impact on sales revenue
of 12% and lower selling prices had a negative impact on sales revenue of 5%.   

Operating earnings increased 4% mainly due to the increase in sales   
volumes. Higher raw material costs, particularly for paraxylene and ethylene    
glycol, had a negative impact on operating earnings in 1999. Several            
nonrecurring items totaling $10 million also negatively impacted operating      
earnings in 1999. These included a pre-tax charge of $6 million related to      
employee separations and pension settlement and a pre-tax charge of $4 million  
related to write-off of purchased technology that was determined to have no     
future value. As a result of the adoption of SOP 98-1 in 1999, certain          
internal-use software costs were capitalized which otherwise would have been    
expensed.                                                                       

  Operating earnings for 1998 included a nonrecurring charge of $1 million
related to a power outage at the Kingsport, Tennessee, manufacturing site.      

     Decreased pension expense in 1999 resulting from the mid-1999 amendments to
Eastman Chemical's defined benefit pension plan had a positive impact on        
earnings.                                                                       

EFFECT OF ACQUISITIONS ON SALES REVENUE AND VOLUME                    

     The following table presents segment information on growth in sales revenue
and volume for Eastman Company's existing businesses and for Eastman Company's  
existing businesses with acquisitions:                                          

                                                        [Enlarge/Download Table]

                                                            % GROWTH (DECLINE) IN      % GROWTH (DECLINE) IN  
                                                                SALES REVENUE              SALES VOLUME       
                                                          -------------------------  -------------------------
                                                              WITH        EXISTING       WITH        EXISTING 
                                                          ACQUISITIONS   BUSINESSES  ACQUISITIONS   BUSINESSES
                                                          ------------   ----------  ------------   ----------
                                                                                                              
        SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX                                                      
        MONTHS ENDED JUNE 30, 2000                                                                            
Coatings, Adhesives, Specialty Polymers and Inks........       49            (4)          44            (9)   
Performance Chemicals and Intermediates.................      (5)            (6)         (6)            (7)   
Specialty Plastics......................................      N/A            (4)         N/A            (2)   
         Total..........................................       11            (5)           7            (7)   
         2000 COMPARED WITH 1999                                                                              
Coatings, Adhesives, Specialty Polymers and Inks........       39              1          37            (2)   
Performance Chemicals and Intermediates.................        6              3          --            (3)   
Specialty Plastics......................................      N/A              6         N/A              6   
         Total..........................................       15              3          10            (1)   
         1999 COMPARED WITH 1998                                                                              
Coatings, Adhesives, Specialty Polymers and Inks........       27              5          25              7   
Performance Chemicals and Intermediates.................      N/A            (2)         N/A              8   
Specialty Plastics......................................      N/A              6         N/A             15   
         Total..........................................        7              2          12              9   

  63

DEFS14A
70th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 70th
SUMMARY BY CUSTOMER LOCATION                                                    

SALES BY REGION                                                               

                                                        [Enlarge/Download Table]

                                                               SIX MONTHS                              
                                                                  ENDED               YEAR ENDED       
                                                                JUNE 30,             DECEMBER 31,      
                                                             ---------------   ------------------------
                                                              2001     2000     2000     1999     1998 
                                                             ------   ------   ------   ------   ------
                                                                           (IN MILLIONS)               
                                                                                                       
United States and Canada.................................... $1,363   $1,229   $2,600   $2,317   $2,309
Europe, Middle East and Africa..............................    315      254      552      415      336
Asia Pacific................................................    155      169      347      308      217
Latin America...............................................     86       81      166      147      125

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

In the United States and Canada, sales revenue was $1.4 billion in the
first six months of 2001, up 11% from sales of $1.2 billion in the first six    
months of 2000. Higher sales volume had a positive impact on sales revenue of   
9%. The increase in sales volume was primarily due to recent acquisitions which 
contributed $220 million to the increase in sales revenue. Sales volume declined
for Eastman Company's existing businesses in North America. Results for the     
first six months of 2001 were also positively impacted 4% by higher selling     
prices.                                                                         

   For the first six months of 2001, sales revenue outside the United States
and Canada was $556 million, up 11% from sales of $504 million for the first six
months of 2000, and were 29% of total sales in both the first six months of 2001
and 2000. Sales revenue increased $61 million in Europe, the Middle East and    
Africa in the first six months of 2001, reflecting increased sales volume       
attributable to acquisitions, which contributed $59 million to the increase in  
revenue. For the first six months of 2001, sales revenue declined $14 million in
Asia Pacific primarily due to lower sales volume which accounted for $5 million 
of the decrease in sales revenue and price and exchange, which also had a       
negative impact on sales revenue of $5 million. Sales revenue in Latin America  
increased approximately $10 million primarily due to increased sales volumes    
which had a positive impact on sales revenue of $5 million and a favorable      
impact from product mix of $3 million.                                          

2000 COMPARED WITH 1999                                               

     Sales revenue in the United States and Canada for 2000 was $2.6 billion, up
13% from 1999 sales revenue of $2.3 billion. Sales revenue increased 7% due to  
higher selling prices and 6% due to higher sales volumes resulting from         
acquisitions.                                                                   

Sales revenue outside the United States and Canada in 2000 was $1.1   
billion, up 22% from 1999 sales revenue of $0.9 billion. In Europe, Middle East 
and Africa sales revenue increased significantly due to increased sales volumes 
resulting from acquisitions which had a positive impact on sales revenue of $168
million. Increased sales volumes for the PCI segment contributed $42 million to 
the increase in sales volume. Price and exchange had a negative impact on sales 
revenue in Europe, Middle East and Africa of $30 million. Sales revenue         
increased in Asia Pacific primarily due to higher sales volume resulting from   
acquisitions which contributed $28 million to the increase in sales revenue and 
higher selling prices which had a positive impact of $14 million on sales       
revenue. Sales revenue increased in Latin America mainly due to higher selling  
prices, which had a positive impact on sales revenue of $14 million, and higher 
sales volume, which positively impacted sales revenue by $8 million.            

1999 COMPARED WITH 1998                                               

  Sales revenue in the United States and Canada increased slightly in 1999
over 1998. Increased sales volume, due to acquisitions and increased sales      
volume in the existing businesses, had a positive impact on sales revenue of 2%,
offset by an unfavorable shift in product mix which had a negative impact on    
sales revenue of 2%.                                                            

  64

DEFS14A
71st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 71st
Sales revenue outside the United States and Canada for 1999 was $0.9  
billion, up 28% from 1998 sales revenue of $0.7 billion. The increase is        
primarily due to higher sales volume resulting from acquisitions which had a    
positive impact on sales revenue of 33%. Overall, selling prices outside the    
United States and Canada had a negative impact on sales revenue of 2%. Asia     
Pacific sales revenue increased $90 million primarily due to higher sales       
volume, mainly for oxo chemicals products following the startup in 1999 of a new
manufacturing site in Singapore and specialty plastics, which had a positive    
impact on sales revenue of $92 million. Sales revenue in Europe, Middle East and
Africa increased $78 million, driven by increased sales volume which had a      
positive impact on sales revenue of $100 million, partially offset by price and 
exchange which had a negative impact on sales revenue of $19 million. In Latin  
America, sales revenue increased $22 million, driven by increased sales volume  
which had a positive impact on sales revenue of $34 million, partially offset by
foreign currency exchange rates which had a negative impact on sales revenue of 
$9 million.                                                                     

     With a substantial portion of sales to customers outside the United States,
Eastman Company is subject to the risks associated with operating in            
international markets. To mitigate exchange rate risks, Eastman Company         
frequently negotiates payment terms in U.S. dollars. In addition, where deemed  
advisable, Eastman Company engages in foreign currency hedging transactions and 
requires letters of credit and prepayment for shipments where its assessment of 
individual customer and country risks indicates their use is appropriate. See   
note 10 to Eastman Company's consolidated financial statements, included        
elsewhere in this proxy statement.                                              

EASTMAN COMPANY LIQUIDITY AND CAPITAL RESOURCES                                 

                                                        [Enlarge/Download Table]

                                                           SIX MONTHS                             
                                                              ENDED                               
                                                            JUNE 30,      YEAR ENDED DECEMBER 31, 
                                                          -------------   ------------------------
                                                          2001    2000     2000     1999     1998 
                                                          -----   -----   ------   ------   ------
                                                                       (IN MILLIONS)              
                                                                                                  
Net cash provided by (used in)                                                                    
  Operating activities................................... $ (22)  $ 232   $ 462    $ 467    $ 578 
  Investing activities...................................  (344)    (77)   (390)    (588)    (385)
  Financing activities...................................   366    (155)    (72)     121     (193)
                                                          -----   -----   -----    -----    ----- 
Net change in cash and cash equivalent................... $  --   $  --   $  --    $  --    $  -- 
                                                          =====   =====   =====    =====    ===== 
Cash and cash equivalents at end of period............... $  --   $  --   $  --    $  --    $  -- 
                                                          =====   =====   =====    =====    ===== 

For purposes of the historical financial statements, Eastman Company's
sources and uses of cash reflect an assumed net zero balance as of the end of   
each reporting period. Cash used in operating activities in the first six months
of 2001 reflect an increase in working capital primarily related to a decrease  
in trade payables and an increase in inventories and additionally reflect the   
payment of certain employee incentive compensation expenses. In the first six   
months of 2000, cash flows were positively impacted by settlement of strategic  
foreign currency hedging transactions, partially offset by an increase in       
working capital. Cash provided by operating activities in 2000 and 1999         
reflected cash provided by Eastman Chemical's continuous sale of accounts       
receivable program. Cash used in investing activities in the first six months of
2001 reflected the Hercules acquisition, in the first six months of 2000,       
reflected the Sokolov and McWhorter acquisitions, in 1999 reflected the Lawter  
acquisition, and in 1998 reflected the Jager acquisition. Cash used in investing
activities also reflected proceeds from the sale of certain assets in 2001 and  
2000. Net transactions with Eastman Chemical reflected net cash provided by     
Eastman Chemical in the first six months of 2001 and the year 1999 and net cash 
provided to Eastman Chemical in the first six months of 2000 and the years 2000 
and 1998.                                                                       

   Historically, cash flows from operations, supplemented by credit provided
by Eastman Chemical, were used to finance the working capital requirements,     
capital and investment projects and acquisitions for the Eastman Company        
Business. On or prior to the Distribution, Eastman Company expects to assume    
approximately $1.3 billion of the outstanding debentures of Eastman Chemical and
will establish a                                                                

  65

DEFS14A
72nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 72nd
revolving credit facility that is expected to contain customary commercial bank 
covenants. Effective as of the date of the Distribution, Eastman Company's      
balance sheet is expected to include approximately $1.3 billion of debt, with no
drawings on the revolving credit facility.                                      

Eastman Company expects that its capital expenditures for 2001 will be
approximately $150 million and will increase by approximately $30 million in    
2002 primarily for the continued integration of its acquired businesses. For    
2001 and 2002, Eastman Company estimates that depreciation will be approximately
$264 million and $272 million, respectively and that, for 2002, total capital   
expenditures, investment capital and investments will not exceed depreciation.  

   Eastman Company believes that its cash flow from operations, supplemented
by periodic additional borrowings from the revolving credit facility or         
otherwise, will provide it with sufficient resources to finance operations and  
planned capital needs.                                                          

DIVIDENDS                                                                       

    Eastman Chemical declared cash dividends totaling $1.76 per share in 2000,
declared and paid cash dividends of $0.44 per share for each of the first two   
quarters of 2001 and has declared a cash dividend of $0.44 per share for the    
third quarter of 2001 to be paid on October 1, 2001. Based on an assumed        
distribution ratio of one for one, it is expected that the initial annual cash  
dividend to be paid by Eastman Company will be between $0.80 and $0.88 per share
which, when combined with the initial annual cash dividend expected to be paid  
by Voridian, will be less than the amount historically paid to shareowners of   
Eastman Chemical. The payment and level of cash dividends by Eastman Company    
after the Distribution are not guaranteed and will be subject to the discretion 
of its board of directors and any restrictions on its ability to pay dividends  
under Delaware law or otherwise.                                                

RECENTLY ISSUED ACCOUNTING STANDARDS                                            

 In July 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other     
Intangible Assets." SFAS No. 141 requires business combinations initiated after 
June 30, 2001 to be accounted for using the purchase method of accounting and   
broadens the criteria for recording intangible assets separate from goodwill.   
Recorded goodwill and intangibles with indefinite useful lives will be evaluated
against this new criteria and may result in certain intangibles being subsumed  
into goodwill, or alternatively, amounts initially recorded as goodwill may be  
separately identified and recognized apart from goodwill. SFAS No. 142 requires 
the use of a nonamortization approach to account for purchased goodwill and     
certain intangibles. Under a nonamortization approach, goodwill and specified   
intangibles will not be amortized into results of operations, but instead would 
be reviewed for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain         
intangibles is more than its fair value. The provisions of each statement that  
apply to goodwill and intangible assets acquired prior to June 30, 2001, will be
adopted by Eastman Company on January 1, 2002. Eastman Company expects the      
adoption of these accounting standards to result in certain intangible assets   
being subsumed into goodwill and to have the impact of reducing annual          
amortization of goodwill and intangibles now included in results primarily for  
the CASPI segment, by approximately $16 million commencing January 1, 2002.     
Impairment reviews may result in future periodic write-downs.                   

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset   
Retirement Obligations" which addresses financial accounting and reporting for  
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This standard applies to legal obligations   
associated with the retirement of long-lived assets that result from the        
acquisition, construction, development and/or normal use of the asset.          

 Eastman Company is required to, and intends to, adopt the provisions of
SFAS No. 143 on January 1, 2003. Upon initial application of the provisions of  
this statement, entities are required to recognize a liability for any existing 
asset retirement obligations adjusted for cumulative accretion to the date of   
adoption of this statement, an asset retirement cost capitalized as an increase 
to the carrying                                                                 
  66

DEFS14A
73rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 73rd
amount of the associated long-lived asset, and accumulated depreciation on that 
capitalized cost. The cumulative effect, if any, of initially applying this     
statement will be recognized as a change in accounting principle. Eastman       
Company has not yet assessed the impact of this statement on its financial      
statements.                                                                     

In October 2001, the FASB issued SFAS No. 144, "Accounting for the    
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial  
accounting and reporting for the impairment of long-lived assets and for assets 
to be disposed of and broadens the presentation of discontinued operations to   
include more disposal transactions. Eastman Company is required to, and intends 
to, adopt the provisions of SFAS No. 144 on January 1, 2002. Eastman Company has
not yet completed an assessment of the impact of this statement on its financial
statements.                                                                     

  67

DEFS14A
74th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 74th
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                      

     Eastman Company is exposed to changes in financial market conditions in the
normal course of its business due to its use of certain financial instruments as
well as transactions in various foreign currencies. To mitigate Eastman         
Company's exposure to these market risks, Eastman Company has established       
policies, procedures, and internal processes governing its management of        
financial market risks and the use of financial instruments to manage its       
exposure to such risks.                                                         

    Eastman Chemical uses a centralized approach to finance its operations. As
a result, debt was not allocated to Eastman Company in the historical financial 
statements. As such, there is no market risk discussion below relating to       
interest rate sensitivity.                                                      

  Eastman Company's operating cash flows denominated in foreign currencies
are exposed to changes in foreign exchange rates. Eastman Company continually   
evaluates its foreign currency exposure based on current market conditions and  
the locations in which Eastman Company conducts business. In order to mitigate  
the effect of foreign currency risk, Eastman Company enters into forward        
exchange contracts to hedge certain firm commitments denominated in foreign     
currencies and currency options to hedge probable anticipated but not yet       
committed export sales and purchase transactions expected within no more than   
two years and denominated in foreign currencies. The gains and losses on these  
contracts offset changes in the value of related exposures. It is Eastman       
Company's policy to enter into foreign currency transactions only to the extent 
considered necessary to meet its objectives as stated above. Eastman Company    
does not enter into foreign currency transactions for speculative purposes.     

    Eastman Company is exposed to fluctuations in market prices for certain of
its major raw materials. To mitigate short-term fluctuations in market prices   
for certain commodities, principally propane, ethane, and natural gas, Eastman  
Company enters into forwards and options contracts.                             

    Eastman Company determines its market risk utilizing sensitivity analysis,
which measures the potential losses in fair value resulting from one or more    
selected hypothetical changes in foreign currency exchange rates and/or         
commodity prices. The market risk associated with foreign currency-sensitive    
instruments utilizing a modified Black-Scholes option pricing model and a 10%   
adverse move in the U.S. dollar relative to each foreign currency hedged by     
Eastman Company is approximately $3.2 million and an additional $0.2 million for
an additional one percentage point adverse change in foreign currency exchange  
rates. Further adverse movements in foreign currencies would create losses in   
fair value; however, such losses would not be linear to that disclosed above.   
This exposure, which is primarily related to foreign currency options purchased 
by Eastman Company to manage fluctuations in foreign currencies, is limited to  
the dollar value of option premiums payable by Eastman Company for the related  
financial instruments. Furthermore, since Eastman Company utilizes              
currency-sensitive derivative instruments for hedging anticipated foreign       
currency transactions, a loss in fair value for those instruments is generally  
offset by increases in the value of the underlying anticipated transactions. The
market risk associated with feedstock options and natural gas swaps assuming an 
instantaneous parallel shift in the underlying commodity price of 10% is        
approximately $3.6 million and an additional $0.3 million for each one          
percentage point move in closing prices thereafter.                             

  68

DEFS14A
75th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 75th
EASTMAN COMPANY 

UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL INFORMATION 

The following unaudited consolidated pro forma statement of financial 
position as of June 30, 2001 presents Eastman Company's financial position      
assuming the Distribution had been completed on that date. The following        
unaudited consolidated pro forma statement of earnings (loss) for the year ended
December 31, 2000 and the six months ended June 30, 2001 presents Eastman       
Company's results of operations assuming that the Distribution had been         
completed on January 1, 2000. In the opinion of Eastman Company's management,   
these statements include all material adjustments necessary to reflect, on a pro
forma basis, the impact of the Distribution on the historical financial         
information of Eastman Company. The adjustments are described in the            
accompanying notes and are set forth in the "Pro Forma Adjustments" column.     

   In connection with the Distribution, Eastman Company and Eastman Chemical
will enter into a number of contracts relating to product sales, operating and  
service agreements. These agreements are given effect in the pro forma          
adjustments described in the accompanying unaudited pro forma consolidated      
statements of earnings (loss).                                                  

     Shares outstanding used in calculating basic and diluted earnings per share
included in the unaudited pro forma consolidated statement of earnings (loss)   
gives effect to the issuance of one share of Eastman Company common stock for   
every one share of Eastman Chemical common stock outstanding.                   

  Eastman Company's unaudited pro forma consolidated financial information
should be read in conjunction with, and is qualified in its entirety by, the    
information under "Eastman Company Selected Consolidated Financial Data,"       
"Eastman Company Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Eastman Company's consolidated financial statements  
and the related notes included elsewhere in this proxy statement. The unaudited 
consolidated pro forma financial information has been presented for             
informational purposes only and does not reflect the results of operations or   
financial position of Eastman Company that would have existed had it operated as
a separate, independent company for the periods presented and should not be     
relied upon as being necessarily indicative of its future results after the     
Distribution.                                                                   

  69

DEFS14A
76th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 76th
EASTMAN COMPANY 

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS (LOSS) 

                                                        [Enlarge/Download Table]

                                                                  SIX MONTHS ENDED JUNE 30, 2001     
                                                             ----------------------------------------
                                                               EASTMAN         PRO                   
                                                               COMPANY        FORMA             PRO  
                                                             HISTORICAL    ADJUSTMENTS         FORMA 
                                                             -----------   ------------       -------
                                                             (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 
                                                                                                     
Sales.......................................................   $1,919          (10) (a)       $1,909 
Cost of sales...............................................    1,643          (22) (b)        1,621 
Asset impairments and restructuring costs...................       80           --                80 
                                                               ------          ---            ------ 
Gross profit................................................      196           12               208 
Selling and general administrative expenses.................      145           10(c)            155 
Research and development costs..............................       58           (1)(d)            57 
Write-off of acquired in-process research and development...        8           --                 8 
                                                               ------          ---            ------ 
Operating earnings (loss)...................................      (15)           3               (12)
Interest expense, net.......................................       50           (7)(e)            43 
Other income................................................       (8)          --                (8)
Other charges...............................................       20           --                20 
                                                               ------          ---            ------ 
Earnings (loss) before income taxes.........................      (77)          10               (67)
Provision (benefit) for income taxes........................      (36)           3(f)            (33)
                                                               ------          ---            ------ 
Net earnings (loss).........................................   $  (41)         $ 7            $  (34)
                                                               ======          ===            ====== 
Basic earnings (loss) per share.............................   $(0.53)                        $(0.44)
                                                               ======                         ====== 
Diluted earnings (loss) per share...........................   $(0.53)                        $(0.44)
                                                               ======                         ====== 
Shares used in calculating pro forma earnings (loss) per                                             
  share:                                                                                             
  Basic.....................................................     76.7                           76.7 
  Diluted...................................................     76.7                           76.7 

---------------                                                                 

(a) Product sales between Eastman Company and Voridian have historically been   
recorded at cost. The pro forma adjustments are based on contracts for  
 product sales and conversion and service agreements to be entered into in
   connection with the Distribution as if those contracts were in effect as of
January 1, 2001. Certain of these contracts are conversion agreements in
which Eastman Company will convert Voridian's raw materials to finished 
   goods and charge a fee to Voridian for this conversion. Historically, these
  transactions were recorded as product sales (including raw materials) from
  Eastman Company to Voridian at cost which resulted in $23 million in sales
for Eastman Company. Based upon the pricing terms of these conversion   
contracts, sales for Eastman Company would have been $1 million. The net
  difference in these agreements results in a $22 million decrease in sales.
This decrease will be partially offset by profits of $9 million on other
   historical sales of chemical raw materials from Eastman Company to Voridian
 resulting from these sales being repriced in accordance with the terms of
the new contracts, as well as profits of $3 million on revenues from    
services to be performed by Eastman Company for Voridian.               

(b) Cost of sales pro forma adjustments are based on contracts for product sales
   and conversion and service agreements to be entered into in connection with
    the Distribution as if those contracts were in effect as of January 1, 2001.
Certain of these contracts are conversion agreements in which Eastman   
    Company will convert Voridian's raw materials to finished goods and charge a
fee to Voridian for this conversion. Historically, these transactions   
    included raw materials which resulted in $23 million in cost of sales. Based
  upon the terms of these conversion contracts, the cost of sales would have
been $1 million. The net difference in these agreements results in a $22
    million decrease in cost of sales. This decrease will be partially offset by
    the additional cost of sales from other historical purchases of chemical raw
 materials manufactured by Voridian for Eastman Company resulting from the
purchases                                                               

  70

DEFS14A
77th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 77th
   being recosted in accordance with the terms of the new contracts as well as
billings for services to be performed by Voridian for Eastman Company   
totaling $7 million.                                                    

Eastman Company to Voridian are treated as reimbursement of Eastman     
Company's fully allocated costs.                                        

(c) Reflects the estimated additional selling and general administrative        
 expenses resulting from assignment of personnel to Eastman Company of $11
   million offset by management fees charged to Voridian by Eastman Company of
 $1 million. The management fees charged to Voridian by Eastman Company is
for employee, administrative and other services and are treated as a    
reimbursement of Eastman Company's fully allocated costs. The personnel 
   adjustment arises due to differences between the historical cost allocation
of personnel compared to the actual assignment of personnel to Eastman  
Company as of the date of the Distribution.                             

(d) Reflects the reduction of research and development costs resulting from     
management fees of $1 million charged to Voridian by Eastman Company and
treated as a reimbursement of Eastman Company's fully allocated costs.  

(e) To record the estimated decrease in net interest expense as a result of the 
   Distribution from that which was historically allocated to Eastman Company.
   Assumes an aggregate of $1.3 billion of long-term debt for Eastman Company.
The interest rate assumed on the long-term debt was 7.08%, the weighted 
average interest rate on Eastman Chemical's fixed rate debt.            

 The pro forma adjustment to interest expense was calculated as follows:

                                                                [Download Table]

                                                             (IN MILLIONS)    
                                                         ---------------------
                                                                              
Gross interest expense on $1.3 billion of long-term                           
 debt to be assumed by Eastman Company.................          $ 46         
Less capitalized interest expense......................            (1)        
Interest income........................................            (2)        
                                                                 ----         
  Total pro forma interest expense.....................            43         
                                                                 ----         
Less historical........................................           (50)        
                                                                 ----         
Pro forma adjustment...................................          $ (7)        
                                                                 ====         

(f) To record the impact of the pre-tax pro forma adjustment at the tax rate of 
38%.                                                                    

  71

DEFS14A
78th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 78th
EASTMAN COMPANY 

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

                                                        [Enlarge/Download Table]

                                                                   YEAR ENDED DECEMBER 31, 2000       
                                                             -----------------------------------------
                                                               EASTMAN           PRO                  
                                                               COMPANY          FORMA           PRO   
                                                              HISTORICAL     ADJUSTMENTS       FORMA  
                                                             ------------   -------------     --------
                                                              (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 
                                                                                                      
Sales.......................................................    $3,665          $ (11) (a)     $3,654 
Cost of sales...............................................     3,003            (45) (b)      2,958 
Asset impairments and restructuring costs...................        13             --              13 
                                                                ------          -----          ------ 
Gross profit................................................       649             34             683 
Selling and general administrative expenses.................       223             22(c)          245 
Research and development costs..............................       104             (1)(d)         103 
Write-off of acquired in-process research and development...         9             --               9 
                                                                ------          -----          ------ 
Operating earnings..........................................       313             13             326 
Interest expense, net.......................................        88             (2)(e)          86 
Gain recognized on initial public offering of equity                                                  
  investment................................................       (38)            --             (38)
Other income................................................       (34)            --             (34)
Other charges...............................................        44             --              44 
                                                                ------          -----          ------ 
Earnings before income taxes................................       253             15             268 
Provision for income taxes..................................        91              5(f)           96 
                                                                ------          -----          ------ 
Net earnings................................................    $  162          $  10          $  172 
                                                                ======          =====          ====== 
Basic earnings per share....................................    $ 2.11                         $ 2.24 
                                                                ======                         ====== 
Diluted earnings per share..................................    $ 2.10                         $ 2.23 
                                                                ======                         ====== 
Shares used in calculating pro forma earnings per share:                                              
  Basic.....................................................      76.7                           76.7 
  Diluted...................................................      77.3                           77.3 

---------------                                                                 

(a)  Product sales between Eastman Company and Voridian have historically been  
recorded at cost. The pro forma adjustments are based on contracts for
   product sales and conversion and service agreements to be entered into in
     connection with the Distribution as if those contracts were in effect as of
  January 1, 2000. Certain of these contracts are conversion agreements in
 which Eastman Company will convert Voridian's raw materials to finished
     goods and charge a fee to Voridian for this conversion. Historically, these
    transactions were recorded as product sales (including raw materials) from
    Eastman Company to Voridian at cost which resulted in $46 million in sales
for Eastman Company. Based upon the pricing terms of these conversion 
  contracts, sales for Eastman Company would have been $1 million. The net
    difference in these agreements results in a $45 million decrease in sales.
   This decrease will be partially offset by profits of $28 million on other
     historical sales of chemical raw materials from Eastman Company to Voridian
   resulting from these sales being repriced in accordance with the terms of
the new contracts, as well as profits of $6 million on revenues from  
services to be performed by Eastman Company for Voridian.             

(b)  Cost of sales pro forma adjustments are based on contracts for product     
sales and conversion and service agreements to be entered into in     
     connection with the Distribution as if those contracts were in effect as of
  January 1, 2000. Certain of these contracts are conversion agreements in
 which Eastman Company will convert Voridian's raw materials to finished
     goods and charge a fee to Voridian for this conversion. Historically, these
   transactions included raw materials which resulted in $46 million in cost
   of sales. Based upon the terms of these conversion contracts, the cost of
  sales would have been $1 million. The net difference in these agreements
   results in a $45 million decrease in cost of sales. This decrease will be
partially offset by the additional cost of sales from other historical
purchases of                                                          

  72

DEFS14A
79th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 79th
chemical raw materials manufactured by Voridian for Eastman Company   
     resulting from the purchases being recosted in accordance with the terms of
the new contracts as well as billings for services to be performed by 
    Voridian for Eastman Company totaling $13 million. Site service management
   fees of $13 million charged by Eastman Company to Voridian are treated as
reimbursement of Eastman Company's fully allocated costs.             

(c)  Reflects the estimated additional selling and general administrative       
   expenses resulting from assignment of personnel to Eastman Company of $23
     million offset by management fees charged to Voridian by Eastman Company of
   $1 million. The management fees charged to Voridian by Eastman Company is
for employee, administrative and other services and are treated as a  
 reimbursement of Eastman Company's fully allocated costs. The personnel
     adjustment arises due to differences between the historical cost allocation
of personnel compared to the actual assignment of personnel to Eastman
Company as of the date of the Distribution.                           

(d)  Reflects the reduction of research and development costs resulting from    
  management fees of $1 million charged to Voridian by Eastman Company and
treated as a reimbursement of Eastman Company's fully allocated costs.

(e)  To record the estimated decrease in net interest expense as a result of the
     Distribution from that which was historically allocated to Eastman Company.
     Assumes an aggregate of $1.3 billion of long-term debt for Eastman Company.
 The interest rate assumed on the long-term debt was 7.08%, the weighted
average interest rate on Eastman Chemical's fixed rate debt.          

The pro forma adjustment to interest expense is calculated as follows:

                                                                [Download Table]

                                                                 (IN   
                                                              MILLIONS)
                                                              ---------
                                                                       
Gross interest expense on $1.3 billion of long-term debt to            
  be assumed by Eastman Company.............................    $ 93   
Less capitalized interest expense...........................      (2)  
Interest income.............................................      (5)  
                                                                ----   
          Total pro forma interest expense..................      86   
                                                                ----   
Less historical interest expense............................     (88)  
                                                                ----   
Pro forma adjustment........................................    $ (2)  
                                                                ====   

(f)  To record the impact of the pre-tax pro forma adjustments at the tax rate  
of 38%.                                                               

  73

DEFS14A
80th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 80th
EASTMAN COMPANY 

UNAUDITED PRO FORMA 
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                        [Enlarge/Download Table]

                                                                          JUNE 30, 2001             
                                                              --------------------------------------
                                                               EASTMAN         PRO                  
                                                               COMPANY        FORMA           PRO   
                                                              HISTORICAL   ADJUSTMENTS       FORMA  
                                                              ----------   -----------      --------
                                                                          (IN MILLIONS)             
                                                                                                    
                                               ASSETS                                               
Current assets:                                                                                     
  Cash and cash equivalents.................................    $   --            --         $   -- 
  Trade receivables, net of allowance of $11................       359            --            359 
  Miscellaneous receivables.................................        49       $    (5)(a)         44 
  Inventories...............................................       535            --            535 
  Other current assets......................................        65            --             65 
                                                                ------       -------         ------ 
         Total current assets...............................     1,008            (5)         1,003 
Properties                                                                                          
  Properties and equipment at cost..........................     5,792            --          5,792 
  Less: Accumulated depreciation............................     3,187            --          3,187 
                                                                ------       -------         ------ 
         Net properties.....................................     2,605            --          2,605 
                                                                ------       -------         ------ 
Goodwill, net of accumulated amortization of $35............       336            --            336 
Other intangibles, net of accumulated amortization of $29...       268            --            268 
Other noncurrent assets.....................................       363            --            363 
                                                                ------       -------         ------ 
         Total assets.......................................    $4,580       $    (5)        $4,575 
                                                                ======       =======         ====== 
                                LIABILITIES AND SHAREOWNERS' EQUITY                                 
Current liabilities:                                                                                
  Payables and other current liabilities....................    $  552            22(b)      $  574 
                                                                ------       -------         ------ 
         Total current liabilities..........................       552            22            574 
Long-term borrowings........................................        --         1,300(c)       1,300 
Deferred income tax credits.................................       530            24(a)         554 
Postemployment obligations..................................       270           (57)(a)        213 
Other long-term liabilities.................................        65                           65 
                                                                ------       -------         ------ 
         Total liabilities..................................     1,417         1,289          2,706 
                                                                ------       -------         ------ 
Shareowners' equity:                                                                                
  Common stock ($0.01 par - 350,000,000 shares authorized;                                          
    shares issued - 85,023,199).............................        --             1(d)           1 
Paid in capital.............................................        --            28(a)             
                                                                              (1,300)(c)            
                                                                               3,240(d)             
                                                                                 (22)(b)      1,946 
Other comprehensive loss....................................       (78)           --            (78)
Net investment by Eastman Chemical..........................     3,241        (3,241)(d)         -- 
                                                                ------       -------         ------ 
Total shareowners' equity...................................     3,163        (1,294)         1,869 
                                                                ------       -------         ------ 
         Total liabilities and shareowners' equity..........    $4,580       $    (5)        $4,575 
                                                                ======       =======         ====== 

---------------                                                                 
(a) To reflect the transfer of assets and liabilities and related deferred taxes
of Holston Defense, which ceased operations on December 31, 1998, to    
   Voridian as of the date of the Distribution. Holston Defense was previously
operated as a part of the PCI segment of Eastman Company.               

(b) To reflect interest payable on debt assigned to Eastman Company of $36      
  million, calculated on $1.3 billion of debt at an assumed interest rate of
   7.08%, less the related tax effect of $14 million, based on the tax rate of
 38%. This accrual is 4.7 months of interest, the weighted average months'
 interest unpaid on the assumed debt. Interest payable was not recorded by
Eastman Company in the historical financial statements as no debt was   
allocated to Eastman Company in these historical statements.            

(c) Reflects the assignment of $1.3 billion of outstanding long-term debt to    
Eastman Company.                                                        

(d) To adjust shareowners' equity balances to reflect the capital structure of  
Eastman Company.                                                        

  74

DEFS14A
81st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 81st
EASTMAN COMPANY CAPITALIZATION

The following table sets forth the debt and capitalization of Eastman 
Company as of June 30, 2001 on a historical basis and pro forma basis to give   
effect to the Distribution. This table should be read in conjunction with the   
information under the heading "Eastman Company Management's Discussion and      
Analysis of Financial Condition and Results of Operations" and the consolidated 
financial statements of Eastman Company and the related notes included elsewhere
in this proxy statement. The pro forma information set forth below gives effect 
to the Distribution as if it had occurred on June 30, 2001. This information is 
not indicative of the capitalization of Eastman Company in the future or as it  
would have been had Eastman Company been a separate, independent company at June
30, 2001 or had the Distribution actually been completed on that date.          

 Based upon the relative financial conditions, results of operations and
prospects of Eastman Chemical (to be renamed Voridian after the Distribution)   
and Eastman Company, Eastman Chemical determined that $1.3 billion would be an  
appropriate allocation to Eastman Company of the existing Eastman Chemical debt 
at June 30, 2001. Accordingly, Eastman Company expects to assume approximately  
$1.3 billion of Eastman Chemical's currently outstanding debt, all of which will
become the direct and sole obligation of Eastman Company. No cash will be paid  
to Voridian by Eastman Company, except for final adjustments according to the   
distribution agreement. Eastman Company expects to obtain a commitment for a    
$300 million revolving line of credit. This line of credit will be used to meet 
Eastman Company's working capital needs after the Distribution.                 

                                                        [Enlarge/Download Table]

                                                                   JUNE 30, 2001      
                                                             -------------------------
                                                              EASTMAN       EASTMAN   
                                                              COMPANY       COMPANY   
                                                             HISTORICAL    PRO FORMA  
                                                             ----------   ------------
                                                                   (IN MILLIONS)      
                                                                                      
LONG-TERM BORROWINGS:                                                                 
Long term debt..............................................   $   --        $1,300   

SHAREOWNERS' EQUITY:                                                                  
Eastman Chemical equity investment..........................    3,241            --   
Other comprehensive loss....................................      (78)          (78)  
Common stock................................................       --             1   
Paid-in capital.............................................       --         1,946   
                                                               ------        ------   
          Total shareowners' equity.........................    3,163         1,869   
                                                               ------        ------   
          Total capitalization..............................   $3,163        $3,169   
                                                               ======        ======   

  75

DEFS14A
82nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 82nd
BUSINESS OF VORIDIAN

OVERVIEW                                                                        

Voridian is a global manufacturer of PET polymers, acetate fibers and 
polyethylene products. Voridian is the largest producer of PET polymers based on
market share and believes it is one of the two largest producers of acetate tow 
worldwide. Voridian's products are used in a wide range of consumer and         
industrial markets, including beverage bottles, food and consumer products      
packaging and cigarette filters. Voridian currently has nine manufacturing sites
strategically positioned around the world, as well as contract manufacturing    
arrangements in the North American and Asia Pacific regions. In 2000, historical
sales attributable to the Voridian Business totaled $2.4 billion.               

Voridian's business consists of two strategic operating segments:     

     - the polymers segment, which manufactures a broad line of PET polymers and
       polyethylene products for the beverage bottle and consumer and industrial
products markets, generated 2000 historical sales of $1.7 billion,
   representing 71% of the historical sales attributable to the Voridian
Business; and                                                     

- the fibers segment, which manufactures acetate tow and Estrobond    
      triacetin plasticizers for the cigarette filter market, acetate yarn for
     textile markets, and acetate flake and acetyl raw materials for acetate
fibers and plastics uses, generated 2000 historical sales of $700 
   million, representing 29% of the historical sales attributable to the
Voridian Business.                                                

 Voridian believes it is well positioned to take advantage of its market
leadership in PET polymers and acetate tow product lines. Voridian intends to   
enhance profitability through capitalizing on its efficient, global integrated  
operations.                                                                     

INDUSTRY OVERVIEW                                                               

    PET polymers are clear, lightweight plastics used principally in packaging
applications such as containers for beverages, edible oils and other foods. To a
lesser extent, they are also used in films and sheet for packaging and consumer 
and industrial applications. Defining characteristics include high strength,    
light weight, durability, clarity, versatility, low cost, safety and            
recyclability. PET polymers function as a substitute for traditional glass and  
aluminum containers and over the past 10 years have virtually eliminated glass  
in carbonated soft drink bottles.                                               

   PET polymer capacity is more concentrated than for many plastics. The top
10 PET polymer producers account for approximately 55% of global capacity, and  
in North America, the top 5 producers account for 89% of total capacity,        
according to industry estimates. The European market is less concentrated than  
North America, with the top 5 producers accounting for 69% of total capacity.   
Eastman Chemical has been the world's leading PET polymer producer for over ten 
years.                                                                          

    In 2000, the worldwide market for PET polymers, including containers, film
and sheet, was approximately 7.0 million metric tons, representing about $7.5   
billion in sales. Demand for PET polymers has grown briskly over the past       
several years, driven by its popularity as a substitute for glass in packaging  
and consumer applications. PET polymers have already made significant inroads in
soft drink and water bottles, and producers are currently targeting markets such
as hot-fill and barrier containers for beer, soups and sauces. Industry analysts
report that PET polymers consumption grew worldwide from 1.0 million metric tons
in 1989 to 4.4 million in 1998, a compound annual growth rate of 17.7%. Industry
analysts project global demand for PET polymer containers is expected to grow at
a compound annual growth rate of approximately 10% from 1998 to 2004. The strong
growth in demand, coupled with ease of access to manufacturing technology, has  
resulted in the presence of approximately fifty suppliers in this market, up    
from fewer than twenty in 1995. Capacity utilization rates are expected to      
remain steady in 2002 and decline slightly in 2003 if expected additions to     
capacity materialize.                                                           

  76

DEFS14A
83rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 83rd
    Voridian's polyethylene products consist of both low density polyethylene,
or LDPE, and linear low density polyethlene, or LLDPE. According to industry    
analysts, growth in this combined polyethylene market in North America is       
expected to be from 1% to 2% through 2005. Competitive advantages in this market
will be gained through increased operating efficiencies and new product         
offerings.                                                                      

     Cellulose acetate fiber is used primarily in the manufacture of acetate tow
for cigarette filters. Cellulose acetate fiber is also used in acetate yarn for 
apparel and home furnishings. The acetate tow market, which Voridian believes is
approximately a $2 billion market annually, grew at a rate of 1.5% annually from
1998 to 2000. Industry analysts indicate that, for the first two quarters of    
2001, the acetate tow market grew by 3.8% as compared to the first two quarters 
of 2000. Two trends are contributing to the current increase in demand and are  
expected to do so in future years:                                              

     - a decline in the use of polypropylene tow in China and its replacement by
acetate tow; and                                                  

- legislation in the European Union, Brazil and China to reduce tar   
      deliveries in cigarettes, which result in cigarette filter manufacturers
producing longer cigarette filters.                               

If polypropylene tow usage in China were totally replaced by acetate tow over   
the next five years, the world market for acetate tow could grow at a rate of up
to 2.1% per year through 2007. Increased filter lengths due to legislated lower 
tar deliveries in the European Union, Brazil and China would increase the       
expected growth rate above the estimated 2.1% per year for the next few years.  
After polypropylene tow is replaced in China, the expected growth rate for      
worldwide demand is approximately 0.5-1.0% per year. Included within these      
estimates are adjustments for the expected decrease in cigarette consumption in 
the United States, which is expected to be more than offset by a corresponding  
increase in consumption overseas.                                               

   The acetate yarn market was a $640 million market in 2000. The demand for
acetate yarn is declining and is projected to continue to do so due in part to  
the availability of less expensive fibers. This decline has led to associated   
decreases in price and profitability throughout the market.                     

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

STRATEGY                                                                        

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

- CONTINUE TO FOCUS ON OPERATIONAL EFFICIENCY                         

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

- MAINTAIN SUPERIOR PROCESS TECHNOLOGIES                              

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

  77

DEFS14A
84th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 84th
- LEVERAGE REPUTATION FOR QUALITY AND INNOVATION                      

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

   - EXPAND INTELLIGENTLY IN RESPONSE TO EXPECTED GROWTH IN THE PET POLYMERS
MARKET                                                            

      Demand in the PET polymers market is expected to grow at an average of 10%
per year through 2003. In response to this expected demand growth,  
Voridian intends to expand its production capabilities in a capital 
    efficient manner. Voridian intends to focus on utilizing excess capacity
    at existing manufacturing sites, adding capacity by reducing bottlenecks
      in its current production lines to increase productivity and participating
in strategic manufacturing alliances.                               

COMPETITIVE STRENGTHS                                                           

  Voridian believes it is in a strong position to successfully execute its
business strategy due to its many competitive strengths, which include the      
following:                                                                      

     VORIDIAN IS A RECOGNIZED INDUSTRY LEADER WITH GLOBAL SCOPE IN ITS
PRIMARY MARKETS.  Voridian has the largest global market share and is 
widely recognized as a supplier of choice in the PET polymers market. 
     Voridian's strategically located manufacturing sites and the breadth of its
PET polymers product line and formula capabilities position it to     
    effectively provide a full range of products to customers. In addition, as
 one of the two largest suppliers of acetate tow worldwide, Voridian has
developed a reputation as an industry leader.                         

     VORIDIAN IS A HIGHLY INTEGRATED SUPPLIER.  Voridian benefits from
    having highly integrated production capabilities, which reduces production
     costs and its reliance on third-party suppliers. Voridian has proven it can
   successfully operate as a focused, low-cost producer, having successfully
undertaken several restructuring, cost reduction and development      
  initiatives. Voridian's integration positions it to capitalize on market
  upturns, as well as enabling it to adjust to changing market conditions.

VORIDIAN HAS A SUCCESSFUL HISTORY OF TECHNOLOGICAL          
INNOVATION.  Voridian has been able to leverage its expertise into    
     significant achievements in technological innovations. Voridian's effective
    use of research and development activities and technical assistance to its
     customers results in increased process and product knowledge, which is then
  translated not only into successful introductions of innovative products
   but also to process improvements for the direct benefit of its customers.

          VORIDIAN HAS STRONG BRAND IDENTITY FOR MANY OF ITS PRODUCTS.  Voridian
  has strong brand identity for many of its products, particularly its PET
 polymers, such as Aqua, VersaTray and Heatwave polymers, and its fibers
   products, such as Estron acetate tow and yarn, Chromspun acetate yarn and
     Estrobond plasticizers, due to superior performance characteristics and its
history of customer service innovation.                               

POLYMERS SEGMENT (POLYMERS)                                                     

OVERVIEW                                                              

     The polymers segment offers the world's largest, most global and vertically
integrated PET polymers product line with a broad formula capability. Voridian  
is the largest supplier of PET polymers for beverage bottles and sheet for      
thermoforming. PET polymers serve as source products for containers for, among  
other things, carbonated soft drinks, water, beer and personal care items, and  
food containers that are suitable for both conventional and microwave oven use. 
Voridian has PET polymers manufacturing sites strategically positioned around   
the world, and competes primarily in North America, Latin America and Europe.   
Voridian manufactures polymers at facilities in Argentina, Mexico, Spain, the   
Netherlands, England and Canada, as well as the United States. In addition,     
Voridian has contract manufacturing arrangements in Asia and the United States. 

  78

DEFS14A
85th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 85th
    The polymers segment also offers a polyethylene product line including low
density polyethylene, which is well-positioned in the extrusion coatings        
industry, and linear low density polyethylene, which is manufactured with       
Voridian's proprietary technology. Polyethylene products are used primarily for 
packaging and film applications and in extrusion coated containers such as milk 
and juice cartons.                                                              

The polymers segment's product line benefits from a global asset base,
which Voridian intends to grow in a capital efficient manner through the        
elimination of production bottlenecks and the use of business models such as    
contract manufacturing. In addition, Voridian intends to grow through e-business
capabilities which improve connectivity to customers and, in turn, improve      
customer service.                                                               

PRODUCTS                                                              

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

    - PET POLYMERS:  Voridian's broad PET polymers product line consists of 22
    product offerings, which accounted for approximately 75% of historical
   polymers segment sales in 2000. PET polymers are used in beverage and
     food packaging and other applications such as custom-care and cosmetics
    packaging, health care and pharmaceutical uses, household products and
     industrial and automotive uses. Voridian's polymers offer fast and easy
       processing, superb clarity, excellent colorability and color consistency,
   durability and strength, impact and chemical resistance and high heat
stability.                                                        

  - LOW DENSITY AND LINEAR LOW DENSITY POLYETHYLENE:  Voridian is a market
    leading supplier of low density polyethylene for extrusion coatings in
    North America and is a manufacturer of linear low density polyethylene
     through utilization of Voridian's new proprietary Energx technology for
       gas phase polyethylene production. The low density and linear low density
polyethylene product lines consist of 10 product categories, which
     accounted for approximately 25% of historical polymers segment sales in
2000.                                                             

GROWTH STRATEGY                                                       

  Voridian's strategy within the polymers segment is focused on maximizing
growth and shareholder value through the following initiatives:                 

- INCREASE CAPACITY TO MEET MARKET DEMAND IN A CAPITAL EFFICIENT      
     MANNER.  Voridian intends to capitalize on PET polymers industry growth
with timely and efficient capacity additions such as eliminating  
production bottlenecks, asset expansions, contract manufacturing  
arrangements and manufacturing alliances.                         

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

 - MAINTAIN AND EXPAND TECHNOLOGY LICENSING.  Voridian believes that the
  licensing of certain of its technologies, such as its PTA and Energx
technologies, provides significant revenue opportunities. Voridian
intends to seek additional licensing opportunities.               

    - CAPITALIZE ON OPPORTUNITIES CREATED BY NICHE POSITIONING.  Voridian is a
   niche producer of polyethylene. Due to its size and ability to target
markets which may otherwise be underserved,                       

  79

DEFS14A
86th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 86th
       Voridian intends to continue to maximize its asset utilization in meeting
       the targeted needs of customers of the polymers segment while maintaining
high levels of profitability.                                     

CUSTOMERS AND MARKETS                                                 

 The polymers segment has a diverse customer base consisting of over 150
companies worldwide. The largest 74 customers within the polymers segment       
accounted for 80% of the segment's total sales in 2000 on a historical basis.   
Also on a historical basis in 2000, sales to Eastman Company represented 2.3%,  
and sales to no other individual customer represented more than 9%, of total    
sales attributable to the Voridian Business. The polymers segment's largest     
customers typically have a small percentage of the overall market share in their
geographic region. These customers are primarily PET polymer container suppliers
whose primary business is in the large volume beverage segments such as         
carbonated soft drinks, water and juice, with strong participation in custom    
areas such as food, liquor, sport and fruit beverages, health and beauty aids   
and household products.                                                         

    Voridian's PET polymers product line has broad formula capabilities, which
has helped it to successfully respond to market changes. Voridian's PET polymers
have become preferred by customers, and have significantly replaced metal and   
glass as the industry standard, due to these capabilities and other benefits,   
such as resealability and aseptic nature. As a result, Voridian has been able to
achieve brand strength with its customers.                                      

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

COMPETITION                                                           

Within the polymers segment, competition varies by region. There are a
substantial number of competitors worldwide, with no PET polymers competitors   
having any dominant role or any significant competitive advantage over Voridian.
These competitors, such as KoSa, Mossi & Ghisolfi Group and Wellman, Inc. are   
typically smaller than Voridian and do not have the same level of integration or
global operations as Voridian. Competition is primarily on the basis of price,  
as well as product performance and quality, service and reliability. Industry   
pricing, in turn, is strongly affected by industry capacity utilization. For    
this reason, Voridian believes that the combination of its size and scale of    
operations enables it to be a low cost PET polymers producer, providing a       
significant advantage.                                                          

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

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

  80

DEFS14A
87th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 87th
RESEARCH AND DEVELOPMENT                                              

 Voridian directs its research and development programs for the polymers
segment toward four key objectives:                                             

     - developing new products and services in PET polymers through applications
research and customer feedback;                                   

     - developing new products and processes that are compatible with Voridian's
commitment to producing more environmentally friendly products;   

- lowering manufacturing costs through process improvement; and       

    - enhancing product quality by improvement in manufacturing technology and
processes.                                                        

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

FIBERS SEGMENT (FIBERS)                                                         

OVERVIEW                                                              

    The fibers segment manufactures Estron acetate tow and Estrobond triacetin
plasticizers, which are used primarily in cigarette filters, Estron and         
Chromspun acetate yarns for use in apparel, home furnishings and industrial     
fabrics and acetate flake and acetyl raw materials for other acetate fiber      
producers. Voridian is one of the world's two largest suppliers of acetate tow  
and has been a market leader in the manufacture and sale of acetate tow since it
began producing the product in the early 1950s. Voridian is also one of the     
three largest producers of acetate yarn worldwide.                              

    Voridian's long history and experience in the fibers markets are reflected
in its operating expertise, both within the company and in support of its       
customers' processes. Voridian's expertise in internal operating processes      
allows it to achieve a consistently high level of product quality, a            
differentiating factor in the industry. Further, Voridian's fully integrated    
facilities allow it to reduce its dependence on necessary petrochemicals from   
third parties. Voridian believes that all of these factors combine to make it a 
leader in performance and cost position.                                        

     Voridian's high quality products, technical expertise and superior customer
service in the fibers segment are its key competitive strengths. Voridian's     
industry knowledge and knowledge of its fibers segment customers' processes     
allow it to assist its customers in maximizing their processing efficiencies,   
promoting repeat sales and mutually beneficial, long-term customer              
relationships. In addition, Voridian is well known for its expert technical     
service. Voridian's scale, strong customer base and these long-standing customer
relationships contribute to its market leading position. Voridian's goal is to  
build on these strengths to improve its strategic position.                     

PRODUCTS                                                              

 Voridian's main products in the fibers segment are acetate tow, acetate
yarn and acetate flake.                                                         

     - ACETATE TOW:  Voridian is one of the two largest producers of acetate tow
    worldwide. Voridian manufactures acetate tow to various specifications
      providing different filtration patterns, which are primarily used by its
     customers in the production of cigarette filters. In addition, Voridian
       manufactures triacetin plasticizers for use by cigarette manufacturers as
a bonding agent in these filters.                                 

  81

DEFS14A
88th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 88th
    - ACETATE YARN:  Voridian is one of the three largest producers of acetate
yarn worldwide. Voridian is a market leader in this product line, 
offering over 300 types of acetate yarn. These products are used  
     primarily in apparel, home furnishings and industrial applications. The
  primary benefit of Voridian's acetate yarn products is their ease of
   processability. These yarns allow for fabrics with properties such as
      excellent breathability and comfort, silky feel, stability for shrinkage
       and stretch and mildew resistance. Chromspun acetate yarn is available in
over 60 colors.                                                   

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

GROWTH STRATEGY                                                       

Voridian's growth strategy in the fibers segment is set forth below:  

- POSITION FOR GROWTH.  Voridian intends to emphasize its high quality
       products, excellent customer service and operational efficiencies to take
advantage of global market growth.                                

- CONTINUE TO CAPITALIZE ON OPERATING EXPERTISE.  Voridian emphasizes 
incremental product and process improvements to continue to meet  
  customers' evolving needs and to maximize efficiencies in the supply
     chain through collaborative planning. Voridian intends to further focus
on refining its processes to lower manufacturing costs and provide
additional operations improvements.                               

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

CUSTOMERS AND MARKETS                                                 

The customer base in the fibers segment is relatively concentrated,   
consisting of about 150 companies, primarily those involved in the production of
cigarettes and in the textiles industry. The largest customers within the fibers
segment are multinational as well as regional cigarette producers and textile   
industry fabric manufacturers. The largest twenty customers within the fibers   
segment accounted for greater than 80% of the segment's total sales in 2000 on a
historical basis. Also on a historical basis in 2000, sales to Eastman Company  
represented 3.4%, and sales to no other individual customer represented more    
than 7%, of historical sales attributable to the Voridian Business.             

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

COMPETITION                                                           

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

  82

DEFS14A
89th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 89th
     In the acetate tow market, Voridian's principal competitor has added and is
considering additional production facilities in China through joint ventures    
with the government-owned China National Tobacco Corporation. Further, local    
production in China may diminish Voridian's access to this market.              

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

RESEARCH AND DEVELOPMENT                                              

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

SALES, MARKETING AND DISTRIBUTION                                               

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

Voridian was the first manufacturer in the industry to effectively and
efficiently service customers through the use of e-business platforms, which    
improve connectivity and reduce costs. For example, through The Customer Center,
Voridian offers its customers an Internet option for placing and tracking       
orders, generating reports and online auction capabilities. Voridian also       
provides integrated direct capabilities to some customers, allowing enhanced    
collaborative planning to improve supply chain efficiencies.                    

RESEARCH AND DEVELOPMENT                                                        

     Specific value-adding research and development activities are undertaken on
a segment basis, each with a different focus as described in the segment        
discussions above. For 2000, 1999 and 1998, research and development expenses,  
on a historical basis, totaled $46 million, $64 million and $63 million,        
respectively.                                                                   

INTELLECTUAL PROPERTY AND TRADEMARKS                                            

   Voridian believes that significant advantages can be obtained through the
continued focus on branding its products and, for this reason, protects its     
intellectual property through a combination of patents that expire at various   
times, trademarks and licenses. Voridian expects to expand its portfolio of     
technologies licensed to other companies in the future. To date, Voridian has   
selectively licensed a fairly extensive portfolio of patented technologies,     
including PTA technology, which has been licensed to a major engineering company
in the chemicals industry, and Voridian's Energx polyethylene technology, which 
has been licensed to BP Amoco under an agreement that allows BP to market and   
sub-license the technology to other gas-phase producers. In this instance,      
Voridian chose BP as the licensee due to BP's ability to access the market in   
connection with some of its current technology.                                 

SOURCES AND AVAILABILITY OF RAW MATERIALS AND ENERGY                            

Voridian is one of the world's largest purchasers of paraxylene and   
ethylene glycol, and, because of its volume of purchases, maintains a strong raw
material supply position relative to its competitors. Voridian                  

  83

DEFS14A
90th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 90th
purchases a substantial portion of its key raw materials and energy through     
advantageous long-term contracts, generally of two to five years initial        
duration with renewal provisions. Other key raw materials and energy for        
Voridian include PTA, ethylene, cellulose, methanol, coal, natural gas and      
electricity. Voridian enjoys a long history of well-established relationships   
with the major suppliers of these raw materials around the world.               

  Some purchase contracts involve arrangements with suppliers for pipeline
delivery of raw materials to avoid delays in the supply chain. All raw materials
are purchased under agreed-upon specifications, which often are global purchase 
specifications.                                                                 

  In addition, following the Distribution, Eastman Company will supply raw
materials, energy and services to Voridian. Eastman Company will provide energy 
to Voridian through provisions in long term ground leases. For the purchase and 
sale of raw materials and services, Voridian and Eastman Company will enter into
contracts, generally for two year terms, with pricing based either on market    
prices or on actual production cost plus an appropriate return, which Voridian  
believes to be fair market value. If and when these contracts expire or are     
otherwise terminated, or if there is otherwise any unfavorable development in   
the business of either Voridian or Eastman Company so that these obligations    
cannot be met, there can be no assurance that Voridian will be able to find     
comparable sources of raw materials, energy or services. This inability to      
obtain raw materials or energy necessary to produce its products or services or 
energy necessary to run its plant sites, would have an adverse impact on        
Voridian's results of operations. For a discussion of these contracts, please   
refer to "Relationship Between Voridian and Eastman Company After the           
Distribution -- Agreements Related to Operations After the Distribution," which 
is included elsewhere in this proxy statement.                                  

While temporary shortages of raw materials and energy may occasionally
occur, these items are generally sufficiently available to cover current and    
projected requirements. However, their continuous availability and price are    
subject to unscheduled plant interruptions occurring during periods of high     
demand, or due to domestic or world market and political conditions and changes 
in government regulations. Operations or products may, at times, be adversely   
affected by legislation, shortages or other events.                             

SEASONALITY                                                                     

    Although seasonality is not a significant factor for Voridian overall, the
polymers segment typically experiences stronger demand for PET polymers for     
beverage plastics during the second quarter due to higher consumption of        
beverages, while demand typically weakens during the third quarter.             

ENVIRONMENTAL                                                                   

     Voridian is subject to laws, regulations and legal requirements relating to
the use, storage, handling, generation, transportation, emission, discharge,    
disposal and remediation of, and exposure to, hazardous and non-hazardous       
substances and wastes in all of the countries in which it does business. These  
health, safety and environmental considerations are a priority in Voridian's    
planning for all existing and new products and processes. Voridian's board of   
directors reviews Voridian's policies and practices concerning health, safety   
and the environment, and its processes for complying with related laws and      
regulations, as well as monitors related matters.                               

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

 Voridian has made capital expenditures and has incurred other costs and
expenses arising from its compliance with environmental laws and regulations,   
cleanup initiatives and development of environmen-                              

  84

DEFS14A
91st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 91st
tally responsible products and expects that it will continue to make these      
capital expenditures and incur these costs and expenses in the future. Voridian 
estimates that capital expenditures and related expenses for environmental      
control facilities and related expenses for 2001 will be approximately $5       
million. However, there can be no assurance that this estimate will prove       
accurate or that Voridian will not incur costs materially in excess of this     
estimate. Additionally, there can be no assurance that changes in existing laws 
or regulations, or the discovery of additional environmental liabilities        
associated with Voridian's current or historical operations, will not require   
Voridian to incur material costs or will not otherwise adversely affect         
Voridian's business, results of operations or competitive position.             

In addition to compliance and cleanup activities, Voridian is actively
engaged in the development and enhancement of environmentally responsible       
products such as recyclable plastics, and it has established the                
biodegradability/photodegradability of acetate fiber. Voridian also participates
in several plastic recycling and related organizations worldwide, such as the   
National Association for Plastic Container Recovery, American Plastics Council, 
The Association of Postconsumer Plastic Recyclers, Association of Plastic       
Manufacturers in Europe, Recycling PET France, PET Container Recycling Europe,  
PET Forum in Germany, VMK in the Netherlands, Plastivida and ARPET in Argentina,
ABEPET in Brazil and APREPET in Mexico, among others. Finally, Voridian is an   
active participant in Responsible Care(R), a chemicals industry initiative that 
focuses on improving performance in areas of community awareness and emergency  
response, pollution prevention, process safety, distribution, employee health   
and safety and product stewardship.                                             

EMPLOYEES                                                                       

Upon completion of the Distribution, Voridian expects to employ       
approximately 3,300 men and women worldwide, none of whom is expected to be     
represented by a labor union in the United States.                              

PROPERTIES                                                                      

Operations of Voridian and its subsidiaries are conducted at nine     
manufacturing sites in seven countries. All of the properties are owned, unless 
otherwise noted. The locations and general character of the major manufacturing 
facilities are:                                                                 

                                                                [Download Table]

                                                                SEGMENT USING  
                                                                MANUFACTURING  
                                                                  FACILITY     
                                                              -----------------
                          LOCATION                            POLYMERS   FIBERS
                          --------                            --------   ------
                                                                               
USA AND CANADA                                                                 
  Columbia, South Carolina..................................     x             
  Kingsport, Tennessee*.....................................               x   
  Longview, Texas*..........................................     x             
  Toronto, Ontario, Canada..................................     x             
EUROPE                                                                         
  Workington, England.......................................     x         x   
  Rotterdam, Netherlands....................................     x             
  San Roque, Spain..........................................     x             
LATIN AMERICA                                                                  
  Zarate, Argentina.........................................     x             
  Cosoleacaque, Mexico......................................     x             

* indicates a location that Voridian will lease from Eastman Company under a    
long-term ground lease.                                                     

Voridian also owns a 50% interest in a joint venture that manufactures
cellulose esters at the Kingsport, Tennessee plant. The property underlying the 
plant site will be owned by Eastman Company and is leased to The Industrial     
Development Board of the County of Sullivan under a long-term ground lease and  
subleased to the joint venture, along with the plant located on this site, under
a long-term lease agreement. Voridian has distribution facilities at all of its 
plant sites, as well as at other locations in the United States and foreign     
countries.                                                                      

  85

DEFS14A
92nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 92nd
LEGAL PROCEEDINGS                                                               

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

  86

DEFS14A
93rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 93rd
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

SELECTED CONSOLIDATED FINANCIAL DATA

    The following selected consolidated financial data of Eastman Chemical, as
of and for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 have    
been derived from the consolidated financial statements of Eastman Chemical,    
which have been audited by PricewaterhouseCoopers LLP, independent accountants. 
The selected consolidated financial data of Eastman Chemical as of and for the  
six months ended June 30, 2001 and 2000 are derived from the unaudited          
consolidated financial statements of Eastman Chemical, which, in the opinion of 
management, include all adjustments necessary for a fair presentation of such   
data in conformity with accounting principles generally accepted in the United  
States of America. Operating results for the six months ended June 30, 2001 are 
not necessarily indicative of the results that may be achieved for the year     
ending December 31, 2001.                                                       

The selected consolidated statements of earnings (loss) data set forth
below do not reflect the many significant changes that will occur in the        
operations and capitalization of Eastman Chemical as a result of the            
Distribution, including the change of the company's name to Voridian. Because   
the data reflect periods during which Voridian did not operate as an independent
company, the data may not reflect the financial position, results of operations 
or cash flows that would have resulted if Voridian had operated as a separate,  
independent company during the periods shown. In addition, the data are not     
necessarily indicative of Voridian's future financial position, results of      
operations, or cash flows. The selected consolidated financial data should be   
read in conjunction with "Eastman Chemical Management's Discussion and Analysis 
of Financial Condition and Results of Operations," "Eastman Chemical Unaudited  
Consolidated Pro Forma Financial Information" and Eastman Chemical's            
consolidated financial statements and the related notes, which are included     
elsewhere in this proxy statement.                                              

                                                        [Enlarge/Download Table]

                                                                                                            SIX MONTHS    
                                                                                                               ENDED      
                                                                      YEAR ENDED DECEMBER 31,                JUNE 30,     
                                                             ------------------------------------------   --------------- 
                                                              2000     1999     1998     1997     1996     2001     2000  
                                                             ------   ------   ------   ------   ------   ------   ------ 
                                                                       (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)            
                                                                                                                          
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) DATA:                                                                          
Sales....................................................... $5,292   $4,590   $4,481   $4,678   $4,782   $2,746   $2,533 
Earnings (loss) before taxes................................    452       72      360      446      607     (188)     230 
Net earnings (loss).........................................    303       48      249      286      380     (110)     154 
EARNINGS (LOSS) PER SHARE                                                                                                 
Basic....................................................... $ 3.95   $ 0.61   $ 3.15   $ 3.66   $ 4.84   $(1.44)  $ 2.00 
Diluted.....................................................   3.94     0.61     3.13     3.63     4.79    (1.44)    2.00 
Shares used in calculating earnings (loss) per share:                                                                     
  Basic.....................................................   76.8     78.2     78.9     78.1     78.5     76.7     77.0 
  Diluted...................................................   77.0     78.4     79.5     78.7     79.3     76.7     77.2 
CONSOLIDATED BALANCE SHEET DATA:                                                                                          
Current assets.............................................. $1,523   $1,489   $1,398   $1,490   $1,345   $1,656   $1,525 
Current liabilities.........................................  1,258    1,608      959      954      787    1,147    1,144 
Working capital (deficit)...................................    265     (119)     439      536      558      509      381 
Property, plant and equipment, net..........................  3,925    3,950    4,034    3,881    3,520    3,748    3,824 
Total assets................................................  6,550    6,303    5,850    5,778    5,266    6,434    6,247 
Total debt..................................................  2,020    2,105    1,649    1,714    1,523    2,364    1,957 
OTHER DATA:                                                                                                               
EBITDA excluding nonrecurring charges(1)(2)................. $1,002   $  699   $  832   $  922   $  985   $  409   $  517 
EBIT excluding nonrecurring charges(1)(2)...................    584      316      478      592      671      195      314 
Cash flows provided by operating activities.................    831      744      731      698      746       64      378 
Cash flows used in investing activities.....................   (465)    (715)    (545)    (745)    (809)    (385)    (102)
Cash flows provided by (used in) financing activities.......   (451)     128     (186)      52      (13)     290     (293)
Capital expenditures........................................    226      292      500      749      789      117       78 

---------------                                                                 

(1) Nonrecurring charges are discussed in "Eastman Chemical Summary Financial   
  Data" included elsewhere in this proxy statement. Nonrecurring charges for
1997 included a pre-tax charge of $62 million for the partial           
settlement/curtailment of pension and other postemployment benefit      
   liabilities. The charge resulted from the retirement of approximately 1,700
  employees, a majority of whom chose to take their retirement benefits as a
lump sum.                                                               
(2) EBITDA excluding nonrecurring charges and EBIT excluding nonrecurring       
   charges are discussed in "Eastman Chemical Summary Financial Data" included
elsewhere in this proxy statement.                                      

  87

DEFS14A
94th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 94th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

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

CONTINUING STATUS OF EASTMAN CHEMICAL                                           

   Eastman Chemical is a Delaware corporation with an over 80 year operating
history, which currently operates in five business segments. In connection with 
and immediately prior to the Distribution, Eastman Chemical will transfer to its
wholly-owned subsidiary, Eastman Company, all of the assets and businesses      
comprising the coatings, adhesives, specialty polymers and inks segment, the    
performance chemicals and intermediates segment and the specialty plastics      
segments of Eastman Chemical, as well as specified Eastman Chemical strategic   
investments. Eastman Chemical will retain the assets and businesses comprising  
its polymers and fibers segments and will be renamed Voridian Company. After the
Distribution, Voridian and Eastman Company will each be independent public      
companies.                                                                      

  In conjunction with the Distribution, Eastman Chemical will enter into a
number of agreements with Eastman Company that address the allocation of assets 
and liabilities and that define Voridian's relationship with Eastman Company    
after the Distribution, including the distribution agreement, the tax matters   
agreement, the employee matters agreement and certain product supply, operating 
and service agreements. For further information on these arrangements, see      
"Relationship Between Voridian and Eastman Company After the Distribution" and  
"Eastman Chemical Unaudited Consolidated Pro Forma Financial Information."      

MATTERS AFFECTING ANALYSIS                                                      

Eastman Chemical's financial statements have been prepared on the     
historical cost basis in accordance with accounting principles generally        
accepted in the United States of America, and reflect the historical financial  
position, results of operations and cash flows of all of the business segments  
of Eastman Chemical, including the businesses to be transferred to Eastman      
Company in connection with the Distribution. The financial information included 
in this proxy statement, however, is not indicative of what Eastman Chemical's  
financial position, results of operations or cash flows would have been had it  
operated as Voridian during the periods presented, nor is it indicative of its  
future performance as Voridian.                                                 

    In this Eastman Chemical Management's Discussion and Analysis of Financial
Condition and Results of Operations, "existing businesses" refers to businesses 
whose results of operations are included for the entirety of both periods being 
compared. For a summary of the impact of acquisitions in the respective periods,
please refer to the table under the caption "-- Effect of Acquisitions on Sales 
Revenue and Volume." The following discussion should be read in conjunction with
"Eastman Chemical Selected Consolidated Financial Data" and Eastman Chemical's  
consolidated financial statements and the related notes included elsewhere in   
this proxy statement.                                                           

  88

DEFS14A
95th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 95th
ANALYSIS OF EASTMAN CHEMICAL                                                    

                                                        [Enlarge/Download Table]

                                                         SIX MONTHS                               
                                                            ENDED                                 
                                                          JUNE 30,       YEAR ENDED DECEMBER 31,  
                                                       ---------------   ------------------------ 
                                                        2001     2000     2000     1999     1998  
                                                       ------   ------   ------   ------   ------ 
                                                                     (IN MILLIONS)                
                                                                                                  
CONSOLIDATED STATEMENTS OF EARNINGS DATA                                                          
COATINGS, ADHESIVES, SPECIALTY POLYMERS AND INKS:                                                 
Sales................................................. $  722   $  480   $1,176   $  836   $  651 
Operating earnings including nonrecurring charges.....      0       77      123      121      147 
Operating earnings excluding nonrecurring charges.....     25       77      132      154      166 
Capital expenditures..................................     18       13       55       34       46 
EBITDA excluding nonrecurring charges(1)..............     75      120      219      220      216 
EBIT excluding nonrecurring charges(1)................     25       77      132      154      166 
PERFORMANCE CHEMICALS AND INTERMEDIATES:                                                          
Sales................................................. $  595   $  650   $1,297   $1,245   $1,290 
Operating earnings (loss) including nonrecurring                                                  
  charges.............................................    (55)      33       87       (2)      88 
Operating earnings excluding nonrecurring charges.....      8       42      100       32      113 
Capital expenditures..................................     28       21       46       92      205 
EBITDA excluding nonrecurring charges(1)..............     58       91      171       94      171 
EBIT excluding nonrecurring charges(1)................      8       42      100       32      113 
SPECIALTY PLASTICS:                                                                               
Sales................................................. $  265   $  282   $  550   $  531   $  487 
Operating earnings including nonrecurring charges.....     40       64      103       80       77 
Operating earnings excluding nonrecurring charges.....     40       64      103       86       77 
Capital expenditures..................................     21       10       30       35       75 
EBITDA excluding nonrecurring charges(1)..............     80      103      160      135      123 
EBIT excluding nonrecurring charges(1)................     40       64      103       86       77 
POLYMERS:                                                                                         
Sales................................................. $  852   $  818   $1,636   $1,344   $1,346 
Operating earnings (loss) including nonrecurring                                                  
  charges.............................................   (163)      61       99     (104)      (2)
Operating earnings (loss) excluding nonrecurring                                                  
  charges.............................................     48       61       99      (72)      (2)
Capital expenditures..................................     34       25       71       95      137 
EBITDA excluding nonrecurring charges(1)..............     98      110      236       67      133 
EBIT excluding nonrecurring charges(1)................     48       61       99      (72)      (2)
FIBERS:                                                                                           
Sales................................................. $  312   $  303   $  633   $  634   $  707 
Operating earnings including nonrecurring charges.....     74       70      150      107      124 
Operating earnings excluding nonrecurring charges.....     74       70      150      116      124 
Capital expenditures..................................     16        9       24       36       37 
EBITDA excluding nonrecurring charges(1)..............     98       93      216      183      189 
EBIT excluding nonrecurring charges(1)................     74       70      150      116      124 
TOTAL:                                                                                            
Sales................................................. $2,746   $2,533   $5,292   $4,590   $4,481 
Operating earnings (loss) including nonrecurring                                                  
  charges.............................................   (104)     305      562      202      434 
Operating earnings excluding nonrecurring charges.....    195      314      584      316      478 
Capital expenditures..................................    117       78      226      292      500 
Cash provided by operating activities.................     64      378      831      744      731 
Cash used in investing activities.....................   (385)    (102)    (465)    (715)    (545)
Cash provided by financing activities.................    290     (293)    (451)     128     (186)

  89

DEFS14A
96th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 96th
                                                        [Enlarge/Download Table]

                                                         SIX MONTHS                              
                                                            ENDED                                
                                                          JUNE 30,       YEAR ENDED DECEMBER 31, 
                                                       ---------------   ------------------------
                                                        2001     2000     2000     1999     1998 
                                                       ------   ------   ------   ------   ------
                                                                     (IN MILLIONS)               
                                                                                                 
EBITDA excluding nonrecurring charges(1).............. $  409   $  517   $1,002   $  699   $  832
EBIT excluding nonrecurring charges(1)................    195      314      584      316      478

---------------                                                                 

(1) EBITDA excluding nonrecurring charges and EBIT excluding nonrecurring       
   charges are discussed in "Eastman Chemical Summary Financial Data" included
elsewhere in this proxy statement.                                      

SUMMARY OF EASTMAN CHEMICAL RESULTS                                             

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

     Sales revenue for Eastman Chemical increased 8% for the first six months of
2001 over the first six months of 2000 driven by increased sales volumes, which 
had a positive impact on sales revenue of 7% over the applicable period and by  
higher selling prices, which had a positive impact on sales revenue of          
approximately 5% over the applicable period. The increase in selling prices was 
driven by higher selling prices for PET polymers in the polymers segment. The   
increase in sales volumes was attributable to acquisitions in the CASPI segment.
Acquisitions affecting the comparison of 2001 to 2000 include the May 2001      
Hercules acquisition, the July 2000 McWhorter acquisition and the February 2000 
Sokolov acquisition. Sales volumes increased 4% including acquisitions but      
decreased 6% in existing businesses. The lack of volume growth in existing      
businesses is attributed to a slowing of economic demand worldwide and cooler   
than normal weather in Europe and North America which affected PET polymers     
demand. Sales revenue for the first six months of 2001 was also negatively      
affected by product mix and the decline in the value of the euro.               

     Although sales volumes were higher overall in the first six months of 2001,
operating results were negatively impacted by lower capacity utilization due to 
lower sales volumes in existing businesses, and higher raw material and energy  
costs of approximately $114 million, net of the impact of Eastman Chemical's    
feedstock and energy cost hedging program. Operating results were impacted by   
certain nonrecurring items that are more fully described in "-- Summary by      
Operating Segment" below.                                                       

For the first six months of 2001, nonrecurring charges totaling $290  
million resulted in substantially lower gross profit. These nonrecurring charges
included the write-off of a prepaid asset related to the termination of a raw   
material supply agreement, the write-down of underperforming polyethylene       
assets, charges related to the previously announced ongoing restructuring of the
custom synthesis and photographic chemicals product lines, which were           
historically managed as part of the overall fine chemicals product line, and    
charges related to the restructuring of the coatings operations.                

     Higher selling and general administrative expenses for the first six months
of 2001 reflected costs related to acquired businesses and costs related to     
ShipChem's efforts to build capability to add new customers. Also included in   
selling and general administrative expenses are nonrecurring pre-tax charges    
totaling approximately $8 million which were recognized in the first six months 
of 2001 for costs associated with restructuring of the coatings operations and  
costs related to the Distribution.                                              

   Research and development costs increased for the first six months of 2001
but were relatively unchanged as a percentage of sales revenue. A nonrecurring  
pre-tax charge of approximately $8 million was recognized in the first six      
months of 2001 for the write-off of acquired in-process research and development
related to the Hercules acquisition.                                            

 Higher interest expense in the first six months of 2001 reflects higher
average commercial paper and other short-term borrowings used to finance recent 
acquisitions.                                                                   

  Other income and charges includes foreign exchange transactions, results
from equity investments, royalty income and gains and losses on sales of        
nonoperating assets. Results for the first six months of 2001 were adversely    
impacted by foreign exchange losses and results from equity investments.        

  90

DEFS14A
97th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 97th
2000 COMPARED WITH 1999                                               

Eastman Chemical's record sales revenue of $5.3 billion represented an
increase of 15% over 1999 sales revenue. Substantially higher operating earnings
in 2000 reflected improving market conditions for PET polymers, growth through  
acquisitions, and an ongoing emphasis on lower cost structure. Higher selling   
prices accounted for 11% of the increase in sales revenue and improved sales    
volumes had a positive impact of 8% on sales revenue. The increase in selling   
prices was driven by substantially higher selling prices for PET polymers and   
higher selling prices in the PCI and CASPI segments. Significant sales volume   
growth in the CASPI segment, mainly attributable to acquisitions, accounted for 
the increase in sales volumes. Acquisitions contributed approximately $360      
million to the increase in sales revenue in 2000. Sales volume increased 7%     
including acquisitions, but sales volume in existing businesses declined 1% due 
to a slowing of economic demand in the second half of 2000, Eastman Chemical's  
firm stance on pricing for PET polymers and the discontinuation of certain      
products. Overall, foreign currency exchange had a slight negative impact on    
sales revenue, although the impact in Europe, Middle East and Africa was more   
significant due to the strength of the U.S. dollar against the euro.            

   Significant factors that impacted earnings in 2000 included the improving
supply and demand balance for PET polymers accompanied by Eastman Chemical's    
firm stance on pricing for PET polymers, lower cost structure resulting from    
employee separations that occurred late in 1999 and additional non-labor cost   
reductions implemented in 2000, and overall higher selling prices. Certain      
nonrecurring items described in "-- Summary by Operating Segment" below,        
resulted in a $97 million improvement in operating earnings for 2000 over 1999. 
Lower pension expense in 2000 of approximately $30 million resulted from        
mid-1999 amendments to Eastman Chemical's defined benefit pension plan. Costs   
for major raw materials and energy were approximately $380 million higher in    
2000, net of Eastman Chemical's feedstock and energy cost hedging program.      

Benefits derived from a lower cost structure resulted in significantly
lower selling and general administrative expenses, even with the addition of    
costs for acquired businesses and costs related to ShipChem.                    

    Research and development costs were significantly lower during 2000 due to
the lower cost structure. A nonrecurring pre-tax charge of approximately $9     
million for the write-off of in-process research and development related to the 
McWhorter acquisition was recorded in 2000. Similarly, in 1999, a nonrecurring  
pre-tax charge of approximately $25 million was recorded for the write-off of   
in-process research and development related to the Lawter acquisition.          

     Higher net interest expense in 2000 reflects decreased capitalized interest
resulting from the completion of certain capital expansion projects during 1999,
higher average commercial paper borrowings due to acquisitions, and higher      
interest rates on commercial paper borrowings in 2000 compared to 1999.         

    Other income and charges include royalty income, gains and losses on sales
of assets and investments, results for investments accounted for under the      
equity method, foreign exchange transactions and fees paid related to the       
securitization of receivables. Other charges, net, increased in 2000 due to     
higher litigation costs and higher fees related to securitized receivables,     
offset partially by higher income from equity investments. Losses related to    
foreign exchange transactions declined in 2000. Eastman Chemical reported a     
pre-tax gain of approximately $38 million in 2000 resulting from the initial    
public offering of Genencor.                                                    

1999 COMPARED WITH 1998                                               

 Sales revenues for Eastman Chemical in 1999 increased 2% over 1998, due
primarily to increased sales volumes resulting from acquired businesses, which  
had a positive impact on sales revenue of 9%. The increase in sales revenue due 
to sales volumes was partially offset by lower selling prices for products in   
existing businesses, which negatively impacted revenue 4%. Sales volumes for    
Eastman Chemical in 1999 increased 10% from 1998 mainly due to additional       
capacity for PET polymers in Europe and Latin America, the Lawter acquisition,  
the completion and startup of a new oxo chemical plant in Singapore, and strong 
demand for specialty plastics. The U.S. dollar produced an unfavorable effect on
sales revenues                                                                  

  91

DEFS14A
98th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 98th
denominated in currencies other than U.S. dollars, although the impact on       
earnings was mitigated somewhat by gains from Eastman Chemical's currency       
hedging program.                                                                

Operating earnings declined significantly in 1999 compared to 1998,   
reflecting the impact of challenging market conditions, which negatively        
affected selling prices, and a number of nonrecurring items mainly related to   
Eastman Chemical's cost control efforts and changes in the portfolio of         
products, partially offset by a reimbursement of previously expensed pension    
costs. Although sales volumes were 10% higher overall and 35% higher outside the
United States, lower selling prices coupled with higher costs for major raw     
materials, particularly propane, eroded margins for many products. The negative 
impact of increased raw materials costs on earnings was approximately $30       
million, net of Eastman Chemical's feedstock and energy cost hedging program.   

 Eastman Chemical's cost control efforts and changes in the portfolio of
products resulted in several nonrecurring charges which significantly impacted  
results for the fourth quarter and full year 1999. A program to decrease labor  
costs resulted in a reduction of 1,200 employees and a pre-tax net charge of $53
million in the fourth quarter of 1999. A pre-tax charge of $25 million was      
recorded in the fourth quarter of 1999 for the write-off of acquired in-process 
research and development related to the Lawter acquisition. Also in the fourth  
quarter, a decision was made to discontinue production at the sorbates          
facilities in Chocolate Bayou, Texas and to discontinue a PTA plant project in  
Columbia, South Carolina, resulting in pre-tax charges of approximately $33     
million. Other nonrecurring charges which negatively affected the fourth quarter
and full year 1999 by approximately $12 million before taxes included an        
increase in the reserve for civil litigation related to sorbates and other      
matters, the write-off of purchased technology which was determined to have no  
future value, and a loss recognized on an investment. A reimbursement of        
previously expensed pension costs related to Holston Defense had a positive     
impact on pre-tax earnings in the fourth quarter and full year 1999 of          
approximately $20 million.                                                      

 Results for the full year 1999 were also impacted by other nonrecurring
items, including approximately $15 million of pre-tax charges related to the    
phase-out of operations in Rochester, New York and the write-off of construction
in progress related to an EpB plant project and a pre-tax gain of approximately 
$8 million recognized on the sale of assets.                                    

Results for the fourth quarter and full year 1999 were also negatively
impacted by pre-tax charges totaling approximately $17 million related to the   
write-up of Lawter's inventory required by purchase accounting, a decrement     
recognized using the last-in, first-out inventory valuation method, loss on     
sales of excess spare parts, and two months of unplanned downtime at the        
Malaysia facility. Amendments to Eastman Chemical's defined benefit pension plan
resulted in a pre-tax decrease in pension expense for the full year 1999 of     
approximately $37 million. As a result of the adoption of AICPA Statement of    
Position 98-1, "Accounting for the Costs of Computer Software Developed or      
Obtained for Internal Use" ("SOP 98-1"), Eastman Chemical capitalized $22       
million, net of $2 million amortization, of certain internal-use software costs 
which otherwise would have been expensed.                                       

Operating earnings for 1998 were negatively impacted by several       
nonrecurring items, including an $11 million charge for violation of the Sherman
Act, pre-tax charges of approximately $33 million related to certain            
underperforming assets and discontinued capital projects, and pre-tax charges of
approximately $7 million related to the impact of a power outage at the         
Kingsport, Tennessee manufacturing site, partially offset by the effect of a    
lower tax rate resulting from a tax settlement which favorably affected net     
earnings by $15 million.                                                        

    Selling and general administrative expenses increased in 1999 over 1998 as
a result of the Lawter and Jager acquisitions, e-business development, and      
timing of expenditures.                                                         

Research and development costs were relatively unchanged.             

   Gross interest costs increased in 1999 reflecting increased debt incurred
in the Lawter acquisition. Capitalized interest declined in 1999 and 1998       
reflecting completion of several substantial projects in Eastman Chemical's     
major capital investment program during 1999 and 1998.                          

  92

DEFS14A
99th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 99th
   Other income and other charges include interest and royalty income, gains
and losses on asset sales, results from equity investments, foreign exchange    
transactions, and other items. Included in 1999 is a loss on foreign exchange   
transactions, offset partially by a gain recognized on the sale of assets. In   
1998, Eastman Chemical recorded a gain on foreign exchange transactions.        

EASTMAN CHEMICAL SUMMARY BY OPERATING SEGMENT                                   

COATINGS, ADHESIVES, SPECIALTY POLYMERS AND INKS SEGMENT                    

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

     For the first six months of 2001, sales revenues for the CASPI segment were
51% higher than the first six months of 2000. Sales revenue increased 48% due to
higher sales volumes resulting from acquisitions. Higher selling prices had a   
slight positive impact on sales revenue of 2%. For the first six months of 2001,
the Hercules, McWhorter and Sokolov acquisitions contributed approximately $274 
million to the increase in sales revenues. Excluding acquisitions, both sales   
volumes and sales revenues declined 9% and 7%, respectively, for the first six  
months of 2001 from the first six months of 2000 due to weaker demand. Foreign  
currency exchange rates had a slightly negative effect on sales revenue for the 
first six months of 2001.                                                       

   Despite higher sales volumes from acquisitions and higher selling prices,
operating results for the first six months of 2001 declined significantly due to
lower capacity utilization from the existing businesses, higher costs for raw   
materials and energy and nonrecurring pre-tax charges of approximately $30      
million. The nonrecurring pre-tax charges primarily related to the restructuring
of the coatings operations and the write-off of in-process research and         
development related to the Hercules acquisition.                                

2000 COMPARED WITH 1999                                               

 Sales revenue for the CASPI segment increased 41% in 2000 compared with
1999, reflecting higher sales volumes attributable to the Lawter, Sokolov and   
McWhorter acquisitions and overall higher selling prices. Sales revenue         
increased 40% due to increased sales volumes and 6% due to higher selling       
prices. Excluding volume attributable to acquisitions, sales volumes in 2000    
were basically level with 1999. The increase in selling prices was driven by    
increased raw material costs. Foreign currency exchange had a slightly negative 
impact on sales revenue in 2000.                                                

    Raw materials cost increases in 2000 exceeded selling price increases, and
margins eroded for many products. Lower cost structure resulting from employee  
separations that occurred late in 1999 and non-labor cost reductions implemented
in 2000 did not offset the reduction in margins. Results for 2000 and 1999 also 
were impacted by several nonrecurring items, including a pre-tax charge of $9   
million in 2000 for the write-off of in-process research and development related
to the McWhorter acquisition. In 1999, a net pre-tax charge totaling $30 million
primarily related to employee separations and pension settlement and the        
write-off of in-process research and development related to the Lawter          
acquisition was recorded for the CASPI segment.                                 

     Operating earnings were positively affected by decreased pension expense in
2000 and 1999 that resulted from the mid-1999 amendments to Eastman Chemical's  
defined benefit pension plan.                                                   

1999 COMPARED WITH 1998                                               

  Sales revenue for 1999 for the CASPI segment was 28% higher than in 1998
due to higher sales volume which had a positive impact on sales revenue of 32%. 
The increase in sales volume, mainly attributable to the Lawter acquisition, was
partially offset by lower selling prices which had a slight negative impact on  
sales revenue of 2%. Operating earnings declined 18% in 1999 as a result of     
lower selling prices and higher raw materials costs, particularly for propane.  

     In addition, operating earnings for 1999 were adversely impacted by pre-tax
charges of $25 million for the write-off of in-process research and development 
related to the Lawter acquisition and $8 million related to employee separations
and pension settlement, which were partially offset by a $3 million             
  93

DEFS14A
100th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 100th
adjustment to a reserve for shutdown costs. Results for 1998 reflected a        
nonrecurring pre-tax charge of approximately $19 million related to certain     
underperforming assets and discontinued capital projects, and a pre-tax charge  
of approximately $1 million related to a power outage at the Kingsport,         
Tennessee, manufacturing site. As a result of the adoption of SOP 98-1 in 1999, 
approximately $6 million of certain internal-use software costs were capitalized
which otherwise would have been expensed.                                       

   Selling and general administrative expenses increased in 1999 compared to
1998 as a result of increased costs related to the Lawter and Jager acquisitions
and expenses related to the development of e-businesses.                        

Net interest expense increased in 1999, reflecting increased debt as a
result of the Lawter acquisition.                                               

     Decreased pension expense resulting from the mid 1999 amendments to Eastman
Chemical's defined benefit pension plan had a positive impact on earnings in    
1999.                                                                           

PERFORMANCE CHEMICALS AND INTERMEDIATES                                     

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

    Although increased selling prices in the PCI segment had a positive impact
on sales revenue of 5% for the first six months of 2001 over the first six      
months of 2000, sales revenue declined 9% in the applicable period due to lower 
sales volume attributed to weaker demand and the mix of products sold. Decreased
sales volume and the mix of products sold each had a negative impact of 6% on   
sales revenue in the first six months of 2001 from the first six months of 2000.

Nonrecurring pre-tax charges of approximately $64 million, primarily  
resulting from the restructuring of the custom synthesis and photographic       
chemicals product lines, which were historically managed as part of Eastman     
Chemical's overall fine chemicals product line, sharply impacted results for the
first six months of 2001. Higher selling prices did not offset the negative     
impact of lower capacity utilization due to lower sales volume, higher costs for
raw materials and energy, and the negative impact of product mix.               

2000 COMPARED WITH 1999                                               

  Sales revenue for the PCI segment increased 4% in 2000 due to moderately
higher selling prices. Increased selling prices, driven by higher raw materials 
costs, had a positive impact on sales revenue of 7%. Sales revenue for fine     
chemicals declined in 2000, partially due to lower volume associated with       
discontinued products that were part of the fine chemicals product line. Foreign
currency exchange had a slightly negative impact on revenues in 2000.           

     Lower cost structure in 2000, in part due to dependence on coal rather than
oil or natural gas for acetyl-based products, and higher selling prices,        
resulted in substantially increased operating earnings.                         

   Operating earnings in 2000 were negatively impacted by pre-tax charges of
approximately $13 million related to the shutdown of facilities in Chocolate    
Bayou, Texas and Rochester, New York. The operating loss for 1999 included net  
pre-tax charges totaling $32 million related to exiting sorbates production at  
Chocolate Bayou, Texas; employee separations and pension settlement; phase-out  
of operations in Rochester, New York; the write-off of construction in progress 
related to an EpB plant project; and an adjustment to the reserve for sorbates  
civil litigation; partially offset by a gain resulting from the reimbursement of
previously expensed pension costs related to Holston Defense; and other items.  

     Operating earnings were positively affected by decreased pension expense in
2000 and 1999 that resulted from the mid-1999 amendments to Eastman Chemical's  
defined benefit pension plan.                                                   

1999 COMPARED WITH 1998                                               

  Sales revenue for the PCI segment in 1999 decreased 4% from 1998, due to
lower selling prices and product mix which had a negative impact on sales       
revenue of 5% and 3%, respectively, partially offset by increased sales volumes 
which had a positive impact on sales revenue of 5%.                             

  94

DEFS14A
101st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 101st
   The operating loss in 1999 resulted from lower selling prices, higher raw
materials costs, particularly for propane, and several nonrecurring items       
totaling $32 million, including a pre-tax charge of $17 million related to      
exiting sorbates production at Chocolate Bayou, Texas, $15 million related to   
employee separations and pension settlement, $9 million related to phase-out of 
operations in Rochester, New York, $9 million for the write-off of construction 
in progress related to an EpB plant project and a $5 million adjustment to the  
reserve for sorbates civil litigation, which were partially offset by a pre-tax 
gain of approximately $20 million for the reimbursement of previously expensed  
pension costs related to Holston Defense, and other items. As a result of the   
adoption of SOP 98-1 in 1999, approximately $6 million of certain internal-use  
software costs were capitalized which otherwise would have been expensed.       

Operating earnings for 1998 were negatively impacted by nonrecurring  
charges totaling $27 million. Nonrecurring charges included pre-tax charges of  
$14 million related to certain underperforming assets and discontinued capital  
projects, an $11 million charge related to a fine for violation of the Sherman  
Act and a pre-tax charge of $2 million related to a power outage at the         
Kingsport, Tennessee, manufacturing site.                                       

     Decreased pension expense in 1999 resulting from the mid-1999 amendments to
Eastman Chemical's defined benefit pension plan had a positive impact on        
earnings.                                                                       

SPECIALTY PLASTICS                                                          

SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30,
2000.                                                                           

  Sales revenue declined 6% for the SP segment for the first six months of
2001 due to decreased sales volumes which had a negative impact on sales revenue
of 5%. The decrease in sales volumes was driven mainly by lower demand for the  
cellulosics product line.                                                       

 Although operating earnings remained strong for the copolyester product
lines such as Spectar copolyester, results for the cellulosics product line     
declined as capacity utilization decreased due to weaker demand. Higher costs   
for raw materials and energy negatively impacted operating earnings.            

2000 COMPARED WITH 1999                                               

     Sales revenue for the SP segment increased 4% in 2000 as higher volumes had
a positive impact on revenues of 6%, partially offset 3% by the negative effect 
of foreign currency exchange.                                                   

Lower cost structure resulted in increased operating earnings for 2000
compared to 1999. Operating earnings for 1999 included pre-tax charges totaling 
$10 million related to employee separations and pension settlement, and the     
write-off of purchased technology that was determined to have no future value.  

     Operating earnings were positively affected by decreased pension expense in
2000 and 1999 resulting from the mid-1999 amendments to Eastman Chemical's      
defined benefit pension plan.                                                   

1999 COMPARED WITH 1998                                               

     Sales revenue for specialty plastics increased in 1999 due to significantly
higher sales volume for copolyester products, such as Spectar copolymer. Selling
prices for specialty plastics were slightly lower in 1999 compared with 1998.   

     Operating earnings declined significantly in 1999 as a result of higher raw
materials costs, particularly for paraxylene and ethylene glycol. Several       
nonrecurring items totaling $10 million negatively impacted operating earnings  
in 1999. These included a pre-tax charge of $6 million related to employee      
separations and pension settlement and a pre-tax charge of $4 million related to
write-off of purchased technology that was determined to have no future value.  
As a result of the adoption of SOP 98-1 in 1999, approximately $6 million of    
certain internal-use software costs were capitalized which otherwise would have 
been expensed.                                                                  

  95

DEFS14A
102nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 102nd
  Operating earnings for 1998 included a nonrecurring charge of $1 million
related to a power outage at the Kingsport, Tennessee, manufacturing site.      

     Decreased pension expense in 1999 resulting from the mid-1999 amendments to
Eastman Chemical's defined benefit pension plan had a positive impact on        
earnings.                                                                       

POLYMERS SEGMENT                                                            

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

Sales revenue for the polymers segment increased 4% for the first six 
months of 2001, primarily due to increased selling prices which had a positive  
impact on sales revenue of 8%. The increase in selling prices was driven by     
significantly higher selling prices for PET polymers, offset by lower sales     
revenue for polyethylene. An unfavorable move in foreign currency exchange rates
negatively affected revenues for the first six months of 2001 by 2%.            

  Nonrecurring pre-tax charges totaling approximately $211 million, higher
costs for raw materials and energy and lower selling prices for polyethylene    
products sharply impacted operating earnings for the first six months of 2001.  
The nonrecurring pre-tax charges primarily resulted from the write-off of a     
prepaid asset related to the termination of a raw material supply agreement and 
the write-down of underperforming polyethylene assets.                          

2000 COMPARED WITH 1999                                               

   Sales revenue for the polymers segment increased 22% mainly due to higher
selling prices which had a positive impact on sales revenue of 26%. The increase
in selling prices is attributable to higher selling prices for PET polymers in  
2000, driven by an improved supply and demand balance for PET polymers. Sales   
volumes for PET polymers used in beverage containers were level in 2000 compared
with 1999 due to Eastman Chemical's firm stance on selling prices and a maturing
carbonated soft drink market in North America. Foreign currency exchange had a  
negative impact on sales revenue of 4%, although the impact in Europe, Middle   
East and Africa was more significant due to the strength of the U.S. dollar     
against the euro.                                                               

Operating earnings for the segment were sharply higher for the year   
primarily due to Eastman Chemical's lower cost structure and substantially      
higher selling prices for PET polymers. Margins on polyethylene products were   
pressured by higher raw material costs and lower selling prices that resulted   
from slowing demand.                                                            

The polymers segment's operating earnings were positively affected by 
decreased pension expense in 2000 and 1999 resulting from mid-1999 amendments to
Eastman Chemical's defined benefit pension plan, and in 2000, by a gain on the  
sale of certain assets.                                                         

     Operating earnings for 1999 were negatively impacted by previously reported
pre-tax charges totaling $37 million related to employee separations and pension
settlement, write-off of construction in progress related to a PTA plant project
in Columbia, South Carolina, a loss recognized on an investment, and write-off  
of technology which was determined to have no future value.                     

1999 COMPARED WITH 1998                                               

     Continued strong worldwide demand for PET polymers resulted in higher sales
volumes of approximately 14% for PET polymers in 1999 compared to 1998. Although
selling prices for PET polymers for the year overall were approximately 15%     
lower than 1998, prices increased during the latter half of 1999. Operating     
earnings declined sharply in 1999 as a result of lower selling prices, higher   
raw material costs, particularly for ethylene glycol and paraxylene, and several
nonrecurring items totaling $37 million pertaining to employee separations and  
pension settlement, write-off of construction in progress related to a PTA plant
project in Columbia, South Carolina, a loss recognized on an investment, and    
write-off of technology which was determined to have no future value. Operating 
earnings for the polymers segment                                               

  96

DEFS14A
103rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 103rd
were positively affected by decreased pension expense in 1999 resulting from    
mid-1999 amendments to Eastman Chemical's defined benefit pension plan. As a    
result of the adoption of SOP 98-1 in 1999, approximately $3 million of certain 
internal-use software costs were capitalized which otherwise would have been    
expensed.                                                                       

 Results for 1998 reflected a pre-tax charge of approximately $1 million
related to a power outage at the Kingsport, Tennessee, manufacturing site.      

FIBERS SEGMENT                                                              

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

Higher selling prices had a positive impact on sales revenue of 3% and
higher sales volume, attributable to the timing of increased orders in Asia     
Pacific, had a slight positive impact on sales revenue for the fibers segment in
the first six months of 2001.                                                   

     Operating earnings increased 6% for the first six months of 2001 mainly due
to the increase in sales volume.                                                

2000 COMPARED WITH 1999                                               

    Sales revenue for the fibers segment was level in 2000 compared with 1999.
Higher sales volume was offset by the negative impact of price and foreign      
exchange.                                                                       

  Operating earnings for the fibers segment increased sharply for the year
mainly due to lower cost structure and were positively affected by decreased    
pension expense in 2000 and 1999 resulting from mid-1999 amendments to Eastman  
Chemical's defined benefit pension plan. Operating earnings for 1999 were       
negatively impacted by previously reported pre-tax charges totaling $8 million  
related to employee separations and pension settlement.                         

1999 COMPARED WITH 1998                                               

In 1999, sales revenue for the fibers segment declined 8% due to lower
sales volume and 3% due to lower selling prices. Operating earnings declined 14%
mainly due to higher costs for raw materials and lower selling prices and sales 
volumes.                                                                        

  Operating earnings in 1999 were also negatively impacted by nonrecurring
charges totaling $8 million pertaining to a net charge related to employee      
separations and pension settlement. Operating earnings were positively affected 
by decreased pension expense in 1999 resulting from amendments to Eastman       
Chemical's defined benefit pension plan. As a result of the adoption of SOP 98-1
in 1999, approximately $3 million of certain internal-use software costs were   
capitalized which otherwise would have been expensed.                           

 Results for 1998 reflected a pre-tax charge of approximately $2 million
related to a power outage at the Kingsport, Tennessee, manufacturing site.      

  97

DEFS14A
104th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 104th
EFFECT OF ACQUISITIONS ON SALES REVENUE AND VOLUME                          

     The following table presents segment information on growth in sales revenue
and volume for Eastman Chemical's existing businesses and for Eastman Chemical's
existing businesses with acquisitions:                                          

                                                        [Enlarge/Download Table]

                                                               % GROWTH (DECLINE)         % GROWTH (DECLINE)    
                                                                IN SALES REVENUE            IN SALES VOLUME     
                                                            -------------------------  -------------------------
                                                                WITH        EXISTING       WITH        EXISTING 
                                                            ACQUISITIONS   BUSINESSES  ACQUISITIONS   BUSINESSES
                                                            ------------   ----------  ------------   ----------
                                                                                                                
     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX                                                           
       MONTHS ENDED JUNE 30, 2000                                                                               
Coatings, Adhesives, Specialty Polymers and Inks...........      50            (7)          44             (9)  
Performance Chemicals and Intermediates....................      (8)          (10)         (11)           (12)  
Specialty Plastics.........................................     N/A            (6)         N/A             (6)  
Polymers...................................................     N/A             4          N/A             --   
Fibers.....................................................     N/A             3          N/A             (2)  
         Total.............................................       8            (3)           4             (6)  
     2000 COMPARED WITH 1999                                                                                    
Coatings, Adhesives, Specialty Polymers and Inks...........      41            --           37             (2)  
Performance Chemicals and Intermediates....................       4             1            1             (3)  
Specialty Plastics.........................................     N/A             4          N/A              6   
Polymers...................................................     N/A            22          N/A             --   
Fibers.....................................................     N/A            --          N/A              5   
         Total.............................................      15             7            7             (1)  
     1999 COMPARED WITH 1998                                                                                    
Coatings, Adhesives, Specialty Polymers and Inks...........      28             5           25              7   
Performance Chemicals and Intermediates....................     N/A            (3)         N/A             10   
Specialty Plastics.........................................     N/A             9          N/A             16   
Polymers...................................................     N/A            --          N/A              9   
Fibers.....................................................     N/A           (10)         N/A            (10)  
         Total.............................................       2            (1)          10              8   

SUMMARY BY CUSTOMER LOCATION                                                    

SALES BY REGION                                                             

                                                        [Enlarge/Download Table]

                                                         SIX MONTHS                              
                                                            ENDED               YEAR ENDED       
                                                          JUNE 30,             DECEMBER 31,      
                                                       ---------------   ------------------------
                                                        2001     2000     2000     1999     1998 
                                                       ------   ------   ------   ------   ------
                                                                     (IN MILLIONS)               
                                                                                                 
United States and Canada.............................. $1,656   $1,557   $3,229   $2,869   $2,934
Europe, Middle East, and Africa.......................    588      510    1,062      849      752
Asia Pacific..........................................    264      262      547      486      428
Latin America.........................................    238      204      454      386      367

   In the United States and Canada, sales revenue increased 6% for the first
six months of 2001, primarily due to higher sales volumes resulting from recent 
acquisitions which had a positive impact on sales revenue of 6%. Excluding      
acquisitions, sales volume declined 12%.                                        

   For the first six months of 2001, sales revenue outside the United States
and Canada increased 12% compared to 2000. For the first six months of 2001,    
sales revenue for Europe, the Middle East, and Africa increased $62 million due 
to higher selling prices, mainly for PET polymers, and $53 million due to       
increased sales volume attributable to acquisitions. Foreign currency exchange  
rates had a negative impact on sales revenue of $36 million. Strong demand and  
higher selling prices for PET polymers resulted in increased sales in Latin     
America for the first six months of 2001. Increased sales volumes had a positive
impact on sales revenue of $22 million and higher selling prices had a positive 
impact on sales revenue of $16 million. For the first six months of 2001,       
slightly higher sales volume in Asia Pacific had a positive impact on sales     
revenue of $11 million, partially offset by the impact of unfavorable foreign   
currency                                                                        

  98

DEFS14A
105th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 105th
movements and a shift in the mix of products sold, which combined, had a        
negative impact on sales revenue of $8 million.                                 

     Sales revenue in the United States and Canada for 2000 was $3.2 billion, up
13% from 1999 sales revenue of $2.9 billion. The improvement was primarily      
attributable to significantly higher selling prices, mainly for PET polymers,   
which accounted for 8% of the increase in sales revenue and higher sales volume,
resulting from acquisitions, which accounted for 5% of the increase in sales    
revenue.                                                                        

Sales revenue outside the United States and Canada in 2000 was $2.1   
billion, up 24% from 1999 sales revenue of $1.7 billion due to higher selling   
prices, mainly for PET polymers, which had a positive impact on sales revenue of
15% and higher sales volume resulting from acquisitions which had a positive    
impact on sales revenue of 13%. Sales revenue outside the United States and     
Canada in 2000 was 39% of total sales revenue compared with 37% in 1999. In     
Europe, Middle East and Africa, higher selling prices, mainly for PET polymers, 
had a positive impact on sales revenue of $190 million. Additional volume       
resulting from acquisitions contributed $163 million to the increase in sales   
revenue for 2000. A strong U.S. dollar against the euro resulted in a           
significantly unfavorable currency exchange effect of $131 million for that     
region. The increase in sales revenue for Latin America is primarily            
attributable to higher selling prices, mainly for PET polymers, which had a     
positive impact on sales revenue of $61 million. Sales revenue in Asia Pacific  
increased primarily due to higher sales volumes which had a positive impact on  
sales revenue of $54 million in 2000 and higher selling prices which had a      
positive impact on sales revenue of $12 million in 2000. The increase in sales  
volume was mainly for the fibers segment and the increase in selling prices was 
primarily for the PCI segment and for PET polymers.                             

  Sales revenue in the United States and Canada for 1999 and 1998 was $2.9
billion. Although polyethylene prices improved, selling prices declined overall 
3% and were significantly lower for PET polymers, oxo chemicals products, and   
imaging chemicals. Sales volume overall was relatively flat as volume gains,    
mainly attributable to the Lawter acquisition and fine chemicals, were offset by
lower sales volume for PET polymers, acetyls and fibers.                        

    Sales revenue from customers outside the United States and Canada for 1999
was $1.7 billion, up 11% from 1998 sales revenue of $1.5 billion due to         
significantly higher sales volume, which had a positive impact on sales revenue 
of $345 million. Sales revenue outside the United States and Canada was 37% of  
total sales revenue in 1999 compared with 35% for 1998. Sales revenue in Europe,
Middle East and Africa was positively impacted $203 million due primarily to    
increased sales volume resulting from the Lawter acquisition and sales volume   
improvement for PET polymers. Lower selling prices had a negative impact on     
sales revenue of $60 million. A strong U.S. dollar against foreign currencies   
resulted in an overall slightly unfavorable currency exchange effect, negatively
impacting sales revenue in Europe, Middle East and Africa by $21 million. In    
Asia Pacific, sales revenue was positively impacted $72 million due to higher   
sales volume resulting from the Lawter acquisition. Lower selling prices had a  
negative impact on sales revenue of $22 million. Sales volumes for fibers       
declined in Asia Pacific, but oxo chemicals products increased following the    
startup of a new manufacturing site in Singapore. Latin America sales increased 
$70 million due to higher sales volumes resulting from improvement for PET      
polymers, partially offset by an unfavorable currency exchange effect which     
negatively impacted sales revenue by $31 million and lower selling prices which 
had a negative effect on sales revenue of $9 million.                           

     With a substantial portion of sales to customers outside the United States,
Eastman Chemical is subject to the risks associated with operating in           
international markets. To mitigate exchange rate risks, Eastman Chemical        
frequently negotiates payment terms in U.S. dollars. In addition, where such    
actions are advisable, Eastman Chemical engages in foreign currency hedging     
transactions and requires letters of credit and prepayment for shipments where  
individual customer and country risks indicates their use is appropriate.       

  99

DEFS14A
106th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 106th
EASTMAN CHEMICAL LIQUIDITY AND CAPITAL RESOURCES                                

                                                        [Enlarge/Download Table]

                                                            SIX MONTHS           YEAR ENDED       
                                                          ENDED JUNE 30,        DECEMBER 31,      
                                                          ---------------   --------------------- 
                                                           2001     2000    2000    1999    1998  
                                                          ------   ------   -----   -----   ----- 
                                                                       (IN MILLIONS)              
                                                                                                  
CASH FLOW                                                                                         
Net cash provided by (used in)                                                                    
  Operating activities................................... $  64    $ 378    $ 831   $ 744   $ 731 
  Investing activities...................................  (385)    (102)    (465)   (715)   (545)
  Financing activities...................................   290     (293)    (451)    128    (186)
                                                          -----    -----    -----   -----   ----- 
Net change in cash and cash equivalents.................. $ (31)   $ (17)   $ (85)  $ 157   $  -- 
                                                          =====    =====    =====   =====   ===== 
Cash and cash equivalents at end of period............... $  70    $ 169    $ 101   $ 186   $  29 
                                                          =====    =====    =====   =====   ===== 

   For Eastman Chemical, cash provided by operating activities for the first
six months of 2001 reflected an increase in working capital related to a        
decrease in trade accounts payable, an increase in inventories and higher       
receivables related to the increase in sales, and also reflects the payment of  
specified employee incentive compensation expenses. In the first six months of  
2000, cash flows from Eastman Chemical's operations were positively impacted by 
settlement of strategic foreign currency hedging transactions, partially offset 
by an increase in working capital. Cash used in investing activities in the     
first six months of 2001 reflected higher expenditures for capital additions and
the Hercules acquisition, which will become a part of Eastman Company following 
the Distribution, and in the first six months of 2000, reflected the Sokolov    
acquisition, which also will become a part of Eastman Company following the     
Distribution. Cash used in investing activities also reflected lower proceeds   
from sales of assets in the first six months of 2001 compared to 2000. Cash     
provided by financing activities in the first six months of 2001 reflected an   
increase in commercial paper and other short-term borrowings related to the     
Hercules acquisition and for general operating purposes and, in first quarter   
2000, a repayment of borrowings associated with acquisitions. Cash provided by  
financing activities in the first six months of 2001 included the effect of an  
increase in treasury stock resulting from a reverse/forward stock split of      
Eastman Chemical's common stock approved by the shareowners on May 3, 2001, and 
the repurchase of shares of Eastman Chemical's common stock in the first six    
months of 2000.                                                                 

 Cash provided by operating activities was significantly higher in 2000,
reflecting Eastman Chemical's higher net earnings. Cash provided by operating   
activities in 2000 and 1999 also reflected cash provided by a continuous sale of
accounts receivable program and, in 2000, reflected proceeds from the settlement
of strategic foreign currency hedging transactions. Cash used in investing      
activities reflected lower capital expenditures over the periods presented as   
Eastman Chemical's major capital expansion projects were completed. Cash used in
financing activities in 2000 reflected the McWhorter and Sokolov acquisitions,  
in 1999 reflected the Lawter acquisition and the acquisition of a North American
textile chemicals business and in 1998 reflected the acquisition of a German    
manufacturer of specialty polymers, all of which will become a part of Eastman  
Company following the Distribution. Cash used in financing activities in 2000   
reflected significant repayment of debt incurred in the McWhorter, Lawter and   
Sokolov acquisitions and repayment of other, primarily short-term, borrowings.  
Cash provided by financing activities in 1999 reflected an increase in          
commercial paper borrowings primarily related to the Lawter acquisition and     
additional borrowings at year-end as a precautionary measure related to the year
2000 issue. Also reflected in cash flows from financing activities is the       
payment of dividends in all years presented and common stock repurchases in 2000
and 1999.                                                                       

  Eastman Chemical has access to an $800 million revolving credit facility
expiring in July 2005 and to a short-term $165 million credit agreement expiring
in December 2001. Although Eastman Chemical does not have any amounts           
outstanding under the credit facility or the credit agreement, any borrowings   
would be subject to interest at varying spreads above quoted market rates,      
principally LIBOR. The credit facility and the credit agreement require facility
fees on the total commitment that vary based on Eastman Chemical's credit       
rating. The rate for these fees for the credit facility was 0.125% as of June   
30, 2001 and                                                                    

 100

DEFS14A
107th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 107th
December 31, 2000. The rate for these fees for the credit facility in 1999 and  
1998 was 0.085% and 0.075%, respectively. The rate for these fees for the credit
agreement was 0.125% as of June 30, 2001 and December 30, 2000. The credit      
facility and the credit agreement contain a number of covenants and events of   
default, including the maintenance of certain financial ratios. Eastman Chemical
is in compliance with all these covenants for all periods.                      

     Eastman Chemical utilizes commercial paper, generally with maturities of 90
days or less, to meet its liquidity needs. Because the credit facility, which   
provides liquidity support for commercial paper, expires in July 2005, the      
commercial paper borrowings are classified as long-term borrowings since Eastman
Chemical has the ability to refinance such borrowings long term. At December 31,
1999, Eastman Chemical's commercial paper borrowings were classified as         
short-term borrowings because the revolving credit facility then in effect would
have expired in December 2000. In 1998, commercial paper borrowings were        
classified as long-term borrowings. As of June 30, 2001, Eastman Chemical's     
commercial paper outstanding balance was $675 million at an effective interest  
rate of 5.15%. At December 31, 2000, 1999 and 1998, Eastman Chemical's          
commercial paper outstanding balance was $400 million at an effective interest  
rate of 7.12%, $398 million at an effective interest rate of 6.30%, and $123    
million at interest rates ranging between 5.25% and 5.81%, respectively.        

    In 1999, Eastman Chemical entered into an agreement that allows it to sell
undivided interests in specified domestic trade accounts receivable under a     
planned continuous sale program to a third party. Under this agreement,         
receivables sold to the third party totaled $200 million at June 30, 2001 and   
December 31, 2000, and $150 million at December 31, 1999. Undivided interests in
designated receivable pools were sold to the purchaser with recourse limited to 
the receivables purchased. Fees to be paid by Eastman Chemical under this       
agreement are based on specified variable market rate indices.                  

 On May 1, 2001, Eastman Chemical completed the Hercules acquisition for
approximately $250 million. Hercules' facilities acquired by Eastman Chemical   
are located in the United States, the Netherlands, England and Mexico.          
Additionally, certain operating assets acquired will be operated under contract 
with Hercules at shared facilities in the United States. The transaction was    
financed with available cash and commercial paper borrowings.                   

  As of June 30, 2001, Eastman Chemical had outstanding approximately $1.5
billion in long-term debt, approximately $200 million of which is expected to be
retained by Voridian or retired, through refinancing or repurchases, in         
connection with the Distribution.                                               

   Eastman Chemical is currently authorized to repurchase up to $400 million
of its common stock. In the second quarter 2001, a total of 77,069 shares of    
common stock at a total cost of approximately $4 million, or an average price of
$53 per share, were repurchased. This repurchase was the result of a            
reverse/forward stock split of Eastman Chemical's common stock, which was       
approved by the shareowners on May 3, 2001. During 2000, 1,575,000 shares of    
common stock at a total cost of approximately $57 million, or an average price  
of approximately $36 per share, were repurchased under this authorization.      
During 1999, 1,094,800 shares of common stock at a cost of approximately $50    
million, or an average price of approximately $46 per share, were repurchased   
under this authorization. A total of 2,746,869 shares of common stock at a cost 
of approximately $112 million, or an average price of approximately $41 per     
share, have been repurchased under the authorization. Repurchased Eastman       
Chemical shares may be used by Eastman Chemical or, following the Distribution, 
by Voridian to meet common stock requirements for compensation and benefit plans
and other corporate purposes.                                                   

  Eastman Chemical anticipates that no contribution to its defined benefit
pension plan will be required for 2001. However, Eastman Chemical's future      
pension obligations, including projected annual contributions, are affected by  
general economic conditions (particularly interest rates), the actual investment
return on plan assets, retirement and attrition rates for employees, federal    
government regulation and other factors.                                        

 101

DEFS14A
108th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 108th
RECENTLY ISSUED ACCOUNTING STANDARDS                                            

 In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business        
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting and broadens the criteria for       
recording intangible assets separate from goodwill. Recorded goodwill and       
intangibles with indefinite useful lives will be evaluated against this new     
criteria and may result in certain intangibles being subsumed into goodwill, or 
alternatively, amounts initially recorded as goodwill may be separately         
identified and recognized apart from goodwill. SFAS No. 142 requires the use of 
a nonamortization approach to account for purchased goodwill and certain        
intangibles. Under a nonamortization approach, goodwill and certain intangibles 
will not be amortized into results of operations, but instead would be reviewed 
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and specified intangibles is    
more than its fair value. On January 1, 2002, Voridian will adopt the provisions
of each statement that apply to goodwill and intangible assets acquired prior to
June 30, 2001. Voridian expects the adoption of these accounting standards to   
result in certain intangible assets, which will be transferred to Eastman       
Company in connection with the Distribution, being subsumed into goodwill and to
have the impact of reducing annual amortization of goodwill and intangibles, now
included in results primarily for the CASPI segment, by approximately $16       
million commencing January 1, 2002. Impairment reviews may result in future     
periodic write-downs.                                                           

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset   
Retirement Obligations" which addresses financial accounting and reporting for  
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations    
associated with the retirement of long-lived assets that result from the        
acquisition, construction, development and (or) normal use of the asset.        

Voridian is required and plans to adopt the provisions of SFAS No. 143
January 1, 2003. Upon initial application of the provisions of this Statement,  
entities are required to recognize a liability for any existing asset retirement
obligations adjusted for cumulative accretion to the date of adoption of this   
Statement, an asset retirement cost capitalized as an increase to the carrying  
amount of the associated long-lived asset, and accumulated depreciation on that 
capitalized cost. The cumulative effect, if any, of initially applying this     
Statement will be recognized as a change in accounting principle. Voridian has  
not yet assessed the impact of this Statement on its financial statements.      

In October 2001, the FASB issued SFAS No. 144, "Accounting for the    
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial  
accounting and reporting for the impairment of long-lived assets and for assets 
to be disposed of and broadens the presentation of discontinued operations to   
include more disposal transactions. Voridian is required and plans to adopt the 
provisions of SFAS No. 144 January 1, 2002. Voridian has not yet completed an   
assessment of the impact of this Statement on its financial statements.         

ANALYSIS OF VORIDIAN                                                            

   Voridian is not a separate company from Eastman Chemical; accordingly, no
separate historical financial statements have been presented for Voridian.      
Certain limited financial information for the Voridian Business is presented    
below. For purposes of this presentation, Voridian's sales revenue and costs of 
goods sold reflect corresponding increases from historical Eastman Chemical     
amounts as a result of the inclusion of sales to Eastman Company that otherwise 
would have been eliminated as intercompany                                      

 102

DEFS14A
109th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 109th
transactions in Eastman Chemical's historical financial statements. Because both
of these amounts are recorded at cost, there is no impact on earnings.          

                                                        [Enlarge/Download Table]

                                                     SIX MONTHS ENDED           YEAR ENDED        
                                                         JUNE 30,              DECEMBER 31,       
                                                     -----------------   ------------------------ 
                                                      2001      2000      2000     1999     1998  
                                                     -------   -------   ------   ------   ------ 
                                                                    (IN MILLIONS)                 
                                                                                                  
VORIDIAN STATEMENTS OF EARNINGS DATA                                                              
POLYMERS:                                                                                         
Sales............................................... $  884    $  846    $1,692   $1,377   $1,378 
Operating earnings (loss) including nonrecurring                                                  
  charges...........................................   (163)       61        99     (104)      (2)
Operating earnings (loss) excluding nonrecurring                                                  
  charges...........................................     48        61        99      (72)      (2)
Capital expenditures................................     25        16        53       70      113 
EBITDA excluding nonrecurring charges...............     98       110       236       67      133 
EBIT excluding nonrecurring charges.................     48        61        99      (72)      (2)
Pro forma sales.....................................    883       N/A     1,688      N/A      N/A 
Pro forma EBITDA excluding nonrecurring charges.....     88       N/A       176      N/A      N/A 
Pro forma EBIT excluding nonrecurring charges.......     46       N/A        88      N/A      N/A 
FIBERS:                                                                                           
Sales............................................... $  358    $  345    $  716   $  726   $  796 
Operating earnings including nonrecurring charges...     74        70       150      107      124 
Operating earnings excluding nonrecurring charges...     74        70       150      116      124 
Capital expenditures................................     12         7        17       31       29 
EBITDA excluding nonrecurring charges...............     98        93       216      183      189 
EBIT excluding nonrecurring charges.................     74        70       150      116      124 
Pro forma sales.....................................    360       N/A       718      N/A      N/A 
Pro forma EBITDA excluding nonrecurring charges.....     95       N/A       191      N/A      N/A 
Pro forma EBIT excluding nonrecurring charges.......     73       N/A       149      N/A      N/A 
TOTAL:                                                                                            
Sales............................................... $1,242    $1,191    $2,408   $2,103   $2,174 
Operating earnings (loss) including nonrecurring                                                  
  charges...........................................    (89)      131       249        3      122 
Operating earnings excluding nonrecurring charges...    122       131       249       44      122 
Capital expenditures................................     37        23        70      101      142 
EBITDA excluding nonrecurring charges...............    196       203       452      250      322 
EBIT excluding nonrecurring charges.................    122       131       249       44      122 
Pro forma sales.....................................  1,243       N/A     2,406      N/A      N/A 
Pro forma EBITDA excluding nonrecurring charges.....    183       N/A       367      N/A      N/A 
Pro forma EBIT excluding nonrecurring charges.......    119       N/A       237      N/A      N/A 

SUMMARY OF VORIDIAN RESULTS                                                     

     SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000

     Sales revenue for the Voridian Business, and for each segment individually,
for the first six months of 2001 was approximately 4% higher than the comparable
period in 2000. The polymers segment revenue increased 7% due to higher selling 
prices, primarily for PET polymers, partially offset by lower sales revenue for 
polyethylene. An unfavorable move in foreign currency exchange rates negatively 
affected revenues 2% for the first six months of 2001. Sales volume for the     
Voridian Business, and for each segment individually, for the first six months  
of 2001 increased 1%. In the polymers segment, increased sales volume for PET   
polymers was primarily offset by a decline in polyethylene volume.              

   Operating results for the Voridian Business declined $220 million for the
first six months of 2001 mainly impacted by nonrecurring pre-tax charges        
totaling approximately $211 million. These charges are more fully described     
under the discussion of the polymers segment in "Summary by Operating Segment"  
above. Operating earnings were also negatively impacted by lower margins on     
polyethylene products and                                                       

 103

DEFS14A
110th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 110th
higher costs for raw materials and energy of approximately $50 million, net of  
Voridian Business' feedstock and energy cost hedging program. Improved          
performance of PET polymers had a positive impact on results. Operating earnings
for the fibers segment were 6% higher for the first six months of 2001 mainly   
due to the increase in sales volume.                                            

2000 COMPARED WITH 1999                                               

  Sales revenue for the Voridian Business increased 14% for 2000 primarily
due to a 23% increase in sales revenue for the polymers segment and an improved 
supply and demand balance. The increase in sales revenue in the polymers segment
was driven by higher selling prices, mainly for PET polymers, which had a       
positive impact on sales revenue of 26%. Increased sales volume for the fibers  
segment was offset by lower selling prices. Foreign currency exchange had a     
negative impact on revenues for both segments.                                  

  Although raw material costs increased approximately $220 million, net of
Voridian Business' feedstock and energy cost hedging program, operating earnings
increased $246 million for the year primarily due to higher revenues in the     
polymers segment arising from substantially higher selling prices for PET       
polymers and lower cost structure. Margins on polyethylene products were        
pressured by higher raw materials costs and lower selling prices that resulted  
from slowing demand. The Voridian Business' fibers segment operating earnings   
increased 40% for the year mainly due to lower cost structure. Certain          
nonrecurring items that impacted operating results for 1999 are more fully      
described under the polymers and fibers segments in "-- Summary by Operating    
Segment" above.                                                                 

1999 COMPARED WITH 1998                                               

   Sales revenue for the Voridian Business declined 3% in 1999 compared with
1998, with sales revenue remaining flat for the polymers segment and down 9% for
the fibers segment. In the polymers segment, continued strong worldwide demand  
for PET polymers resulted in a 9% increase in sales volume in 1999 compared to  
1998. However, selling prices for the year for the polymers segment were lower  
than 1998, primarily for PET polymers, and had a negative impact on sales       
revenue of 5%. Increased sales volumes had a positive impact on Voridian's      
revenue of 4% as higher polymers segment sales volume was partially offset by a 
sales volume decline for fibers.                                                

    Operating earnings for the Voridian Business declined $119 million in 1999
primarily due to lower selling prices and nonrecurring pre-tax charges totaling 
approximately $45 million. The charges are more fully described in "-- Summary  
by Operating Segment" above. Operating earnings were also negatively impacted by
higher raw material costs, particularly for ethylene glycol and paraxylene,     
which had a negative impact on results of approximately $11 million, net of     
Voridian Business' feedstock and energy cost hedging program.                   

VORIDIAN LIQUIDITY AND CAPITAL RESOURCES                                        

   Historically, cash flows from operations, supplemented by credit provided
by Eastman Chemical, were used to finance the working capital requirements,     
capital and investment projects of the Voridian Business. Upon or prior to the  
Distribution, Voridian expects to enter into credit arrangements providing for  
new borrowing options and customary commercial bank covenants appropriate to the
Voridian Business. Assuming the Distribution had occurred on June 30, 2001, on a
pro forma basis Voridian would have had total debt of $1.064 billion.           

Voridian expects that its capital requirements for 2001 will be       
approximately $65 million and will increase by approximately $30 million in     
2002, primarily for reducing bottlenecks in production lines and other process  
improvements. For 2001 and 2002, Voridian expects that depreciation will be     
approximately $113 million and $112 million, respectively.                      

Voridian believes that its cash flow from operations, supplemented by 
periodic additional borrowings from the revolving credit facility or otherwise, 
will provide it with sufficient resources to finance its operations, debt       
repayment and planned capital needs.                                            

 104

DEFS14A
111th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 111th
DIVIDENDS                                                                       

    Eastman Chemical declared cash dividends totaling $1.76 per share in 2000,
declared and paid cash dividends of $0.44 per share for each of the first two   
quarters of 2001 and has declared a cash dividend of $0.44 per share for the    
third quarter of 2001 to be paid on October 1, 2001. Based on an assumed        
distribution ratio of one for one, it is expected that the initial annual cash  
dividend to be paid by Voridian will be between $0.28 and $0.32 per share which,
when combined with the initial cash dividend expected to be paid by Eastman     
Company, will be less than the amount historically paid to shareowners of       
Eastman Chemical. The payment and level of cash dividends by Voridian after the 
Distribution are not guaranteed and will be subject to the discretion of its    
board of directors and any restrictions on its ability to pay dividends under   
Delaware law or otherwise.                                                      

 105

DEFS14A
112th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 112th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL INFORMATION 

The following unaudited consolidated pro forma statement of financial 
position as of June 30, 2001 presents Eastman Chemical's financial position     
assuming the Distribution had been completed on that date. The following        
unaudited consolidated pro forma statements of earnings (loss) for the year     
ended December 31, 2000 and the six months ended June 30, 2001 presents Eastman 
Chemical's results of operations assuming that the Distribution had been        
completed on January 1, 2000. In the opinion of Eastman Chemical's management,  
these statements include all material adjustments necessary to reflect, on a pro
forma basis, the impact of the Distribution on the historical financial         
information of Eastman Chemical. The adjustments are described in the           
accompanying notes to and are set forth in the "Pro Forma Adjustments" column.  

    Following the Distribution, Eastman Chemical (to be renamed Voridian) will
conduct the Voridian Business. For accounting purposes, Eastman Chemical will   
treat the Distribution of the Eastman Company Business as a discontinued        
operation in accordance with Accounting Principles Board Opinion No. 30.        
Accordingly, the following unaudited 1999 and 1998 pro forma financial          
information reflects the exclusion of the assets and liabilities and the results
of operations of Eastman Company.                                               

   In connection with the Distribution, Eastman Chemical and Eastman Company
will enter into a number of contracts relating to product sales, operating and  
service agreements. These agreements are given effect in the pro forma          
adjustments as described in the accompanying unaudited pro forma consolidated   
statements of earnings (loss).                                                  

     Voridian's unaudited consolidated pro forma financial information should be
read in conjunction with, and are qualified in their entirety by, the           
information under "Eastman Chemical Selected Consolidated Financial Data,"      
"Eastman Chemical Management's Discussion and Analysis of Financial Condition   
and Results of Operations" and Eastman Chemical's consolidated financial        
statements and the related notes included elsewhere in this proxy statement. The
unaudited consolidated pro forma financial information has been presented for   
informational purposes only and does not necessarily reflect the results of     
operations or financial position of Voridian that would have existed had        
Voridian operated as a separate, independent company for the periods presented  
and should not be relied upon as being indicative of its future results after   
the Distribution.                                                               

 106

DEFS14A
113th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 113th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF EARNINGS (LOSS)

                                                        [Enlarge/Download Table]

                                                              SIX MONTHS ENDED JUNE 30, 2001          
                                                    --------------------------------------------------
                                                                  EASTMAN          PRO                
                                                    EASTMAN       COMPANY         FORMA         PRO   
                                                    CHEMICAL   HISTORICAL(A)   ADJUSTMENTS    FORMA(A)
                                                    --------   -------------   -----------    --------
                                                         (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)      
                                                                                                      
Sales..............................................  $2,746       $1,919          $415(b)             
                                                                                     1(c)      $1,243 
Cost of sales......................................   2,261        1,643           415(b)             
                                                                                    13(d)       1,046 
Asset impairments and restructuring costs..........     290           80            --            210 
                                                     ------       ------          ----         ------ 
Gross profit.......................................     195          196           (12)           (13)
Selling and general administrative expenses........     212          145           (10)(e)         57 
Research and development costs.....................      79           58             1(f)          22 
Write-off of acquired in-process research and                                                         
  development......................................       8            8            --             -- 
                                                     ------       ------          ----         ------ 
Operating earnings (loss)..........................    (104)         (15)           (3)           (92)
Interest expense, net..............................      72           50             7(g)          29 
Other income.......................................     (11)          (8)           --             (3)
Other charges......................................      23           20            --              3 
                                                     ------       ------          ----         ------ 
Earnings (losses) before income taxes..............    (188)         (77)          (10)          (121)
Provision (benefit) for income taxes...............     (78)         (36)           (3)(h)        (45)
                                                     ------       ------          ----         ------ 
          Net earnings (loss) from continuing                                                         
            operations.............................  $ (110)      $  (41)         $ (7)        $  (76)
                                                     ======       ======          ====         ====== 
Basic earnings (loss) per share....................  $(1.44)                                   $(0.99)
                                                     ======                                    ====== 
Diluted earnings (loss) per share..................  $(1.44)                                   $(0.99)
                                                     ======                                    ====== 
Shares used in calculating earnings (loss) per                                                        
  share:                                                                                              
  Basic............................................    76.7                                      76.7 
  Diluted..........................................    76.7                                      76.7 

---------------                                                                 

(a)  Represents the exclusion of the results of operations of Eastman Company   
     that are included in Eastman Chemical's Consolidated Statements of Earnings
(Loss).                                                               

(b)  Reflects the recording of sales and purchases, when recorded at cost,      
    between the Voridian Business and the Eastman Company Business, which were
previously eliminated as part of the Eastman Chemical consolidation.  

(c)  Product sales between Voridian and Eastman Company were historically       
 recorded at cost. This adjustment reflects the estimated net profits on
   product sales from Voridian to Eastman Company. The adjustments are based
    on contracts for product sales that will be entered into as of the date of
the Distribution.                                                     

(d)  Reflects the estimated additional cost of sales resulting from product     
   sales from Eastman Company to Voridian at market or formula based pricing
   and services performed by Eastman Company for Voridian, offset by the net
     amount of management fees charged between Eastman Company and Voridian. The
     adjustments are based on contracts for product sales and operating services
 that will be entered into as of the date of the Distribution. Operating
  service management fees of $1 million charged by Voridian are treated as
reimbursement of Voridian's fully allocated cost.                     

(e)  Reflects the estimated additional selling and general administrative       
    expenses resulting from assignment of personnel to Voridian of $11 million
offset by management fees charged to Voridian by Eastman Company of $1
million. The management fees charged to Voridian by Eastman Company   

 107

DEFS14A
114th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 114th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF EARNINGS (LOSS) -- (CONTINUED) 

are for employee, administrative and other services. The personnel    
     adjustment arises due to differences between the historical cost allocation
    of personnel compared to the actual assignment of personnel to Voridian as
of the date of the Distribution.                                      

(f)  Reflects the increase in research and development costs resulting from     
management fees charged to Voridian by Eastman Company.               

(g)  To record the estimated net increase in net interest expense as a result of
the Distribution above that which was historically allocated to the   
   Voridian Business. Interest rate assumed on the long-term debt was 6.91%,
Eastman Chemical's historical weighted average interest rate.         

     The pro forma adjustment to interest expense reflected the following items:

                                                                [Download Table]

                                                              (IN MILLIONS)
                                                                           
Gross interest expense on long-term debt remaining with                    
  Eastman Chemical..........................................      $ 33     
Less capitalized interest expense...........................        (2)    
Interest income.............................................        (2)    
                                                                  ----     
          Total pro forma net interest expense..............        29     
Less historical.............................................       (22)    
                                                                  ----     
Pro forma adjustment........................................      $  7     
                                                                  ====     

    An increase in the assumed rate on the revolving credit facility and fixed
  rate debt of  1/4% would increase the pro forma interest expense by $1.1
million.                                                              

(h)  To record the impact of the pre-tax pro forma adjustments at the tax rate  
of 38%.                                                               

 108

DEFS14A
115th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 115th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF EARNINGS 

                                                        [Enlarge/Download Table]

                                                              YEAR ENDED DECEMBER 31, 2000            
                                                    ------------------------------------------------- 
                                                                  EASTMAN          PRO                
                                                    EASTMAN       COMPANY         FORMA         PRO   
                                                    CHEMICAL   HISTORICAL(A)   ADJUSTMENTS     FORMA  
                                                    --------   -------------   -----------     ------ 
                                                         (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)      
                                                                                                      
Sales..............................................  $5,292       $3,665          $781(b)             
                                                                                    (2)(c)     $2,406 
Cost of sales......................................   4,226        3,016           781(b)             
                                                                                    31(d)       2,022 
                                                     ------       ------          ----         ------ 
Gross profit.......................................   1,066          649           (33)           384 
Selling and general administrative expenses........     346          223           (22)(e)        101 
Research and development costs.....................     149          104             1(f)          46 
Write-off of acquired in-process research and                                                         
  development......................................       9            9            --             -- 
                                                     ------       ------          ----         ------ 
Operating earnings.................................     562          313           (12)           237 
Interest expense, net..............................     135           88             2(g)          49 
Gain recognized on initial public offering of                                                         
  equity investment................................     (38)         (38)           --             -- 
Other income.......................................     (39)         (34)           --             (5)
Other charges......................................      52           44            --              8 
                                                     ------       ------          ----         ------ 
Earnings before income taxes.......................     452          253           (14)           185 
Provision for income taxes.........................     149           91            (5)(h)         53 
                                                     ------       ------          ----         ------ 
Net earnings from continuing operations............  $  303       $  162          $ (9)        $  132 
                                                     ======       ======          ====         ====== 
Basic earnings per share...........................  $ 3.95                                    $ 1.72 
                                                     ======                                    ====== 
Diluted earnings per share.........................  $ 3.94                                    $ 1.71 
                                                     ======                                    ====== 
Shares used in calculating earnings per share:                                                        
  Basic............................................    76.8                                      76.8 
  Diluted..........................................    77.0                                      77.0 

---------------                                                                 

(a)  Represents the exclusion of the results of operations of Eastman Company   
     that are included in Eastman Chemical's Consolidated Statements of Earnings
(Loss).                                                               

(b)  Reflects the recording of sales and purchases, recorded at cost, between   
the Voridian Business and the Eastman Company Business, which were    
previously eliminated as part of the Eastman Chemical consolidation.  

(c)  Product sales between Voridian and Eastman Company were historically       
 recorded at cost. This adjustment reflects the estimated net profits on
   product sales from Voridian to Eastman Company. The adjustments are based
    on contracts for product sales that will be entered into as of the date of
the Distribution.                                                     

(d)  Reflects the estimated additional cost of sales resulting from product     
   sales from Eastman Company to Voridian at market or formula based pricing
   and services performed by Eastman Company for Voridian, offset by the net
     amount of management fees charged between Eastman Company and Voridian. The
     adjustments are based on contracts for product sales and operating services
 that will be entered into as of the date of the Distribution. Operating
  service management fees of $1 million charged by Voridian are treated as
reimbursement of Voridian's fully allocated cost.                     

(e)  Reflects the estimated additional selling and general administrative       
    expenses resulting from assignment of personnel to Voridian of $23 million
offset by management fees charged to Voridian by Eastman Company of $1
   million. The management fee charged to Voridian by Eastman Company is for
employee, administrative and other services. The personnel adjustment 
arises due to differences                                             

 109

DEFS14A
116th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 116th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF EARNINGS -- (CONTINUED)

between the historical cost allocation of personnel compared to the   
 assignment of personnel to Voridian as of the date of the Distribution.

(f)  Reflects the increase in research and development costs resulting from     
management fees charged to Voridian by Eastman Company.               

(g)  To record the estimated net increase in net interest expense as a result of
the Distribution above that which was historically allocated to the   
   Voridian Business. Interest rate assumed on the long-term debt was 7.05%,
Eastman Chemical's historical weighted average interest rate.         

     The pro forma adjustment to interest expense reflected the following items:

                                                                [Download Table]

                                                              (IN MILLIONS)
                                                              -------------
                                                                           
Gross interest expense on long-term debt....................      $ 55     
Less capitalized interest expense...........................        (4)    
Interest income.............................................        (2)    
                                                                  ----     
          Total pro forma net interest expense..............        49     
Less historical.............................................       (47)    
                                                                  ----     
Pro forma adjustment........................................      $  2     
                                                                  ====     

An increase in the assumed rate on the long term debt of  1/4% would  
increase the pro forma interest expense by $2.2 million.              

(h)  To record the impact of the pre-tax pro forma adjustments at the tax rate  
of 38%.                                                               

 110

DEFS14A
117th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 117th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED PRO FORMA 
CONSOLIDATED STATEMENT OF EARNINGS

                                                        [Enlarge/Download Table]

                                                              YEAR ENDED DECEMBER 31, 1999            
                                                    ------------------------------------------------- 
                                                                  EASTMAN          PRO                
                                                    EASTMAN       COMPANY         FORMA         PRO   
                                                    CHEMICAL   HISTORICAL(A)   ADJUSTMENTS     FORMA  
                                                    --------   -------------   -----------     ------ 
                                                         (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)      
                                                                                                      
Sales..............................................  $4,590       $3,187          $700(b)      $2,103 
Cost of sales......................................   3,768        2,588           700(b)       1,880 
                                                     ------       ------          ----         ------ 

Gross profit.......................................     822          599            --            223 
Selling and general administrative expenses........     355          223            --            132 
Research and development costs.....................     187          123            --             64 
Write-off of acquired in-process research and                                                         
  development......................................      25           25            --             -- 
Employee separations and pension                                                                      
  settlement/curtailment...........................      53           29            --             24 
                                                     ------       ------          ----         ------ 
Operating earnings.................................     202          199            --              3 
Interest expense, net..............................     121           75           (10)(c)         36 
Other income.......................................     (20)         (18)           --             (2)
Other charges......................................      29           30            --             (1)
                                                     ------       ------          ----         ------ 
Earnings (loss) before income taxes................      72          112            10            (30)
Provision (benefit) for income taxes...............      24           42             4(d)         (14)
                                                     ------       ------          ----         ------ 
Net earnings (loss) from continuing operations.....  $   48       $   70          $  6         $  (16)
                                                     ======       ======          ====         ====== 
Basic earnings (loss) per share....................  $ 0.61                                    $(0.20)
                                                     ======                                    ====== 
Diluted earnings (loss) per share..................  $ 0.61                                    $(0.20)
                                                     ======                                    ====== 
Shares used in calculating earnings per share:                                                        
  Basic............................................    78.2                                      78.2 
  Diluted..........................................    78.4                                      78.2 

---------------                                                                 

(a)  Represents the exclusion of the results of operations of Eastman Company   
    that are included in Eastman Chemical's Consolidated Statement of Earnings
(Loss).                                                               

(b)  Reflects the recording of sales and purchases, when recorded at cost,      
    between the Voridian Business and the Eastman Company Business, which were
previously eliminated as part of the Eastman Chemical consolidation.  

(c)  To record the estimated net decrease in net interest expense as a result of
the Distribution above that which was historically allocated to the   
   Voridian Business. Interest rate assumed on the long-term debt was 6.86%,
Eastman Chemical's historical weighted average interest rate.         

     The pro forma adjustment to interest expense reflected the following items:

                                                                [Download Table]

                                                                  (IN MILLIONS)
                                                                  -------------
                                                                               
Gross interest expense on long term debt....................          $ 46     
Less capitalized interest expense...........................            (9)    
Interest income.............................................            (1)    
                                                                      ----     
          Total pro forma net interest expense..............            36     
Less historical.............................................           (46)    
                                                                      ----     
Pro forma adjustment........................................          $(10)    
                                                                      ====     

(d)  To record the impact of the pre-tax pro forma adjustments at the tax rate  
of 38%.                                                               

 111

DEFS14A
118th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 118th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

                                                        [Enlarge/Download Table]

                                                              YEAR ENDED DECEMBER 31, 1998            
                                                    ------------------------------------------------- 
                                                                  EASTMAN          PRO                
                                                    EASTMAN       COMPANY         FORMA         PRO   
                                                    CHEMICAL   HISTORICAL(A)   ADJUSTMENTS     FORMA  
                                                    --------   -------------   -----------     ------ 
                                                         (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)      
                                                                                                      
Sales..............................................  $4,481       $2,987         $  680(b)     $2,174 
Cost of sales......................................   3,546        2,362            680(b)      1,864 
                                                     ------       ------         ------        ------ 
Gross profit.......................................     935          625             --           310 
Selling and general administrative expenses........     316          191             --           125 
Research and development costs.....................     185          122             --            63 
                                                     ------       ------         ------        ------ 
Operating earnings.................................     434          312             --           122 
Interest expense, net..............................      91           55            (25)(c)        11 
Other income.......................................     (19)         (16)            --            (3)
Other charges......................................       2            2             --            -- 
                                                     ------       ------         ------        ------ 
Earnings before income taxes.......................     360          271             25           114 
Provision for income taxes.........................     111           91             10(d)         30 
                                                     ------       ------         ------        ------ 
Net earnings from continuing operations............  $  249       $  180         $   15        $   84 
                                                     ======       ======         ======        ====== 
Basic earnings per share...........................  $ 3.15                                    $ 1.06 
                                                     ======                                    ====== 
Diluted earnings per share.........................  $ 3.13                                    $ 1.06 
                                                     ======                                    ====== 
Shares used in calculating earnings per share:                                                        
  Basic............................................    78.9                                      78.9 
  Diluted..........................................    79.5                                      79.5 

---------------                                                                 

(a)  Represents the exclusion of the results of operations of Eastman Company   
    that are included in Eastman Chemical's Consolidated Statement of Earnings
(Loss).                                                               

(b)  Reflects the recording of sales and purchases, recorded at cost, between   
the Voridian Business and the Eastman Company Business, which were    
previously eliminated as part of the Eastman Chemical consolidation.  

(c)  To record the estimated net decrease in net interest expense as a result of
the Distribution above that which was historically allocated to the   
   Voridian Business. Interest rate assumed on the long-term debt was 7.09%,
Eastman Chemical's historical weighted average interest rate.         

     The pro forma adjustment to interest expense reflected the following items:

                                                                [Download Table]

                                                                  (IN MILLIONS)
                                                                  -------------
                                                                               
Gross interest expense on long term debt....................          $ 34     
Less capitalized interest expense...........................           (22)    
Interest income.............................................            (1)    
                                                                      ----     
          Total pro forma net interest expense..............            11     
Less historical.............................................           (36)    
                                                                      ----     
Pro forma adjustment........................................          $(25)    
                                                                      ====     

(d)  To record the impact of the pre-tax pro forma adjustments at the tax rate  
of 38%.                                                               

 112

DEFS14A
119th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 119th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF FINANCIAL POSITION 

                                                        [Enlarge/Download Table]

                                                                       JUNE 30, 2001                   
                                                    ---------------------------------------------------
                                                                  EASTMAN          PRO                 
                                                    EASTMAN       COMPANY         FORMA          PRO   
                                                    CHEMICAL   HISTORICAL(A)   ADJUSTMENTS      FORMA  
                                                    --------   -------------   -----------     --------
                                                                       (IN MILLIONS)                   
                                                                                                       
                                                ASSETS                                                 
Current assets                                                                                         
  Cash and cash equivalents.......................   $   70       $   --         $    --        $   70 
  Trade receivables, net..........................      673          359              --           314 
  Miscellaneous receivables.......................       86           49               5(b)         42 
  Inventories.....................................      731          535              --           196 
  Other current assets............................       96           65               6(c)         37 
                                                     ------       ------         -------        ------ 
          Total current assets....................    1,656        1,008              11           659 
                                                     ------       ------         -------        ------ 
Properties                                                                                             
  Properties and equipment at cost................    8,908        5,792              --         3,116 
  Less: Accumulated depreciation..................    5,160        3,187              --         1,973 
                                                     ------       ------         -------        ------ 
          Net properties..........................    3,748        2,605              --         1,143 
                                                     ------       ------         -------        ------ 
Goodwill, net of accumulated amortization.........      336          336              --            -- 
Other intangibles, net of accumulated                                                                  
  amortization....................................      268          268              --            -- 
Other noncurrent assets...........................      426          363              39(b)        102 
                                                     ------       ------         -------        ------ 
          Total assets............................   $6,434       $4,580         $    50        $1,904 
                                                     ======       ======         =======        ====== 
                                  LIABILITIES AND SHAREOWNERS' EQUITY                                  
Current liabilities                                                                                    
  Payables and other current liabilities..........   $  968       $  552         $    15(c)            
                                                                                     (22)(d)    $  409 
  Borrowings due within one year..................      179           --              --           179 
                                                     ------       ------         -------        ------ 
          Total current liabilities...............    1,147          552              (7)          588 
                                                     ------       ------         -------        ------ 
Long-term borrowings..............................    2,185           --          (1,300)(e)       885 
Deferred income tax credits.......................      527          530              15(b)         12 
Postemployment obligations........................      849          270              57(b)        636 
Other long-term liabilities.......................      116           65              --            51 
                                                     ------       ------         -------        ------ 
          Total liabilities.......................    4,824        1,417          (1,235)        2,172 
                                                     ------       ------         -------        ------ 
Shareowners' equity                                                                                    
  Common stock ($0.01 par -- 350,000,000 shares                                                        
     authorized; shares issued -- 85,023,199).....        1           --              --             1 
  Paid-in capital.................................      118           --              --           118 
  Retained earnings...............................    2,088           --                               
                                                                                      (9)(c)           
                                                                                     (28)(b)           
                                                                                  (3,241)(f)           
                                                                                   1,300(e)            
                                                                                      22(d)        132 
  Other comprehensive loss........................     (155)         (78)                          (77)
  Net investment in Eastman Chemical..............       --        3,241           3,241(f)         -- 
                                                     ------       ------         -------        ------ 
                                                      2,052        3,163           1,285           174 

 113

DEFS14A
120th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 120th
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF FINANCIAL POSITION -- (CONTINUED)

                                                        [Enlarge/Download Table]

                                                                    JUNE 30, 2001                   
                                                 ---------------------------------------------------
                                                               EASTMAN          PRO                 
                                                 EASTMAN       COMPANY         FORMA          PRO   
                                                 CHEMICAL   HISTORICAL(A)   ADJUSTMENTS      FORMA  
                                                 --------   -------------   -----------     --------
                                                                    (IN MILLIONS)                   
                                                                                                    
Less: Treasury stock at cost (8,073,859                                                             
   shares)......................................     442           --              --           442 
                                                  ------       ------         -------        ------ 
        Total shareowners' equity...............   1,610        3,163           1,285          (268)
                                                  ------       ------         -------        ------ 
        Total liabilities and shareowners'                                                          
          equity................................  $6,434       $4,580         $    50        $1,904 
                                                  ======       ======         =======        ====== 

---------------                                                                 
(a)  Reflects the separation of the assets and liabilities of Eastman Company   
  that are in Eastman Chemical's consolidated balance sheet as of June 30,
   2001. Amounts have been derived from the unaudited consolidated financial
statements of Eastman Company as of June 30, 2001.                    

(b)  To record the transfer of assets and liabilities, and the related deferred 
     taxes, of Holston Defense, which ceased operations on December 31, 1998, to
     Voridian. As of the date of Distribution, ownership of Holston Defense will
be assumed by Voridian.                                               

(c)  In connection with the Distribution, Eastman Chemical expects to incur     
     various transaction costs of approximately $15 million. These costs are not
 included in the unaudited pro forma consolidated statement of earnings.
     These costs are reflected on the unaudited pro forma consolidated statement
of financial position and are outlined as follows:                    

                                                                [Download Table]

                                                                 (IN MILLIONS)    
                                                             ---------------------
                                                                                  
Financial advisors..........................................         $  5         
Legal and accounting........................................          7.5         
Other.......................................................          2.5         
                                                                     ----         
                                                                       15         
Less tax effect at 38%......................................           (6)        
                                                                     ----         
                                                                     $  9         
                                                                     ====         

(d)  To reflect interest payable on debt assigned to Eastman Company of $36     
    million, calculated on $1.3 billion of debt at an assumed interest rate of
     7.08%, less the related tax effect of $14 million, based on the tax rate of
   38%. This accrual is 4.7 months of interest, the weighted average months'
    interest unpaid on the assumed debt. Interest payable was not allocated to
Eastman Company in the historical financial statements as no debt was 
allocated to Eastman Company in these historical statements.          

(e)  Reflects the long term debt to be assumed by Eastman Company as well as    
   Voridian's expected borrowing on its revolving credit facility concurrent
with the Distribution.                                                

(f)  To reflect Eastman Chemical's distribution of Eastman Company.             

 114

DEFS14A
121st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 121st
EASTMAN CHEMICAL
(TO BE RENAMED VORIDIAN)

CAPITALIZATION

The following table sets forth the debt and capitalization of Eastman 
Chemical as of June 30, 2001 on a historical basis and of Voridian on a pro     
forma basis to give effect to the Distribution. This table should be read in    
conjunction with the information under the heading "Eastman Chemical            
Management's Discussion and Analysis of Financial Condition and Results of      
Operations" and Eastman Chemical's consolidated financial statements and the    
related notes included elsewhere in this proxy statement. The pro forma         
information set forth below gives effect to the Distribution as if it had       
occurred on June 30, 2001. This information is not indicative of the            
capitalization of Voridian in the future or as it would have been had Voridian  
been a separate, independent company at June 30, 2001 or had the Distribution   
actually been completed on that date.                                           

 Based upon the relative financial conditions, results of operations and
prospects of Eastman Chemical (to be renamed Voridian after the Distribution)   
and Eastman Company, Eastman Chemical determined that $1.3 billion would be an  
appropriate allocation to Eastman Company of the existing Eastman Chemical debt 
at June 30, 2001. Accordingly, in connection with the Distribution (i)          
approximately $200 million of Eastman Chemical's long-term debt will be retained
by Voridian or retired, and (ii) $675 million of commercial paper of Eastman    
Chemical will be retired. Eastman Chemical expects to amend and restate its $800
million revolving line of credit. Eastman Chemical is in the process of         
negotiating credit arrangements for Voridian, which are expected to be          
implemented simultaneously with the Distribution. These arrangements are        
expected to be used for the retirement of debt and for Voridian's working       
capital needs after the Distribution.                                           

                                                        [Enlarge/Download Table]

                                                                     JUNE 30, 2001         
                                                             ------------------------------
                                                              EASTMAN            EASTMAN   
                                                              CHEMICAL           CHEMICAL  
                                                             HISTORICAL         PRO FORMA  
                                                             ----------        ------------
                                                                     (IN MILLIONS)         
                                                                                           
SHORT-TERM BORROWINGS:                                                                     
  Notes payable.............................................   $  174             $  174   
  Other.....................................................        5                  5   
LONG-TERM BORROWINGS:                                                                      
  Long term debt............................................    1,493                868   
  Commercial paper..........................................      675                 --   
  Other.....................................................       17                 17   
SHAREOWNERS' EQUITY:                                                                       
  Common stock, $0.01 par value, 350,000,000 shares                                        
     authorized, 85,023,199 issued and outstanding..........        1                  1   
  Paid-in capital...........................................      118                118   
  Retained earnings.........................................    2,088                132   
  Other comprehensive loss..................................     (155)               (77)  
  Treasury stock............................................     (442)              (442)  
                                                               ------             ------   
          Total Shareowners' Equity.........................    1,610               (268)  
                                                               ------             ------   
          Total Capitalization..............................   $3,974             $  796   
                                                               ======             ======   

 115

DEFS14A
122nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 122nd
DIVIDEND POLICIES 

    Following the Distribution, Voridian intends to pay quarterly dividends on
its common stock at an initial annual rate of between $0.28 and $0.32 per share,
and Eastman Company intends to pay quarterly dividends on its common stock at an
initial annual rate of between $0.80 and $0.88 per share, assuming a            
distribution ratio of one for one. The payment and level of cash dividends by   
Voridian and Eastman Company are not guaranteed and will be subject to the      
discretion of each company's board of directors. Some factors to be considered  
by each company's board of directors in determining the actual amount of        
dividends to pay after the Distribution include that company's results of       
operations, financial condition, cash needs, business prospects and other       
factors deemed relevant, including any restrictions on that company's ability to
pay dividends on its common stock under Delaware law or otherwise. Delaware law 
prohibits a company from declaring and paying dividends that exceed (i) the     
company's surplus, which is the excess of the net assets of the company over its
stated capital or (ii) the company's net profits for the fiscal year in which   
the dividend is declared and/or the preceding fiscal year. Assuming the         
Distribution had been completed as of June 30, 2001, Voridian would have had pro
forma negative shareowners' equity of $302 million. If Voridian continues to    
have negative shareowners' equity after the Distribution, it would be limited in
the amount it could pay as a dividend to the amount of its net profits for the  
year in which the dividend is declared and/or the preceding year.               

 116

DEFS14A
123rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 123rd
RELATIONSHIP BETWEEN VORIDIAN AND EASTMAN COMPANY 
AFTER THE DISTRIBUTION

     Eastman Company is currently a wholly-owned subsidiary of Eastman Chemical.
After the Distribution, Eastman Chemical (which will change its name to Voridian
Company) will not have any ownership interest in Eastman Company, and Eastman   
Company will be an independent public company. In addition, after the           
Distribution, Eastman Company will not have any ownership interest in Voridian, 
and Voridian will be an independent public company.                             

AGREEMENTS RELATED TO EFFECTING THE DISTRIBUTION                                

    In connection with the Distribution, Eastman Chemical has entered into the
distribution agreement and will enter into a number of related agreements with  
Eastman Company for the purpose of accomplishing the contribution to Eastman    
Company of the businesses described in this proxy statement and the             
Distribution. These agreements provide, among other things, for the allocation  
of tax, employee benefits and other liabilities and obligations between Voridian
and Eastman Company attributable to periods prior to and as a result of the     
Distribution. These agreements, prepared before the Distribution, reflect       
agreements that will be entered into between affiliated parties. These          
agreements include the distribution agreement, which is summarized below and is 
attached as Appendix A to this proxy statement. The distribution agreement may  
be amended on, prior to or subsequent to the date of the Distribution, and the  
following summary is qualified by reference to the full text of the agreement.  

DISTRIBUTION AGREEMENT                                                      

 Eastman Chemical and Eastman Company have entered into the distribution
agreement providing for, among other things, specified corporate transactions   
required to effect the Distribution and other arrangements between Voridian and 
Eastman Company subsequent to the Distribution.                                 

In general, the distribution agreement provides that:                 

  - Eastman Chemical will transfer the Eastman Company Business to Eastman
Company;                                                          

     - Eastman Chemical will distribute all of the outstanding shares of Eastman
  Company common stock to Eastman Chemical's shareowners on a pro-rata
basis and will change its name to Voridian Company;               

   - following the Distribution, Eastman Company will indemnify Voridian for
   liabilities incurred by Voridian that relate to specified liabilities
assumed by Eastman Company; and                                   

   - following the Distribution, Voridian will indemnify Eastman Company for
liabilities incurred by Eastman Company that relate to liabilities
retained by Voridian.                                             

In particular, the distribution agreement defines the assets and      
liabilities which are being allocated to, and assumed by, Eastman Company and   
those which will remain with Voridian. The distribution agreement also defines  
what constitutes the "Eastman Company Business" and what constitutes the        
"Voridian Business."                                                            

     Under the distribution agreement, Eastman Chemical is obligated to transfer
or cause to be transferred all of its right, title and interest in the assets   
comprising the Eastman Company Business and other assets not specifically       
included in the Voridian Business to Eastman Company, and Eastman Company is    
obligated to transfer or cause to be transferred all its right, title and       
interest, if any, in the assets comprising the Voridian Business to Eastman     
Chemical. All assets are being transferred without any representation or        
warranty, "as is-where is," except for specified representations relating to    
certain real and intellectual property. Each party has also agreed to cooperate 
to obtain any necessary consents and approvals and to take those actions that   
may be reasonably necessary or desirable to carry out the purposes of the       
distribution agreement.                                                         

 117

DEFS14A
124th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 124th
Under the terms of the distribution agreement, all assets of Eastman  
Chemical prior to the date of the Distribution, other than those relating to the
Voridian Business, will become assets of Eastman Company. The distribution      
agreement also provides for the assumption of liabilities and cross-indemnities 
designed to allocate, generally effective as of the date of the Distribution,   
financial responsibility for all current and specified long-term liabilities    
arising out of or in connection with the Eastman Company Business to Eastman    
Company and all liabilities arising out of or in connection with the Voridian   
Business to Voridian. The distribution agreement provides that the Distribution 
is conditioned upon the satisfaction of several conditions, which are discussed 
in "The Distribution -- Conditions to the Distribution" in this proxy statement.
If any of these conditions are not satisfied, Eastman Chemical could decide to  
cancel the Distribution or waive the conditions and complete the Distribution.  
The distribution agreement also provides that Eastman Chemical may terminate and
abandon, or defer, the Distribution at any time prior to its completion, either 
before or after approval by its shareowners, if, in the opinion of Eastman      
Chemical's board of directors, such action would be in the best interests of    
Eastman Chemical and its shareowners.                                           

    In the event that any transfers contemplated by the distribution agreement
are not effected on or prior to the date of the Distribution, the parties will  
be required to cooperate to effect those transfers as promptly as practicable   
following the date of the Distribution, and pending those transfers, to hold any
asset not so transferred in trust for the use and benefit of the party entitled 
thereto (at the expense of the party entitled thereto), and to retain any       
liability not so transferred for the account of the party by whom that liability
is to be assumed.                                                               

The distribution agreement also provides in general that, when the    
Distribution is completed, Voridian and its affiliates will not use the Eastman 
corporate name or names derived therefrom, and that the parties will cooperate  
in the handling of specified litigation matters.                                

TAX MATTERS AGREEMENT                                                       

Eastman Chemical and Eastman Company will enter into a tax matters    
agreement, which will set forth each party's rights and obligations with respect
to tax matters for periods before and after the date of the Distribution.       

The tax matters agreement will provide that Voridian will generally be
responsible for the portion of the consolidated tax liability for the year      
ending December 31, 2001 that is attributable to Eastman Chemical and its       
subsidiaries (excluding the Eastman Company Business owned and conducted after  
the Distribution by Eastman Company and its subsidiaries), and Eastman Company  
will generally be responsible for the portion attributable to the Eastman       
Company Business.                                                               

The tax matters agreement will detail Voridian's and Eastman Company's
responsibilities relating to tax payments and refunds, the filing of returns and
the conduct of audits. The tax matters agreement also will provide for          
cooperation with respect to specified tax matters and for the exchange of       
information and retention of records which may affect the tax liability of      
either party.                                                                   

  The tax matters agreement will allocate the federal income tax liability
that may arise if the Distribution of Eastman Company's stock is found to be a  
taxable transaction. Generally, Voridian will bear 40% of that corporate tax    
liability and Eastman Company will bear 60% of that corporate tax liability,    
except where the liability is attributable to one party's actions or to a change
of ownership, as described in Section 355(e) of the Code, with respect to one   
party's stock. In any of those events, the party that has caused the            
Distribution to be taxable or which has had a change of ownership occur will    
generally bear the entire corporate tax liability.                              

Since the Distribution will be implemented only following receipt of a
favorable tax ruling, it is not anticipated that the IRS will challenge the     
tax-free status of the Distribution unless the provisions of Section 355(e) were
to apply. See the discussion of Section 355(e) in "The Distribution -- Material 
United States Federal Income Tax Consequences."                                 

 118

DEFS14A
125th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 125th
    Each corporation included as a member of a consolidated federal income tax
return group is jointly and severally liable for all of the federal income tax  
associated with that return. Although the tax matters agreement will allocate   
the tax liabilities between the parties with respect to consolidated returns    
which include Eastman Chemical and Eastman Company, Voridian and Eastman Company
may each be liable for all of the federal income tax with respect to those      
returns, if the party upon whom the tax matters agreement imposes responsibility
for all or a portion of that tax fails to discharge that responsibility.        

 Although valid as between Voridian and Eastman Company, the tax matters
agreement will not be binding on the IRS or other taxing authorities.           

AGREEMENTS RELATED TO OPERATIONS AFTER THE DISTRIBUTION                         

    The division of Eastman Chemical's assets and businesses into the Voridian
Business and the Eastman Company Business has required Eastman Chemical to      
separate ownership of portions of its integrated manufacturing sites and to     
divide its employees between the two companies. Voridian and Eastman Company    
will enter into a number of contractual relationships to effect the subdivision 
of the ownership and operation of the facilities on these sites and the         
provision of products, energy and services to one another, and the division of  
employees and related benefits. Ownership by separate chemical companies of     
portions of an integrated manufacturing facility is common in the chemicals     
industry. Eastman Chemical and Eastman Company believe that the arrangements to 
be entered into between Voridian and Eastman Company are similar to contractual 
relationships entered into by unrelated third parties in similar circumstances  
and that these arrangements will equitably reflect the benefits and costs of the
ongoing relationship between Voridian and Eastman Company. These agreements may 
be amended on, prior to or subsequent to the date of the Distribution.          

    Set forth below is a description of the types of agreements expected to be
entered into between Voridian and Eastman Company.                              

ADMINISTRATIVE SERVICES AGREEMENTS                                          

  Voridian and Eastman Company will enter into agreements under which each
company will provide the other specified administrative, technical and support  
services. The services to be provided will include payroll and accounting,      
information systems, engineering, environmental, regulatory, maintenance and    
security. The service agreements generally will have terms of two years or less.

PROCUREMENT AND SUPPLY AGREEMENTS                                           

  Voridian and Eastman Company will enter into a number of procurement and
supply agreements which generally will have terms of two years. These agreements
will contain representations, warranties and covenants that Voridian and Eastman
Company believe to be customary in the chemicals industry. The most significant 
procurement and supply agreements expected to be entered into between Voridian  
and Eastman Company include:                                                    

   - agreements which provide that Eastman Company will procure coal, oxygen
     and isopropyl alcohol for Voridian and Voridian will procure paraxylene
      for Eastman Company. The price of each product will be calculated at the
  seller's cost plus fees to cover operational expenses related to the
product;                                                          

     - an agreement in which Voridian will sell acetic acid and acetic anhydride
  to Eastman Company and Eastman Company will sell acetic anhydride to
      Voridian. This supply agreement will generally provide that the customer
    must obtain all of its requirements for the product from the supplier.
The products will be sold based upon the fully allocated costs of 
       production of the supplier and a reasonable return on the assets utilized
in production; and                                                

 - an agreement for Eastman Company to supply ethylene to Voridian for a
  period of 15 years. This longer term agreement is designed to ensure
    Voridian an economical supply of ethylene, a critical component of the
 Voridian Business. The agreement will establish minimum and maximum
 119

DEFS14A
126th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 126th
     amounts of ethylene that each party is required to supply and purchase,
       subject to adjustments for extraordinary circumstances. Voridian will pay
  Eastman Company under a pricing formula based upon Eastman Company's
 fully allocated costs of production plus a reasonable return on the
capitalized costs of the assets utilized in the production.       

INTELLECTUAL PROPERTY TRANSFER AND LICENSE AGREEMENT                        

Voridian and Eastman Company will enter into an intellectual property 
transfer and license agreement relating to the transfer of specified            
intellectual property and proprietary technology between Eastman Chemical and   
Eastman Company. Among other things, the agreement will:                        

    - assign specified patents and proprietary information to Eastman Company;

     - license specified intellectual property from Eastman Company to Voridian;

     - license specified intellectual property from Voridian to Eastman Company;
and                                                               

   - assign to Eastman Company those marks which Eastman Company uses in the
Eastman Company Business.                                         

OPERATING AGREEMENTS                                                        

 Voridian and Eastman Company will enter into operations agreements with
respect to the operation of the coal gasification plant located in Kingsport,   
Tennessee and the CHDM production facility located in San Roque, Spain. The     
initial term of each agreement will be two years.                               

Voridian will own the coal gasification plant and Eastman Company will
operate it. The coal gasification plant produces acetic anhydride, acetic acid  
and related products from coal. These products are used by Voridian in producing
acetate fibers and related products and by Eastman Company in producing polymer 
intermediates, cellulose esters and sales grade acids and anhydrides for sales  
to customers. Eastman Chemical determined that Voridian should own the coal     
gasification plant because it has the greatest vested interest in the products  
produced in that plant. However, efficiencies in environmental permitting and   
compliance certification derived from having a common operator for coal gas and 
other operations at the Kingsport, Tennessee site resulted in Eastman Chemical  
determining that the coal gasification plant should be operated by Eastman      
Company.                                                                        

The San Roque, Spain CHDM production facility will be owned by Eastman
Company, and Voridian will operate it. The chemical produced at the facility,   
CHDM, is a critical component of the Eastman Company Business. Voridian and     
Eastman Company have agreed that Eastman Company will own the plant; however,   
due to regulatory restrictions and overall efficiency considerations, Voridian  
will continue to operate the CHDM production facility in conjunction with the   
operation of the other facilities in San Roque that it will own and operate.    

The operating agreements for both the coal gasification and the CHDM  
facility will provide that, among other things, each operator will, as an       
independent contractor, provide, or arrange for the provision of, such          
production, specified utilities and certain ancillary services as are reasonably
necessary or required for the production operations at the Kingsport and San    
Roque facilities. Each party receiving services from the Kingsport and San Roque
facilities will be required to pay all direct and indirect costs incurred by the
operator of the facility in the performance or supply of such services, plus an 
agreed upon return on the assets utilized in connection with the respective     
operating agreements.                                                           

EMPLOYEE MATTERS AGREEMENT                                                  

     Eastman Chemical will enter into an employee matters agreement with Eastman
Company that provides for the treatment of employee benefit matters and other   
compensation arrangements for Eastman Chemical employees who will become Eastman
Company employees. This agreement will also allocate responsibility for         
specified employee benefits matters and liabilities after the Distribution.     

 120

DEFS14A
127th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 127th
   Under the employee matters agreement, Eastman Company will be responsible
for providing specified welfare and retirement benefits to its employees after  
the Distribution, which will generally be similar to the benefits now provided  
by Eastman Chemical to those employees. These benefits include, but are not     
limited to, medical, dental, flexible spending accounts covering health care and
dependent care expenses, life and accident insurance plans, short and long term 
disability, a severance plan, a combined 401(k) and qualified employee stock    
ownership plan, and a defined benefit pension plan, as well as vacations and    
holidays. Upon the Distribution, Eastman Company's active employees generally   
will cease current participation in the Eastman Chemical employee benefit plans 
and begin participation in the Eastman Company employee benefit plans. Eastman  
Company will generally recognize, among other things, its employees' past       
service with Eastman Chemical for purposes of Eastman Company's employee benefit
plans. During a transition period after the Distribution, Eastman Company will  
administer some of Voridian's plans together with the Eastman Company plans, and
Voridian will provide reimbursement to Eastman Company for any costs or expenses
Eastman Company incurs in connection with that administration.                  

Eastman Chemical will retain, and therefore Voridian will bear, the   
responsibility for providing welfare benefits to all of its former employees and
existing employees who retire prior to or on the date of the Distribution and   
their eligible dependents, referred to in this proxy statement as the Eastman   
Chemical Retirees. Voridian will have the responsibility of providing pension,  
401(k) and retiree health and welfare benefits for Eastman Chemical Retirees and
former Eastman Chemical employees on long term disability who have previously   
terminated employment with Eastern Chemical with vested benefits. Except as     
specifically provided in the employee matters agreement, nothing in that        
agreement will restrict Eastman Company's or Voridian's ability to amend, modify
or terminate any of its respective employee benefit plans.                      

    Eastman Chemical and Eastman Company will agree that neither the continued
employment of those Eastman Chemical employees who will become Eastman Company  
employees nor the Distribution will be deemed a severance of employment from    
Eastman Chemical for purposes of any employee benefits or compensation          
arrangements of Eastman Chemical. The employee matters agreement will also      
provide that the Distribution will not constitute a "change in control" or      
"potential change in control" under any employee benefits or compensation       
arrangements. Eastman Chemical will retain, and therefore Voridian will bear,   
the responsibility for any liabilities and obligations in connection with       
severance pay relating to terminations that occur prior to or on the date of the
Distribution.                                                                   

RETIREMENT PLANS                                                      

  Eastman Company Investment and Employee Stock Ownership Plan.  Effective
before or immediately after the Distribution, Eastman Company will establish an 
investment and employee stock ownership plan that will be similar to Eastman    
Chemical's investment and employee stock ownership plan as currently in effect. 
Generally, Eastman Company's investment and employee stock ownership plan will  
cover all current employees of Eastman Chemical who will become Eastman Company 
employees upon the Distribution. Eastman Chemical Retirees will remain          
participants in the Voridian investment and employee stock ownership plan, and  
their accounts will not be transferred to the Eastman Company investment and    
employee stock ownership plan. The Eastman Company investment and employee stock
ownership plan will receive a transfer from the Voridian investment and employee
stock ownership plan of the account balances of each of the active employees who
become Eastman Company employees upon the Distribution and each will be credited
under Eastman Company's investment and employee stock ownership plan with the   
account balance credited to him or her as of the transfer date.                 

     During a transition period, a Voridian stock account and an Eastman Company
stock account will be maintained under the investment and employee stock        
ownership plans of both companies to hold the shares of Voridian common stock   
and the shares of Eastman Company common stock distributed to those accounts    
with respect to the Distribution. Participants will not be allowed to add to    
their accounts through new contributions or balance transfers to the stock fund 
of the company for whom they are not employed. Any dividends on Eastman Company 
common stock in accounts of Voridian employees will be reinvested               
 121

DEFS14A
128th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 128th
in the Eastman Company stock fund. Any dividends on Voridian common stock in    
accounts of Eastman Company employees will be reinvested in the Voridian stock  
fund.                                                                           

     Eastman Company Retirement Plan.  Effective before or immediately after the
Distribution, Eastman Company will establish its own qualified defined benefit  
pension plan which will be similar to Eastman Chemical's retirement assistance  
plan currently in effect. Eastman Company's retirement plan will generally      
provide benefits to the Eastman Chemical employees who become Eastman Company   
employees upon the Distribution. Eastman Company employees who currently        
participate in Eastman Chemical's retirement assistance plan will be eligible   
for immediate participation in Eastman Company's retirement plan. Eastman       
Chemical Retirees will not become participants in the Eastman Company plan, but 
will remain participants under Eastman Chemical's retirement assistance plan,   
which will be renamed the Voridian Company retirement plan. Following the       
Distribution, Eastman Company employees will also be credited under Eastman     
Company's retirement plan, for eligibility and vesting purposes, with service   
credited to them under Eastman Chemical's retirement assistance plan.           

     It is contemplated that Voridian's retirement plan will transfer assets and
liabilities to Eastman Company's retirement plan for benefits earned by Eastman 
Company employees through the date of the Distribution, including a pro rata    
share of surplus plan assets, if any. The transfer is scheduled to occur as soon
as practicable after the date of Distribution, and will be effective as of the  
date of the Distribution. Pursuant to the transfer, assets will be allocated    
between the trust for Voridian's retirement plan and the trust for Eastman      
Company's retirement plan based on the methodology set forth in the employee    
matters agreement. Any excess assets will be shared between Voridian's          
retirement plan and Eastman Company's retirement plan in accordance with the    
employee matters agreement. Following the transfers, Eastman Company employees  
would look solely to the Eastman Company retirement plan for their pension      
benefits.                                                                       

HEALTH AND WELFARE PLANS                                              

Eastman Company will assume all liabilities and responsibilities for  
providing health and welfare benefits to its active employees. As of the date of
the Distribution, Eastman Company intends to establish health and welfare plans 
that are substantially similar to Eastman Chemical's current plans. During a    
transition period after the Distribution, Eastman Company will administer some  
of Voridian's plans together with the respective Eastman Company plans, and     
Voridian will provide reimbursement to Eastman Company for any costs or expenses
Eastman Company incurs in connection with that administration. For those        
benefits that are provided through insurance, Voridian will take steps to have  
each insurance carrier agree to allow Eastman Company's employees to continue to
be covered by Voridian's policies or through separate contracts on substantially
the same terms during the transition period.                                    

POSTRETIREMENT WELFARE PLANS                                          

   Eastman Chemical currently provides specified health and welfare benefits
to eligible retirees in the United States and their eligible dependents. The    
employee matters agreement will provide that Voridian will continue to provide  
certain health and welfare benefits to Eastman Chemical Retirees and will retain
the portion of the unfunded benefit obligation reported in Eastman Chemical's   
financial statements for these postretirement benefits. Any of the Eastman      
Chemical employees who are eligible to retire, and do retire, from Eastman      
Chemical prior to or on the date of the Distribution will receive any such      
retiree health and welfare benefits from Voridian. Eastman Company will provide 
any applicable health and welfare benefits to eligible retirees who are active  
employees of Eastman Company and who subsequently retire from Eastman Company.  

COMPENSATION PLANS                                                    

Omnibus Long-Term Compensation Plans.  Prior to the date of the       
Distribution, Eastman Company intends to establish an omnibus long-term         
compensation plan that will provide for grants of nonqualified and incentive    
stock options, stock appreciation rights, stock awards, performance shares and  
other stock                                                                     

 122

DEFS14A
129th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 129th
and stock-based awards, which will be substantially similar to Eastman          
Chemical's 1997 omnibus long-term compensation plan. With respect to outstanding
options for both Eastman Chemical employees and Eastman Company employees, the  
employee matters agreement will provide that options under Eastman Chemical's   
omnibus long-term compensation plans will be retained and become Voridian       
options. Additionally, holders of Eastman Chemical options will be granted one  
new option to purchase Eastman Company common stock for each Eastman Chemical   
option outstanding. The exercise price of each Eastman Company option will bear 
the same ratio to the market price of Eastman Company's stock, as of the day    
after the Distribution, as the exercise price of the original Eastman Chemical  
stock option bore to the market price of Eastman Chemical's common stock as of  
the day before the Distribution. A corresponding adjustment will be made to the 
exercise price of the Voridian stock options. Eastman Company stock options will
be granted under the omnibus long-term compensation plan Eastman Company intends
to establish.                                                                   

In the adjustment of options granted under Eastman Chemical's omnibus 
long-term compensation plans, and in the grant of new Eastman Company stock     
options, the exercisable and unexercisable aggregate intrinsic value of the     
options immediately after the conversion will be equal to the intrinsic value   
immediately before the adjustment and grant. The vesting provisions and term of 
Eastman Company's and Voridian's stock options will be the same as for the      
original Eastman Chemical stock options. Accordingly, no compensation expense   
will be recognized by Eastman Company or Voridian. All other terms of the       
Voridian and Eastman Company stock options will generally remain the same as in 
effect immediately prior to the Distribution. For options held by Eastman       
Company's employees in some foreign countries, if the above method is not       
permitted or desirable under the foreign tax, securities or other laws, a       
different approach may be used.                                                 

     Holders of Eastman Chemical's restricted stock will retain their restricted
stock and will also receive the dividend of Eastman Company shares that will be 
subject to similar restrictions as the existing original Eastman Chemical       
restricted stock. Restricted shares of both companies will require continued    
employment with Eastman Company or Voridian as a condition of vesting in such   
shares.                                                                         

   Assuming the Distribution is completed, all outstanding performance share
awards for which the three year performance period would typically extend beyond
December 31, 2001 will be terminated as of December 31, 2001. For purposes of   
determining the payout under those awards, Eastman Chemical will measure Eastman
Chemical's actual performance versus that of the applicable peer companies over 
the corresponding period as of the date of termination as if such period would  
have expired on December 31, 2001, regardless of the period of time actually    
remaining in the performance period.                                            

    Deferred Compensation Plans.  Eastman Chemical has unfunded obligations to
pay deferred compensation and retirement income under its executive deferred    
compensation plan, unfunded retirement plan, supplemental Eastman Chemical      
retirement assistance plan and individual severance agreements. Eastman Chemical
has established a benefit security trust, referred to in this proxy statement as
the Rabbi Trust, to provide a degree of financial security for its unfunded     
obligations under these plans and agreements. Eastman Chemical has conveyed to  
the trustee rights to certain assets as partial security for Eastman Chemical's 
funding under the Rabbi Trust. The employee matters agreement will provide that 
Eastman Chemical will retain the benefit obligations for Eastman Chemical       
Retirees and Eastman Chemical employees who remain employed by Voridian after   
the Distribution.                                                               

   Eastman Company will assume the liabilities associated with the employees
who become Eastman Company employees after the date of the Distribution. The    
employee matters agreement also will provide that Eastman Company will establish
a deferred compensation plan and severance arrangements for its eligible        
employees and that the accounts of Eastman Company's employees who are          
participants under Eastman Chemical's similar arrangements will be transferred  
to Eastman Company's deferred compensation plans. Eastman Company will also     
establish a benefit security trust similar to Eastman Chemical's Rabbi Trust to 
provide a degree of financial security for its unfunded obligations under its   
deferred compensation plans and severance arrangements.                         

 123

DEFS14A
130th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 130th
Annual Variable Cash Compensation Plans.  Under the Eastman Chemical  
performance plan and unit performance plan, with respect to awards for the      
performance period that began on January 1, 2001 and will end on December 31,   
2001, Eastman Chemical will be responsible for determining the extent to which  
the performance criteria have been met and for making any required payments     
under the plans at the time required by the plans to all participants, including
Eastman Company employees and eligible Eastman Chemical Retirees. Prior to the  
Distribution, Eastman Company intends to establish its own variable cash        
compensation programs for performance periods following the date of the         
Distribution that are expected to be similar to the existing Eastman Chemical   
plans.                                                                          

Director Compensation.  None of the directors of Eastman Company has  
received compensation from Eastman Company since it was formed. Once the board  
of directors has been expanded in connection with the Distribution, each        
non-employee member of the board of directors is expected to receive            
compensation under Eastman Company's director compensation arrangements that    
will be adopted prior to the Distribution. Obligations for Eastman Chemical     
directors resigning to become members of Eastman Company's board of directors   
are expected to be assumed by Eastman Company. Obligations for Eastman Chemical 
directors remaining on Voridian's board of directors and retired directors of   
Eastman Chemical will be retained by Voridian.                                  

     In addition, prior to the date of the Distribution, Eastman Company intends
to establish a director long-term compensation plan that will provide for grants
of nonqualified stock options and restricted shares to non-employee members of  
Eastman Company's board of directors and a non-employee director stock option   
plan that will provide for grants of nonqualified stock options to non-employee 
members of Eastman Company's board of directors in lieu of all or a portion of  
each member's annual retainer. Each plan established by Eastman Company will be 
substantially similar to Eastman Chemical's current director long-term          
compensation plan and director stock option plan. With respect to outstanding   
options of non-employee directors, the employee matters agreement will provide  
that each option outstanding on the date of the Distribution under Eastman      
Chemical's 1999 director long-term compensation plan and 1996 non-employee      
director stock option plan will be retained and become Voridian options.        
Additionally, holders of Eastman Chemical options will be granted one new option
to purchase Eastman Company common stock for each Eastman Chemical option       
outstanding. The exercise price of each Eastman Company option will bear the    
same ratio to the market price of Eastman Company's common stock, as of the day 
after the Distribution, as the exercise price of the original Eastman Chemical  
stock option bore to the market price of Eastman Chemical's common stock as of  
the day before the Distribution. A corresponding adjustment will be made to the 
exercise price of the Voridian stock options. The Eastman Company stock options 
will be granted under the director long-term compensation plan and stock option 
plan Eastman Company intends to establish.                                      

     In the adjustment of options granted under Eastman Chemical's 1999 director
long-term compensation plan and 1996 nonemployee director stock option plan for 
the Distribution, and in the grant of new Eastman Company stock options, the    
exercisable and unexercisable aggregate intrinsic value of the options          
immediately after the conversion will be equal to the intrinsic value           
immediately before the adjustment and grant. The vesting provisions and term of 
the Eastman Company and Voridian stock options will be the same as for the      
original Eastman Chemical stock options. Accordingly, no compensation expense   
will be recognized by Eastman Company or Voridian. All other terms of the       
Voridian and Eastman Company stock options will generally remain the same as in 
effect immediately prior to the Distribution.                                   

Eastman Chemical nonemployee directors who hold Eastman Chemical's    
restricted stock will retain their restricted stock and will also receive the   
dividend of Eastman Company shares that will be subject to similar restrictions 
as the original Eastman Chemical restricted stock. Restricted shares of both    
companies will require continued service as a non-employee director of Eastman  
Company or Voridian as a condition of vesting in such shares.                   

 124

DEFS14A
131st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 131st
MANAGEMENT OF EASTMAN COMPANY 

EASTMAN COMPANY EXECUTIVE OFFICERS AND DIRECTORS                                

    Information as of September 1, 2001 regarding the persons who are expected
to be the executive officers and directors of Eastman Company following the     
Distribution is provided below. Each Eastman Company executive officer is       
currently an executive officer of Eastman Chemical and each Eastman Company     
director is currently a director of Eastman Chemical. Each named Eastman Company
executive officer or director will resign his or her position or positions with 
Eastman Chemical effective upon the Distribution. Similar to the current Eastman
Chemical board of directors, the Eastman Company board of directors will be     
divided into three classes with the terms of office of the respective classes   
ending in successive years. All executive officers will be elected by, and serve
at the discretion of, the Eastman Company board of directors.                   

                                                        [Enlarge/Download Table]

NAME                                        AGE               EXPECTED POSITION             
----                                        ---               -----------------             
                                                                                            
J. Brian Ferguson.......................... 47   Chairman of the Board and Chief Executive  
                                                 Officer                                    
James P. Rogers............................ 50   Chief Operating Officer and Chief Financial
                                                 Officer                                    
Betty W. DeVinney.......................... 56   Senior Vice President, Human Resources,    
                                                 Communications and Public Affairs          
Theresa K. Lee............................. 48   Senior Vice President, General Counsel and 
                                                 Secretary                                  
Roger K. Mowen, Jr......................... 55   Senior Vice President                      
Mark W. Joslin............................. 42   Vice President, Finance                    
H. Jesse Arnelle........................... 67   Director                                   
Calvin A. Campbell, Jr..................... 67   Director                                   
Jerry E. Dempsey........................... 68   Director                                   
Donald W. Griffin.......................... 64   Director                                   
David W. Raisbeck.......................... 51   Director                                   
Peter M. Wood.............................. 63   Director                                   

J. BRIAN FERGUSON joined Eastman Chemical in 1977. He was named Vice  
President, Industry and Federal Affairs in 1994, became Managing Director,      
Greater China in 1997, was named President, Eastman Chemical Asia Pacific in    
1998 and became President, Polymers Group in 1999. He became President,         
Chemicals Group in February 2001 in connection with the Distribution.           

  JAMES P. ROGERS joined Eastman Chemical in 1999 as Senior Vice President
and Chief Financial Officer. Mr. Rogers served previously as Executive Vice     
President and Chief Financial Officer of GAF Corporation, a manufacturer of     
commercial and residential roofing materials. He also served as Executive Vice  
President, Finance, of International Specialty Products, Inc., which was spun   
off from GAF in 1997. Mr. Rogers is a member of the four-person executive       
management team that is overseeing the Distribution transition during 2001.     
Before he joined the Company in August 1999, Mr. Rogers was Executive Vice      
President and Chief Financial Officer of GAF Corporation and of certain         
affiliated and successor entities of GAF, including G-I Holdings, Inc. On       
January 5, 2001, G-I Holdings announced that it had filed a voluntary petition  
for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.     
Bankruptcy Court for the District of New Jersey to resolve asbestos liability   
claims.                                                                         

BETTY W. DEVINNEY joined Eastman Chemical in 1973. She became Manager,
Employment in 1991, Manager, Community Relations in 1995 and Manager, Corporate 
Relations in 1997. She became Vice President, Communications and Public Affairs 
of Eastman Chemical in 1998.                                                    

 125

DEFS14A
132nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 132nd
    THERESA K. LEE joined Eastman Chemical as a staff attorney in 1987, served
as Assistant General Counsel for the health, safety and environmental legal     
staff from 1993 to 1995 and served as Assistant General Counsel for the         
corporate legal staff from 1995 until her appointment as Vice President,        
Associate General Counsel and Secretary in 1997. She became Vice President,     
General Counsel and Secretary of Eastman Chemical in 2000. Ms. Lee is a member  
of the four-person executive management team that is overseeing the Distribution
transition during 2001.                                                         

ROGER K. MOWEN, JR. joined Eastman Chemical in 1971. He was named Vice
President and General Manager, Polymer Modifiers in 1991, Superintendent of the 
Polymers Division in 1994, and President, Carolina Operations in 1996. In 1998, 
he was named Vice President, Customer Demand Chain and became Vice President,   
CustomerFirst and Chief Information Officer in 1999. In 2000, Mr. Mowen became  
Senior Vice President, Global Customer Services Group and Chief Information     
Officer.                                                                        

    MARK W. JOSLIN joined Eastman Chemical in 2000 as Vice President, Finance.
Mr. Joslin previously served as Chief Financial Officer, Treasurer and Secretary
of Lawter International, Inc. Prior to joining Lawter in 1996, he was employed  
by Arthur Andersen LLP, an international accounting and consulting firm, Baxter 
International, Inc., a medical products and services company and ANGUS Chemical 
Company, a manufacturer and marketer of nitroparaffin-based chemicals. He became
Vice President and Controller of Eastman Chemical in 2000.                      

   H. JESSE ARNELLE is of counsel to the Winston-Salem, North Carolina-based
law firm of Womble, Carlyle, Sandridge & Rice. He was a partner of the San      
Francisco-based law firm of Arnelle, Hastie, McGee, Willis & Greene or its      
predecessor from 1985 until 1996. Mr. Arnelle is Immediate Past Chairman of the 
Board of Trustees of Pennsylvania State University, is a director of the        
National Football Foundation and Collegiate Hall of Fame and is a member of the 
boards of directors of Armstrong World Industries, Inc., FPL Group, Inc.,       
Gannett Corporation, Metropolitan Series Fund, Inc., Textron, Inc., and Waste   
Management, Inc. Mr. Arnelle has been a director of Eastman Chemical since 1994.

     CALVIN A. CAMPBELL, JR. has been Chairman of the Board, President and Chief
Executive Officer of Goodman Equipment Corporation since 1971. Goodman Equipment
designs, manufactures and markets worldwide underground mining locomotives and  
personnel carriers and services and parts for injection molding machinery. He   
was also President and Chief Executive Officer of Cyprus Amax Minerals Company, 
a producer of copper and molybdenum, in 1992, Chairman of the Board in 1991 and 
1992, and a director from 1985 through 1994. Mr. Campbell is a member of the    
boards of directors of Mine Safety Appliances Company and of Bulley & Andrews   
Company. He is also a director and former Chairman of the National Association  
of Manufacturers, a director of the National Mining Association, a director and 
former Chairman of the Illinois Manufacturers Association, and serves as        
Chairman of Armour College of Engineering and Science, and as a trustee of the  
Illinois Institute of Technology. Mr. Campbell has been a director of Eastman   
Chemical since 1994.                                                            

JERRY E. DEMPSEY served as Chairman of the Board and Chief Executive  
Officer of PPG Industries, Inc., a manufacturer of protective and decorative    
coatings, fiberglass products and specialty chemicals, from 1993 until his      
retirement in 1997. From 1991 until he joined PPG, he was Senior Vice President 
of WMX Technologies, Inc., a waste treatment and disposal company, and Chairman 
of its publicly-traded, majority-owned subsidiary, Chemical Waste Management,   
Inc., having served as President and Chief Executive Officer of Chemical Waste  
Management, Inc. since 1985. Mr. Dempsey is also a member of the boards of      
directors of Birmingham Steel Corporation and Navistar International            
Corporation. Mr. Dempsey has been a director of Eastman Chemical since 1997.    

   DONALD W. GRIFFIN is Chairman of the Board, President and Chief Executive
Officer of Olin Corporation, a manufacturer of chemicals, metals and ammunition.
He joined Olin in 1961, and served in a series of marketing and management      
positions prior to appointment to the position of President and Chief Operating 
Officer in 1994 and to his current positions in 1996. Mr. Griffin also serves as
a trustee of the University of Evansville and the Buffalo Bill Historical       
Center. Mr. Griffin has been a director of Eastman Chemical since 1999.         

 126

DEFS14A
133rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 133rd
DAVID W. RAISBECK is Vice Chairman of Cargill, Incorporated, an       
agricultural trading and processing company. He joined Cargill in 1971 and has  
held a variety of merchandising and management positions focused primarily in   
the commodity and financial trading businesses. Mr. Raisbeck was elected        
President of Cargill's Financial Markets Division in 1988, President of         
Cargill's Trading Sector in 1993, a director of Cargill in 1994, Executive Vice 
President in 1995 and to his current position in 1999. He is also a member of   
the board of directors of Armstrong World Industries, Inc. Mr. Raisbeck has been
a director of Eastman Chemical since 2000.                                      

  PETER M. WOOD is non-executive Chairman of the Board of Stone & Webster,
Incorporated, an engineering and construction firm, and served as Managing      
Director of J. P. Morgan & Company, an investment banking firm, from 1986 until 
his retirement in 1996. He is also a member of the boards of directors of Arthur
D. Little, Inc. and Middlesex Mutual Assurance Company. Mr. Wood has been a     
director of Eastman Chemical since 2000.                                        

COMPENSATION OF EASTMAN COMPANY DIRECTORS                                       

Eastman Company was formed in 2001. None of the directors of Eastman  
Company has received compensation from Eastman Company since it was formed.     
Following the Distribution, each non-employee member of the board of directors  
is expected to receive payments under Eastman Company's director compensation   
arrangements, which are expected to be adopted effective upon the Distribution. 

COMPENSATION OF EASTMAN COMPANY NAMED EXECUTIVE OFFICERS                        

The individuals who will be serving as executive officers of Eastman  
Company, although employed by Eastman Chemical prior to the Distribution, were  
not exclusively devoted to the Eastman Company Business and, in fact, devoted   
substantial time and effort to other Eastman Chemical businesses in other       
capacities. Further, some of these individuals served in capacities other than  
as executive officers of Eastman Chemical. Accordingly, Eastman Chemical does   
not believe that it is material or appropriate to include historical information
on the compensation paid by Eastman Chemical to the individuals who are expected
to be serving as executive officers of Eastman Company.                         

SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS                                    

     SEVERANCE AGREEMENTS.  In connection with the Distribution, Eastman Company
expects to enter into severance agreements with its chief executive officer and 
some of its other executive officers, the terms of which are expected to be     
substantially similar to those contained in Eastman Chemical's severance        
agreements. These agreements are expected to have three-year terms with         
automatic one-year extensions absent advance notice from Eastman Company;       
provided, however, that upon the occurrence of a change in control or a         
potential change in control, as those terms will be defined in the agreements,  
prior to the termination date, the terms of the agreements will automatically be
extended for two years from the date of the change in control or potential      
change in control, as the case may be.                                          

A change in control will be defined in the agreements to include, with
specified exceptions, the acquisition by a person of 19% or more of the voting  
stock of Eastman Company, the incumbent members of the board of directors (and  
subsequent directors approved by them) ceasing to constitute a majority of the  
board, approval by Eastman Company's shareowners of a reorganization or merger  
unless, after such proposed transaction, the former shareowners of Eastman      
Company will own more than 75% of the resulting corporation's voting stock or   
approval by Eastman Company's shareowners of a complete liquidation and         
dissolution of Eastman Company or the sale or other disposition of substantially
all of the assets of Eastman Company other than to a subsidiary or in a spin-off
transaction.                                                                    

     A potential change in control will be deemed to have occurred if any of the
following occurs: Eastman Company enters into an agreement that, if implemented,
would result in the occurrence of a change in control, any person (including    
Eastman Company) publicly announces an intention to take any action that would  
constitute a change in control, any person (other than Eastman Company or       
certain affiliated entities) becomes the beneficial owner of 10% or more of the 
combined voting power of Eastman                                                
 127

DEFS14A
134th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 134th
Company's then-outstanding securities or the board of directors adopts a        
resolution to the effect that a potential change in control has occurred.       

    If during the term of the agreements and following a change in control (or
within 120 days before or after a potential change in control) of Eastman       
Company, the employee's employment with Eastman Company is terminated by Eastman
Company other than for cause, death or disability or by the employee for good   
reason, then, in addition to any other benefits accruing to the employee outside
the scope of the agreement, the acquiror in the change of control or the        
potential change of control will be obligated to:                               

  - pay the employee any unpaid salary, benefits or awards that would have
been earned or become payable through the date of termination;    

- pay to the employee as severance an amount equal to three times the 
     employee's "pay" (defined as the average of the three highest years out
of the last ten years of the employee's total annual compensation,
       including annual base salary, bonus, the grant date value of stock grants
and incentive compensation);                                      

    - maintain in effect for three years after the date of termination for the
employee and his dependents all welfare benefit plans in which the
    employee was entitled to participate immediately prior to termination;
and                                                               

     - pay the employee a single lump sum amount equal to the difference between
   the actuarial equivalent of the pension benefit to which the employee
      would have been entitled under Eastman Company's defined benefit pension
    plan if the employee had five additional years of service and was five
    years older, and the pension benefit to which the employee is actually
entitled under this plan at that time.                            

     EMPLOYEE PROTECTION PLAN.  Eastman Company expects to establish an employee
protection plan, substantially similar to Eastman Chemical's employee protection
plan, which will provide severance pay, health, dental, disability, and life    
insurance continuation, and a retraining allowance (of up to $5,000) for        
substantially all employees whose employment is terminated within two years     
following a change in control. A change in control will be defined in the       
employee protection plan and will generally relate to circumstances in which    
Eastman Company is acquired by another entity or its controlling ownership is   
changed. For purposes of the employee protection plan, participants will be     
credited for their service with Eastman Chemical and its affiliates prior to the
Distribution. The employee protection plan will provide for a lump sum severance
payment of three weeks of "pay" (as defined in the plan) for each year of       
service up to 16 years and four weeks of pay for each year of service in excess 
of 16 years, with a minimum of six weeks of pay and a maximum of 104 weeks.     
Health, dental, disability, and life insurance are expected to be continued at  
Eastman Company's expense for up to 12 months, depending on years of service, on
the same basis as in effect on the date of employment termination, except that  
no employee contributions would be required. In addition, the employee          
protection plan will provide for the payment of specified bonuses declared in   
the year in which employment terminates. Finally, in the event that the total   
payments under the employee protection plan and any other plan or agreement that
the employee is party to subject the employee to specified federal excise taxes,
the employee protection plan will provide for a "gross-up payment." The gross-up
payment would be in an amount such that the net amount retained by the employee,
after deduction of any such excise tax and any tax on the gross-up payment,     
would equal the total payments under the employee protection plan and other     
plans or agreements.                                                            

    OMNIBUS LONG-TERM COMPENSATION PLAN.  In connection with the Distribution,
Eastman Company expects to establish an omnibus long-term compensation plan,    
also referred to as the omnibus plan, for its management and key employees,     
which will provide for the grant of nonqualified and incentive stock options,   
stock appreciation rights, stock awards, performance shares and other stock and 
stock-based awards, substantially similar to those currently authorized by      
Eastman Chemical's existing omnibus long-term compensation plans. It is         
anticipated that the omnibus plan will authorize the use of sufficient shares to
provide grants and awards that are competitive with those of other chemicals    
companies and which are intended to align the interests of management and key   
employees with those of the shareowners. In                                     

 128

DEFS14A
135th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 135th
addition, the omnibus plan will be designed to help Eastman Company attract and 
retain key employees by providing an incentive to increase their proprietary    
interest in Eastman Company. The omnibus plan will be administered by the       
compensation and management development committee.                              

Eastman Company expects that the omnibus plan will contain provisions 
regarding the treatment of the various nonqualified and incentive stock options,
stock appreciation rights, stock awards, performance shares and other stock and 
stock-based awards in the event of a change in ownership and a change in        
control. A change of ownership, as is expected to be defined in the omnibus     
plan, generally relates to circumstances in which Eastman Company's common stock
is no longer publicly traded. A change in control, as is expected to be defined 
in the omnibus plan, generally relates to circumstances in which Eastman Company
is acquired by another entity or its controlling ownership is changed. Upon a   
change in ownership or change in control, the rules described below are expected
to apply to the various awards granted under the omnibus plan. However, Eastman 
Company expects that the omnibus plan will allow the compensation and management
development committee to have the discretion either to determine that a         
particular transaction is of the type that does not warrant the described       
consequences with respect to the various awards, in which case such consequences
would not occur, or to alter the way in which the various awards are treated    
upon a change in ownership or change in control.                                

If a change in ownership occurs (and the compensation and management  
development committee has not exercised its discretion outlined above) during   
the term of one or more performance periods for which the compensation and      
management development committee has granted performance shares, the term of    
such performance period will immediately terminate and, except with respect to  
performance periods for which the compensation and management development       
committee has previously reached a determination regarding the degree to which  
the performance objectives have been attained, it will be assumed that the      
performance objectives have been attained at a level of 100%. Participants, as a
result, will be considered to have earned and therefore be entitled to receive a
prorated share of the awards previously granted for such performance period. In 
addition, upon a change in ownership, all outstanding awards will be valued and 
cashed out on the basis of the change in ownership price as soon as practicable 
but in no event more than 90 days after the change in ownership.                

In the event of a change in control (assuming the compensation and    
management development committee has not exercised its discretion outlined      
above), if a participant's employment is terminated within two years following  
the change in control, unless such termination is due to death, disability or   
cause (as defined in the omnibus plan), resignation (other than as a result of  
certain actions by Eastman Company and any successor) or retirement, all        
conditions, restrictions, and limitations in effect with respect to any         
unexercised award will immediately lapse and no other terms or conditions will  
be applied. Any unexercised, unvested, unearned, or unpaid award will           
automatically become 100% vested. Performance shares will be treated in a manner
similar to that described above in the case of a change in ownership. A         
participant will be entitled to a lump sum cash payment as soon as practicable  
but in no event more than 90 days after the date of such participant's          
termination of employment with respect to all of such participant's awards.     

 BENEFIT SECURITY TRUST.  Eastman Company expects to establish a benefit
security trust, referred to as the Rabbi Trust, to provide a degree of financial
security for its unfunded obligations under various unfunded deferred           
compensation plans and severance agreements. The assets of the Rabbi Trust would
be subject to the claims of Eastman Company's creditors in the event of         
insolvency. Upon the occurrence of a change in control or a potential change in 
control, which generally will be defined in the same way as in the severance    
agreements, or if Eastman Company fails to meet its payment obligations under   
the covered plans or the severance agreements, Eastman Company would be required
to transfer to the trustee cash or other liquid funds in an amount equal to the 
value of Eastman Company's obligations under the plans and severance agreements.
Eastman Company will convey to the trustee rights to certain assets as partial  
security for Eastman Company's funding obligations under the Rabbi Trust.       

 129

DEFS14A
136th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 136th
MANAGEMENT OF VORIDIAN

VORIDIAN EXECUTIVE OFFICERS AND DIRECTORS                                       

    Information as of September 1, 2001 regarding the persons who are expected
to be the executive officers and directors of Voridian following the            
Distribution is provided below. Each named Voridian director is currently a     
director of Eastman Chemical, and each named Voridian executive officer is      
currently an officer or employee of Eastman Chemical. Each named Voridian       
executive officer will be appointed to his or her new position effective upon   
the Distribution. All executive officers will be appointed by, and serve at the 
discretion of, the Voridian board of directors.                                 

                                                        [Enlarge/Download Table]

NAME                                       AGE                   EXPECTED POSITION                
----                                       ----                  -----------------                
                                                                                                  
Allan R. Rothwell.........................   54  Chairman of the Board and Chief Executive Officer
B. Fielding Rolston.......................   60  Senior Vice President, Human Resources,          
                                                   Communications and Public Affairs              
David E. Cotey............................   45  Vice President, General Counsel and Secretary    
James L. Harlan II........................   45  Vice President Operations Support                
Albert J. Wargo...........................   47  Vice President, Chief Financial Officer and      
                                                 Treasurer                                        
Richard L. Johnson........................   52  Group Vice President, Fibers                     
Thomas A. Smith...........................   57  Group Vice President, PET and Polyethylene       
Robin M. Wilkerson........................   46  Controller                                       
John W. Donehower.........................   55  Director                                         
Lee Liu...................................   68  Director                                         
Marilyn R. Marks..........................   48  Director                                         
Dr. John A. White.........................   61  Director                                         

  ALLAN R. ROTHWELL joined Eastman Chemical in 1969, became Vice President
and General Manager, Container Plastics in 1994 and was appointed Vice          
President, Corporate Development and Strategy in 1997. He was named Senior Vice 
President and Chief Financial Officer in 1998 and became President, Chemicals   
Group in 1999. Mr. Rothwell became President, Polymers Group in February 2001 in
connection with the Distribution.                                               

 B. FIELDING ROLSTON joined Eastman Chemical in 1964, was appointed Vice
President, Customer Service and Materials Management in 1987 and Vice President,
Human Resources and Health, Safety, Environment and Security in 1998. He became 
Vice President, Human Resources and Quality of Eastman Chemical in 1999.        

 DAVID E. COTEY joined Eastman Chemical as a staff attorney in 1981, and
thereafter had assignments in the areas of patent law, environmental and        
regulatory law, commercial law and litigation management, and became Managing   
Counsel, Litigation in 1995. Mr. Cotey became Assistant General Counsel of the  
corporate legal staff in 1999.                                                  

    JAMES L. HARLAN II joined Eastman Chemical in 1978 as a chemical engineer.
He has served in several technical and management positions. In 1991, he became 
Engineering and Start-Up Manager for the company's joint venture, Primester, and
became Director of Acquisitions Integration in 1999. Later that year, he became 
Director, Operations Support Services in Kingsport, Tennessee.                  

   ALBERT J. WARGO joined Eastman Chemical in 1976 as an industrial engineer
and, since then, has served in several financial positions. He became Assistant 
Treasurer in 1993, Director of Investor Relations in 1997 and Treasurer in 1999.

    RICHARD L. JOHNSON joined Eastman Chemical as a chemical engineer in 1971,
was appointed Department Superintendent in the Acid Division in 1986, was named 
Manager of New Business Development in 1988, was appointed Manager, Quality     
Management and Staff for the Tennessee Eastman Division in 1989, was appointed  
Superintendent, Cellulose Esters Division in 1991 and was named                 

 130

DEFS14A
137th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 137th
Superintendent, Acetate Tow Division in 1993. Mr. Johnson became Vice President 
and General Manager, Fibers in 1996.                                            

 THOMAS A. SMITH joined Eastman Chemical in 1966 as a chemical engineer.
After a series of manufacturing assignments, Mr. Smith was appointed Vice       
President and General Manager, Flexible Plastics in 1991, President, Latin      
America Region in 1994 and Vice President and General Manager, Container        
Plastics in 1999.                                                               

 ROBIN M. WILKERSON joined Eastman Chemical in 1979 as a systems analyst
and, after a series of information technology and internal audit positions,     
became Principal Accountant, External Reporting in 1993. She was named          
Supervisor, Manufacturing Cost Accounting in 1996, Manager of Global Financial  
Infrastructure in 1998, Manager, Internal Auditing in early 1999 and became     
Director, Corporate Assessment later that year.                                 

   JOHN W. DONEHOWER is Senior Vice President and Chief Financial Officer of
Kimberly-Clark Corporation, a manufacturer and marketer of a wide range of      
tissue, personal care and health care products for personal, business and       
industrial uses. He joined Kimberly-Clark in 1974, and served in a series of    
management positions prior to election to his current position in 1993. Mr.     
Donehower is also a member of the boards of directors of Factory Mutual         
Insurance Company and Kimberly-Clark De Mexico S.A. de C.V.                     

  LEE LIU served as Chairman of the Board of Alliant Energy Corporation, a
public utility holding company, from 1999 until his retirement in 2000, was     
Chairman of the Board of Alliant's predecessor, Interstate Energy Corporation   
from 1998 to 1999, and was Chairman of the Board and Chief Executive Officer of 
IES Industries, Inc., predecessor of Interstate Energy Corporation, and of IES  
Utilities, the major subsidiary of IES Industries, from 1993 to 1998. Mr. Liu   
was previously employed with Iowa Electric Light & Power Company, predecessor of
IES Industries, since 1957. He is also a member of the boards of directors of   
Alliant Energy Corporation and Principal Financial Group.                       

MARILYN R. MARKS was Chairman of the Board of Dorsey Trailers, Inc., a
truck trailer manufacturer, from 1987 until her resignation in March 2001. She  
was Chairman, Chief Executive Officer and President of Dorsey from 1987 to 1997 
and was Chairman and Chief Executive Officer of Dorsey from 1997 until 1999.    
Miss Marks was Chairman and Chief Executive Officer of TruckBay.com, Inc., an   
Internet source of goods, services and information serving the trucking         
industry, from 1999 to 2000. On December 5, 2000, Dorsey filed a voluntary      
petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S.    
Bankruptcy Court for the Middle District of Alabama. Miss Marks is also a member
of the board of directors of Dana Corporation.                                  

DR. JOHN A. WHITE is Chancellor of, and Distinguished Professor of    
Industrial Engineering at, the University of Arkansas. From 1991 to 1997, he was
Dean of the College of Engineering at the Georgia Institute of Technology. From 
July 1988 to September 1991, he was Assistant Director of the National Science  
Foundation in Washington, D.C. and served on the faculty of the Georgia         
Institute of Technology from 1975 to 1997. Dr. White is also a member of the    
National Science Board, a member of the National Academy of Engineering, and a  
member of the boards of directors of J.B. Hunt Transport Services, Inc.,        
Logility, Inc., Motorola, Inc. and Russell Corporation.                         

 131

DEFS14A
138th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 138th
SECURITY OWNERSHIP OF SPECIFIED BENEFICIAL OWNERS 
AND MANAGEMENT OF EASTMAN COMPANY 

     All of the outstanding shares of Eastman Company common stock are currently
held by Eastman Chemical. The following table sets forth, as of September 1,    
2001, the number of shares of Eastman Company common stock that would have been 
beneficially owned immediately after the Distribution assuming the Distribution 
had occurred on September 1, 2001 by:                                           

- each person expected to be a director of Eastman Company;           

- each person expected to be an executive officer of Eastman Company; 

    - all expected Eastman Company directors and executive officers as a group
(12 persons); and                                                 

    - those persons expected by Eastman Chemical to beneficially own more than
     5% of Eastman Company's common stock, based solely upon their ownership
of Eastman Chemical's common stock.                               

EASTMAN COMPANY COMMON STOCK

                                                        [Enlarge/Download Table]

                 NAME OF BENEFICIAL OWNER                   NUMBER OF SHARES BENEFICIALLY OWNED(1)(2)
                 ------------------------                   -----------------------------------------
                                                                                                     
J. Brian Ferguson..........................................                   98,125(3)              
James P. Rogers............................................                  385,046(4)              
Betty W. DeVinney..........................................                  185,491(5)              
Theresa K. Lee.............................................                   46,812(6)              
Roger K. Mowen, Jr. .......................................                   76,305(7)              
Mark W. Joslin.............................................                   14,116(8)              
H. Jesse Arnelle...........................................                    5,012(9)              
Calvin A. Campbell, Jr. ...................................                    7,045(10)             
Jerry E. Dempsey...........................................                    7,409(11)             
Donald W. Griffin..........................................                    1,793(12)             
David W. Raisbeck..........................................                      317(13)             
Peter M. Wood..............................................                    1,787(14)             
All Eastman Company directors and executive officers as a                                            
  group (12 persons).......................................                  670,834                 

                                                        [Enlarge/Download Table]

                                                                SHARES BENEFICIALLY OWNED(1)     
                                                            -------------------------------------
                 NAME OF BENEFICIAL OWNER                     NUMBER         PERCENT OF CLASS(15)
                 ------------------------                   ----------       --------------------
                                                                                                 
AXA Financial, Inc.........................................  9,898,203(16)          12.84%       
  1290 Avenue of the Americas                                                                    
  New York, New York 10104                                                                       
Dodge & Cox................................................  5,299,485(17)           6.87%       
  One Sansome St., 35th Floor                                                                    
  San Francisco, California 94104                                                                
Barclays Global Investors N.A. ............................  4,814,440(18)           6.24%       
  45 Fremont Street                                                                              
  San Francisco, California 94105                                                                

---------------                                                                 

(1) Information relating to beneficial ownership is based upon information    
     furnished by each person using "beneficial ownership" concepts set forth in
     rules of the SEC. Under those rules, a person is deemed to be a "beneficial
 owner" of a security if that person has or shares "voting power," which
 includes the power to vote or to direct the voting of such security, or
  "investment power," which includes the power to dispose or to direct the
    disposition of such security. The person is also deemed to be a beneficial
owner of any security of which that person has a right to acquire     
beneficial                                                            

 132

DEFS14A
139th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 139th
ownership (such as by exercise of options) within 60 days. Under such 
   rules, more than one person may be deemed to be a beneficial owner of the
 same securities, and a person may be deemed to be a beneficial owner of
securities as to which he or she may disclaim any beneficial interest.
   Except as indicated in other notes to this table, directors and executive
 officers possessed sole voting and investment power with respect to all
shares of common stock referred to in the table.                      
(2) The total number of shares of common stock beneficially owned by all      
   directors and executive officers as a group or by any individual director
or executive officer does not in any case exceed one percent of the   
outstanding shares of common stock as of September 1, 2001. Shares not
outstanding which are subject to options exercisable within 60 days by
     persons in the group or a named individual are deemed to be outstanding for
 the purpose of computing the percentage of outstanding shares of common
stock owned by the group or such individual.                          

(3) Includes 91,920 shares that may be acquired upon exercise of options      
    (including an option to purchase 56,800 shares only if certain stock price
   targets are met) and 578 shares allocated to Mr. Ferguson's ESOP account.

(4) Includes 199,500 shares that may be acquired upon exercise of options, 322
    shares allocated to Mr. Rogers' ESOP account, and 11,300 restricted shares
     that generally vest in August 2002 but as to which Mr. Rogers currently has
voting power. Also includes 158,424 shares expected to be owned by the
  Eastman Company Foundation, Inc., of which shares Mr. Rogers may also be
 deemed a beneficial owner by virtue of his shared voting and investment
power as a director of the foundation.                                

(5) Includes 22,120 shares that may be acquired upon exercise of options      
    (including an option to purchase 10,650 shares only if certain stock price
targets are met, and options to purchase 2,500 shares held by Ms.     
 DeVinney's spouse as to which options Ms. DeVinney disclaims beneficial
  ownership) and 493 shares allocated to Ms. DeVinney's ESOP account. Also
includes 158,424 shares expected to be owned by the Eastman Company   
Foundation, Inc. of which shares Ms. DeVinney may also be deemed a    
   beneficial owner by virtue of her shared voting and investment power as a
director of the Foundation.                                           

(6) Includes 44,540 shares that may be acquired upon exercise of options      
    (including an option to purchase 21,300 shares only if certain stock price
targets are met) and 740 shares allocated to Ms. Lee's ESOP account.  

(7) Includes 72,942 shares that may be acquired upon exercise of options      
    (including an option to purchase 35,500 shares only if certain stock price
targets are met) and 784 shares allocated to Mr. Mowen's ESOP account.

(8) Includes 6,500 shares that may be acquired upon exercise of options, 110  
    shares allocated to Mr. Joslin's ESOP account, and 3,308 restricted shares
  that generally vest in January 2002 but as to which Mr. Joslin currently
has voting power.                                                     
(9) Includes 1,778 shares that may be acquired upon exercise of options and 95
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
Arnelle currently has voting power.                                   
(10) Includes 2,078 shares that may be acquired upon exercise of options and 95 
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
Campbell currently has voting power.                                  
(11) Includes 1,976 shares that may be acquired upon exercise of options and 95 
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
Dempsey currently has voting power.                                   
(12) Includes 1,500 shares that may be acquired upon exercise of options, 175   
   restricted shares that generally vest on May 6, 2002, but as to which Mr.
    Griffin currently has voting power and 95 restricted shares that generally
vest on May 3, 2004, but as to which Mr. Griffin currently has voting 
power.                                                                
(13) Includes 222 restricted shares that generally vest on December 7, 2003, but
as to which Mr. Raisbeck currently has voting power and 95 restricted 
 shares that generally vest on May 3, 2004, but as to which Mr. Raisbeck
currently has voting power.                                           
(14) Includes 500 shares that may be acquired upon exercise of options, 192     
   restricted shares that generally vest on May 4, 2003, but as to which Mr.
 Wood currently has voting power and 95 restricted shares that generally
   vest on May 3, 2004, but as to which Mr. Wood currently has voting power.
(15) Based upon the number of shares of common stock outstanding as of September
1, 2001.                                                              
 133

DEFS14A
140th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 140th
(16) Based on a Schedule 13G filed with the SEC on February 12, 2001 by AXA     
Financial, Inc., and certain of its subsidiaries. According to this   
Schedule 13G, AXA Financial and these subsidiaries together have sole 
 investment power with respect to 9,895,753 of these shares, sole voting
 power with respect to 5,894,682 of these shares and shared voting power
with respect to 1,606,270 of these shares.                            

(17)Based on a Schedule 13G filed with the SEC on February 14, 2001 by Dodge &  
  Cox. According to this Schedule 13G, Dodge & Cox has sole investment power
with respect to all of these shares, sole voting power with respect to  
    4,946,275 of these shares, and shared voting power with respect to 46,200 of
these shares.                                                           

(18) Based on a Schedule 13G filed with the SEC on February 14, 2001 by Barclays
   Global Investors N.A., and certain affiliated entities. According to this
  Schedule 13G, Barclays Global Investors and these entities together have
   sole investment power with respect to all of these shares and sole voting
power with respect to 4,437,160 of these shares.                      

 134

DEFS14A
141st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 141st
SECURITY OWNERSHIP OF SPECIFIED BENEFICIAL OWNERS 
AND MANAGEMENT OF EASTMAN CHEMICAL

The following table sets forth, as of September 1, 2001, the number of
shares of Eastman Chemical common stock that are beneficially owned by:         

- each of Eastman Chemical's directors;                               

  - each of Eastman Chemical's chief executive officer and four other most
highly compensated executive officers as of December 31, 2000;    

- all Eastman Chemical directors and executive officers as a group (21
persons); and                                                     

    - those persons known to Eastman Chemical to beneficially own more than 5%
of Eastman Chemical's common stock.                               

EASTMAN CHEMICAL COMMON STOCK 

                                                        [Enlarge/Download Table]

NAME OF BENEFICIAL OWNER                                    NUMBER OF SHARES BENEFICIALLY OWNED(1)(2)
------------------------                                    -----------------------------------------
                                                                                                     
Earnest W. Deavenport, Jr..................................                   662,760(3)             
James L. Chitwood..........................................                   161,932(4)             
J. Brian Ferguson..........................................                    98,125(5)             
James P. Rogers............................................                   385,046(6)             
Allan R. Rothwell..........................................                   118,923(7)             
H. Jesse Arnelle...........................................                     5,012(8)             
Calvin A. Campbell, Jr.....................................                     7,045(9)             
Jerry E. Dempsey...........................................                     7,409(10)            
John W. Donehower..........................................                     2,887(11)            
Donald W. Griffin..........................................                     1,793(12)            
Lee Liu....................................................                     9,295(13)            
Marilyn R. Marks...........................................                     7,393(14)            
David W. Raisbeck..........................................                       317(15)            
John A. White..............................................                     7,128(16)            
Peter M. Wood..............................................                     1,787(17)            
All Eastman Chemical directors and executive officers as a                                           
  group (21 persons).......................................                 1,783,665(18)            

                                                        [Enlarge/Download Table]

                                                               SHARES BENEFICIALLY OWNED(1)   
                                                             ---------------------------------
NAME OF BENEFICIAL OWNER                                      NUMBER      PERCENT OF CLASS(19)
------------------------                                     ---------    --------------------
                                                                                              
AXA Financial, Inc.......................................... 9,898,203(20)        12.84%      
  1290 Avenue of the Americas                                                                 
  New York, New York 10104                                                                    
Dodge & Cox................................................. 5,299,485(21)         6.87%      
  One Sansome St., 35th Floor                                                                 
  San Francisco, California 94104                                                             
Barclays Global Investors N.A............................... 4,814,440(22)         6.24%      
  45 Fremont Street                                                                           
  San Francisco, California 94105                                                             

---------------                                                                 

(1) Information relating to beneficial ownership is based upon information    
     furnished by each person using "beneficial ownership" concepts set forth in
     rules of the SEC. Under those rules, a person is deemed to be a "beneficial
 owner" of a security if that person has or shares "voting power," which
 includes the power to vote or to direct the voting of such security, or
  "investment power," which includes the power to dispose or to direct the
    disposition of such security. The person is also deemed to be a beneficial
owner of any security of which that person has a right to acquire     
beneficial                                                            

 135

DEFS14A
142nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 142nd
ownership (such as by exercise of options) within 60 days. Under such 
   rules, more than one person may be deemed to be a beneficial owner of the
 same securities, and a person may be deemed to be a beneficial owner of
securities as to which he or she may disclaim any beneficial interest.
   Except as indicated in other notes to this table, directors and executive
 officers possessed sole voting and investment power with respect to all
shares of common stock referred to in the table.                      
(2) The total number of shares of common stock beneficially owned by all      
    directors and executive officers as a group represents approximately 2.27%
of the shares of common stock outstanding as of September 1, 2001. The
percentage beneficially owned by any individual director or executive 
 officer does not exceed one percent of the outstanding shares of common
stock. Shares not outstanding which are subject to options exercisable
    within 60 days by persons in the group or a named individual are deemed to
   be outstanding for the purpose of computing the percentage of outstanding
shares of common stock owned by the group or such individual.         

(3) Includes 608,930 shares that may be acquired upon exercise of options     
  (including options to purchase a total of 119,990 shares only if certain
stock price targets are met).                                         

(4) Includes 140,936 shares that may be acquired upon exercise of options     
    (including an option to purchase 28,400 shares only if certain stock price
   targets are met) and 893 shares allocated to Dr. Chitwood's ESOP account.
     Also includes 101 shares held by Dr. Chitwood's spouse as custodian for his
adult children, as to which shares Dr. Chitwood disclaims beneficial  
ownership.                                                            

(5) Includes 91,920 shares that may be acquired upon exercise of options      
    (including an option to purchase 56,800 shares only if certain stock price
   targets are met) and 578 shares allocated to Mr. Ferguson's ESOP account.

(6) Includes 199,500 shares that may be acquired upon exercise of options, 322
    shares allocated to Mr. Rogers' ESOP account, and 11,300 restricted shares
     that generally vest in August 2002 but as to which Mr. Rogers currently has
  voting power. Also includes 158,424 shares owned by the Eastman Chemical
   Company Foundation, Inc., of which shares Mr. Rogers may also be deemed a
   beneficial owner by virtue of his shared voting and investment power as a
director of the foundation.                                           

(7) Includes 113,700 shares that may be acquired upon exercise of options     
    (including an option to purchase 56,800 shares only if certain stock price
   targets are met) and 770 shares allocated to Mr. Rothwell's ESOP account.

(8) Includes 1,778 shares that may be acquired upon exercise of options and 95
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
Arnelle currently has voting power.                                   
(9) Includes 2,078 shares that may be acquired upon exercise of options and 95
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
Campbell currently has voting power.                                  
(10) Includes 1,976 shares that may be acquired upon exercise of options and 95 
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
Dempsey currently has voting power.                                   
(11) Includes 1,907 shares that may be acquired upon exercise of options and 95 
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
Donehower currently has voting power.                                 
(12) Includes 1,500 shares that may be acquired upon exercise of options, 175   
   restricted shares that generally vest on May 6, 2002, but as to which Mr.
    Griffin currently has voting power and 95 restricted shares that generally
vest on May 3, 2004, but as to which Mr. Griffin currently has voting 
power.                                                                
(13) Includes 4,916 shares that may be acquired upon exercise of options and 95 
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
    Liu currently has voting power. Also includes 600 shares held by Mr. Liu's
spouse, as to which shares Mr. Liu disclaims beneficial ownership, and
1,090 shares held by the Lee and Andrea Liu Foundation.               
(14) Includes 4,258 shares that may be acquired upon exercise of options and 95 
    restricted shares that generally vest on May 3, 2004, but as to which Miss
Marks currently has voting power.                                     
(15) Includes 222 restricted shares that generally vest on December 7, 2003, but
as to which Mr. Raisbeck currently has voting power and 95 restricted 
 shares that generally vest on May 3, 2004, but as to which Mr. Raisbeck
currently has voting power.                                           
(16) Includes 3,688 shares that may be acquired upon exercise of options and 95 
   restricted shares that generally vest on May 3, 2004, but as to which Mr.
White currently has voting power.                                     

 136

DEFS14A
143rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 143rd
(17) Includes 500 shares that may be acquired upon exercise of options, 192     
   restricted shares that generally vest on May 4, 2003, but as to which Mr.
 Wood currently has voting power and 95 restricted shares that generally
   vest on May 3, 2004, but as to which Mr. Wood currently has voting power.
(18) Includes a total of 1,438,509 shares that may be acquired upon exercise of 
  options and 5,579 shares allocated to executive officers' ESOP accounts.
Includes options held by the spouse of an executive officer not named 
above, as to which options such executive officer disclaims beneficial
  ownership. Includes 158,424 shares owned by the Eastman Chemical Company
Foundation, Inc., of which shares Mr. Rogers and two other executive  
     officers not named above may each be deemed a beneficial owner by virtue of
  their shared voting and investment power as directors of the Foundation.
(19) Based upon the number of shares of common stock outstanding as of September
1, 2001.                                                              
(20) Based on a Schedule 13G filed with the SEC on February 12, 2001 by AXA     
Financial, Inc., and certain of its subsidiaries. According to this   
Schedule 13G, AXA Financial and these subsidiaries together have sole 
 investment power with respect to 9,895,753 of these shares, sole voting
 power with respect to 5,894,682 of these shares and shared voting power
with respect to 1,606,270 of these shares.                            

(21)Based on a Schedule 13G filed with the SEC on February 14, 2001 by Dodge &  
  Cox. According to this Schedule 13G, Dodge & Cox has sole investment power
with respect to all of these shares, sole voting power with respect to  
    4,946,275 of these shares, and shared voting power with respect to 46,200 of
these shares.                                                           

(22) Based on a Schedule 13G filed with the SEC on February 14, 2001 by Barclays
   Global Investors N.A., and certain affiliated entities. According to this
  Schedule 13G, Barclays Global Investors and these entities together have
   sole investment power with respect to all of these shares and sole voting
power with respect to 4,437,160 of these shares.                      

 137

DEFS14A
144th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 144th
DESCRIPTION OF EASTMAN COMPANY CAPITAL STOCK

    The following description of Eastman Company capital stock is based on the
amended and restated certificate of incorporation and bylaws of Eastman Company,
which will take effect simultaneously with the Distribution. The following      
description is qualified in its entirety by reference to those documents, which 
have been filed as exhibits to Eastman Company's registration statement on Form 
10.                                                                             

GENERAL                                                                         

   Eastman Company's certificate of incorporation authorizes the issuance of
350,000,000 shares of Eastman Company common stock, par value $0.01 per share   
and 50,000,000 shares of Eastman Company preferred stock. Based on approximately
77,105,150 shares of Eastman Chemical common stock outstanding as of November 2,
2001, approximately 77,105,150 shares of Eastman Company common stock will be   
distributed to Eastman Chemical shareowners on a pro rata basis on the effective
date of the Distribution. Based on approximately 39,453 holders of record of    
Eastman Chemical common stock as of November 2, 2001, there will be             
approximately 39,453 holders of record of Eastman Company common stock on the   
effective date of the Distribution. No shares of Eastman Company preferred stock
will be outstanding immediately following the Distribution.                     

COMMON STOCK                                                                    

     VOTING RIGHTS.  Holders of Eastman Company common stock are entitled to one
vote per share on all matters voted on generally by shareowners. Except as      
otherwise required by law or with respect to any outstanding series of Eastman  
Company preferred stock, holders of common stock possess all voting power.      
Eastman Company bylaws state that shareowner action is effective upon majority  
vote. However, an affirmative vote of the holders of at least 66 2/3% of the    
voting power of outstanding shares is required to amend or repeal the bylaws,   
unless those actions are approved by Eastman Company's board of directors.      

DIVIDEND RIGHTS; RIGHTS UPON LIQUIDATION.  Subject to any preferential
rights of holders of any Eastman Company preferred stock that may be            
outstanding, holders of shares of Eastman Company common stock are entitled to  
receive dividends on common stock out of assets legally available for           
distribution when, as and if authorized and declared by Eastman Company's board 
of directors and to share ratably in the assets of Eastman Company legally      
available for distribution to its shareowners in the event of its liquidation,  
dissolution or winding-up.                                                      

     MISCELLANEOUS.  Holders of Eastman Company common stock have no preferences
or preemptive, conversion or exchange rights. Shares of Eastman Company common  
stock are not liable for further calls or assessments by Eastman Company, and   
holders of Eastman Company common stock are not liable for any liabilities of   
Eastman Company.                                                                

PREFERRED STOCK                                                                 

     Eastman Company's certificate of incorporation authorizes Eastman Company's
board of directors to provide for the issuance, from time to time, of Eastman   
Company preferred stock in series, and to fix the voting rights, designations,  
powers, preferences and the relative participating, optional or other rights of 
the shares, if any, of each series and any qualifications, limitations or       
restrictions with respect to each series. Because Eastman Company's board of    
directors has the power to establish the preferences and rights of the shares of
any series of Eastman Company preferred stock, holders of any Eastman Company   
preferred stock may be afforded voting rights and preferences, powers and rights
senior to the rights of holders of Eastman Company common stock in a way which  
could adversely affect the rights of holders of Eastman Company common stock.   

 138

DEFS14A
145th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 145th
ANTI-TAKEOVER PROVISIONS OF EASTMAN COMPANY'S CERTIFICATE OF INCORPORATION AND  
BYLAWS AND DELAWARE LAW                                                         

GENERAL                                                                     

  Certain provisions of Eastman Company's certificate of incorporation and
bylaws are designed to encourage persons seeking to acquire control of Eastman  
Company to negotiate with Eastman Company's board. Eastman Company believes     
that, as a general rule, its interests and the interests of its shareowners     
would be served best if any change in control results from negotiations with    
Eastman Company's board based upon careful consideration of the proposed terms, 
such as the price to be paid to shareowners, the form of consideration to be    
paid and the anticipated tax effects of the transaction.                        

    Eastman Company's certificate of incorporation and bylaw provisions could,
however, have the effect of discouraging a prospective acquiror from making a   
tender offer for Eastman Company's stock or otherwise attempting to obtain      
control of Eastman Company. To the extent that these provisions discourage      
takeover attempts, they could deprive shareowners of opportunities to realize   
takeover premiums for their shares. Moreover, these provisions could discourage 
accumulations of large blocks of common stock, thus depriving shareowners of any
advantages which large accumulations of stock might provide.                    

CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS                           

NUMBER OF DIRECTORS; REMOVAL; VACANCIES                               

    Eastman Company's certificate of incorporation and bylaws provide that the
number of directors shall be determined from time to time exclusively by a vote 
of a majority of Eastman Company's board of directors then in office. The board 
of directors has the exclusive right to fill vacancies, including vacancies     
created by expansion of the board. The certificate of incorporation further     
provides that directors may be removed only for cause and only by the           
affirmative vote of the owners of at least two-thirds of the voting power of all
of the shares of Eastman Company's capital stock then entitled to vote in the   
election of directors. This provision, together with the provision of the       
certificate of incorporation authorizing the board to fill vacant directorships,
could prevent shareowners from removing incumbent directors without cause and   
filling the resulting vacancies with their own nominees.                        

CLASSIFIED BOARD OF DIRECTORS                                         

   The board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the         
directors are elected each year. Eastman Company believes that a classified     
board will help to assure the continuity and stability of its board of          
directors, and its business strategies and policies as determined by its board, 
because a majority of the directors at any given time will have prior experience
as directors of Eastman Company. This provision should also help to ensure that 
Eastman Company, if confronted with an unsolicited proposal from a third party  
that has acquired a block of Eastman Company's voting stock, will have          
sufficient time to review the proposal and appropriate alternatives and to seek 
the best available result for all shareowners. A classified board could prevent 
a third party which acquires control of a majority of the outstanding voting    
stock from obtaining control of Eastman Company's board of directors until the  
second annual shareowners meeting following the date the third party obtains the
controlling stock interest. This could have the effect of discouraging a        
potential acquiror from making a tender offer or otherwise attempting to obtain 
control of Eastman Company and could thus increase the likelihood that incumbent
directors will retain their positions.                                          

NO SHAREOWNER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS             

 The certificate of incorporation provides that shareowner action can be
taken only at an annual special meeting of shareowners and cannot be taken by   
written consent in lieu of a meeting. However, special meetings of the          
shareowners can only be called pursuant to a resolution approved by a majority  
of the board of directors then in office. In other words, shareowners are not   
permitted to call a special meeting or to require the board of directors to call
a special meeting of shareowners. These provisions could delay a                
 139

DEFS14A
146th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 146th
shareowner vote on certain matters, such as business combinations and removal of
directors, and could have the effect of discouraging a potential acquiror from  
making a tender offer.                                                          

NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS         

   The bylaws establish an advance notice procedure for shareowner proposals
to be brought before a meeting of shareowners and for nominations by shareowners
of candidates for election as directors at an annual meeting or a special       
meeting at which directors are to be elected. As described more fully in the    
bylaws, only such business may be conducted at a meeting of shareowners as has  
been brought before the meeting by, or at the direction of, the board of        
directors, or by a shareowner who has given the secretary of Eastman Company    
timely written notice, in proper form, of the shareowner's intention to bring   
that business before the meeting. The presiding officer at this meeting has the 
authority to make these determinations. Only persons who are nominated by, or at
the direction of, the board of directors, or who are nominated by a shareowner  
who has given timely written notice, will be eligible for election as directors 
of Eastman Company.                                                             

These provisions could make it more difficult for shareowners to raise
matters affecting control of Eastman Company, including tender offers, business 
combinations or the election or removal of directors, for shareowner vote.      

AMENDMENTS TO BYLAWS; CERTIFICATE OF INCORPORATION                    

  The certificate of incorporation provides that the board of directors or
the owners of at least two-thirds of the voting power of all of the shares of   
Eastman Company's capital stock then entitled to vote generally in the election 
of directors have the power to amend or repeal the bylaws. This provision could 
make it more difficult for shareowners to amend or repeal any provisions of the 
bylaws adopted by the board of directors or to adopt any bylaws provisions      
opposed by the board of directors.                                              

   In addition, any proposal to amend, alter, change or repeal any provision
of the certificate of incorporation requires approval by the affirmative vote of
both a majority of the members of the board of directors then in office and a   
majority vote of the voting power of all of the shares of Eastman Company's     
capital stock entitled to vote generally in the election of directors. This     
provision could make it more difficult for shareowners to adopt, amend or repeal
any provision of the certificate of incorporation, including a provision        
affecting control of Eastman Company.                                           

PREFERRED STOCK AND ADDITIONAL COMMON STOCK                           

Under Eastman Company's certificate of incorporation, the board of    
directors has the authority, without further shareowner approval, to issue      
Eastman Company preferred stock in series, and to fix the designations, voting  
powers, preferences and rights of the shares of each series and any             
qualifications, limitations or restrictions with respect to that series. With   
this authority, Eastman Company's board of directors could create and issue a   
series of Eastman Company preferred stock with rights, preferences or           
restrictions which have the effect of discriminating against an existing or     
prospective owner of capital stock of Eastman Company as a result of the owner  
beneficially owning or commencing a tender offer for a substantial amount of    
Eastman Company common stock. One of the effects of authorized but unissued and 
unreserved shares of preferred stock may be to render more difficult for, or    
discourage an attempt by, a potential acquiror to obtain control of Eastman     
Company by means of a merger, tender offer, proxy contest or otherwise, and     
thereby protect the continuity of Eastman Company's management. The issuance of 
any shares of preferred stock may have the effect of delaying, deferring or     
preventing a change in control of Eastman Company without any further action by 
the shareowners of Eastman Company. For example, the issuance of new shares     
might impede a business combination if the terms of these shares include voting 
rights which would enable an owner to block business combinations.              

 140

DEFS14A
147th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 147th
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW                         

Eastman Company will be subject to Section 203 of the Delaware General
Corporation Law, or DGCL. The provisions of Section 203 prohibit Eastman Company
from engaging in specified "business combinations" with an "interested          
stockholder" for a period of three years after the date that the person became  
an interested stockholder, unless one of the following conditions is satisfied: 

   - prior to the date that the person became an interested stockholder, the
      transaction or business combination that resulted in the person becoming
an interested stockholder is approved by the board of directors;  

 - upon consummation of the transaction that resulted in the stockholder
    becoming an interested stockholder, the interested stockholder owns at
least 85% of Eastman Company's outstanding voting stock; or       

  - on or after the date that the person became an interested stockholder,
the business combination is approved by Eastman Company's board of
      directors and by the holders of at least two-thirds of Eastman Company's
      outstanding voting stock, excluding voting stock owned by the interested
stockholder.                                                      

    Generally, a "business combination" includes a merger, asset or stock sale
or other transaction resulting in a financial benefit to the interested         
stockholder. Subject to specified exceptions, an "interested stockholder" is a  
person who, together with that person's affiliates and associates, owns, or     
within the previous three years did own, 15% or more of Eastman Company's voting
stock. These provisions of Section 203 may encourage companies interested in    
acquiring Eastman Company to negotiate in advance with the board of directors,  
since the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the         
transaction that results in the stockholder becoming an interested stockholder. 
These provisions may also have the effect of preventing changes in the          
management of Eastman Company. It is possible that these provisions could make  
it more difficult to accomplish transactions which shareowners may otherwise    
deem to be in their best interests.                                             

RIGHTS PLAN                                                                     

  Eastman Company's board of directors has adopted a share purchase rights
plan and will issue, as a dividend, one right for each outstanding share of     
Eastman Company's common stock, effective as of the time of the Distribution.   
Each right will entitle the registered owner to purchase from Eastman Company   
one one-hundredth of a share of preferred stock of Eastman Company, designed to 
have economic and voting terms similar to those of one share of Eastman Company 
common stock, for an exercise price of $100 per one one-hundredth of a preferred
share. The price and the number of rights outstanding, or in certain            
circumstances the securities that can be purchased upon exercise of the rights, 
are subject to adjustment upon the occurrence of specified events.              

     The rights will be evidenced by the certificates evidencing Eastman Company
common stock until the separation time, which is the earlier of:                

     (i) the close of business on the tenth business day following the
    first date, referred to as the flip-in date, of a public announcement that
 a person or group (other than Eastman Company, a subsidiary or employee
     benefit or stock ownership plan of Eastman Company or any of its affiliates
   or associates), together with its affiliates and associates, has acquired
beneficial ownership of 15% or more of the outstanding Eastman Company
  common stock (that person or group being hereinafter called an acquiring
person); or                                                           

         (ii) the close of business on the tenth business day (or a later date
     that may be specified by the board of directors) following the commencement
of a tender offer or exchange offer by a person or group (other than  
   Eastman Company, a subsidiary or employee benefit or stock ownership plan
of Eastman Company or any of its affiliates or associates), that, if  
 consummated, would result in that person or group becoming an acquiring
person.                                                               

 141

DEFS14A
148th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 148th
     Until the separation time, the rights may be transferred with and only with
shares of Eastman Company common stock. Until the separation time (or earlier   
redemption, exchange or expiration of the rights), any certificate evidencing   
Eastman Company common stock issued upon transfer or new issuance of Eastman    
Company common stock will contain a notation incorporating the rights agreement 
by reference. Until the separation time (or earlier redemption, exchange or     
expiration of the rights), the surrender for transfer of any certificates       
evidencing Eastman Company common stock will also constitute the transfer of the
rights associated with those certificates.                                      

     As soon as practicable following the separation time, separate certificates
evidencing the rights will be mailed to owners of record of Eastman Company     
common stock as of the close of business on the date of the separation time and 
these separate right certificates alone will evidence the rights. No right is   
exercisable following that time before the separation time. The rights will     
expire on the earliest of:                                                      

   - the date Eastman Company's board of directors exchanges all of the then
outstanding rights for shares of Eastman Company's common stock;  

- the date the rights are redeemed as described below; or             

    - the close of business on the tenth anniversary of the record date of the
rights distribution.                                              

     Until a right is exercised, the holder of the right will have no additional
rights as a shareowner of Eastman Company, including the right to vote or to    
receive dividends.                                                              

     In the event that prior to the termination, expiration or redemption of the
rights, a flip-in date occurs, Eastman Company will take any action as shall be 
necessary to ensure and provide that each right (other than rights beneficially 
owned by an acquiring person or any affiliate, associate or transferee, which   
rights shall become void) shall thereafter constitute the right to purchase from
Eastman Company that number of shares of Eastman Company's common stock having  
an aggregate market price equal to two times the exercise price for an amount in
cash equal to the then current exercise price. In addition, Eastman Company's   
board of directors may, at its option, at any time after a flip-in date and     
prior to the time that an acquiring person becomes the beneficial owner of more 
than 50% of the outstanding shares of Eastman Company common stock, elect to    
exchange all of the then outstanding rights for shares of Eastman Company common
stock at an exchange ratio of one share of Eastman Company common stock per     
right, appropriately adjusted to reflect any stock split, stock dividend or     
similar transaction occurring after the date of the separation time. Immediately
upon that action by Eastman Company's board of directors, the right to exercise 
the rights will terminate and each right will thereafter represent only the     
right to receive a number of shares of Eastman Company's common stock equal to  
that exchange ratio. If Eastman Company becomes obligated to issue shares of its
common stock upon exercise of or in exchange for rights, Eastman Company may, at
its option, substitute shares of preferred stock for that common stock, at a    
rate of one one-hundredth of a share of preferred stock for each share of common
stock issuable.                                                                 

     In the event that prior to the termination, expiration or redemption of the
rights, Eastman Company enters into, consummates or permits to occur a          
transaction or series of transactions, referred to as a flip-over transaction,  
after any time a person becomes an acquiring person in which, directly or       
indirectly, one of the following occurs:                                        

       (i) Eastman Company consolidates, merges or participates in a share
     exchange with any other person if, at the time of the transaction or at the
time Eastman Company enters into an agreement with respect to the     
 transaction, and any term of or arrangement concerning the treatment of
     shares of capital stock in the transaction relating to the acquiring person
     is not identical to the terms and arrangements relating to ether holders of
Eastman Company's common stock; or                                    

   (ii) Eastman Company sells or otherwise transfers assets either
    aggregating more than 50% of its assets or generating more than 50% of its
 operating income or cash flow if at the time of the sale or transfer of
     assets or at the time Eastman Company enters into an agreement with respect
  to the sale or transfer, the acquiring person controls Eastman Company's
    board of directors, then Eastman Company shall take any action as shall be
necessary to ensure, and shall not enter into, consummate             

 142

DEFS14A
149th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 149th
or permit to occur any flip-over transaction until it enters into a   
supplemental agreement with the person engaging in that flip-over     
  transaction, referred to as the flip-over entity, for the benefit of the
  holders of the rights, providing that upon consummation or occurrence of
  the flip-over transaction (i) each right shall thereafter constitute the
  right to purchase from the flip-over entity, upon exercise in accordance
 with the terms of the rights agreement, that number of shares of common
    stock of the flip-over entity having an aggregate market price on the date
   of or occurrence of the flip-over transaction equal to twice the exercise
  price for an amount in cash equal to the then current exercise price and
     (ii) the flip-over entity shall thereafter be liable for, and shall assume,
    by virtue of the flip-over transaction and supplemental agreement, all the
obligations and duties of Eastman Company under the rights agreement. 

     The rights are redeemable by Eastman Company at $0.01 per right, subject to
adjustment upon the occurrence of specified events, at any date prior to the    
flip-in date. The rights have no voting rights and are not entitled to          
dividends.                                                                      

The rights will not prevent a takeover of Eastman Company. The rights,
however, may cause substantial dilution to an acquiring person, unless the      
rights are first redeemed or the rights plan is amended by Eastman Company's    
board of directors. Nevertheless, the rights should not interfere with a        
transaction that is in the best interests of Eastman Company and its shareowners
because the rights can be redeemed or the rights plan may be amended as         
described, before the consummation of any proposed transaction.                 

TRANSFER AGENT AND REGISTRAR                                                    

American Stock Transfer & Trust Company will act as transfer agent and
registrar for Eastman Company's common stock and as rights agent under the      
rights plan.                                                                    

 143

DEFS14A
150th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 150th
INDEMNIFICATION AND LIMITATION OF LIABILITY FOR 
EASTMAN COMPANY DIRECTORS AND OFFICERS

Set forth below is a description of provisions of Eastman Company's   
certificate of incorporation and bylaws and Delaware law that serve to indemnify
or limit the liability of Eastman Company's officers and directors for monetary 
damages to Eastman Company. This description is intended as a summary only and  
is qualified in its entirety by reference to those documents, which have been   
filed as exhibits to Eastman Company's registration statement on Form 10.       

INDEMNIFICATION OF LIABILITY FOR DIRECTORS AND OFFICERS                         

     Eastman Company is a Delaware corporation. Eastman Company's certificate of
incorporation provides that Eastman Company will indemnify and hold harmless its
officers, directors and others serving the corporation in various capacities to 
the fullest extent permitted by the DGCL. Section 145 of the DGCL provides that 
a Delaware corporation has the power to indemnify officers and directors in     
specified circumstances.                                                        

  Under Section 145 of the DGCL, a corporation may indemnify its directors
and officers as well as other employees and individuals against expenses        
(including attorneys' fees), judgments, fines and amounts paid in settlement in 
connection with specified actions, suits or proceedings, whether civil,         
criminal, administrative or investigative (other than an action by or in the    
right of the corporation, referred to as a derivative action) if they acted in  
good faith and in a manner they reasonably believed to be in or not opposed to  
the best interests of the corporation, and with respect to any criminal action  
or proceeding, had no reasonable cause to believe their conduct was unlawful. A 
similar standard of conduct is applicable in the case of derivative actions,    
except that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with defense or settlement of that action, and Section   
145 requires court approval before there can be any indemnification where the   
person seeking indemnification has been found liable to the corporation.        

     Section 145 of the DGCL further provides that to the extent that a director
or officer has been successful on the merits or otherwise in the defense of any 
action, suit or proceeding referred to above or in the defense of any claim,    
issue or matter within that action, suit or proceeding, that person shall be    
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by that person in connection with that defense. Eastman Company's      
certificate of incorporation provides that the indemnification rights described 
above shall be contract rights and shall include the right to be paid expenses  
incurred in defending any proceeding in advance of its final disposition subject
to any undertakings required under the DGCL. Section 145 requires an undertaking
to repay any amount advanced if the director or officer receiving that amount is
ultimately determined not to be entitled to indemnification.                    

Indemnification provided for by Section 145 of the DGCL and Eastman   
Company's certificate of incorporation is not to be deemed exclusive of any     
other rights to which the indemnified party may be entitled. Both Section 145   
and Eastman Company's certificate of incorporation permit Eastman Company to    
maintain insurance on behalf of a director, officer or others against any       
liability asserted against that person and incurred by that person, whether or  
not Eastman Company would have the power to indemnify that person against those 
liabilities under Section 145.                                                  

Anyone claiming rights to indemnification under Eastman Company's     
certificate of incorporation may bring suit if that indemnification is not paid 
within thirty days. Eastman Company's certificate of incorporation further      
provides that Eastman Company bears the burden of proving that the claimant has 
not met the standards of conduct required for indemnification under Section 145 
of the DGCL if Eastman Company elects to defend that action.                    

 144

DEFS14A
151st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 151st
LIMITATION OF LIABILITY OF DIRECTORS                                            

Eastman Company's certificate of incorporation provides that, to the  
fullest extent permitted under the DGCL, a director of Eastman Company will not 
be personally liable to Eastman Company or its shareowners for monetary damages 
for breach of fiduciary duty as a director. Section 102(b)(7) of the DGCL       
permits a corporation to include in its certificate of incorporation provisions 
limiting the personal liability of its directors for monetary damages to the    
corporation except that directors shall remain personally liable for:           

    - acts or omissions not in good faith which involve intentional misconduct
or a knowing violation of law;                                    

- the payment of dividends or the redemption of purchase of stock in  
violation of Delaware law;                                        

  - any breach of the director's duty of loyalty to the corporation or its
shareowners; or                                                   

- any transaction from which the director derived an improper personal
benefit.                                                          

SUBMISSION OF SHAREOWNER PROPOSALS

     Assuming the Distribution is completed, it is expected that Voridian's 2002
annual meeting of shareowners will be held on Tuesday, May 14, 2002. In         
accordance with rules of the SEC, if you want to submit a proposal for          
presentation at Voridian's 2002 annual meeting of shareowners, it must be       
received by Voridian at its principal executive offices on or before November   
26, 2001 in order to be included in Voridian's proxy materials relating to its  
2002 annual meeting of shareowners. In addition, Voridian's bylaws require that 
a proposal to be submitted by a shareowner for a vote of Voridian's shareowners,
whether or not also submitted for inclusion in Voridian's proxy materials, must 
be preceded by adequate and timely notice to the secretary of Voridian. If the  
2002 annual meeting is held as scheduled on Tuesday, May 14, 2002, then that    
advance notice would be timely if delivered on or before March 15, 2002.        

AVAILABLE INFORMATION 

   Eastman Chemical is, and after the Distribution Voridian will continue to
be, subject to the information and reporting requirements of the Securities     
Exchange Act of 1934 and, in accordance with the Exchange Act, it files annual, 
quarterly and current reports, proxy statements and other information with the  
SEC. Copies of these reports, proxy statements and other information may be     
examined without charge in the Public Reference Room maintained by the SEC at   
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.     
Please call the SEC at 1-800-SEC-0330 for further information about the         
operation of the Public Reference Room. Copies of all or a portion of this proxy
statement can be obtained from the Public Reference Room upon payment of        
prescribed fees. Eastman Chemical's filings with the SEC are also available to  
the public from commercial document retrieval services and at the SEC's web site
at the address http://www.sec.gov.                                              

    This document constitutes a part of the registration statement on Form 10,
together with all amendments, supplements, schedules and exhibits to the        
registration statement, referred to as the registration statement, which Eastman
Company has filed with the SEC covering shares of Eastman Company's common stock
to be registered immediately upon the Distribution. This proxy statement does   
not contain all of the information in the registration statement. Reference is  
made to the registration statement for further information about Eastman Company
and Eastman Company's common stock. Each statement contained in this proxy      
statement as to the contents of any contract, agreement or other document filed 
as an exhibit to the registration statement is qualified in its entirety by     
reference to that exhibit for a more complete description of the matter         
involved. The registration statement can be examined at the SEC's Public        
Reference Room.                                                                 

 145

DEFS14A
152nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 152nd
    After the Distribution, Eastman Company will be subject to the information
and reporting requirements of the Exchange Act and will be required to file     
periodic reports, proxy statements and other information with the SEC. Eastman  
Company will send an annual report to shareowners, containing audited financial 
statements, and any additional reports or statements required by the SEC.       

   YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT
TO VOTE ON THE PROPOSAL. EASTMAN CHEMICAL HAS NOT AUTHORIZED ANYONE TO PROVIDE  
YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY     
STATEMENT. THIS PROXY STATEMENT IS DATED NOVEMBER 9, 2001.                      

 146

DEFS14A
153rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 153rd
INDEX TO FINANCIAL STATEMENTS 

                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
EASTMAN CHEMICAL CONSOLIDATED FINANCIAL STATEMENTS                
Consolidated Financial Statements (Unaudited):                    
  Consolidated Statements of Earnings (Loss), Comprehensive       
     Income (Loss), and Retained Earnings for the Six Months      
     Ended June 30, 2001 and 2000...........................   F-2
  Consolidated Statements of Financial Position at June 30,       
     2001 and December 31, 2000.............................   F-3
  Consolidated Statements of Cash Flows for the Six Months        
     Ended June 30, 2001 and 2000...........................   F-4
  Notes to Unaudited Consolidated Financial Statements......   F-5
Report of Independent Accountants...........................  F-14
Consolidated Financial Statements:                                
  Consolidated Statements of Earnings, Comprehensive Income,      
     and Retained Earnings for the Three Years Ended              
     December 31, 2000, 1999 and 1998.......................  F-15
  Consolidated Statements of Financial Position at December       
     31, 2000 and 1999......................................  F-16
  Consolidated Statements of Cash Flows for the Three Years       
     Ended December 31, 2000, 1999 and 1998.................  F-17
  Notes to Consolidated Financial Statements................  F-18
EASTMAN COMPANY CONSOLIDATED FINANCIAL STATEMENTS                 
Report of Independent Accountants...........................  F-49
Consolidated Financial Statements:                                
  Consolidated Statements of Earnings (Loss) and                  
     Comprehensive Income (Loss) for the Six Months Ended         
     June 30, 2001 and 2000 (Unaudited) and the Three Years       
     Ended December 31, 2000, 1998 and 1998.................  F-50
  Consolidated Statements of Financial Position at June 30,       
     2001 (Unaudited) and December 31, 2000 and 1999........  F-51
  Consolidated Statements of Cash Flows for the Six Months        
     Ended June 30, 2001 and 2000 (Unaudited) and the Three       
     Years Ended December 31, 2000, 1999 and 1998...........  F-52
  Notes to Consolidated Financial Statements................  F-53

 F-1

DEFS14A
154th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 154th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS), COMPREHENSIVE 
INCOME (LOSS), AND RETAINED EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 

                                                        [Enlarge/Download Table]

                                                             SIX MONTHS ENDED JUNE 30, 
                                                             --------------------------
                                                                2001           2000    
                                                             -----------   ------------
                                                                    (UNAUDITED)        
                                                                                       
Sales.......................................................   $2,746         $2,533   
Cost of sales...............................................    2,261          1,993   
Asset impairments and restructuring costs...................      290             --   
                                                               ------         ------   
Gross profit................................................      195            540   
Selling and general administrative expenses.................      212            161   
Research and development costs..............................       79             74   
Write-off of acquired in-process research and development...        8             --   
                                                               ------         ------   
Operating earnings (loss)...................................     (104)           305   
Interest expense, net.......................................       72             64   
Other income................................................      (11)           (17)  
Other charges...............................................       23             28   
                                                               ------         ------   
Earnings (loss) before income taxes.........................     (188)           230   
Provision (benefit) for income taxes........................      (78)            76   
                                                               ------         ------   
Net earnings (loss).........................................   $ (110)        $  154   
                                                               ======         ======   
Earnings (loss) per share                                                              
  Basic.....................................................   $(1.44)        $ 2.00   
                                                               ======         ======   
  Diluted...................................................   $(1.44)        $ 2.00   
                                                               ======         ======   
COMPREHENSIVE INCOME (LOSS)                                                            
Net earnings (loss).........................................   $ (110)        $  154   
Other comprehensive loss....................................      (38)           (34)  
                                                               ------         ------   
Comprehensive income (loss).................................   $ (148)        $  120   
                                                               ======         ======   
RETAINED EARNINGS                                                                      
Retained earnings at beginning of period....................   $2,266         $2,098   
Net earnings (loss).........................................     (110)           154   
Cash dividends declared.....................................      (68)           (67)  
                                                               ------         ------   
Retained earnings at end of period..........................   $2,088         $2,185   
                                                               ======         ======   

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

 F-2

DEFS14A
155th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 155th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 
(DOLLARS IN MILLIONS) 

                                                        [Enlarge/Download Table]

                                                              JUNE 30,   DECEMBER 31,
                                                                2001         2000    
                                                              --------   ------------
                                                                    (UNAUDITED)      
                                                                                     
                                       ASSETS                                        
Current assets:                                                                      
  Cash and cash equivalents.................................   $   70       $  101   
  Trade receivables, net of allowance of $21 and $16........      673          650   
  Miscellaneous receivables.................................       86           87   
  Inventories...............................................      731          580   
  Other current assets......................................       96          105   
                                                               ------       ------   
          Total current assets..............................    1,656        1,523   
                                                               ------       ------   
Properties:                                                                          
  Properties and equipment at cost..........................    8,908        9,039   
  Less: Accumulated depreciation............................    5,160        5,114   
                                                               ------       ------   
          Net properties....................................    3,748        3,925   
                                                               ------       ------   
Goodwill, net of accumulated amortization of $35 and $28....      336          344   
Other intangibles, net of accumulated amortization of $29                            
  and $20...................................................      268          277   
Other noncurrent assets.....................................      426          481   
                                                               ------       ------   
          Total assets......................................   $6,434       $6,550   
                                                               ======       ======   
                         LIABILITIES AND SHAREOWNERS' EQUITY                         
Current liabilities:                                                                 
  Payables and other current liabilities....................   $  968       $1,152   
  Borrowings due within one year............................      179          106   
                                                               ------       ------   
          Total current liabilities.........................    1,147        1,258   
Long-term borrowings........................................    2,185        1,914   
Deferred income taxes.......................................      527          607   
Postemployment obligations..................................      849          829   
Other long-term liabilities.................................      116          130   
                                                               ------       ------   
          Total liabilities.................................    4,824        4,738   
                                                               ------       ------   
Commitments and contingencies:                                                       
Shareowners' equity:                                                                 
  Common stock ($0.01 par -- 350,000,000 shares authorized;                          
     shares issued -- 85,023,199 and 84,739,902)............        1            1   
  Paid-in capital...........................................      118          100   
  Retained earnings.........................................    2,088        2,266   
  Other comprehensive loss..................................     (155)        (117)  
                                                               ------       ------   
                                                                2,052        2,250   
  Less: Treasury stock at cost (8,073,859 and 7,996,790                              
     shares)................................................      442          438   
                                                               ------       ------   
          Total shareowners' equity.........................    1,610        1,812   
                                                               ------       ------   
          Total liabilities and shareowners' equity.........   $6,434       $6,550   
                                                               ======       ======   

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

 F-3

DEFS14A
156th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 156th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(DOLLARS IN MILLIONS) 

                                                                [Download Table]

                                                               SIX MONTHS   
                                                                  ENDED     
                                                                JUNE 30,    
                                                              ------------- 
                                                              2001    2000  
                                                              -----   ----- 
                                                               (UNAUDITED)  
                                                                            
CASH FLOWS FROM OPERATING ACTIVITIES:                                       
  Net earnings (loss).......................................  $(110)  $ 154 
                                                              -----   ----- 
Adjustments to reconcile net earnings (loss) to net cash                    
  provided by operating activities, net of effect of                        
  acquisitions:                                                             
  Depreciation and amortization.............................    214     199 
  Write-off of impaired assets..............................    287      -- 
  Write-off of acquired in-process research and                             
     development............................................      8      -- 
  Provision (benefit) for deferred income taxes.............    (81)      6 
  Increase in receivables...................................    (22)    (14)
  Increase in inventories...................................    (86)    (57)
  Increase (decrease) in liabilities for employee benefits                  
     and incentive pay......................................    (47)      3 
  Increase (decrease) in liabilities excluding borrowings                   
     and liabilities for employee benefits and incentive                    
     pay....................................................    (73)     57 
  Other items, net..........................................    (26)     30 
                                                              -----   ----- 
          Total adjustments.................................    174     224 
                                                              -----   ----- 
          Net cash provided by operating activities.........     64     378 
                                                              -----   ----- 
CASH FLOWS FROM INVESTING ACTIVITIES:                                       
  Additions to properties and equipment.....................   (117)    (78)
  Acquisitions, net of cash acquired........................   (250)    (52)
  Additions to capitalized software.........................    (15)     (9)
  Other investments.........................................     (7)    (23)
  Proceeds from sales of fixed assets.......................      4      60 
                                                              -----   ----- 
          Net cash used in investing activities.............   (385)   (102)
                                                              -----   ----- 
CASH FLOWS FROM FINANCING ACTIVITIES:                                       
  Net increase in commercial paper and other short-term                     
     borrowings.............................................    348      51 
  Repayment of borrowings...................................     (4)   (221)
  Dividends paid to shareowners.............................    (68)    (68)
  Treasury stock purchases..................................     (4)    (57)
  Other items...............................................     18       2 
                                                              -----   ----- 
          Net cash provided by (used in) financing                          
           activities.......................................    290    (293)
                                                              -----   ----- 
          Net change in cash and cash equivalents...........    (31)    (17)
Cash and cash equivalents at beginning of period............    101     186 
                                                              -----   ----- 
Cash and cash equivalents at end of period..................  $  70   $ 169 
                                                              =====   ===== 

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

 F-4

DEFS14A
157th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 157th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION                                                        

   The accompanying unaudited interim consolidated financial statements have
been prepared by Eastman Chemical in accordance and consistent with the         
accounting policies stated in Eastman Chemical's 2000 Annual Report on Form 10-K
and the Quarterly Report on Form 10-Q for the first quarter 2001 and should be  
read in conjunction with the consolidated financial statements appearing        
therein. In the opinion of Eastman Chemical, all normally recurring adjustments 
necessary for a fair presentation have been included in the unaudited interim   
consolidated financial statements. The unaudited interim consolidated financial 
statements are based in part on estimates made by management.                   

  Eastman Chemical has reclassified certain 2000 amounts to conform to the
2001 presentation.                                                              

2. INVENTORIES                                                                  

                                                                [Download Table]

                                                             JUNE 30,   DECEMBER 31,
                                                               2001         2000    
                                                             --------   ------------
                                                              (DOLLARS IN MILLIONS) 
                                                                                    
At FIFO or average cost (approximates current cost):                                
  Finished goods............................................  $  574        $482    
  Work in process...........................................     172         125    
  Raw materials and supplies................................     287         248    
                                                              ------        ----    
          Total inventories.................................   1,033         855    
  Reduction to LIFO value...................................    (302)       (275)   
                                                              ------        ----    
          Total inventories at LIFO value...................  $  731        $580    
                                                              ======        ====    

Inventories valued on the LIFO method were approximately 70% of total 
inventories in each of the periods.                                             

3. PAYABLES AND OTHER CURRENT LIABILITIES                                       

                                                                [Download Table]

                                                             JUNE 30,   DECEMBER 31,
                                                               2001         2000    
                                                             --------   ------------
                                                              (DOLLARS IN MILLIONS) 
                                                                                    
Trade creditors.............................................   $475        $  526   
Accrued payrolls, vacation, and variable-incentive                                  
  compensation..............................................    143           201   
Accrued taxes...............................................    103            95   
Deferred gain on currency options...........................     --            68   
Other.......................................................    247           262   
                                                               ----        ------   
          Total.............................................   $968        $1,152   
                                                               ====        ======   

 F-5

DEFS14A
158th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 158th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

4. BORROWINGS                                                                   

                                                                [Download Table]

                                                             JUNE 30,   DECEMBER 31,
                                                               2001         2000    
                                                             --------   ------------
                                                              (DOLLARS IN MILLIONS) 
                                                                                    
SHORT-TERM BORROWINGS:                                                              
Notes payable...............................................  $  174       $  101   
Other.......................................................       5            5   
                                                              ------       ------   
          Total short-term borrowings.......................     179          106   
                                                              ------       ------   
LONG-TERM BORROWINGS:                                                               
6 3/8% notes due 2004.......................................     500          500   
7 1/4% debentures due 2024..................................     496          496   
7 5/8% debentures due 2024..................................     200          200   
7.60% debentures due 2027...................................     297          297   
Commercial paper............................................     675          400   
Other.......................................................      17           21   
                                                              ------       ------   
          Total long-term borrowings........................   2,185        1,914   
                                                              ------       ------   
          Total borrowings..................................  $2,364       $2,020   
                                                              ======       ======   

  Eastman Chemical has access to an $800 million revolving credit facility
expiring in July 2005 and to a short-term $165 million credit agreement expiring
in December 2001. Although Eastman Chemical does not have any amounts           
outstanding under the credit facility or the credit agreement, any such         
borrowings would be subject to interest at varying spreads above quoted market  
rates, principally LIBOR. The credit facility and the credit agreement require  
facility fees on the total commitment that vary based on Eastman Chemical's     
credit rating. For the credit facility, the rate for such fees was 0.125% as of 
June 30, 2001 and December 31, 2000. For the credit agreement, the rate for such
fees was 0.125% as of June 30, 2001. The credit facility and the credit         
agreement contain a number of covenants and events of default, including the    
maintenance of certain financial ratios. Eastman Chemical was in compliance with
all such covenants for all periods.                                             

     Eastman Chemical utilizes commercial paper, generally with maturities of 90
days or less, to meet its liquidity needs. Because the credit facility which    
provides liquidity support for the commercial paper expires in July 2005, the   
commercial paper borrowings are classified as long-term borrowings because      
Eastman Chemical has the ability to refinance such borrowings long term. As of  
June 30, 2001, Eastman Chemical's commercial paper outstanding balance was $675 
million at an effective interest rate of 5.15%. At December 31, 2000, Eastman   
Chemical's commercial paper outstanding balance was $400 million at an effective
interest rate of 7.12%.                                                         

5. EARNINGS (LOSS) AND DIVIDENDS PER SHARE                                      

                                                                [Download Table]

                                                              SIX MONTHS 
                                                                 ENDED   
                                                               JUNE 30,  
                                                              -----------
                                                              2001   2000
                                                              ----   ----
                                                                         
Shares used for earnings (loss) per share calculation (in                
  millions):                                                             
  Basic.....................................................  76.7   77.0
  Diluted...................................................  76.7   77.2

As a result of the net loss reported for the six months ended June 30,
2001, common shares underlying options have been excluded from the calculation  
of diluted earnings (loss) per share. Excluded from the first six months 2001   
calculation were shares underlying options to purchase 5,581,894 shares of      

 F-6

DEFS14A
159th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 159th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

common stock at a range of prices from $33.01 to $73.94. Excluded from the first
six months 2000 calculations were shares underlying options to purchase         
3,060,841 common shares at a range of prices from $45.44 to $73.81, in both     
instances because the exercise price of the options was greater than the average
market price of the underlying common shares.                                   

In 1999, several key executive officers were awarded performance-based
stock options to further align their compensation with the return to Eastman    
Chemical's shareowners and to provide additional incentive and opportunity for  
reward to individuals in key positions having direct influence over corporate   
actions that are expected to impact the market price of Eastman Chemical's      
stock. Options to purchase a total of 574,000 shares will become exercisable    
through December 31, 2001, if both the stock price and time vesting conditions  
are met. The options will be cancelled and forfeited on December 31, 2001 as to 
any shares for which the applicable stock price target is not met. As a result  
of the net loss reported for the first six months 2001, 156,060 shares          
underlying such options were excluded from the calculation of diluted earnings  
(loss) per share because their effect would be anti-dilutive. At June 30, 2000, 
149,240 shares underlying such options were included in diluted earnings per    
share calculations as a result of the stock price conditions for vesting being  
met.                                                                            

Additionally, 200,000 shares underlying an option issued to the chief 
executive officer in the third quarter 1997 were excluded from diluted earnings 
(loss) per share calculations because the stock price vesting conditions to     
exercise had not been met as to any of the shares as of June 30, 2001 or June   
30, 2000.                                                                       

  Eastman Chemical declared cash dividends of $0.88 per share in the first
six months of 2001 and 2000.                                                    

6. ACQUISITIONS                                                                 

CERTAIN BUSINESSES OF HERCULES INCORPORATED                                 

 On May 1, 2001, Eastman Chemical completed the asset acquisition of the
hydrocarbon resins and select portions of the rosin-based resins business from  
Hercules Inc., or Hercules, for approximately $250 million. Hercules' resins    
businesses facilities acquired are located in the United States, the            
Netherlands, England and Mexico. Additionally, certain operating assets acquired
will be operated under contract with Hercules at shared facilities in the United
States.                                                                         

The transaction, which was financed with available cash and commercial
paper borrowings, was accounted for by the purchase method of accounting and,   
accordingly, the results of operations of certain Hercules resins businesses for
the period from the acquisition date are included in the accompanying           
consolidated financial statements. Tangible assets acquired were recorded at    
their fair values. Goodwill and other intangible assets totaling approximately  
$30 million are included in other noncurrent assets in the consolidated         
statement of financial position and will be reclassified pending completion of  
an independent appraisal currently underway. Acquired in-process research and   
development of approximately $8 million was written off during the second       
quarter 2001. Assuming this transaction had been made at January 1, 2000 and    
2001, the consolidated pro forma results for the first six months 2000 and 2001 
would not be materially different from reported results.                        

MCWHORTER TECHNOLOGIES, INC.                                                

In July 2000, Eastman Chemical completed its acquisition of McWhorter 
Technologies, Inc., or McWhorter, for approximately $200 million in cash and the
assumption of $155 million in debt. McWhorter manufactures specialty resins and 
colorants used in the production of consumer and industrial coatings and        
reinforced fiberglass plastics.                                                 

 F-7

DEFS14A
160th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 160th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

  This transaction, which was funded through available cash and commercial
paper borrowings, was accounted for by the purchase method of accounting and,   
accordingly, the results of operations of McWhorter for the period from the     
acquisition date are included in the accompanying consolidated financial        
statements. Assets acquired and liabilities assumed were recorded at their fair 
values. Goodwill and other intangible assets of approximately $190 million,     
which represents the excess of cost over the fair value of net tangible assets  
acquired, are being amortized on a straight-line basis over 11-40 years.        
Acquired in-process research and development of approximately $9 million was    
written off after completion of purchase accounting. Assuming this transaction  
had been made at January 1, 2000, the consolidated pro forma results for the    
first six months 2000 would not be materially different from reported results.  

CHEMICKE ZAVODY SOKOLOV                                                     

 As of February 21, 2000, Eastman Chemical acquired 76% of the shares of
Chemicke Zavody Sokolov, or Sokolov, a manufacturer of waterborne polymer       
products, acrylic acid and acrylic esters located in the Czech Republic. During 
the second quarter 2000, Eastman Chemical acquired an additional 21% of the     
shares resulting in 97% ownership of Sokolov. These transactions, for cash      
consideration totaling approximately $46 million (net of $3 million cash        
acquired) and the assumption of $21 million of Sokolov debt, were financed with 
available cash and commercial paper borrowings.                                 

The acquisition of Sokolov was accounted for by the purchase method of
accounting and, accordingly, the results of operations of Sokolov from the      
acquisition date are included in the accompanying consolidated financial        
statements. Assets acquired and liabilities assumed have been recorded at their 
fair values. The minority interest, which is included in other long-term        
liabilities in the consolidated statements of financial position, is not        
significant. Assuming this transaction had been made at January 1, 2000, the    
consolidated pro forma results for the first six months 2000 would not be       
materially different from reported results.                                     

SUPPLEMENTAL CASH FLOW INFORMATION                                          

                                                                [Download Table]

                                                                SIX MONTHS ENDED   
                                                                    JUNE 30,       
                                                             ----------------------
                                                              2001           2000  
                                                             -------        -------
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
Details of Acquisitions                                                            
Fair value of assets acquired, including goodwill...........  $250            $96  
Liabilities assumed.........................................    --             44  
                                                              ----            ---  
          Net cash paid for acquisitions....................  $250            $52  
                                                              ====            ===  

7. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN      
TRADING                                                                         

    Effective January 1, 2001, Eastman Chemical adopted Statement of Financial
Accounting Standards or, SFAS, No. 133, as amended by SFAS No. 138, "Accounting 
for Derivative Instruments and Hedging Activities," which requires that all     
derivative instruments be reported on the balance sheet at fair value and       
establishes criteria for designation and effectiveness of hedging relationships.
Instruments with a fair market value of $33 million, previously not required to 
be recorded and primarily pertaining to Eastman Chemical's raw materials and    
energy cost hedging program, were recognized as miscellaneous receivables in the
consolidated statement of financial position on January 1, 2001. Previously     
deferred gains of $68 million from the settlement of currency options were      
reclassified from other current liabilities. These amounts resulted in an       
after-tax credit of $58 million to other comprehensive income, a component of   
shareowners' equity, and an after-tax gain of $4 million included in net        
earnings as of January 1, 2001.                                                 

 F-8

DEFS14A
161st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 161st
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

     At June 30, 2001 the remaining mark-to-market gains and losses from hedging
activities included an increase in other comprehensive income of approximately  
$21 million. This balance is expected to be reclassified into earnings during   
2001. The mark-to-market gains or losses on non-qualifying, excluded, and       
ineffective portions of hedges are recognized in cost of sales or other income  
and charges immediately. Such amounts did not have a material impact on earnings
(loss) during the first six months 2001.                                        

 Eastman Chemical is exposed to market risk, such as changes in currency
exchange rates, raw material and energy costs, and interest rates. To manage the
volatility relating to these exposures, Eastman Chemical nets the exposures on a
consolidated basis to take advantage of natural offsets. For the residual       
portion, Eastman Chemical uses various derivative financial instruments pursuant
to its policies for hedging practices. Such instruments are used to mitigate the
risk that changes in exchange rates or raw material and energy costs will       
adversely affect the eventual dollar cash flows resulting from the hedged       
transactions. Designation is performed on a specific exposure basis to support  
hedge accounting. The changes in fair value of these hedging instruments are    
offset in part or in whole by corresponding changes in the cash flows of the    
underlying exposures being hedged. Eastman Chemical does not currently utilize  
fair value hedges and does not hold or issue derivative financial instruments   
for trading purposes.                                                           

CURRENCY RATE HEDGING                                                       

Eastman Chemical manufactures and sells its products in a number of   
countries throughout the world and, as a result, is exposed to movements in     
foreign currency exchange rates. Eastman Chemical enters into forward exchange  
contracts to hedge certain firm commitments denominated in foreign currencies   
and currency options to hedge probable anticipated, but not yet committed,      
export sales transactions expected within no more than 2 years and denominated  
in foreign currencies (principally the British pound, French franc, German mark,
Italian lira, Canadian dollar, euro and the Japanese yen). These contracts are  
designated as cash flow hedges. The mark-to-market gain or loss on qualifying   
hedges is included in other comprehensive income to the extent effective, and   
reclassified into cost of sales in the period during which the hedged           
transaction affects earnings.                                                   

COMMODITY HEDGING                                                           

  Raw materials and energy sources used by Eastman Chemical are subject to
price volatility caused by weather, supply conditions, economic variables and   
other unpredictable factors. To mitigate short-term fluctuations in market      
prices for propane and natural gas, Eastman Chemical enters into forwards and   
options contracts. These contracts are designated as cash flow hedges. The      
mark-to-market gain or loss on qualifying hedges is included in other           
comprehensive income to the extent effective, and reclassified into cost of     
sales in the period during which the hedged transaction affects earnings.       

OTHER INSTRUMENTS                                                           

    From time to time, Eastman Chemical also utilizes interest rate derivative
instruments, primarily swaps, to hedge its exposure to movements in interest    
rates. These instruments are typically 100% effective. As a result, there is no 
current impact to earnings due to hedge ineffectiveness. These instruments are  
recorded on the balance sheet at fair value, but the impact was not material to 
the income statement. During the second quarter 2001, an interest rate          
derivative instrument held as a cash flow hedge was discontinued and resulted in
an immaterial loss. The loss was charged to earnings when incurred. No other    
cash flow hedges were discontinued.                                             

8. EMPLOYEE SEPARATIONS                                                         

    In the fourth quarter 1999, Eastman Chemical accrued costs associated with
employee terminations which resulted from voluntary and involuntary employee    
separations that occurred during the fourth                                     
 F-9

DEFS14A
162nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 162nd
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

quarter 1999. The voluntary and involuntary separations resulted in a reduction 
of about 1,200 employees. About 760 employees who were eligible for full        
retirement benefits left Eastman Chemical under a voluntary separation program  
and approximately 400 additional employees were involuntarily separated from    
Eastman Chemical. Employees separated under these programs each received a      
separation package equaling two weeks' pay for each year of employment, up to a 
maximum of one year's pay and subject to certain minimum payments. Approximately
$71 million was accrued in 1999 for termination allowance payments associated   
with the separations, of which $6 million was paid in 1999, $58 million was paid
during 2000 and approximately $5 million was paid in the first six months of    
2001. As of June 30, 2001, approximately $2 million remains to be paid.         

9. ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES                                  

WRITE-OFF OF PREPAID ASSET                                                  

  During the second quarter 2001, Eastman Chemical terminated an agreement
with a supplier that guaranteed its right to buy a specified quantity of a      
certain raw material annually through 2007 at prices determined by the pricing  
formula specified in the agreement. In prior years, Eastman Chemical paid a     
total of $239 million to the supplier and deferred those costs to be amortized  
over the 15-year period during which the product was to be received. Eastman    
Chemical began amortizing those costs in 1993 and had recorded accumulated      
amortization of $131 million at March 31, 2001. As a result of the termination  
of this agreement, the remaining net book value of $108 million was charged to  
the Polymers segment's earnings during the second quarter 2001 as no continuing 
economic benefits will be received pertaining to this contract.                 

WRITE-OFF OF IMPAIRED POLYETHYLENE ASSETS                                   

 During the second quarter 2001, management identified and announced the
assets that are intended to be spun-off at year-end 2001 pursuant to a          
previously announced plan to become two independent public companies by the end 
of 2001, assuming all conditions to the spin-off are met and it occurs. An      
indirect result of these decisions is that the continuing operations, which     
consist primarily of the Polymers and Fibers segments, will be required to      
purchase certain raw materials and utilities that are currently produced        
internally for use in the manufacture of polyethylene. Considering the purchase 
price for these raw materials and utilities, the carrying value of certain      
assets used in the manufacture of polyethylene exceeds the expected future cash 
flows attributable to such assets. An impairment loss of $103 million,          
representing the excess of the carrying value over expected future cash flows,  
was charged to the Polymers segment's earnings during the second quarter 2001.  
The fair value of the impacted assets was determined using the discounted       
estimated net cash flows related to the products produced by the impacted       
assets.                                                                         

RESTRUCTURING AND ASSET IMPAIRMENTS OF THE FINE CHEMICALS BUSINESS          

During the second quarter 2001, Eastman Chemical recorded a charge of 
approximately $63 million related to certain fine chemicals product lines that  
do not fit Eastman Chemical's long-term strategic objectives and other assets   
determined to be impaired. The ongoing restructuring initiatives and related    
asset impairments involve Eastman Chemical's Performance Chemicals and          
Intermediates segment and include assets at its Tennessee and Arkansas sites    
within the United States, a plant in Wales and a plant in Hong Kong. The        
restructuring and asset impairments at the domestic sites primarily pertain to  
write-downs of fixed assets associated with product lines that Eastman Chemical 
will no longer pursue, and are net of the effect of a reversal of a customer    
deposit related to the impacted assets. The assets will be used to meet current 
contractual requirements and then be idled. The impairments at the foreign sites
include the write-down of fixed assets and other long-term deposits. The fair   
value of the impacted assets was                                                

  F-10

DEFS14A
163rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 163rd
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

determined using current market information where available or discounted       
estimated net cash flows from contracts that are currently in effect.           

RESTRUCTURING OF THE COATINGS OPERATIONS                                    

   During the second quarter 2001, Eastman Chemical recorded a restructuring
charge, including related asset write-downs, of approximately $16 million       
related to plans to close two plants in the United States. The restructuring    
charge includes a write-down of the fixed assets at the facilities, severance   
accruals for approximately 50 employees impacted by the plant shut-downs and    
other costs associated with closing the facilities. The facilities are expected 
to be closed prior to December 31, 2001. In addition, a $4 million charge was   
included in selling and general administrative expenses related to severance    
costs for other employees impacted by the restructuring of the coatings         
operations.                                                                     

10. SEGMENT INFORMATION                                                         

  Effective with the second quarter 2001, Eastman Chemical began reporting
financial results in five operating segments: the Coatings, Adhesives, Specialty
Polymers and Inks segment; the Performance Chemicals and Intermediates segment; 
the Specialty Plastics segment; the Polymers segment; and the Fibers segment. As
previously reported, the products of the new Specialty Plastics segment have    
been moved from the Polymers Group to the Chemicals Group effective with the    
second quarter of 2001, and will be a part of the new Eastman Company after the 
spin-off. Through first quarter 2001, Eastman Chemical managed and reported its 
operations in two segments -- Chemicals and Polymers. Amounts for prior periods 
have been reclassified to conform to the second quarter 2001 presentation.      

  F-11

DEFS14A
164th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 164th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

Sales revenue presented below represents sales to third parties.      
Intersegment transfers, recorded at cost, have been eliminated and have no      
impact on earnings.                                                             

                                                                [Download Table]

                                                               SIX MONTHS ENDED   
                                                                   JUNE 30,       
                                                             ---------------------
                                                               2001         2000  
                                                             --------     --------
                                                             (DOLLARS IN MILLIONS)
                                                                                  
SALES:                                                                            
Chemicals Group Segments:                                                         
  Coatings, Adhesives, Specialty Polymers and Inks..........  $  722       $  480 
  Performance Chemicals and Intermediates...................     595          650 
  Specialty Plastics........................................     265          282 
                                                              ------       ------ 
          Total Chemicals Group.............................   1,582        1,412 
                                                              ------       ------ 
Polymers Group Segments:                                                          
  Polymers..................................................     852          818 
  Fibers....................................................     312          303 
                                                              ------       ------ 
          Total Polymers Group..............................   1,164        1,121 
                                                              ------       ------ 
          Total Eastman Chemical............................  $2,746       $2,533 
                                                              ======       ====== 
OPERATING EARNINGS (LOSS):                                                        
Chemicals Group Segments:                                                         
  Coatings, Adhesives, Specialty Polymers and Inks..........  $   --       $   77 
  Performance Chemicals and Intermediates...................     (55)          33 
  Specialty Plastics........................................      40           64 
                                                              ------       ------ 
          Total Chemicals Group.............................     (15)         174 
                                                              ------       ------ 
Polymers Group Segments:                                                          
  Polymers..................................................    (163)          61 
  Fibers....................................................      74           70 
                                                              ------       ------ 
          Total Polymers Group..............................     (89)         131 
                                                              ------       ------ 
          Total Eastman Chemical............................  $ (104)      $  305 
                                                              ======       ====== 

                                                                [Download Table]

                                                             JUNE 30,   DECEMBER 31,
                                                               2001         2000    
                                                             --------   ------------
                                                              (DOLLARS IN MILLIONS) 
                                                                                    
ASSETS:                                                                             
Chemicals Group Segments:                                                           
  Coatings, Adhesives, Specialty Polymers and Inks..........  $1,991       $1,856   
  Performance Chemicals and Intermediates...................   1,364        1,443   
  Specialty Plastics........................................     890          989   
                                                              ------       ------   
          Total Chemicals Group.............................   4,245        4,288   
                                                              ------       ------   
Polymers Group Segments:                                                            
  Polymers..................................................   1,565        1,604   
  Fibers....................................................     624          658   
                                                              ------       ------   
          Total Polymers Group..............................   2,189        2,262   
                                                              ------       ------   
          Total Eastman Chemical............................  $6,434       $6,550   
                                                              ======       ======   

  F-12

DEFS14A
165th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 165th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

11. LEGAL MATTERS                                                               

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

12. COMMITMENTS                                                                 

    In 1999, Eastman Chemical entered into an agreement that allows it to sell
undivided interests in certain domestic trade accounts receivable under a       
planned continuous sale program to a third party. Under this agreement,         
receivables sold to the third party totaled $200 million at June 30, 2001 and   
December 31, 2000. Undivided interests in designated receivable pools were sold 
to the purchaser with recourse limited to the receivables purchased. Fees paid  
by Eastman Chemical under this agreement are based on certain variable market   
rate indices and totaled approximately $5 million in each of the first six      
months 2001 and 2000. Average monthly proceeds from collections reinvested in   
the continuous sale program were approximately $230 million in each of the first
six months 2001 and 2000. The portion that continues to be recognized by Eastman
Chemical in the statement of financial position are domestic trade receivables  
of $110 million at June 30, 2001.                                               

13. RECENTLY ISSUED ACCOUNTING STANDARDS                                        

 In July 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other     
Intangible Assets." SFAS No. 141 requires business combinations initiated after 
June 30, 2001 to be accounted for using the purchase method of accounting, and  
broadens the criteria for recording intangible assets separate from goodwill.   
Recorded goodwill and intangibles with indefinite useful lives will be evaluated
against this new criteria and may result in certain intangibles being subsumed  
into goodwill, or alternatively, amounts initially recorded as goodwill may be  
separately identified and recognized apart from goodwill. SFAS No. 142 requires 
the use of a nonamortization approach to account for purchased goodwill and     
certain intangibles. Under a nonamortization approach, goodwill and certain     
intangibles will not be amortized into results of operations, but instead would 
be reviewed for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain         
intangibles is more than its fair value. The provisions of each statement which 
apply to goodwill and intangible assets acquired prior to June 30, 2001, will be
adopted by Eastman Chemical on January 1, 2002. Eastman Chemical expects the    
adoption of these accounting standards to result in certain intangibles being   
subsumed into goodwill and to have the impact of reducing annual amortization of
goodwill and intangibles, now included in results primarily for the CASPI       
segment, by approximately $16 million commencing January 1, 2002. Impairment    
reviews may result in future periodic write-downs.                              

  F-13

DEFS14A
166th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 166th
REPORT OF INDEPENDENT ACCOUNTANTS 

To the Board of Directors and Shareowners of                                    
Eastman Chemical Company                                                        

In our opinion, the accompanying consolidated statements of financial 
position and the related consolidated statements of earnings, comprehensive     
income and retained earnings and of cash flows present fairly, in all material  
respects, the financial position of Eastman Chemical Company and its            
subsidiaries at December 31, 2000 and 1999, and the results of their operations 
and their cash flows for each of the three years in the period ended December   
31, 2000 in conformity with accounting principles generally accepted in the     
United States of America. These financial statements are the responsibility of  
Eastman Chemical Company's management; our responsibility is to express an      
opinion on these financial statements based on our audits. We conducted our     
audits of these statements in accordance with auditing standards generally      
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements 
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,    
assessing the accounting principles used and significant estimates made by      
management, and evaluating the overall financial statement presentation. We     
believe that our audits provide a reasonable basis for the opinion expressed    
above.                                                                          

     As discussed in Note 1 to the consolidated financial statements, on January
1, 1999, Eastman Chemical Company adopted AICPA Statement of Position 98-1,     
"Accounting for the Costs of Computer Software Developed or Obtained for        
Internal Use."                                                                  

PRICEWATERHOUSECOOPERS LLP                                                      

Atlanta, Georgia                                                                
January 25, 2001, except as to Note 23, for which the date is February 5, 2001  
and Note 18, for which the date is August 30, 2001                              

  F-14

DEFS14A
167th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 167th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE
INCOME, AND RETAINED EARNINGS 
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 

                                                        [Enlarge/Download Table]

                                                             YEAR ENDED DECEMBER 31,  
                                                             ------------------------ 
                                                              2000     1999     1998  
                                                             ------   ------   ------ 
                                                                                      
Sales....................................................... $5,292   $4,590   $4,481 
Cost of sales...............................................  4,226    3,768    3,546 
                                                             ------   ------   ------ 
Gross profit................................................  1,066      822      935 
Selling and general administrative expenses.................    346      355      316 
Research and development costs..............................    149      187      185 
Write-off of acquired in-process research and development...      9       25       -- 
Employee separations and pension settlement/curtailment.....     --       53       -- 
                                                             ------   ------   ------ 
Operating earnings..........................................    562      202      434 
Interest expense, net.......................................    135      121       91 
Gain recognized on initial public offering of equity                                  
  investment................................................    (38)      --       -- 
Other income................................................    (39)     (20)     (19)
Other charges...............................................     52       29        2 
                                                             ------   ------   ------ 
Earnings before income taxes................................    452       72      360 
Provision for income taxes..................................    149       24      111 
                                                             ------   ------   ------ 
Net earnings................................................ $  303   $   48   $  249 
                                                             ======   ======   ====== 
Basic earnings per share.................................... $ 3.95   $  .61   $ 3.15 
                                                             ======   ======   ====== 
Diluted earnings per share.................................. $ 3.94   $  .61   $ 3.13 
                                                             ======   ======   ====== 
COMPREHENSIVE INCOME                                                                  
Net earnings................................................ $  303   $   48   $  249 
Other comprehensive income (loss)...........................    (63)     (36)      19 
                                                             ------   ------   ------ 
Comprehensive income........................................ $  240   $   12   $  268 
                                                             ======   ======   ====== 
RETAINED EARNINGS                                                                     
Retained earnings at beginning of year...................... $2,098   $2,188   $2,078 
Net earnings................................................    303       48      249 
Cash dividends declared.....................................   (135)    (138)    (139)
                                                             ------   ------   ------ 
Retained earnings at end of year............................ $2,266   $2,098   $2,188 
                                                             ======   ======   ====== 

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

  F-15

DEFS14A
168th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 168th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 
(DOLLARS IN MILLIONS) 

                                                                [Download Table]

                                                               DECEMBER 31,   
                                                              --------------- 
                                                               2000     1999  
                                                              ------   ------ 
                                                                              
                                   ASSETS                                     
Current assets:                                                               
  Cash and cash equivalents.................................  $  101   $  186 
  Trade receivables, net of allowance of $16 and $13........     650      572 
  Miscellaneous receivables.................................      87       59 
  Inventories...............................................     580      485 
  Other current assets......................................     105      187 
                                                              ------   ------ 
          Total current assets..............................   1,523    1,489 
                                                              ------   ------ 
Properties:                                                                   
  Properties and equipment at cost..........................   9,039    8,820 
  Less: Accumulated depreciation............................   5,114    4,870 
                                                              ------   ------ 
          Net properties....................................   3,925    3,950 
                                                              ------   ------ 
Goodwill, net of accumulated amortization of $28 and $14....     344      271 
Other intangibles, net of accumulated amortization of $20                     
  and $6....................................................     277      175 
Other noncurrent assets.....................................     481      418 
                                                              ------   ------ 
          Total assets......................................  $6,550   $6,303 
                                                              ======   ====== 
                     LIABILITIES AND SHAREOWNERS' EQUITY                      
Current liabilities:                                                          
  Payables and other current liabilities....................  $1,152   $1,009 
  Borrowings due within one year............................     106      599 
                                                              ------   ------ 
          Total current liabilities.........................   1,258    1,608 
Long-term borrowings........................................   1,914    1,506 
Deferred income tax credits.................................     607      485 
Postemployment obligations..................................     829      789 
Other long-term liabilities.................................     130      156 
                                                              ------   ------ 
          Total liabilities.................................   4,738    4,544 
                                                              ------   ------ 
Commitments and contingencies                                                 
Shareowners' equity:                                                          
  Common stock ($0.01 par -- 350,000,000 shares authorized;                   
     shares issued -- 84,739,902 and 84,512,004)............       1        1 
  Paid-in capital...........................................     100       95 
  Retained earnings.........................................   2,266    2,098 
  Other comprehensive loss..................................    (117)     (54)
                                                              ------   ------ 
                                                               2,250    2,140 
  Less: Treasury stock at cost (7,996,790 and 6,421,790                       
     shares)................................................     438      381 
                                                              ------   ------ 
          Total shareowners' equity.........................   1,812    1,759 
                                                              ------   ------ 
          Total liabilities and shareowners' equity.........  $6,550   $6,303 
                                                              ======   ====== 

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

  F-16

DEFS14A
169th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 169th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(DOLLARS IN MILLIONS) 

                                                        [Enlarge/Download Table]

                                                             YEAR ENDED DECEMBER 31, 
                                                             ------------------------
                                                              2000     1999     1998 
                                                             ------   ------   ------
                                                                                     
CASH FLOWS FROM OPERATING ACTIVITIES                                                 
Net earnings................................................ $ 303    $  48    $ 249 
                                                             -----    -----    ----- 
Adjustments to reconcile net earnings to net cash provided                           
  by operating activities, net of effect of acquisitions:                            
  Depreciation and amortization.............................   418      383      351 
  Gain recognized on initial public offering of equity                               
     investment.............................................   (38)      --       -- 
  Write-off of impaired assets..............................    --       54       33 
  Write-off of acquired in-process research and                                      
     development............................................     9       25       -- 
  Provision (benefit) for deferred income taxes.............    64      (18)      66 
  (Increase) decrease in receivables........................    (1)     163       19 
  (Increase) decrease in inventories........................   (43)      63       19 
  Increase (decrease) in employee benefit liabilities and                            
     incentive pay..........................................    28      (69)      57 
  Increase (decrease) in liabilities excluding borrowings,                           
     employee benefit liabilities, and incentive pay........     9      115      (35)
  Other items, net..........................................    82      (20)     (28)
                                                             -----    -----    ----- 
          Total adjustments.................................   528      696      482 
                                                             -----    -----    ----- 
          Net cash provided by operating activities.........   831      744      731 
                                                             -----    -----    ----- 
CASH FLOWS FROM INVESTING ACTIVITIES                                                 
  Additions to properties and equipment.....................  (226)    (292)    (500)
  Acquisitions, net of cash acquired........................  (261)    (381)     (32)
  Additions to capitalized software.........................   (21)     (24)      -- 
  Other investments.........................................   (30)      --       -- 
  Capital advances to suppliers.............................    --      (21)     (21)
  Proceeds from sales of investments........................    12       --       -- 
  Proceeds from sales of fixed assets.......................    61       --       -- 
  Other items...............................................    --        3        8 
                                                             -----    -----    ----- 
          Net cash used in investing activities.............  (465)    (715)    (545)
                                                             -----    -----    ----- 
CASH FLOWS FROM FINANCING ACTIVITIES                                                 
  Proceeds from borrowings..................................   208      348      (66)
  Repayment of borrowings...................................  (471)     (34)      -- 
  Dividends paid to shareowners.............................  (135)    (138)    (138)
  Treasury stock purchases..................................   (57)     (51)      -- 
  Other items...............................................     4        3       18 
                                                             -----    -----    ----- 
          Net cash provided by (used in) financing                                   
            activities......................................  (451)     128     (186)
                                                             -----    -----    ----- 
          Net change in cash and cash equivalents...........   (85)     157       -- 
Cash and cash equivalents at beginning of year..............   186       29       29 
                                                             -----    -----    ----- 
Cash and cash equivalents at end of year.................... $ 101    $ 186    $  29 
                                                             =====    =====    ===== 

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

  F-17

DEFS14A
170th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 170th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES                                              

FINANCIAL STATEMENT PRESENTATION                                            

The consolidated financial statements of Eastman Chemical and its     
subsidiaries are prepared in conformity with accounting principles generally    
accepted in the United States of America and of necessity include some amounts  
that are based upon management estimates and judgments. Future actual results   
could differ from such current estimates. The consolidated financial statements 
include assets, liabilities, revenues, and expenses of all wholly-owned         
subsidiaries. Eastman Chemical accounts for joint ventures and investments in   
minority-owned companies where it exercises significant influence on the equity 
basis. Intercompany transactions and balances are eliminated in consolidation.  

TRANSLATION OF NON-U.S. CURRENCIES                                          

  Eastman Chemical uses the local currency as the "functional currency" to
translate the accounts of all consolidated entities outside the United States   
where cash flows are primarily denominated in local currencies. The effects of  
translating those operations that use the local currency as the functional      
currency are included as a component of comprehensive income and shareowners'   
equity. The effects of remeasuring those operations where the U.S. dollar is    
used as the functional currency and all transaction gains and losses are        
reflected in current earnings.                                                  

REVENUE RECOGNITION                                                         

  In 2000, Eastman Chemical implemented Staff Accounting Bulletin, or SAB,
101, "Revenue Recognition in Financial Statements" which specifies the criteria 
that must be met before revenue is realized or realizable and earned. In        
accordance with SAB 101, Eastman Chemical recognizes revenue when persuasive    
evidence of an arrangement exists, delivery has occurred or services have been  
rendered, the price to the customer is fixed or determinable and collectibility 
is reasonably assured. Appropriate accruals for discounts, volume incentives and
other allowances are recorded as reductions in sales. The implementation of SAB 
101 did not have a material impact on sales, operating earnings or net earnings 
for 2000 or prior years.                                                        

SHIPPING AND HANDLING FEES AND COSTS                                        

Shipping and handling fees related to sales transactions are billed to
customers and are recorded as sales revenue. Shipping and handling costs        
incurred are recorded in cost of sales.                                         

CASH AND CASH EQUIVALENTS                                                   

Cash and cash equivalents include cash, time deposits and readily     
marketable securities with original maturities of three months or less.         

ACCOUNTS RECEIVABLE SALES                                                   

 Under a planned continuous sale program agreement entered into in 1999,
Eastman Chemical sells to a third party undivided interests in certain domestic 
accounts receivable. Undivided interests in designated receivable pools are sold
to the purchaser with recourse limited to the receivables purchased. Eastman    
Chemical's retained interests in the designated receivable pools are measured at
fair value, based on expected future cash flows, using management's best        
estimates of returns and credit losses commensurate with the risks involved.    
Eastman Chemical's retained interests in receivables sold are recorded as trade 
receivables in the consolidated financial statements. Fees paid by Eastman      
Chemical under this agreement are based on certain variable market rate indices 
and are included in other (income) charges, net, in the consolidated financial  
statements.                                                                     

  F-18

DEFS14A
171st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 171st
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

INVENTORIES                                                                 

   Inventories are valued at cost, which is not in excess of market. Eastman
Chemical determines the cost of most raw materials, work in process, and        
finished goods inventories in the United States by the last-in, first-out, or   
LIFO, method. The cost of all other inventories, including inventories outside  
the United States, is determined by the first-in, first-out, FIFO, or average   
cost method.                                                                    

PROPERTIES                                                                  

  Eastman Chemical records properties at cost. Maintenance and repairs are
charged to earnings; replacements and betterments are capitalized. When Eastman 
Chemical retires or otherwise disposes of assets, it removes the cost of such   
assets and related accumulated depreciation from the accounts. Eastman Chemical 
records any profit or loss on retirement or other disposition in earnings.      

DEPRECIATION                                                                

Depreciation expense is calculated based on historical cost and the   
estimated useful lives of the assets (buildings and building equipment 20 to 50 
years; machinery and equipment 3 to 33 years), generally using the straight-line
method. For U.S. assets acquired before January 1, 1992, Eastman Chemical       
generally uses accelerated methods to calculate the provision for depreciation. 

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES                              

    Goodwill and other intangibles are amortized on a straight-line basis over
the expected useful lives of the underlying assets, generally from 5 to 40      
years.                                                                          

IMPAIRED ASSETS                                                             

Eastman Chemical reviews the carrying values of long-lived assets,    
identifiable intangibles and goodwill for impairment whenever events or changes 
in circumstances indicate that the carrying amount of an asset may not be       
recoverable. Eastman Chemical reviews these assets for impairment based first on
estimated future undiscounted cash flows attributable to the assets. An         
impairment loss for an asset to be held and used is recognized when the fair    
value of the asset, generally based on discounted estimated future cash flows,  
is less than the carrying value of the asset. An impairment loss for assets to  
be disposed of is recognized when the fair value of the asset, less costs to    
dispose, is less than the carrying value of the asset.                          

DERIVATIVE FINANCIAL INSTRUMENTS                                            

Derivative financial instruments are used by Eastman Chemical in the  
management of its exposures to fluctuations in foreign currency, raw materials  
and energy costs, and interest rates. Such instruments are used to mitigate the 
risk that changes in exchange rates or raw materials and energy costs will      
adversely affect the eventual dollar cash flows resulting from the hedged       
transactions.                                                                   

  Eastman Chemical enters into forward exchange contracts to hedge certain
firm commitments denominated in foreign currencies and currency options to hedge
probable anticipated, but not yet committed, export sales and purchase          
transactions expected within no more than 2 years and denominated in foreign    
currencies (principally the British pound, French franc, German mark, Italian   
lira, Canadian dollar, euro and the Japanese yen). To mitigate short-term       
fluctuations in market prices for propane and natural gas (major raw materials  
and energy used in the manufacturing process), Eastman Chemical enters into     
forwards and options contracts. From time to time, Eastman Chemical also        
utilizes interest rate derivative instruments, primarily swaps, to hedge its    
exposure to movements in interest rates.                                        

  F-19

DEFS14A
172nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 172nd
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

     Eastman Chemical forwards and options contracts are accounted for as hedges
because the derivative instruments are designated and effective as hedges and   
reduce its exposure to identified risks. Gains and losses resulting from        
effective hedges of existing assets, liabilities, firm commitments, or          
anticipated transactions are deferred and recognized when the offsetting gains  
and losses are recognized on the related hedged items and are reported as a     
component of operating earnings.                                                

Deferred currency option premiums are generally included in other     
noncurrent assets and are amortized over the life of the contract. The related  
obligation for payment is generally included in other liabilities and is paid in
the period in which the options are exercised or expire and forward exchange    
contracts mature.                                                               

On January 1, 2001 Eastman Chemical adopted Statement of Financial    
Accounting Standard, or SFAS, 133, as amended by SFAS 138, "Accounting for      
Certain Derivative Instruments and Certain Hedging Activities." The adoption of 
SFAS 133, as amended by SFAS 138, has not had a material impact on the results  
of operations. Instruments with a fair value of approximately $30 million,      
previously not required to be recorded and primarily pertaining to Eastman      
Chemical's raw materials and energy cost hedging program, were recognized as    
miscellaneous receivables in the consolidated statement of financial position on
January 1, 2001. In addition, previously deferred gains of approximately $70    
million from the settlement of currency options were reclassified from other    
current liabilities. These amounts resulted in an after-tax credit to other     
comprehensive income of approximately $62 million on January 1, 2001.           

INVESTMENTS                                                                 

 Eastman Chemical includes in other noncurrent assets its investments in
joint ventures which are managed as integral parts of its operations and        
accounted for on the equity basis. Eastman Chemical carries certain investments 
at negative values, based on its intention to fund its share of deficits in such
investments, and includes such negative carrying values in other long-term      
liabilities. Eastman Chemical includes its share of earnings and losses of such 
joint ventures in other income and charges.                                     

Marketable securities held by Eastman Chemical, currently common or   
preferred stock, are deemed by management to be available-for-sale and are      
reported at fair value, with net unrealized gains or losses reported as a       
component of other comprehensive income in shareowners' equity.                 

  Realized gains and losses are included in earnings and are derived using
the specific identification method for determining the cost of securities.      
Eastman Chemical includes these investments in other noncurrent assets.         

Other equity investments, for which fair values are not readily       
determinable, are carried at historical cost and are included in other          
noncurrent assets.                                                              

OTHER INCOME AND OTHER CHARGES                                              

Included in other income and other charges are results from equity    
investments, gains or losses on sales of nonoperating assets, royalty income,   
gains or losses on foreign exchange transactions, fees on securitized           
receivables, and other miscellaneous items. Material amounts are separately     
presented in the Consolidated Statements of Earnings, Comprehensive Income, and 
Retained Earnings.                                                              

EARNINGS PER SHARE                                                          

    Basic earnings per share reflect reported earnings divided by the weighted
average number of common shares outstanding. Diluted earnings per share include 
the effect of dilutive stock options outstanding during the year.               

  F-20

DEFS14A
173rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 173rd
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

INCOME TAXES                                                                

Deferred income taxes, reflecting the impact of temporary differences 
between the assets and liabilities recognized for financial reporting purposes  
and amounts recognized for tax purposes, are based on tax laws currently        
enacted.                                                                        

STOCK-BASED COMPENSATION                                                    

As permitted by Statement of Financial Accounting Standard No. 123,   
"Accounting for Stock-Based Compensation," Eastman Chemical continues to apply  
intrinsic value accounting for its stock option plans. Compensation cost for    
stock options, if any, is measured as the excess of the quoted market price of  
Eastman Chemical's stock at the date of grant over the amount an employee must  
pay to acquire the stock. Eastman Chemical's pro forma net earnings and pro     
forma earnings per share based upon the fair value at the grant dates for awards
under Eastman Chemical's plans are disclosed in Note 10.                        

RECOGNITION OF GAINS OR LOSSES ON SUBSIDIARY OR AFFILIATE STOCK SALES       

 Gains and losses on subsidiary or affiliate stock sales are recorded in
other income or other charges and are separately disclosed in the Statements of 
Earnings, Comprehensive Income, and Retained Earnings.                          

COMPENSATED ABSENCES                                                        

Eastman Chemical accrues compensated absences and related benefits as 
current charges to earnings.                                                    

COMPUTER SOFTWARE COSTS                                                     

 Certain costs, including internal payroll costs, incurred in connection
with the development or acquisition of software for internal use are            
capitalized. Capitalized software costs are amortized on a straight-line basis  
over three years, the expected useful life of such assets, beginning when the   
software project is substantially complete and placed in service.               

  On January 1, 1999, Eastman Chemical adopted AICPA Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for  
Internal Use," which requires the capitalization of certain costs, including    
internal payroll costs, incurred in connection with the development or          
acquisition of software for internal use. Capitalized software costs will be    
amortized on a straight-line basis over three years, the expected useful life of
such assets, beginning when the software project is substantially complete and  
placed in service. The adoption of this standard resulted in capitalization in  
1999 of $24 million, of which $2 million was amortized, for certain internal-use
software costs which otherwise would have been expensed. The impact on 1999 net 
earnings was approximately $14.7 million or $0.19 per diluted share. No         
restatement of prior year results was required.                                 

ENVIRONMENTAL COSTS                                                         

  Eastman Chemical accrues environmental costs when it is probable that it
has incurred a liability and the amount can be reasonably estimated. Estimated  
costs associated with closure/postclosure are accrued over the facilities'      
estimated remaining useful lives. Accruals for environmental liabilities are    
included in other long-term liabilities at undiscounted amounts and exclude     
claims for recoveries from insurance companies or other third parties.          
Environmental costs are capitalized if they extend the life of the related      
property, increase its capacity, and/or mitigate or prevent future              
contamination. The cost of operating and maintaining environmental control      
facilities is charged to expense.                                               

  F-21

DEFS14A
174th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 174th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

COMPREHENSIVE INCOME                                                        

Components of other comprehensive income (loss) include cumulative    
translation adjustments, additional minimum pension liabilities, and            
unrecognized gains or losses on investments. Amounts of other comprehensive     
income (loss) are presented net of applicable taxes. Because cumulative         
translation adjustments are considered a component of permanently invested      
unremitted earnings of subsidiaries outside the United States, no taxes are     
provided on such amounts.                                                       

RECLASSIFICATIONS                                                           

    Eastman Chemical has reclassified certain 1999 and 1998 amounts to conform
to the 2000 presentation.                                                       

2. INVENTORIES                                                                  

                                                                [Download Table]

                                                                  DECEMBER 31,     
                                                             ----------------------
                                                               2000          1999  
                                                             --------      --------
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
At FIFO or average cost (approximates current cost):                               
  Finished goods............................................  $ 482         $ 404  
  Work in process...........................................    125           128  
  Raw materials and supplies................................    248           210  
                                                              -----         -----  
          Total inventories.................................    855           742  
  Reduction to LIFO value...................................   (275)         (257) 
                                                              -----         -----  
          Total inventories at LIFO value...................  $ 580         $ 485  
                                                              =====         =====  

Inventories valued on the LIFO method were approximately 70% of total 
inventories in each of the periods.                                             

3. PROPERTIES AND ACCUMULATED DEPRECIATION                                      

PROPERTIES AT COST                                                          

                                                                [Download Table]

                                                               2000         1999   
                                                             ---------    ---------
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
Balance at beginning of year................................  $8,820       $8,594  
  Additions                                                                        
     Capital expenditures...................................     226          292  
     Acquisitions...........................................     253          101  
  Deductions................................................    (260)        (167) 
                                                              ------       ------  
Balance at end of year......................................  $9,039       $8,820  
                                                              ======       ======  
Properties:                                                                        
  Land......................................................  $   64       $   61  
  Buildings and building equipment..........................     846          884  
  Machinery and equipment...................................   7,985        7,685  
  Construction in progress..................................     144          190  
                                                              ------       ------  
Balance at end of year......................................  $9,039       $8,820  
                                                              ======       ======  

  F-22

DEFS14A
175th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 175th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

ACCUMULATED DEPRECIATION                                                    

                                                                [Download Table]

                                                               2000         1999   
                                                             ---------    ---------
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
Balance at beginning of year................................  $4,870       $4,560  
  Provision for depreciation................................     382          368  
  Deductions................................................    (138)         (58) 
                                                              ------       ------  
Balance at end of year......................................  $5,114       $4,870  
                                                              ======       ======  

   Construction-period interest of $340 million and $336 million, reduced by
accumulated depreciation of $171 million and $157 million, is included in cost  
of properties at December 31, 2000 and 1999, respectively.                      

   Depreciation expense was $382 million, $368 million, and $351 million for
2000, 1999, and 1998, respectively.                                             

4. EQUITY INVESTMENTS AND OTHER NONCURRENT ASSETS AND LIABILITIES               

Eastman Chemical owns 25 million shares or approximately 42% of the   
outstanding common shares of Genencor International, Inc., or Genencor, a       
company engaged in the discovery, development, manufacture, and marketing of    
biotechnology products for the industrial chemicals, agricultural, and health   
care markets. Prior to its initial public offering in July, 2000, Genencor was a
joint venture in which Eastman Chemical owned a 50% interest.                   

   In the second quarter 2000, Genencor completed an initial public offering
of 8,050,000 shares of its common stock at a price of $18 per share. Net        
proceeds to Genencor from the sale of the shares of common stock were           
approximately $135 million.                                                     

  As a result of this initial public offering, Eastman Chemical recorded a
gain of $38 million due to the change in Eastman Chemical's percentage ownership
interest in Genencor. This investment is accounted for under the equity method, 
and is included in other noncurrent assets. At December 31, 2000 and December   
31, 1999, Eastman Chemical's investment in Genencor was $209 million and $157   
million, respectively.                                                          

    Eastman Chemical has a 50% interest in and serves as the operating partner
in Primester, a joint venture engaged in the manufacture of cellulose esters at 
its Kingsport, Tennessee plant, accounted for by the equity method. Eastman     
Chemical guarantees a portion of the principal amount of the joint venture's    
third-party borrowings; however, management believes, based on current facts and
circumstances and the structure of the venture, that the likelihood of a payment
pursuant to such guarantee is remote. At December 31, 2000 and 1999, Eastman    
Chemical had a negative investment in the joint venture of $41 million for both 
periods, representing the recognized portion of the venture's accumulated       
deficits and the debt guarantee that it has a commitment to fund, as necessary. 
Such amounts are included in other long-term liabilities. Eastman Chemical      
provides certain utilities and general plant services to the joint venture. In  
return for Eastman Chemical providing those services, the joint venture paid    
Eastman Chemical a total of $39 million in three equal installments in 1991,    
1992 and 1993. Eastman Chemical is amortizing the deferred credit to earnings   
over a 10-year period.                                                          

Eastman Chemical has entered into an agreement with a supplier that   
guarantees its right to buy a specified quantity of a certain raw material      
annually through 2007 at prices determined by the pricing formula specified in  
the agreement. In return, Eastman Chemical paid a total of $239 million to the  
supplier through December 31, 2000 and 1999. Eastman Chemical defers and        
amortizes those costs over the 15-year period during which the product is       
received. Eastman Chemical began amortizing those costs                         

  F-23

DEFS14A
176th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 176th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

in 1993 and has recorded accumulated amortization of $128 million and $112      
million at December 31, 2000 and 1999, respectively.                            

5. PAYABLES AND OTHER CURRENT LIABILITIES                                       

                                                                [Download Table]

                                                                  DECEMBER 31,     
                                                             ----------------------
                                                               2000         1999   
                                                             ---------    ---------
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
Trade creditors.............................................  $  526       $  373  
Accrued payrolls, vacation, and variable-incentive                                 
  compensation..............................................     201          143  
Accrued taxes...............................................      95          112  
Deferred gain on currency options...........................      72           --  
Accrued restructuring charge................................       7           65  
Other.......................................................     251          316  
                                                              ------       ------  
          Total.............................................  $1,152       $1,009  
                                                              ======       ======  

6. BORROWINGS                                                                   

                                                                [Download Table]

                                                                  DECEMBER 31,     
                                                             ----------------------
                                                               2000         1999   
                                                             ---------    ---------
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
SHORT-TERM BORROWINGS                                                              
Commercial paper............................................  $   --       $  398  
Notes payable...............................................     101          125  
Other.......................................................       5           76  
                                                              ------       ------  
          Total short-term borrowings.......................     106          599  
                                                              ------       ------  
LONG-TERM BORROWINGS                                                               
6 3/8% notes due 2004.......................................     500          500  
7 1/4% debentures due 2024..................................     497          496  
7 5/8% debentures due 2024..................................     200          200  
7.60% debentures due 2027...................................     296          297  
Commercial paper............................................     400           --  
Other.......................................................      21           13  
                                                              ------       ------  
          Total long-term borrowings........................   1,914        1,506  
                                                              ------       ------  
          Total borrowings..................................  $2,020       $2,105  
                                                              ======       ======  

  Eastman Chemical has access to an $800 million revolving credit facility
expiring in July 2005, and to a short-term $150 million credit agreement        
expiring in June 2001. Although Eastman Chemical does not have any amounts      
outstanding under the credit facility or the credit agreement, any such         
borrowings would be subject to interest at varying spreads above quoted market  
rates, principally LIBOR. The credit facility and the credit agreement require  
facility fees on the total commitment that vary based on Eastman Chemical's     
credit rating. The annual rate for such fees was 0.125% in 2000, and, for the   
credit facility, was 0.085% in 1999. The credit facility and the credit         
agreement contain a number of covenants and events of default, including the    
maintenance of certain financial ratios. Eastman Chemical was in compliance with
all such covenants for all periods.                                             

     Eastman Chemical utilizes commercial paper, generally with maturities of 90
days or less, to meet its liquidity needs. Because the credit facility, which   
provides liquidity support for the commercial paper, expires in July 2005, the  
commercial paper borrowings at December 31, 2000 are classified as long-term    

  F-24

DEFS14A
177th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 177th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

borrowings as Eastman Chemical has the ability to refinance such borrowings long
term. As of December 31, 2000 and December 31, 1999, the effective interest     
rates for Eastman Chemical's commercial paper borrowings were 7.12% and 6.30%,  
respectively.                                                                   

7. SHAREOWNERS' EQUITY                                                          

                                                        [Enlarge/Download Table]

                                                            2000          1999          1998     
                                                         -----------   -----------   ----------- 
                                                                  (DOLLARS IN MILLIONS)          
                                                                                                 
Common stock at par value............................... $         1   $         1   $         1 
                                                         -----------   -----------   ----------- 
Paid-in capital                                                                                  
  Balance at beginning of year..........................          95            94            77 
  Additions.............................................           5             1            17 
                                                         -----------   -----------   ----------- 
  Balance at end of year................................         100            95            94 
                                                         -----------   -----------   ----------- 
Retained earnings.......................................       2,266         2,098         2,188 
                                                         -----------   -----------   ----------- 
Accumulated other comprehensive income (loss)                                                    
  Balance at beginning of year..........................         (54)          (18)          (37)
  Change in cumulative translation adjustment...........         (66)          (46)           24 
  Change in unfunded minimum pension liability..........           4             7            (5)
  Change in unrecognized gain or loss on investment.....          (1)            3            -- 
                                                         -----------   -----------   ----------- 
  Balance at end of year................................        (117)          (54)          (18)
                                                         -----------   -----------   ----------- 
  Treasury stock at cost................................        (438)         (381)         (331)
                                                         -----------   -----------   ----------- 
          Total......................................... $     1,812   $     1,759   $     1,934 
                                                         ===========   ===========   =========== 
Shares of common stock issued(1)                                                                 
  Balance at beginning of year..........................  84,512,004    84,432,114    84,144,672 
  Issued for employee compensation and benefit plans....     227,898        79,890       287,442 
                                                         -----------   -----------   ----------- 
  Balance at end of year................................  84,739,902    84,512,004    84,432,114 
                                                         ===========   ===========   =========== 

---------------                                                                 

(1) Includes shares held in treasury.                                           

   Eastman Chemical has authority to issue 400 million shares of all classes
of stock, of which 50 million may be preferred stock, par value $0.01 per share,
and 350 million may be common stock, par value $0.01 per share. Eastman Chemical
declared dividends of $1.76 per share in 2000, 1999 and 1998.                   

    Eastman Chemical established a benefit security trust in 1997 to provide a
degree of financial security for unfunded obligations under certain plans.      
Eastman Chemical has contributed to the trust a warrant to purchase up to one   
million shares of Eastman Chemical common stock for par value. The warrant is   
exercisable by the trustee if Eastman Chemical does not meet certain funding    
obligations, which obligations would be triggered by certain occurrences,       
including a change in control or potential change in control, as defined, or    
failure by Eastman Chemical to meet its payment obligations under covered       
unfunded plans. Such warrant is excluded from the computation of diluted        
earnings per share because the conditions upon which the warrant is exercisable 
have not been met.                                                              

The additions to paid-in capital for the three years are the result of
exercises of stock options by employees and the issuance of shares to the       
Employee Stock Ownership Plan to settle Eastman Chemical Performance Plan       
obligations.                                                                    

     Eastman Chemical repurchased 1,575,000 shares of its common stock at a cost
of approximately $57 million, or an average price of approximately $36 per      
share, in 2000; 1,094,800 shares at a cost of approximately $50 million, or an  
average price of approximately $46 per share, in 1999; and no shares in         

  F-25

DEFS14A
178th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 178th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

1998. Repurchased common shares may be used to meet common stock requirements   
for benefit plans and other corporate purposes.                                 

    Treasury stock at a cost of approximately $33 million (536,188 shares) and
$1 million (18,018 shares) were reissued in 1998 and 1997, respectively. Eastman
Chemical's charitable foundation held 158,424 shares of Eastman Chemical common 
stock at December 31, 2000, December 31, 1999 and December 31, 1998.            

For 2000, 1999 and 1998, respectively, the weighted average number of 
common shares outstanding used to compute basic earnings per share was 76.8     
million, 78.2 million and 78.9 million and for diluted earnings per share was   
77.0 million, 78.4 million and 79.5 million, reflecting the effect of dilutive  
options outstanding. Excluded were options to purchase 3,899,076 shares of      
common stock at a range of prices from $45.34 to $74.25; 2,331,341 shares of    
common stock at a range of prices from $48.44 to $74.25; and 994,503 shares of  
common stock at a range of prices from $56.88 to $74.25, outstanding at the end 
of 2000, 1999 and 1998, respectively.                                           

In 1999, several key executive officers were awarded performance-based
stock options to further align their compensation with the return to Eastman    
Chemical's shareowners and to provide additional incentive and opportunity for  
reward to individuals in key positions having direct influence over corporate   
actions that are expected to impact the market price of Eastman Chemical's      
stock. A total of 574,000 shares will become exercisable through October 19,    
2001, if both the stock price and time vesting conditions are met. At December  
31, 2000 and December 31, 1999, respectively, 149,240 shares and 45,920 shares  
underlying such options were included in diluted earnings per share calculations
as a result of the stock price conditions for vesting being met.                

Additionally, 200,000 shares underlying an option issued to the Chief 
Executive Officer in 1997 were excluded from diluted earnings per share         
calculations because the stock price conditions to exercise had not been met as 
to any of the shares as of December 31, 2000, 1999 and 1998.                    

8. IMPAIRMENT OF ASSETS                                                         

In 1999, Eastman Chemical recorded pre-tax charges to earnings of $10 
million for the write-off of construction in progress related to an epoxybutene,
or EpB, plant project which was terminated and determined to have no future     
value. These charges were recorded in Cost of Sales for the Chemicals segment.  

     In first quarter 1999, Eastman Chemical announced a phase-out of operations
at Distillation Products Industries in Rochester, New York. In 1999, Eastman    
Chemical recorded pre-tax charges to earnings of $9 million for costs associated
with employee termination benefits and the write-down of plant and equipment    
used at the site. In 2000, Eastman Chemical recorded an additional pre-tax      
charge of $5 million for costs associated with exiting this site. It is expected
that property and equipment used at this site will be disposed of during 2001.  
These charges were recorded in Cost of Sales for the Chemicals segment.         

 During the fourth quarter 1999, Eastman Chemical decided to discontinue
production at its sorbates facilities in Chocolate Bayou, Texas. The projected  
economic performance and cash flows for this product line were determined to be 
insufficient for remaining in this business. In 1999, Eastman Chemical recorded 
a pre-tax charge to earnings of $17 million for the write-down of plant and     
equipment used at the site. In 2000, Eastman Chemical recorded additional       
pre-tax charges of $8 million for costs associated with exiting this business.  
It is expected that property and equipment used at this site will be disposed of
during 2001. These charges were recorded in Cost of Sales for the Chemicals     
segment.                                                                        

  F-26

DEFS14A
179th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 179th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

  In the fourth quarter 1999, Eastman Chemical recorded pre-tax charges to
earnings of $16 million for the write-off of construction in progress related to
a purified terephthalic acid, or PTA, plant project. This project was terminated
due to unfavorable market conditions and unsuccessful discussions with several  
potential buyers of this product. A significant portion of the construction in  
progress was determined to have no alternative use and no future value. This    
charge was recorded in Cost of Sales for the Polymers segment.                  

   In the fourth quarter 1998, Eastman Chemical recorded a pre-tax charge to
earnings of $20 million for the write-down of property, plant and equipment used
in the production of CHDA, a product sold in the Chemicals segment. Based on    
responses from customers surveyed in the fourth quarter 1998, market outlook and
estimated future cash flows for this product declined significantly. The        
carrying values of assets related to CHDA production were written down to fair  
market value based on estimated discounted future cash flows. The charge was    
recorded in Cost of Sales for the Chemicals segment.                            

    Eastman Chemical also recorded in the fourth quarter 1998 a pre-tax charge
to earnings of $12 million for the write-off of construction in progress related
to an Eastotac expansion project and an EpB plant project. Process improvements 
leading to increased Eastotac manufacturing capacity at the existing Longview,  
Texas plant and a planned joint venture in China lead to cancellation of the    
Eastotac expansion project. A portion of work done to date on an EpB plant      
project had no future value. The Eastotac expansion project and EpB plant       
project costs were written off and recorded in Cost of Sales for the Chemicals  
segment.                                                                        

9. ACQUISITIONS                                                                 

MCWHORTER TECHNOLOGIES, INC.                                                

In July 2000, Eastman Chemical completed its acquisition of McWhorter 
Technologies, Inc., or McWhorter, for approximately $200 million in cash and the
assumption of $155 million in debt. McWhorter manufactures specialty resins and 
colorants used in the production of consumer and industrial coatings and        
reinforced fiberglass plastics.                                                 

  This transaction, which was funded through available cash and commercial
paper borrowings, was accounted for by the purchase method of accounting and,   
accordingly, the results of operations of McWhorter for the period from the     
acquisition date are included in the accompanying consolidated financial        
statements. Assets acquired and liabilities assumed were recorded at their fair 
values. Goodwill of approximately $87 million, which represents the excess of   
cost over the estimated fair value of net tangible assets acquired, and other   
intangible assets of approximately $103 million for technology and trademarks,  
customer lists, and workforce are being amortized on a straight-line basis over 
11-40 years. Acquired in-process research and development of approximately $9   
million was written off after completion of purchase accounting. Assuming this  
transaction had been made at January 1, 2000 and 1999, the consolidated proforma
results for 2000 and 1999 would not be materially different from reported       
results.                                                                        

CHEMICKE ZAVODY SOKOLOV                                                     

 As of February 21, 2000, Eastman Chemical acquired 76% of the shares of
Chemicke Zavody Sokolov, or Sokolov, a manufacturer of waterborne polymer       
products, acrylic acid and acrylic esters located in the Czech Republic. During 
the second quarter 2000, Eastman Chemical acquired an additional 21% of the     
shares resulting in 97% ownership of Sokolov. These transactions, for cash      
consideration totaling approximately $46 million (net of $3 million cash        
acquired) and the assumption of $21 million of Sokolov debt, were financed with 
available cash and commercial paper borrowings. Efforts will continue to        
accumulate additional shares as they become available from the remaining        
minority shareholders.                                                          

  F-27

DEFS14A
180th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 180th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

The acquisition of Sokolov was accounted for by the purchase method of
accounting and, accordingly, the results of operations of Sokolov for the period
from February 21, 2000 are included in the accompanying consolidated financial  
statements. Assets acquired and liabilities assumed have been recorded at their 
fair values. The minority interest, which is included in other long-term        
liabilities in the Consolidated Statements of Financial Position, is not        
significant. Assuming this transaction had been made at January 1, 2000 and     
1999, the consolidated proforma results for 2000 and 1999 would not be          
materially different from reported results.                                     

LAWTER INTERNATIONAL, INC.                                                  

In June 1999, Eastman Chemical completed its acquisition of Lawter    
International, Inc., or Lawter, for approximately $370 million (net of $41      
million cash acquired) and the assumption of $145 million in debt. Lawter       
develops, produces and markets specialty products for the inks and coatings     
market.                                                                         

  This transaction, which was funded through available cash and commercial
paper borrowings, was accounted for by the purchase method of accounting. Assets
acquired and liabilities assumed have been recorded at their fair values.       
Goodwill of approximately $253 million, which represents the excess of cost over
the estimated fair value of net tangible assets acquired, and other intangible  
assets of approximately $202 million for technology and trademarks, in-process  
research and development, customer lists and workforce, are being amortized on a
straight-line basis over 5-40 years. Acquired in-process research and           
development of approximately $25 million was written off during 1999 after      
completion of purchase accounting. Assuming this transaction had been made at   
January 1, 1999, the consolidated pro forma results for 1999 would not be       
materially different from reported results.                                     

10. STOCK OPTION AND COMPENSATION PLANS                                         

OMNIBUS PLAN                                                                

     Eastman Chemical's 1997 Omnibus Long-Term Compensation Plan, referred to as
the 1997 Omnibus Plan, which is substantially similar to and intended to replace
the 1994 Omnibus Long-Term Compensation Plan, referred to as the 1994 Omnibus   
Plan, provides for grants to employees of nonqualified stock options, incentive 
stock options, tandem and freestanding stock appreciation rights, performance   
shares and various other stock and stock-based awards. Certain of these awards  
may be based on criteria relating to Eastman Chemical performance as established
by the compensation and management development committee of the board of        
directors. No new awards have been made under the 1994 Omnibus Plan following   
the effectiveness of the 1997 Omnibus Plan. Outstanding grants and awards under 
the 1994 Omnibus Plan are unaffected by the replacement of the 1994 Omnibus Plan
with the 1997 Omnibus Plan. The 1997 Omnibus Plan provides that options can be  
granted through April 30, 2002, for the purchase of Eastman Chemical common     
stock at an option price not less than 50% of the per share fair market value on
the date of the stock option's grant. Substantially all grants awarded under the
1994 Omnibus Plan and under the 1997 Omnibus Plan have been at option prices    
equal to the fair market value on the date of grant. Options typically become   
exercisable 50% one year after grant and 100% after two years and expire 10     
years after grant. There is a maximum of 7 million shares of common stock       
available for option grants and other awards during the term of the 1997 Omnibus
Plan. The maximum number of shares of common stock with respect to one or more  
options and/or SARs that may be granted during any one calendar year under the  
1997 Omnibus Plan to the Chief Executive Officer or to any of the next four most
highly compensated executive officers each referred to as a Covered Employee is 
200,000. The maximum fair market value of any awards (other than options and    
SARs) that may be received by a Covered Employee during any one calendar year   
under the 1997 Omnibus Plan is equal to the fair market value of 100,000 shares 
of common stock as of December 31 of the preceding year.                        

  F-28

DEFS14A
181st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 181st
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

DIRECTOR LONG-TERM COMPENSATION PLAN                                        

Eastman Chemical's 1999 Director Long-Term Compensation Plan, or the  
Director Plan, which is substantially similar to and intended to replace the    
1994 Director Long-Term Compensation Plan, provides for grants of nonqualified  
stock options and restricted shares to nonemployee members of the board of      
directors. No new awards have been made under the 1994 Director Long-Term       
Compensation Plan, following the effectiveness of the 1999 Director Plan.       
Outstanding grants and awards under the 1994 Director Long-Term Compensation    
Plan are unaffected by the replacement of the 1994 Director Plan with the 1999  
Director Plan. Shares of restricted stock are granted upon the first day of the 
directors' initial term of service and nonqualified stock options and shares of 
restricted stock are granted each year following the annual meeting of          
shareowners. The Director Plan provides that options can be granted through the 
later of May 1, 2003, or the date of the annual meeting of shareowners in 2003  
for the purchase of Eastman Chemical common stock at an option price not less   
than the stock's fair market value on the date of the grant. The options vest in
50% increments on the first two anniversaries of the grant date. The maximum    
number of shares of common stock that shall be available for grant of awards    
under the Director Plan during its term is 60,000.                              

NONEMPLOYEE DIRECTOR STOCK OPTION PLAN                                      

     Eastman Chemical's 1996 Nonemployee Director Stock Option Plan provides for
grants of nonqualified stock options to nonemployee members of the board of     
directors in lieu of all or a portion of each member's annual retainer. The     
Nonemployee Director Stock Option Plan provides that options may be granted for 
the purchase of Eastman Chemical common stock at an option price not less than  
the stock's fair market value on the date of grant. The options become          
exercisable six months after the grant date. The maximum number of shares of    
Eastman Chemical common stock available for grant under this plan is 150,000.   

STOCK OPTION BALANCES AND ACTIVITY                                          

  Eastman Chemical applies intrinsic value accounting for its stock option
plans. If Eastman Chemical had elected to recognize compensation expense based  
upon the fair value at the grant dates for awards under these plans, its net    
earnings and earnings per share would be reduced to the unaudited pro forma     
amounts indicated below.                                                        

                                                                [Download Table]

                                                              2000   1999    1998 
                                                             ------  -----  ------
                                                             (DOLLARS IN MILLIONS,
                                                               EXCEPT PER SHARE   
                                                                   AMOUNTS)       
                                                                                  
Net earnings                                                                      
  As reported............................................... $303    $48    $249  
  Pro forma................................................. $294    $45    $248  
Basic earnings per share                                                          
  As reported............................................... $3.95   $.61   $3.15 
  Pro forma................................................. $3.83   $.58   $3.14 
Diluted earnings per share                                                        
  As reported............................................... $3.94   $.61   $3.13 
  Pro forma................................................. $3.82   $.57   $3.12 

The fair value of each option is estimated on the grant date using the
Black-Scholes option-pricing model, which requires input of highly subjective   
assumptions. Some of these assumptions used for grants in 2000, 1999, and 1998, 
respectively, include: average expected volatility of 26.98%, 25.48%, and       
20.87%; average expected dividend yield of 3.84%, 4.05%, and 3.07%; and average 
risk-free interest rates of 6.19%,                                              

  F-29

DEFS14A
182nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 182nd
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

5.74%, and 5.48%. An expected option term of six years for all periods was      
developed based on historical experience information. The expected term for     
reloads was considered as part of this calculation and is equivalent to the     
remaining term of the original grant at the time of reload.                     

Because Eastman Chemical's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in  
management's opinion, the existing models do not necessarily provide a reliable 
single measure of the fair value of its employee stock options.                 

A summary of the status of Eastman Chemical's stock option plans is   
presented below:                                                                

                                                        [Enlarge/Download Table]

                                           2000                   1999                   1998         
                                   ---------------------  ---------------------  ---------------------
                                               WEIGHTED-              WEIGHTED-              WEIGHTED-
                                                AVERAGE                AVERAGE                AVERAGE 
                                               EXERCISE               EXERCISE               EXERCISE 
                                    OPTIONS      PRICE     OPTIONS      PRICE     OPTIONS      PRICE  
                                   ---------   ---------  ---------   ---------  ---------   ---------
                                                                                                      
Outstanding at beginning of                                                                           
  year............................ 4,784,957    $   50    3,865,101     $  51    3,716,208    $   50  
  Granted......................... 1,263,051        45    1,019,977        47      479,446        57  
  Exercised.......................   202,691        35       81,504        39      316,360        42  
  Forfeited or canceled...........    43,969        60       18,617        57       14,193        64  
                                   ---------    ------    ---------     -----    ---------    ------  
Outstanding at end of year........ 5,801,348    $   50    4,784,957     $  50    3,865,101    $   51  
                                   =========              =========              =========            
Options exercisable at year-end... 3,967,571              3,400,079              3,267,275            
                                   =========              =========              =========            
Weighted-average fair value of                                                                        
  options granted during the                                                                          
  year............................              $11.06                  $9.82                 $12.40  
Available for grant at end of                                                                         
  year............................ 6,927,075              7,503,969              8,439,445            
                                   =========              =========              =========            

    The following table summarizes information about stock options outstanding
at December 31, 2000:                                                           

                                                                [Download Table]

                             OPTIONS OUTSTANDING                                  
                    -------------------------------------    OPTIONS EXERCISABLE  
                                   WEIGHTED-               -----------------------
                                    AVERAGE     WEIGHTED-                WEIGHTED-
        RANGE OF      NUMBER       REMAINING     AVERAGE     NUMBER       AVERAGE 
        EXERCISE    OUTSTANDING   CONTRACTUAL   EXERCISE   EXERCISABLE   EXERCISE 
         PRICES     AT 12/31/00      LIFE         PRICE    AT 12/31/00     PRICE  
        --------    -----------   -----------   ---------  -----------   ---------
                                                                                  
$31-$40............    253,881    5.9 Years        $37        163,511       $37   
     42............     19,500    8.8               42          9,750        42   
  43-44............  1,428,891    3.1               43      1,416,312        43   
  45-47............  1,774,064    7.6               46        370,663        46   
  48-63............  1,775,694    5.5               56      1,458,017        56   
  64-74............    549,318    8.2               65        549,318        65   
                     ---------                              ---------             
$31-$74............  5,801,348    5.8              $50      3,967,571       $51   
                     =========                              =========             

EASTMAN INVESTMENT AND EMPLOYEE STOCK OWNERSHIP PLAN                        

   Eastman Chemical sponsors a defined contribution employee stock ownership
plan, or the ESOP, a qualified plan under Section 401(a) of the Internal Revenue
Code, which is a component of the Eastman Chemical Investment and Employee Stock
Ownership Plan, or EIP/ESOP. Eastman Chemical anticipates that it will make     
annual contributions for substantially all U.S. employees equal to 5% of        
eligible compensation to the ESOP, or for employees who have five or more prior 
ESOP contributions, to either the Eastman Chemical Stock Fund or other          
investment funds within the Eastman Chemical Investment Plan. Through early     
2001, Eastman Chemical sponsored, for its international employees, an employee  
stock ownership plan, which was substantially similar to the ESOP. In March     
2001, shares in the                                                             

  F-30

DEFS14A
183rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 183rd
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

international employee stock ownership plan will be distributed to participants 
in the plan. Allocated shares in the ESOP totaled 3,075,739, 3,249,519 and      
2,626,880 as of December 31, 2000, 1999 and 1998, respectively. Dividends on    
shares held by the EIP/ESOP are charged to retained earnings. All shares held by
the EIP/ESOP are treated as outstanding in computing earnings per share.        

     Charges for contributions to the EIP/ESOP were $34 million, $37 million and
$36 million for 2000, 1999, and 1998, respectively. Charges related to 1998 were
previously reported as part of the Eastman Performance Plan.                    

EASTMAN PERFORMANCE PLAN                                                    

     The Eastman Chemical Performance Plan, or the EPP, places a portion of each
employee's annual compensation at risk and provides a lump-sum payment to plan  
participants based on Eastman Chemical's financial performance. Charges under   
the EPP were $55 million, $3 million and $30 million in 2000, 1999 and 1998,    
respectively.                                                                   

ANNUAL PERFORMANCE PLAN                                                     

Through 2000, Eastman Chemical's managers and executive officers      
participated in an Annual Performance Plan, or the APP, which placed a portion  
of annual cash compensation at risk based upon Eastman Chemical's performance as
measured by specified annual goals. Charges under the APP for 2000, 1999 and    
1998 were $3 million, $13 million and $8 million, respectively.                 

UNIT PERFORMANCE PLAN                                                       

Beginning in 2000, Eastman managers and executive officers began      
participating in a new variable compensation plan, the Unit Performance Plan, or
the UPP, under which a portion of annual cash compensation is at risk based upon
organizational unit performance and the attainment of individual objectives and 
expectations. In 2000, the portion of a participant's targeted pay at risk under
the APP and the UPP was equal to the portion of the targeted pay that was       
formerly at risk under the APP prior to the inception of the UPP. Charges under 
the UPP for 2000 were $7 million.                                               

 Beginning in 2001, all Eastman Chemical managers and executive officers
will participate in the UPP and not the APP. Accordingly, the portion of each   
participant's total pay that was formerly at risk under the APP will instead be 
at risk under the UPP.                                                          

  F-31

DEFS14A
184th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 184th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

11. INCOME TAXES                                                                

   Components of earnings before income taxes and the provision for U.S. and
other income taxes follow:                                                      

                                                                [Download Table]

                                                             2000     1999     1998 
                                                             -----   ------   ------
                                                              (DOLLARS IN MILLIONS) 
                                                                                    
Earnings (loss) before income taxes:                                                
  United States............................................. $414    $ 185    $ 463 
  Outside the United States.................................   39     (113)    (103)
                                                             ----    -----    ----- 
          Total............................................. $453    $  72    $ 360 
                                                             ====    =====    ===== 
Provision (benefit) for income taxes:                                               
  United States                                                                     
     Current................................................ $ 69    $  31    $  35 
     Deferred...............................................   60      (14)      64 
  Non-United States                                                                 
     Current................................................    9       10        6 
     Deferred...............................................    1       (3)      (3)
  State and other                                                                   
     Current................................................    4        1        4 
     Deferred...............................................    6       (1)       5 
                                                             ----    -----    ----- 
          Total............................................. $149    $  24    $ 111 
                                                             ====    =====    ===== 

Differences between the provision for income taxes and income taxes   
computed using the U.S. federal statutory income tax rate follow:               

                                                                [Download Table]

                                                             2000    1999    1998 
                                                             -----   -----   -----
                                                             (DOLLARS IN MILLIONS)
                                                                                  
Amount computed using the statutory rate.................... $158     $25    $126 
State income taxes..........................................    6      --       6 
Foreign rate variance.......................................    1       7      (3)
Foreign sales corporation benefit...........................  (11)     (7)    (24)
ESOP dividend payout........................................   (2)     (1)     (1)
Other.......................................................   (3)     --       7 
                                                             ----     ---    ---- 
Provision for income taxes.................................. $149     $24    $111 
                                                             ====     ===    ==== 

The 1998 foreign sales corporation benefit includes $12 million       
attributable to amended returns reflecting redetermined foreign sales           
corporation results for the years prior to 1998.                                

  F-32

DEFS14A
185th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 185th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

   The significant components of deferred tax assets and liabilities follow:

                                                                [Download Table]

                                                              DECEMBER 31, 
                                                              -------------
                                                              2000    1999 
                                                              -----   -----
                                                               (DOLLARS IN 
                                                                MILLIONS)  
                                                                           
Deferred tax assets:                                                       
  Postemployment obligations................................  $299    $285 
  Payroll and related items.................................    47      40 
  Deferred revenue..........................................    13      15 
  Miscellaneous reserves....................................    31      51 
  Preproduction and start-up costs..........................     8      10 
  Other.....................................................    45      55 
                                                              ----    ---- 
          Total.............................................  $443    $456 
                                                              ====    ==== 
Deferred tax liabilities:                                                  
  Depreciation..............................................  $824    $775 
  Inventories...............................................     6       5 
  Purchase accounting adjustments...........................   103      68 
  Other.....................................................    62      28 
                                                              ----    ---- 
          Total.............................................  $995    $876 
                                                              ====    ==== 

     Unremitted earnings of subsidiaries outside the United States totaling $156
million at December 31, 2000, are considered to be reinvested indefinitely. If  
remitted, they would be substantially free of additional tax. It is not         
practicable to determine the deferred tax liability for temporary differences   
related to those unremitted earnings.                                           

Current income taxes payable totaling $67 million and $81 million are 
included in current liabilities at December 31, 2000 and 1999, respectively.    

12. FAIR VALUE OF FINANCIAL INSTRUMENTS                                         

                                                        [Enlarge/Download Table]

                                                             DECEMBER 31, 2000   DECEMBER 31, 1999
                                                             -----------------   -----------------
                                                             RECORDED    FAIR    RECORDED    FAIR 
                                                              AMOUNT    VALUE     AMOUNT    VALUE 
                                                             --------   ------   --------   ------
                                                                     (DOLLARS IN MILLIONS)        
                                                                                                  
Long-term borrowings........................................  $1,914    $1,816    $1,506    $1,424
Foreign exchange contracts..................................       2         6        28        87
Commodity derivative contracts..............................      --        30        --         1

DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN     
TRADING                                                                         

LONG-TERM BORROWINGS                                                  

Eastman Chemical has based the fair value for fixed-rate borrowings on
current interest rates for comparable securities. Eastman Chemical's            
floating-rate borrowings approximate fair value.                                

FOREIGN EXCHANGE CONTRACTS                                            

     Eastman Chemical estimates the fair value of its foreign exchange contracts
based on dealer-quoted market prices of comparable instruments. Eastman Chemical
had currency options with maturities of not more than two years to exchange     
various foreign currencies for U.S. dollars in the aggregate notional amount of 
$44 million and $639 million at December 31, 2000 and 1999, respectively. The   
net unrealized gain deferred on such options was $3 million and $59 million as  
of December 31, 2000 and 1999,                                                  

  F-33

DEFS14A
186th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 186th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

respectively. Those amounts, based on dealer-quoted prices, represent the       
estimated gain that would have been recognized had those hedges been liquidated 
at estimated market value on the last day of each year presented.               

     In February 2000, currency options denominated in French franc, German mark
and Italian lira with a notional amount of $545 million were effectively        
settled, resulting in cash proceeds of $106 million. In October 2000, euro      
currency options with a notional amount of $208 million were effectively settled
resulting in cash proceeds of $24 million. Of these amounts, approximately $53  
million, net of premium amortization, was recognized in earnings during 2000.   
The balance, deferred until the underlying hedged transactions are realized, is 
recorded in other current liabilities in the Consolidated Statements of         
Financial Position. The remaining deferred gain will be recognized over a period
ending fourth quarter 2001.                                                     

   Eastman Chemical is exposed to credit loss in the event of nonperformance
by counterparties on foreign exchange contracts but anticipates no such         
nonperformance. Eastman Chemical minimizes such risk exposure by limiting the   
counterparties to major international banks and financial institutions.         
Concentrations of credit risk with respect to trade accounts receivable are     
generally diversified because of the large number of entities constituting      
Eastman Chemical's customer base and their dispersion across many different     
industries and geographies.                                                     

COMMODITY DERIVATIVE CONTRACTS                                        

   Eastman Chemical utilized commodity derivatives to hedge a portion of its
anticipated purchases of propane and natural gas used in the manufacturing      
process. Eastman Chemical estimates fair value of its commodity derivative      
contracts based on quotes from market makers of these instruments. The fair     
value represents the amount Eastman Chemical would expect to receive or pay to  
terminate the agreements at the reporting dates.                                

OTHER FINANCIAL INSTRUMENTS                                           

    Because of the nature of all other financial instruments, recorded amounts
approximate fair value. In the judgment of management, exposure to third-party  
guarantees is remote and the potential earnings impact pursuant to such         
guarantees is insignificant.                                                    

13. COMMITMENTS                                                                 

LEASE COMMITMENTS                                                           

  Eastman Chemical leases facilities, principally property, machinery, and
equipment, under cancelable, noncancelable, and month-to-month operating leases.
Future lease payments, reduced by sublease income, follow:                      

                                                                [Download Table]

                                                          (DOLLARS IN MILLIONS)
                                                                               
Year ending December 31,                                                       
  2001..................................................          $ 62         
  2002..................................................            53         
  2003..................................................            45         
  2004..................................................            33         
  2005..................................................            30         
  2006 and beyond.......................................            77         
                                                                  ----         
          Total minimum payments required...............          $300         
                                                                  ====         

If certain operating leases are terminated by Eastman Chemical, it    
guarantees a portion of the residual value loss, if any, incurred by the lessors
in disposing of the related assets. Management believes,                        

  F-34

DEFS14A
187th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 187th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

based on current facts and circumstances and current values of such equipment,  
that a material payment pursuant to such guarantees is remote.                  

  Rental expense, net of sublease income, was approximately $83 million in
2000, 1999 and 1998.                                                            

OTHER COMMITMENTS                                                           

  Eastman Chemical had various purchase commitments at the end of 2000 for
materials, supplies and energy incident to the ordinary conduct of business.    
These commitments, over a period of several years, approximate $1.4 billion.    
Eastman Chemical has other long-term commitments relating to joint venture      
agreements as described in Note 4 to Consolidated Financial Statements.         

    In 1999, Eastman Chemical entered into an agreement that allows it to sell
certain domestic accounts receivable under a planned continuous sale program to 
a third party. The agreement permits the sale of undivided interests in domestic
trade accounts receivable. Receivables sold to the third party totaled $200     
million and $150 million at December 31, 2000 and December 31, 1999,            
respectively. Undivided interests in designated receivable pools were sold to   
the purchaser with recourse limited to the receivables purchased. Fees paid by  
Eastman Chemical under this agreement are based on certain variable market rate 
indices and totaled approximately $12 million and $4 million in 2000 and 1999,  
respectively. Average monthly proceeds from collections reinvested in the       
continuous sale program were approximately $235 million and $225 million in 2000
and 1999, respectively. The portion that continues to be recognized in the      
Statements of Financial Position are domestic trade receivables of $73 million  
and $103 million at December 31, 2000 and December 31, 1999, respectively.      

14. RETIREMENT PLANS                                                            

Eastman Chemical maintains defined benefit plans that provide eligible
employees with retirement benefits. Prior to 2000, benefits were calculated     
using a traditional defined benefit formula based on age, years of service, and 
the employees' final average compensation as defined in the plans. Effective    
January 1, 2000, the defined benefit pension plan, the Eastman Retirement       
Assistance Plan, was amended. Employees' accrued pension benefits earned prior  
to January 1, 2000 are calculated based on previous plan provisions using the   
employee's age, years of service, and final average compensation as defined in  
the plans. The amended defined benefit pension plan uses a pension equity       
formula based on age, years of service, and final average compensation to       
calculate an employee's retirement benefit from January 1, 2000, forward.       
Benefits payable will be the combined pre-2000 and post-1999 benefits.          

    Benefits are paid to employees from trust funds. Contributions to the plan
are made as permitted by laws and regulations.                                  

Pension coverage for employees of Eastman Chemical's international    
operations is provided, to the extent deemed appropriate, through separate      
plans. Eastman Chemical systematically provides for obligations under such plans
by depositing funds with trustees, under insurance policies, or by book         
reserves.                                                                       

    A summary balance sheet of the change in plan assets during 2000 and 1999,
the funded status of the plans, amount recognized in the statement of financial 
position, and the assumptions used to develop the projected benefit obligation  
for Eastman Chemical's U.S. defined pension plans are provided in the following 
tables. Non-U.S. plans are not material.                                        

  F-35

DEFS14A
188th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 188th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

SUMMARY BALANCE SHEET                                                       

                                                                [Download Table]

                                                               2000         1999   
                                                             ---------   ----------
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
CHANGE IN BENEFIT OBLIGATION:                                                      
Benefit obligation, beginning of year.......................   $ 877       $1,511  
Service cost................................................      29           41  
Interest cost...............................................      68           87  
Plan amendments.............................................      --         (241) 
Actuarial loss (gain).......................................      47          (54) 
Curtailments/settlements....................................      --         (429) 
Benefits paid...............................................    (101)         (38) 
                                                               -----       ------  
          Benefit obligation, end of year...................   $ 920       $  877  
                                                               =====       ======  
CHANGE IN PLAN ASSETS:                                                             
Fair value of plan assets, beginning of year................   $ 911       $  990  
Actual return on plan assets................................      47          232  
Company contributions.......................................      --          145  
Acquisitions/divestitures/other receipts....................       5           --  
Benefits paid...............................................     (94)        (456) 
                                                               -----       ------  
          Fair value of plan assets, end of year............   $ 869       $  911  
                                                               =====       ======  
Benefit obligation in excess of (less than) plan assets.....   $  51       $  (34) 
Unrecognized actuarial (gain) loss..........................     (43)           7  
Unrecognized prior service cost.............................     128          140  
Unrecognized net transition asset...........................       8           12  
                                                               -----       ------  
          Net amount recognized, end of year................   $ 144       $  125  
                                                               =====       ======  
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION                          
  CONSIST OF:                                                                      
Accrued benefit cost........................................   $ 144       $  125  
Additional minimum liability................................      16           23  
Accumulated other comprehensive income (loss)...............     (16)         (23) 
                                                               -----       ------  
          Net amount recognized, end of year................   $ 144       $  125  
                                                               =====       ======  

    Eastman Chemical's worldwide net pension cost was $32 million, $58 million
and $93 million in 2000, 1999 and 1998, respectively.                           

  F-36

DEFS14A
189th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 189th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

 A summary of the components of net periodic benefit cost recognized for
Eastman Chemical's U.S. defined benefit pension plans follows:                  

SUMMARY OF BENEFIT COSTS                                                    

                                                                [Download Table]

                                                             2000    1999    1998  
                                                             -----   -----   ----- 
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
COMPONENTS OF NET PERIODIC BENEFIT COST:                                           
Service cost................................................ $  29   $  42   $  47 
Interest cost...............................................    68      86      93 
Expected return on assets...................................   (64)    (78)    (73)
Amortization of:                                                                   
  Transition asset..........................................    (4)     (6)     (4)
  Prior service cost........................................   (12)     (5)      5 
  Actuarial loss............................................     7      14      19 
                                                             -----   -----   ----- 
          Net periodic benefit cost......................... $  24   $  53   $  87 
                                                             =====   =====   ===== 
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:                                    
Discount rate...............................................  7.75%   8.15%   6.75%
Expected return on plan assets..............................  9.50%   9.50%   9.50%
Rate of compensation increase...............................  4.25%   4.50%   3.75%

 In 1999, Eastman Chemical recorded a pretax gain of $12 million for the
partial settlement of pension benefit liabilities resulting from a large number 
of employee retirements related to a voluntary and involuntary separation       
program. In 1998, a partial settlement and curtailment of pension and other     
postemployment benefit liabilities resulted from the expiration of the Holston  
Defense Corporation contract. This resulted in recognition of approximately $35 
million of previously unrecognized liabilities, but had no effect on earnings   
because Eastman Chemical also recorded a receivable from the Department of Army 
for expected reimbursement of such amounts.                                     

15. POSTRETIREMENT WELFARE PLANS                                                

Eastman provides life insurance and health care benefits for eligible 
retirees and health care benefits for retirees' eligible survivors. In general, 
Eastman Chemical provides those benefits to retirees eligible under its U.S.    
pension plans.                                                                  

  A few of Eastman Chemical's non-U.S. operations have supplemental health
benefit plans for certain retirees, the cost of which is not significant to     
Eastman Chemical.                                                               

  F-37

DEFS14A
190th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 190th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

    The following tables set forth the status of Eastman Chemical's U.S. plans
at December 31, 2000 and 1999:                                                  

SUMMARY BALANCE SHEET                                                       

                                                                [Download Table]

                                                              2000   1999 
                                                              ----   ---- 
                                                              (DOLLARS IN 
                                                               MILLIONS)  
                                                                          
CHANGE IN BENEFIT OBLIGATION:                                             
Benefit obligation, beginning of year.......................  $587   $617 
Service cost................................................     5      7 
Interest cost...............................................    48     43 
Plan participants' contributions............................    --      1 
Actuarial loss (gain).......................................    38    (50)
Benefits paid...............................................   (33)   (31)
                                                              ----   ---- 
Benefit obligation, end of year.............................  $645   $587 
                                                              ====   ==== 
CHANGE IN PLAN ASSETS:                                                    
Fair value of plan assets, beginning of year................  $ 41   $ 45 
Actual return on plan assets................................     2     -- 
Company contributions.......................................    26     21 
Plan participants' contributions............................    --      1 
Benefits paid...............................................   (32)   (26)
                                                              ----   ---- 
          Fair value of plan assets, end of year............  $ 37   $ 41 
                                                              ====   ==== 
Benefit obligations in excess of plan assets................  $608   $546 
Unrecognized actuarial loss.................................   (84)   (47)
Unrecognized prior service cost.............................    36     39 
                                                              ----   ---- 
          Net amount recognized, end of year................  $560   $538 
                                                              ====   ==== 
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION                 
  CONSIST OF:                                                             
Accrued benefit cost........................................  $560   $538 
                                                              ----   ---- 
          Net amount recognized, end of year................  $560   $538 
                                                              ====   ==== 

     A 1% increase in health care cost trend would increase the 2000 service and
interest costs by $2 million, and the 2000 benefit obligation by $32 million. A 
1% decrease in health care cost trend would decrease the 2000 service and       
interest costs by $2 million and the 2000 benefit obligation by $28 million.    

  F-38

DEFS14A
191st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 191st
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

The net periodic postretirement benefit cost follows:                 

SUMMARY OF BENEFIT COSTS                                                    

                                                                [Download Table]

                                                             2000    1999    1998  
                                                             -----   -----   ----- 
                                                             (DOLLARS IN MILLIONS) 
                                                                                   
COMPONENTS OF NET PERIODIC BENEFIT COST:                                           
Service cost................................................ $   4   $   7   $   8 
Interest cost...............................................    48      42      39 
Expected return on assets...................................    (2)     (2)     (2)
Amortization of:                                                                   
  Prior service cost........................................    (3)     (3)     (4)
  Actuarial loss............................................     1       2       1 
                                                             -----   -----   ----- 
          Net periodic benefit cost......................... $  48   $  46   $  42 
                                                             =====   =====   ===== 
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:                                    
Discount rate...............................................  7.75%   8.15%   6.75%
Expected return on plan assets..............................  9.50%   9.00%   9.00%
Rate of compensation increase...............................  4.25%   4.50%   3.75%
Health care cost trend                                                             
  Initial...................................................  7.00%   7.00%   7.00%
  Decreasing to ultimate trend of...........................  5.00%   5.25%   4.75%
     in year................................................  2006    2005    2004 

In 1998, a partial settlement and curtailment of pension and other    
postemployment benefit liabilities resulted from the December 31, 1998,         
expiration of the Holston Defense Corporation contract. This resulted in        
recognition of approximately $35 million of previously unrecognized liabilities,
but had no effect on earnings because Eastman Chemical also recorded a          
receivable from the Department of Army for expected reimbursement of such       
amounts.                                                                        

16. EMPLOYEE SEPARATIONS                                                        

    In the fourth quarter 1999, Eastman Chemical accrued costs associated with
employee terminations which resulted from voluntary and involuntary employee    
separations that occurred during the fourth quarter 1999. The voluntary and     
involuntary separations resulted in a reduction of about 1,200 employees. About 
760 employees who were eligible for full retirement benefits left Eastman       
Chemical under a voluntary separation program and approximately 400 additional  
employees were involuntarily separated from Eastman Chemical. Employees         
separated under these programs each received a separation package equaling two  
weeks' pay for each year of employment, up to a maximum of one year's pay and   
subject to certain minimum payments. Approximately $71 million was accrued in   
1999 for termination allowance payments associated with the separations, of     
which $6 million was paid in 1999 and $58 million was paid during 2000. As of   
December 31, 2000, a balance of $7 million remains to be paid and is included in
other current liabilities in the Consolidated Statements of Financial Position. 

  F-39

DEFS14A
192nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 192nd
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

17. HOLSTON DEFENSE CORPORATION                                                 

Holston Defense Corporation, or Holston, a wholly-owned subsidiary of 
Eastman Chemical, managed the government-owned Holston Army Ammunition Plant in 
Kingsport, Tennessee, or the Facility, under contract with the Department of    
Army from 1949 until expiration of the contract, or the Contract, on December   
31, 1998. The Department of Army awarded a contract to manage the Facility to a 
third party effective January 1, 1999.                                          

The Contract provided for reimbursement of allowable costs incurred by
Holston. During the fourth quarter 1999, the Department of Army reimbursed      
approximately $20 million of previously expensed pension costs. This            
reimbursement was credited to earnings in the fourth quarter 1999.              

18. SEGMENT INFORMATION                                                         

As described in Note 23, Eastman Chemical plans to separate into two  
independent public companies by the end of 2001. The planned spin-off and       
related management changes completed in the second quarter of 2001 resulted in  
certain specialty plastics products, primarily copolyesters, moving between     
segments. Effective with the second quarter 2001, Eastman Chemical began        
reporting financial results in five operating segments: the CASPI segment; the  
PCI segment; the SP segment; the Polymers segment; and the Fibers segment.      
Through first quarter 2001, Eastman Chemical managed and reported its operations
in two segments -- Chemicals and Polymers. Through 1999, Eastman Chemical's     
products and operations were managed and reported in three operating            
segments -- Specialty and Performance, Core Plastics, and Chemical              
Intermediates.                                                                  

The CASPI segment, which refers to the coatings, adhesives, specialty 
polymers and inks operating segment, manufactures raw materials, additives and  
specialty polymers primarily for the paints and coatings, inks and graphic arts 
and adhesives markets. CASPI's products consist of binders and resins, liquid   
vehicles, pigment concentrates and additives, unsaturated polyester resins and  
polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester
resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as
a key component and in paints and inks to form a protective coating or film and 
bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol 
solvents, maintain the binders in liquid form for ease of application. Pigment  
concentrates and additives, such as cellulosic polymers, Texanol coalescing aid 
and chlorinated polyolefins, provide different properties or performance        
enhancements to the end product. Unsaturated polyester resins are used primarily
in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions
are traditionally used to protect fibers during processing in textile           
manufacturing, and the technology is being extended for use in waterbased       
paints, coatings and inks.                                                      

The PCI segment, which refers to the performance chemicals and        
intermediates operating segment, manufactures chemicals for agricultural        
products, fibers, food and beverage ingredients, photographic chemicals,        
pharmaceutical intermediates, polymer compounding, custom synthesis and chemical
manufacturing intermediates.                                                    

   The SP segment, which refers to the specialty plastics operating segment,
manufactures copolyesters and cellulosic plastics for value-added end uses such 
as consumer products, medical devices, electrical connectors, medical packaging,
heavy gauge sheeting for signs and displays, specialty packaging films and tape.

The polymers segment manufactures a broad line of PET polymers and    
polyethylene products for the beverage bottle and consumer and industrial       
products markets. PET polymers serve as source products for containers for,     
among other things, carbonated soft drinks, water, beer and personal care items,
and food containers that are suitable for both conventional and microwave oven  
use. The polymers segment also                                                  

  F-40

DEFS14A
193rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 193rd
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

offers low density polyethylene and linear low density polyethylene, which are  
used primarily for packaging and film applications and in extrusion coated      
containers such as milk and juice cartons.                                      

The fibers segment manufactures acetate tow and Estrobond triacetin   
plasticizers for the cigarette filter market, acetate yarn for textile markets, 
and acetate flake and acetyl raw materials for acetate fibers and plastics uses.

    The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Corporate and certain other     
costs are allocated to operating segments using systematic allocation methods   
consistently applied. Senior management believes presenting the operating       
segments' performance with these costs allocated is appropriate in the          
circumstances. Non-operating income and expense, including interest cost, are   
not allocated to operating segments.                                            

Sales revenue presented below represents sales to third parties.      
Intersegment transfers, recorded at cost, have been eliminated and have no      
impact on earnings.                                                             

                                                        [Enlarge/Download Table]

                                                             YEAR ENDED DECEMBER 31,  
                                                             ------------------------ 
                                                              2000     1999     1998  
                                                             ------   ------   ------ 
                                                              (DOLLARS IN MILLIONS)   
                                                                                      
SALES                                                                                 
Chemicals Group Segments:                                                             
  Coatings, Adhesives, Specialty Polymers, and Inks......... $1,176   $  836   $  651 
  Performance Chemicals and Intermediates...................  1,297    1,245    1,290 
  Specialty Plastics........................................    550      531      487 
                                                             ------   ------   ------ 
          Total Chemicals Group.............................  3,023    2,612    2,428 
                                                             ======   ======   ====== 
Polymers Group Segments:                                                              
  Polymers..................................................  1,636    1,344    1,346 
  Fibers....................................................    633      634      707 
                                                             ------   ------   ------ 
          Total Polymers Group..............................  2,269    1,978    2,053 
                                                             ------   ------   ------ 
          Consolidated Eastman Total........................ $5,292   $4,590   $4,481 
                                                             ======   ======   ====== 
OPERATING EARNINGS (LOSS)(1)                                                          
Chemicals Group Segments                                                              
  Coatings, Adhesives, Specialty Polymers, and Inks......... $  123   $  121   $  147 
  Performance Chemicals and Intermediates...................     87       (2)      88 
  Specialty Plastics........................................    103       80       77 
                                                             ------   ------   ------ 
          Total Chemicals Group.............................    313      199      312 
                                                             ------   ------   ------ 
Polymers Group Segments:                                                              
  Polymers..................................................     99     (104)      (2)
  Fibers....................................................    150      107      124 
                                                             ------   ------   ------ 
          Total Polymers Group..............................    249        3      122 
                                                             ------   ------   ------ 
          Consolidated Eastman Total........................ $  562   $  202   $  434 
                                                             ======   ======   ====== 

---------------                                                                 

(1) Operating earnings for 2000 include the effect of nonrecurring charges for  
the write-off of in-process research and development related to the     
McWhorter acquisition; charges related to phase-out of operations at    
  Chocolate Bayou, Texas, and Distillation Products Industries in Rochester,
  New York; and certain litigation costs; partially offset by a gain related
 to the sale of certain assets. These charges are reflected in segments as
follows: Performance Chemicals and Intermediates segment $12            

  F-41

DEFS14A
194th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 194th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

million, Coatings, Adhesives, Specialty Polymers, and Inks segment $9   
million, and Polymers segment ($1) million.                             

 Operating earnings for 1999 include the effect of a charge for employee
separations; a charge for the write-off of in-process research and    
   development related to the Lawter acquisition; charges related to certain
 discontinued capital projects, underperforming assets, and phase-out of
  operations at certain sites; and other items; partially offset by a gain
    recognized on the reimbursement of previously expensed pension costs and a
gain on pension settlement. These nonrecurring items are reflected in 
  segments as follows: Polymers segment $37 million, Performance Chemicals
and Intermediates segment $32 million, Coatings, Adhesives, Specialty 
Polymers, and Inks segment $30 million, Specialty Plastics segment $10
million, and Fibers segment $8 million.                               

     Operating earnings for 1998 include the effect of charges related to a fine
for violation of the Sherman Act; charges related to certain          
   underperforming assets and discontinued capital projects; the impact of a
 power outage at the Kingsport, Tennessee, manufacturing site; and other
items. These nonrecurring items are reflected in segments as follows: 
Performance Chemicals and Intermediates segment $27 million, Coatings,
     Adhesives, Specialty Polymers, and Inks segment $20 million, Fibers segment
    $2 million, Specialty Plastics segment $1 million, and Polymers segment $1
million.                                                              

  F-42

DEFS14A
195th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 195th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

                                                        [Enlarge/Download Table]

                                                             YEAR ENDED DECEMBER 31, 
                                                             ------------------------
                                                              2000     1999     1998 
                                                             ------   ------   ------
                                                              (DOLLARS IN MILLIONS)  
                                                                                     
ASSETS                                                                               
Chemicals Group Segments:                                                            
  Coatings, Adhesives, Specialty Polymers, and Inks......... $1,856   $1,390   $  663
  Performance Chemicals and Intermediates...................  1,443    1,497    1,565
  Specialty Plastics........................................    989    1,098    1,061
                                                             ------   ------   ------
          Total Chemicals Group.............................  4,288    3,985    3,289
                                                             ======   ======   ======
Polymers Group Segments:                                                             
  Polymers..................................................  1,604    1,634    1,805
  Fibers....................................................    658      684      756
                                                             ------   ------   ------
          Total Polymers Group..............................  2,262    2,318    2,561
                                                             ------   ------   ------
          Consolidated Eastman Total........................ $6,550   $6,303   $5,850
                                                             ======   ======   ======
DEPRECIATION EXPENSE                                                                 
Chemicals Group Segments:                                                            
  Coatings, Adhesives, Specialty Polymers, and Inks......... $   86   $   66   $   52
  Performance Chemicals and Intermediates...................     80       80       80
  Specialty Plastics........................................     63       64       63
                                                             ------   ------   ------
          Total Chemicals Group.............................    229      210      195
                                                             ------   ------   ------
Polymers Group Segments:                                                             
  Polymers..................................................    104      107      106
  Fibers....................................................     49       51       50
                                                             ------   ------   ------
          Total Polymers Group..............................    153      158      156
                                                             ------   ------   ------
          Consolidated Eastman Total........................ $  382   $  368   $  351
                                                             ======   ======   ======
CAPITAL EXPENDITURES                                                                 
Chemicals Group Segments:                                                            
  Coatings, Adhesives, Specialty Polymers, and Inks......... $   55   $   34   $   46
  Performance Chemicals and Intermediates...................     46       92      205
  Specialty Plastics........................................     30       35       75
                                                             ------   ------   ------
          Total Chemicals Group.............................    131      161      326
                                                             ------   ------   ------
Polymers Group Segments:                                                             
  Polymers..................................................     71       95      137
  Fibers....................................................     24       36       37
                                                             ------   ------   ------
          Total Polymers Group..............................     95      131      174
                                                             ------   ------   ------
          Consolidated Eastman Total........................ $  226   $  292   $  500
                                                             ======   ======   ======

  F-43

DEFS14A
196th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 196th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

GEOGRAPHIC INFORMATION                                                      

                                                        [Enlarge/Download Table]

                                                              2000     1999     1998 
                                                             ------   ------   ------
                                                              (DOLLARS IN MILLIONS)  
                                                                                     
REVENUES                                                                             
  United States............................................. $3,016   $2,662   $2,764
  All foreign countries.....................................  2,276    1,928    1,717
                                                             ------   ------   ------
          Total............................................. $5,292   $4,590   $4,481
                                                             ======   ======   ======
LONG-LIVED ASSETS, NET                                                               
  United States............................................. $3,009   $3,036   $3,088
  All foreign countries.....................................    916      914      946
                                                             ------   ------   ------
          Total............................................. $3,925   $3,950   $4,034
                                                             ======   ======   ======

Revenues are attributed to countries based on customer location. No   
individual foreign country is material with respect to revenues or long-lived   
assets.                                                                         

19. SUPPLEMENTAL CASH FLOW INFORMATION                                          

                                                                [Download Table]

                                                             2000    1999    1998 
                                                             -----   -----   -----
                                                             (DOLLARS IN MILLIONS)
                                                                                  
Cash paid for interest and income taxes is as follows:                            
  Interest (net of amounts capitalized)..................... $156    $127    $107 
  Income taxes..............................................   90      (4)     80 
Details of acquisitions are as follows:                                           
  Fair value of assets acquired............................. $635    $662    $ 42 
  Liabilities assumed.......................................  374     281      10 
                                                             ----    ----    ---- 
          Net cash paid for acquisitions....................  261     381      32 
  Cash acquired in acquisitions.............................    4      41       7 
                                                             ----    ----    ---- 
          Cash paid for acquisitions........................ $265    $422    $ 39 
                                                             ====    ====    ==== 

    Cash flows from operating activities include gains from equity investments
of $15 million, $10 million and $12 million for 2000, 1999 and 1998,            
respectively. Derivative financial instruments and related gains and losses are 
included in cash flows from operating activities. The effect on cash of foreign 
currency transactions and exchange rate changes for all years presented was     
insignificant.                                                                  

   In March 1998, Eastman Chemical issued 536,188 shares of its common stock
with a market value of $35 million to its Employee Stock Ownership Plan as      
partial settlement of the Eastman Performance Plan payout. This noncash         
transaction is not reflected in the Consolidated Statements of Cash Flows.      

20. ENVIRONMENTAL MATTERS                                                       

Certain Eastman Chemical manufacturing sites generate hazardous and   
nonhazardous wastes, of which the treatment, storage, transportation and        
disposal are regulated by various governmental agencies. In connection with the 
cleanup of various hazardous waste sites, Eastman Chemical, along with many     
other entities, has been designated a potentially responsible party, or PRP, by 
the U.S. Environmental Protection Agency under the Comprehensive Environmental  
Response, Compensation and Liability Act, which potentially subjects PRPs to    
joint and several liability for such cleanup costs. In addition, Eastman        
Chemical will be required to incur costs for environmental remediation and      
closure/postclosure under the federal Resource Conservation and Recovery Act.   
Adequate reserves for environmental contingencies have been established in      
accordance with Eastman Chemical's policies described in Note 1. Because of     

  F-44

DEFS14A
197th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 197th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

expected sharing of costs, the availability of legal defenses, and Eastman      
Chemical's preliminary assessment of actions that may be required, Eastman      
Chemical does not believe its liability for these environmental matters,        
individually or in the aggregate, will be material to Eastman's consolidated    
financial position, results of operations, or competitive position.             

Eastman Chemical's environmental protection and improvement cash      
expenditures were approximately $195 million, $220 million and $190 million in  
2000, 1999 and 1998, respectively, including investments in construction,       
operations, and development.                                                    

21. LEGAL MATTERS                                                               

GENERAL                                                                     

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

SORBATES LITIGATION                                                         

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

   In addition, Eastman Chemical, along with other companies, is currently a
defendant in twenty-one antitrust lawsuits brought subsequent to Eastman        
Chemical's plea agreements as putative class actions on behalf of certain       
purchasers of sorbates in the United States and Canada. In each lawsuit, the    
plaintiffs allege that the defendants engaged in a conspiracy to fix the price  
of sorbates and that the class members paid more for sorbates than they would   
have paid absent the defendants' conspiracy. Seven of the lawsuits are pending  
in California state court in a consolidated action and allege state antitrust   
and consumer protection violations on behalf of classes of indirect purchasers  
of sorbates; six of the lawsuits are pending in the United States District Court
for the Northern District of California in a consolidated action and allege     
federal antitrust violations on behalf of classes of direct purchasers of       
sorbates; two lawsuits were filed in Tennessee state courts under the antitrust 
and consumer protection laws of various states, including Tennessee, on behalf  
of classes of indirect purchasers of sorbates in those states; two lawsuits were
filed in Wisconsin State Court under various state antitrust laws on behalf of a
class of indirect purchasers of sorbates in those states; two lawsuits were     
filed in Kansas State Court under Kansas antitrust laws on behalf of a class of 
indirect purchasers of sorbates in that state; one lawsuit was filed in New     
Mexico State                                                                    

  F-45

DEFS14A
198th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 198th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

Court under New Mexico antitrust laws on behalf of a class of indirect          
purchasers of sorbates in that state; one lawsuit was filed in the Ontario      
Superior Court of Justice under the federal competition law and pursuant to     
common law causes of action on behalf of a class of direct and indirect         
purchasers of sorbates in Canada; and one lawsuit was filed in the Quebec       
Superior Court under the federal competition law on behalf of a class of direct 
and indirect purchasers of sorbates in the Province of Quebec. The plaintiffs in
most cases seek damages of unspecified amounts, attorneys' fees and costs, and  
other unspecified relief; in addition, certain of the actions claim restitution,
injunction against alleged illegal conduct, and other equitable relief. Eastman 
Chemical has reached settlements in the direct and indirect purchaser class     
actions pending in California. The California direct purchaser settlement has   
received final court approval; the California indirect purchaser settlement has 
yet to be finally approved by the court. One of the two indirect purchaser      
actions in Tennessee has been preliminarily approved by the trial court in      
Davidson County, Tennessee, and appellate review of that court's action is      
presently underway. Eastman Chemical has also reached preliminary settlements   
that would resolve the Wisconsin and New Mexico indirect purchaser actions;     
however, these settlements require further court approval. Each of the remaining
class actions is in the preliminary discovery stage, with no class having been  
certified to date.                                                              

Eastman Chemical has also been included as a defendant in two separate
lawsuits concerning sorbates currently pending in the United States District    
Court for the Northern District of California, one filed on behalf of Dean Foods
Company, Kraft Foods, Inc. and Ralston Purina Company, and the other filed on   
behalf of Conopco, Inc. Both lawsuits allege that the defendants engaged in a   
conspiracy to fix the price of sorbates in violation of Section One of the      
Sherman Act and that the plaintiffs were direct purchasers of sorbates from the 
defendants. These plaintiffs elected to opt out of the final class action       
settlement of the federal direct purchaser cases in California and are pursuing 
their claims individually.                                                      

 Eastman Chemical intends to continue vigorously to defend these actions
unless they can be settled on terms acceptable to the parties. These matters    
could result in Eastman Chemical being subject to monetary damages and expenses.
Eastman Chemical recognized charges to earnings in the fourth quarter 1998, the 
fourth quarter 1999, and the first and second quarters of 2000 for estimated    
costs, including legal fees, related to the pending sorbates litigation         
described above. The ultimate outcome of these matters cannot presently be      
determined, however, and they may result in greater or lesser liability than    
that currently provided for in Eastman Chemical's financial statements.         

ENVIRONMENTAL MATTER                                                        

    As previously reported, in May 1997, Eastman Chemical received notice from
the Tennessee Department of Environment and Conservation, or TDEC, alleging that
the manner in which hazardous waste was fed into certain boilers at the         
Tennessee Eastman facility in Kingsport, Tennessee violated provisions of the   
Tennessee Hazardous Waste Management Act. The Company had voluntarily disclosed 
this matter to TDEC in December 1996. Over a three year period, Eastman Chemical
has provided extensive information relating to this matter to TDEC, the U.S.    
Environmental Protection Agency, or EPA, and the U.S. Department of Justice. On 
September 7, 1999, Eastman Chemical and EPA entered into a Consent Agreement and
Consent Order whereby Eastman Chemical agreed to pay a civil penalty of $2.75   
million to EPA for an alleged violation concerning monitoring and recordkeeping.
Eastman Chemical recognized the fine in 1999 and paid the fine in three         
installments over a period of one year. Various agencies are continuing to      
review the information submitted by Eastman Chemical.                           

  F-46

DEFS14A
199th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 199th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

22. QUARTERLY SALES AND EARNINGS DATA -- UNAUDITED                              

                                                        [Enlarge/Download Table]

                                                             1ST QTR.   2ND QTR.   3RD QTR.   4TH QTR.
                                                             --------   --------   --------   --------
                                                                       (DOLLARS IN MILLIONS,          
                                                                     EXCEPT PER SHARE AMOUNTS)        
                                                                                                      
2000(1)                                                                                               
Sales.......................................................  $1,217     $1,316     $1,387     $1,372 
Gross profit................................................     250        290        291        235 
Operating earnings..........................................     132        173        154        103 
Earnings before income taxes................................     102        128        145         78 
Provision for income taxes..................................      34         42         48         26 
Net earnings................................................      68         86         97         52 
Basic earnings per share(3).................................     .88       1.12       1.27        .68 
Diluted earnings per share(3)...............................     .88       1.12       1.27        .68 
1999(2)                                                                                               
Sales.......................................................  $1,023     $1,122     $1,190     $1,255 
Gross profit................................................     194        225        215        188 
Operating earnings (loss)...................................      71         96         75        (40)
Earnings before income taxes................................      37         64         49        (78)
Provision for income taxes..................................      12         21         17        (26)
Net earnings (loss).........................................      25         43         32        (52)
Basic earnings (loss) per share(3)..........................     .32        .55        .42       (.67)
Diluted earnings (loss) per share(3)........................     .31        .54        .42       (.67)

---------------                                                                 

(1) Second quarter 2000 includes nonrecurring charges related to phase-out of   
  operations at Chocolate Bayou, Texas, and Distillation Products Industries
in Rochester, New York, and certain litigation costs. Third quarter 2000
includes a nonrecurring gain related to the initial public offering of  
   shares of Genencor International, Inc., and additional nonrecurring charges
related to phase-out of operations at Chocolate Bayou, Texas, and the   
 write-off of in-process research and development related to the McWhorter
acquisition.                                                            
(2) First quarter 1999 includes charges related to a discontinued capital       
  project and phase-out of operations at Distillation Products Industries in
 Rochester, New York. Third quarter 1999 includes a nonrecurring gain from
   the sale of assets. Fourth quarter 1999 includes the effect of a charge for
   employee separations; a charge for the write-off of in-process research and
 development related to the Lawter acquisition; charges related to certain
discontinued capital projects, underperforming assets, and phase-out of 
operations at certain sites, including Eastman Chemical's sorbates      
manufacturing facilities in Chocolate Bayou, Texas; and other items;    
partially offset by a gain recognized on the reimbursement of previously
expensed pension costs and a gain from pension settlement.              
(3) Each quarter is calculated as a discrete period; the sum of the four        
quarters may not equal the calculated full-year amount.                 

23. SUBSEQUENT EVENTS                                                           

CREATION OF TWO INDEPENDENT COMPANIES THROUGH SPIN-OFF                      

   Eastman Chemical reported on February 5, 2001 that its board of directors
has authorized management to pursue a plan that would result in Eastman Chemical
becoming two independent public companies. Under the plan, Eastman Chemical     
would separate its business into two companies -- a specialty chemicals and     
plastics company and a polyethylene terephthalate, or PET, polymer and acetate  
fibers company. The specialty chemicals and plastics company would include the  
coatings, adhesives, specialty polymers and inks, performance chemicals and     
intermediates, and speciality plastics businesses of                            

  F-47

DEFS14A
200th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 200th
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES                   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

Eastman Chemical, and will continue Eastman Chemical's strategic initiatives in 
less capital intensive businesses. The PET and acetate fibers company would     
include Eastman Chemical's PET polymers, acetate fibers and polyethylene        
products.                                                                       

 The new companies are expected to be launched through a spin-off in the
form of a tax-free stock dividend to be effective by the end of the fourth      
quarter 2001, subject to a favorable Internal Revenue Service ruling that the   
distribution of shares will be tax-free to shareowners, final approval of the   
transaction by the board of directors, and other customary conditions.          
Immediately after the spin-off, Eastman Chemical shareowners would own shares in
both companies. Eastman Chemical has not yet finalized all aspects of the       
transaction, but expects the capital structures of the companies to be          
appropriate for each company's financial profile and that each company will     
maintain investment-grade ratings. Eastman Chemical expects to record a one-time
charge in connection with the spin-off.                                         

ACQUISITION OF CERTAIN BUSINESSES OF HERCULES INCORPORATED                  

As previously reported, Eastman Chemical has entered into a letter of 
intent with Hercules Incorporated ("Hercules") to acquire Hercules' hydrocarbon 
resins and select portions of its rosins resins businesses. These businesses    
generated approximately $300 million in sales revenue in 1999. Subject to the   
negotiation of customary agreements, approval by the boards of directors of both
companies, and regulatory approvals, the transaction is expected to be completed
early in second quarter 2001.                                                   

  F-48

DEFS14A
201st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 201st
REPORT OF INDEPENDENT ACCOUNTANTS 

To the Board of Directors and Shareowners of                                    
Eastman Chemical Company                                                        

In our opinion, the accompanying consolidated statements of financial 
position and the related consolidated statements of earnings (loss),            
comprehensive income (loss) and of cash flows present fairly, in all material   
respects, the financial position of Eastman Company (as described in Note 1 to  
the consolidated financial statements) and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of  
the three years in the period ended December 31, 2000 in conformity with        
accounting principles generally accepted in the United States of America. These 
financial statements are the responsibility of the Company's management; our    
responsibility is to express an opinion on these financial statements based on  
our audits. We conducted our audits of these statements in accordance with      
auditing standards generally accepted in the United States of America, which    
require that we plan and perform the audit to obtain reasonable assurance about 
whether the financial statements are free of material misstatement. An audit    
includes examining, on a test basis, evidence supporting the amounts and        
disclosures in the financial statements, assessing the accounting principles    
used and significant estimates made by management, and evaluating the overall   
financial statement presentation. We believe that our audits provide a          
reasonable basis for our opinion.                                               

     As discussed in Note 1 to the consolidated financial statements, on January
1, 1999, the Company adopted AICPA Statement of Position 98-1, "Accounting for  
the Costs of Computer Software Developed or Obtained for Internal Use."         

PRICEWATERHOUSECOOPERS LLP                                                      

Atlanta, Georgia                                                                
October 22, 2001                                                                

  F-49

DEFS14A
202nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 202nd
EASTMAN COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
AND COMPREHENSIVE INCOME (LOSS) 

                                                        [Enlarge/Download Table]

                                                           SIX MONTHS                                  
                                                              ENDED                                    
                                                            JUNE 30,          YEAR ENDED DECEMBER 31,  
                                                        -----------------   ---------------------------
                                                         2001      2000      2000      1999      1998  
                                                        -------   -------   -------   -------   -------
                                                           (UNAUDITED)                                 
                                                         (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)  
                                                                                                       
Sales to third parties................................  $1,582    $1,412    $3,023    $2,612    $2,428 
Sales to Eastman Chemical.............................     337       321       642       575       559 
                                                        ------    ------    ------    ------    ------ 
  Sales...............................................   1,919     1,733     3,665     3,187     2,987 
Cost of sales to third parties........................   1,306     1,079     2,361     1,978     1,770 
Cost of sales to Eastman Chemical.....................     337       321       642       575       559 
                                                        ------    ------    ------    ------    ------ 
  Cost of sales.......................................   1,643     1,400     3,003     2,553     2,329 
Asset impairments and restructuring costs.............      80         9        13        35        33 
                                                        ------    ------    ------    ------    ------ 
Gross profit..........................................     196       324       649       599       625 
Selling and general administrative expenses...........     145       100       223       223       191 
Research and development costs........................      58        50       104       123       122 
Write-off of acquired in-process research and                                                          
  development.........................................       8        --         9        25        -- 
Employee separations and pension                                                                       
  settlement/curtailment..............................      --        --        --        29        -- 
                                                        ------    ------    ------    ------    ------ 
Operating earnings (loss).............................     (15)      174       313       199       312 
Interest expense, net.................................      50        40        88        75        55 
Gain recognized on initial public offering of equity                                                   
  investment..........................................      --        --       (38)       --        -- 
Other income..........................................      (8)      (14)      (34)      (18)      (16)
Other charges.........................................      20        24        44        30         2 
                                                        ------    ------    ------    ------    ------ 
Earnings (loss) before income taxes...................     (77)      124       253       112       271 
Provision (benefit) for income taxes..................     (36)       41        91        42        91 
                                                        ------    ------    ------    ------    ------ 
Net earnings (loss)...................................  $  (41)   $   83    $  162    $   70    $  180 
                                                        ======    ======    ======    ======    ====== 
Pro forma earnings (loss) per share (unaudited)                                                        
  Basic...............................................  $(0.53)   $ 1.08    $ 2.11    $ 0.91    $ 2.35 
                                                        ======    ======    ======    ======    ====== 
  Diluted.............................................  $(0.53)   $ 1.07    $ 2.10    $ 0.91    $ 2.33 
                                                        ======    ======    ======    ======    ====== 
Shares used to calculate pro forma earnings (loss) per                                                 
  share (unaudited)                                                                                    
  Basic...............................................    76.7      76.7      76.7      76.7      76.7 
                                                        ======    ======    ======    ======    ====== 
  Diluted.............................................    76.7      77.3      77.3      77.3      77.3 
                                                        ======    ======    ======    ======    ====== 
COMPREHENSIVE INCOME (LOSS)                                                                            
  Net earnings (loss).................................  $  (41)   $   83    $  162    $   70    $  180 
  Other comprehensive income (loss)...................     (20)      (20)      (44)       (9)        7 
                                                        ------    ------    ------    ------    ------ 
Comprehensive income (loss)...........................  $  (61)   $   63    $  118    $   61    $  187 
                                                        ======    ======    ======    ======    ====== 

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

  F-50

DEFS14A
203rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 203rd
EASTMAN COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 

                                                        [Enlarge/Download Table]

                                                                             DECEMBER 31,   
                                                               JUNE 30,     --------------- 
                                                                 2001        2000     1999  
                                                              -----------   ------   ------ 
                                                              (UNAUDITED)                   
                                                                  (DOLLARS IN MILLIONS)     
                                                                                            
                                          ASSETS                                            
Current assets                                                                              
  Cash and cash equivalents.................................    $   --      $   --   $   -- 
  Trade receivables, net of allowance of $11, $9, and $7....       359         343      294 
  Miscellaneous receivables.................................        49          48       49 
  Inventories...............................................       535         411      291 
  Other current assets......................................        65          61      106 
                                                                ------      ------   ------ 
          Total current assets..............................     1,008         863      740 
                                                                ------      ------   ------ 
Properties                                                                                  
  Properties and equipment at cost..........................     5,792       5,947    5,713 
  Less: Accumulated depreciation............................     3,187       3,338    3,186 
                                                                ------      ------   ------ 
          Net properties....................................     2,605       2,609    2,527 
                                                                ------      ------   ------ 
Goodwill, net of accumulated amortization of $35, $28, and                                  
  $14.......................................................       336         344      271 
Other intangibles, net of accumulated amortization of $29,                                  
  $20, and $6...............................................       268         277      175 
Other noncurrent assets.....................................       363         322      239 
                                                                ------      ------   ------ 
Total assets................................................    $4,580      $4,415   $3,952 
                                                                ======      ======   ====== 

                          LIABILITIES AND EASTMAN CHEMICAL EQUITY                           
Current liabilities                                                                         
  Payables and other current liabilities....................    $  552      $  693   $  579 
                                                                ------      ------   ------ 
          Total current liabilities.........................       552         693      579 
Deferred income tax credits.................................       530         530      418 
Postemployment obligations..................................       270         258      240 
Other long-term liabilities.................................        65          76       81 
                                                                ------      ------   ------ 
          Total liabilities.................................     1,417       1,557    1,318 
                                                                ------      ------   ------ 
Other comprehensive income..................................       (78)        (58)     (14)
Eastman Chemical's investment in Eastman Company............     3,241       2,916    2,648 
                                                                ------      ------   ------ 
Eastman Chemical equity.....................................     3,163       2,858    2,634 
                                                                ------      ------   ------ 
Total liabilities and Eastman Chemical equity...............    $4,580      $4,415   $3,952 
                                                                ======      ======   ====== 

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

  F-51

DEFS14A
204th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 204th
EASTMAN COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 

                                                        [Enlarge/Download Table]

                                                       SIX MONTHS ENDED             YEAR ENDED       
                                                           JUNE 30,                DECEMBER 31,      
                                                   -------------------------   --------------------- 
                                                      2001          2000       2000    1999    1998  
                                                   -----------   -----------   -----   -----   ----- 
                                                   (UNAUDITED)   (UNAUDITED)                         
                                                                 (DOLLARS IN MILLIONS)               
                                                                                                     
Cash flows from operating activities                                                                 
  Net earnings (loss)............................     $ (41)        $  83      $ 162   $  70   $ 180 
                                                      -----         -----      -----   -----   ----- 
Adjustments to reconcile net earnings to net cash                                                    
  provided by operating activities, net of effect                                                    
  of acquisitions                                                                                    
  Depreciation and amortization..................       150           142        288     252     228 
  Gain recognized on initial public offering of                                                      
     equity investment...........................        --            --        (38)     --      -- 
  Write-off of impaired assets...................        76            --         --      34      33 
  Write-off of acquired in-process research and                                                      
     development.................................         8            --          9      25      -- 
  Provision (benefit) for deferred income                                                            
     taxes.......................................        (1)            6         46     (21)     52 
  (Increase) decrease in receivables.............       (17)            9         56     121      (8)
  (Increase) decrease in inventories.............       (69)          (74)       (65)     45      31 
  Increase (decrease) in employee benefit                                                            
     liabilities and incentive pay...............       (43)            6         24     (72)     18 
  Increase (decrease) in liabilities excluding                                                       
     borrowings, employee benefit liabilities,                                                       
     and incentive pay...........................       (98)            6        (25)     14     (14)
  Other items, net...............................        13            54          5      (1)     58 
                                                      -----         -----      -----   -----   ----- 
  Total adjustments..............................        19           149        300     397     398 
                                                      -----         -----      -----   -----   ----- 
  Net cash provided by (used in) operating                                                           
     activities..................................       (22)          232        462     467     578 
                                                      -----         -----      -----   -----   ----- 
Cash flows from investing activities                                                                 
  Additions to properties and equipment..........       (80)          (55)      (156)   (191)   (358)
  Acquisitions, net of cash acquired.............      (250)          (52)      (261)   (381)    (32)
  Additions to capitalized software..............       (11)           (7)       (16)    (18)     -- 
  Other investments..............................        (7)          (23)       (30)     --      -- 
  Proceeds from sales of investments.............        --            --         12      --      -- 
  Proceeds from sales of fixed assets............         4            60         61      --      -- 
  Other items....................................        --            --         --       2       5 
                                                      -----         -----      -----   -----   ----- 
          Net cash used in investing                                                                 
            activities...........................      (344)          (77)      (390)   (588)   (385)
                                                      -----         -----      -----   -----   ----- 
Cash flows from financing activities                                                                 
  Net transactions with Eastman Chemical.........       366          (155)       (72)    121    (193)
                                                      -----         -----      -----   -----   ----- 
          Net cash provided by (used in)                                                             
            financing activities.................       366          (155)       (72)    121    (193)
                                                      -----         -----      -----   -----   ----- 
          Net change in cash and cash                                                                
            equivalents..........................        --            --         --      --      -- 
Cash and cash equivalents at beginning of year...        --            --         --      --      -- 
                                                      -----         -----      -----   -----   ----- 
Cash and cash equivalents at end of year.........     $  --         $  --      $  --   $  --   $  -- 
                                                      =====         =====      =====   =====   ===== 

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

  F-52

DEFS14A
205th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 205th
EASTMAN COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES                                              

FINANCIAL STATEMENT PRESENTATION                                                

    The accompanying financial statements of Eastman Company and subsidiaries,
referred to as Eastman Company, are prepared in conformity with accounting      
principles generally accepted in the United States of America and of necessity  
include some amounts that are based upon management estimates and judgments.    
Future actual results could differ from such current estimates. The accompanying
unaudited interim consolidated financial statements have been prepared by       
Eastman Company in accordance and consistent with the accounting policies in    
these footnotes. In the opinion of Eastman Chemical, all normal recurring       
adjustments necessary for a fair presentation have been included in the         
unaudited interim consolidated financial statements. The accompanying combined  
financial statements, herein referred to as consolidated financial statements,  
have been prepared on a basis which reflects the historical financial statements
of Eastman Company assuming that the operations of Eastman Chemical expected to 
be contributed to Eastman Company in connection with the spin-off of Eastman    
Company to Eastman Chemical's stockholders, referred to as the Distribution,    
were organized as a separate legal entity, owning certain net assets of Eastman 
Chemical. Generally, only those assets and liabilities of the ongoing Eastman   
Chemical business expected to be transferred to Eastman Company prior to the    
Distribution were included in the Consolidated Statement of Financial Position. 

  Eastman Chemical provided certain general and administrative services to
Eastman Company, including finance, legal, treasury, information systems, human 
resources and distribution. The costs for these services were allocated to      
Eastman Company using various percentages based on actual measurable results of 
operations and budgeted results of operations. These measurement bases,         
determined to be reasonable by management, include, but are not limited to, the 
percentage of Eastman Company sales revenue, sale quantities, employee hours    
incurred by Eastman Company, freight and duty costs to the total Eastman        
Chemical costs of these respective items. As a result of the Distribution,      
Eastman Company will be required to perform these general and administrative    
services using its own resources or purchased services and will be responsible  
for the costs and expenses associated with the management of a public company.  
It is estimated that annual selling and general administrative expenses would   
have been $20 million to $30 million higher if Eastman Company had been         
unaffiliated with Eastman Chemical.                                             

   As described in Notes 12 and 13, Eastman Company employees participate in
various Eastman Chemical pension, health care, savings and other benefit plans. 
The costs and certain obligations related to these plans are included in Eastman
Company consolidated financial statements generally based on the percentage of  
Eastman Company personnel to total Eastman Chemical personnel.                  

     Certain assets and liabilities related to Eastman Company's operations have
been managed and controlled by Eastman Chemical on a centralized basis. Certain 
assets and a portion of post-employment obligations and other long-term         
liabilities have been allocated to Eastman Company in the manner described in   
preceding paragraphs for allocating general and administrative expenses and     
benefit plans.                                                                  

 Eastman Chemical uses a centralized approach to cash management and the
financing of its operations. As a result, cash and cash equivalents and debt    
were not allocated to Eastman Company in the historical financial statements.   
Eastman Company generally has not had borrowings except amounts due to Eastman  
Chemical. However, interest expense has been allocated to Eastman Company in the
consolidated financial statements based upon the percentage of Eastman Company  
assets to total Eastman Chemical assets.                                        

     The allocation methodology followed in preparing the consolidated financial
statements may not necessarily reflect the results of operations, cash flows, or
financial position of Eastman Company in the future, or what the results of     
operations, cash flows, or financial position would have been had Eastman       
Company been a separate stand-alone public entity.                              

  F-53

DEFS14A
206th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 206th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

PENDING DISTRIBUTION                                                            

In February 2001, Eastman Chemical's board of directors approved in   
principle a plan to spin off Eastman Company to the stockholders of Eastman     
Chemical. In the Distribution, each of Eastman Chemical's stockholders will     
receive a pro rata share of the voting common stock of Eastman Company in a     
special dividend and Eastman Company will become a separately traded, publicly  
held company. The Distribution is subject to several conditions, including      
stockholder approval. Eastman Chemical has filed a request for a ruling from the
U.S. Internal Revenue Service that this transaction generally would be free from
U.S. federal income taxes.                                                      

     The Distribution will be accomplished through a distribution agreement that
will provide for, among other things, the assets to be contributed to Eastman   
Company and the liabilities to be assumed by Eastman Company. Eastman Chemical  
and Eastman Company will also enter into an employee matters agreement to set   
forth the manner in which assets and liabilities under employee benefit plans   
and other employment-related liabilities will be divided between them.          

    The final determination of the assets to be contributed to Eastman Company
and the liabilities to be assumed by Eastman Company will be made pursuant to   
the agreements to be entered into between Eastman Chemical and Eastman Company  
in connection with the Distribution. As of the date of the Distribution, the    
effect of the final transfer will be treated as a direct increase or decrease in
"Eastman Chemical Company Equity" in the Consolidated Statement of Financial    
Position. Regardless of the allocation of the assets and liabilities described  
in the preceding paragraphs, Eastman Company's Consolidated Statements of       
Earnings (Loss) include all of the related costs of doing business including an 
allocation of certain general corporate expenses from Eastman Chemical which    
were not directly related to Eastman Company.                                   

TRANSLATION OF NON-U.S. CURRENCIES                                              

 Eastman Company uses the local currency as the "functional currency" to
translate the accounts of all consolidated entities outside the United States   
where cash flows are primarily denominated in local currencies. The effects of  
translating those operations that use the local currency as the functional      
currency are included as a component of comprehensive income and shareowners'   
equity. The effects of remeasuring those operations where the U.S. dollar is    
used as the functional currency and all transaction gains and losses are        
reflected in current earnings.                                                  

REVENUE RECOGNITION                                                             

     In 2000, Eastman Company implemented Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements" which specifies the criteria that 
must be met before revenue is realized or realizable and earned. In accordance  
with SAB 101, Eastman Company recognizes revenue when persuasive evidence of an 
arrangement exists, delivery has occurred or services have been rendered, the   
price to the customer is fixed or determinable, and collectibility is reasonably
assured. Appropriate accruals for discounts, volume incentives, and other       
allowances are recorded as reductions in sales. The implementation of SAB 101   
did not have a material impact on sales, operating earnings, or net earnings for
2000 or prior years.                                                            

SHIPPING AND HANDLING FEES AND COSTS                                            

Shipping and handling fees related to sales transactions are billed to
customers and are recorded as sales revenue. Shipping and handling costs        
incurred are recorded in cost of sales.                                         

  F-54

DEFS14A
207th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 207th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

ACCOUNTS RECEIVABLE SALES                                                       

     Under a planned continuous sale program agreement that Eastman Company is a
party to, Eastman Company sells to a third party undivided interests in certain 
domestic accounts receivable. Undivided interests in designated receivable pools
are sold to the purchaser with recourse limited to the receivables purchased.   
Eastman Company's retained interests in the designated receivable pools are     
measured at fair value, based on expected future cash flows, using management's 
best estimates of returns and credit losses commensurate with the risks         
involved. Eastman Company's retained interests in receivables sold are recorded 
as trade receivables in the consolidated financial statements. Fees paid by     
Eastman Company under this agreement are based on certain variable market rate  
indices and are included in other (income) charges, net, in the consolidated    
financial statements.                                                           

INVENTORIES                                                                     

Inventories are valued at cost, which is not in excess of market. The 
Company determines the cost of most raw materials, work in process, and finished
goods inventories in the United States by the last-in, first-out, or LIFO,      
method. The cost of all other inventories, including inventories outside the    
United States, is determined by the first-in, first-out, or FIFO, or average    
cost method.                                                                    

PROPERTIES                                                                      

 Eastman Company records properties at cost. Maintenance and repairs are
charged to earnings; replacements and betterments are capitalized. When Eastman 
Company retires or otherwise disposes of assets, it removes the cost of such    
assets and related accumulated depreciation from the accounts. Eastman Company  
records any profit or loss on retirement or other disposition in earnings.      

DEPRECIATION                                                                    

Depreciation expense is calculated based on historical cost and the   
estimated useful lives of the assets (buildings and building equipment 20 to 50 
years; machinery and equipment 3 to 33 years), generally using the straight-line
method. For U.S. assets acquired before January 1, 1992, Eastman Company        
generally uses accelerated methods to calculate the provision for depreciation. 

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES                                  

    Goodwill and other intangibles are amortized on a straight-line basis over
the expected useful lives of the underlying assets, generally from 5 to 40      
years.                                                                          

IMPAIRED ASSETS                                                                 

Eastman Company reviews the carrying values of long-lived assets,     
identifiable intangibles, and goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be       
recoverable. Eastman Company reviews these assets for impairment based first on 
estimated future undiscounted cash flows attributable to the assets. An         
impairment loss for an asset to be held and used is recognized when the fair    
value of the asset, generally based on discounted estimated future cash flows,  
is less than the carrying value of the asset. An impairment loss for assets to  
be disposed of is recognized when the fair value of the asset, less costs to    
dispose, is less than the carrying value of the asset.                          

DERIVATIVE FINANCIAL INSTRUMENTS                                                

Derivative financial instruments are used by Eastman Company in the   
management of its exposures to fluctuations in foreign currency, raw materials  
and energy costs, and interest rates. Such instruments are                      

  F-55

DEFS14A
208th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 208th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

used to mitigate the risk that changes in exchange rates or raw materials and   
energy costs will adversely affect the eventual dollar cash flows resulting from
the hedged transactions.                                                        

 Eastman Company enters into forward exchange contracts to hedge certain
firm commitments denominated in foreign currencies and currency options to hedge
probable anticipated, but not yet committed, export sales and purchase          
transactions expected within no more than 2 years and denominated in foreign    
currencies (principally the British pound, French franc, German mark, Italian   
lira, Canadian dollar, euro, and the Japanese yen). To mitigate short-term      
fluctuations in market prices for propane and natural gas (major raw materials  
and energy used in the manufacturing process), Eastman Company enters into      
forwards and options contracts. From time to time, Eastman Company also utilizes
interest rate derivative instruments, primarily swaps, to hedge Eastman         
Company's exposure to movements in interest rates.                              

Eastman Company's forwards and options contracts are accounted for as 
hedges because the derivative instruments are designated and effective as hedges
and reduce Eastman Company's exposure to identified risks. Gains and losses     
resulting from effective hedges of existing assets, liabilities, firm           
commitments, or anticipated transactions are deferred and recognized when the   
offsetting gains and losses are recognized on the related hedged items and are  
reported as a component of operating earnings.                                  

Deferred currency option premiums are generally included in other     
noncurrent assets and are amortized over the life of the contract. The related  
obligation for payment is generally included in other liabilities and is paid in
the period in which the options are exercised or expire and forward exchange    
contracts mature.                                                               

On January 1, 2001 Eastman Company adopted Statement of Financial     
Accounting Standard ("SFAS") 133, as amended by SFAS 138, "Accounting for       
Certain Derivative Instruments and Certain Hedging Activities." The adoption of 
SFAS 133, as amended by SFAS 138, has not had a material impact on the results  
of operations. Instruments with a fair value of approximately $30 million,      
previously not required to be recorded and primarily pertaining to Eastman      
Company's raw materials and energy cost hedging program, were recognized as     
miscellaneous receivables in the Consolidated Statement of Financial Position on
January 1, 2001. In addition, previously deferred gains of approximately $30    
million from the settlement of currency options were reclassified from other    
current liabilities. These amounts resulted in an after-tax credit to other     
comprehensive income of approximately $37 million on January 1, 2001.           

INVESTMENTS                                                                     

Eastman Company includes in other noncurrent assets its investments in
joint ventures which are managed as integral parts of Eastman Company's         
operations and accounted for on the equity basis. Eastman Company includes its  
share of earnings and losses of such joint ventures in other income and charges.

Marketable securities held by Eastman Company, currently common or    
preferred stock, are deemed by management to be available-for-sale and are      
reported at fair value, with net unrealized gains or losses reported as a       
component of other comprehensive income in shareowners' equity.                 

  Realized gains and losses are included in earnings and are derived using
the specific identification method for determining the cost of securities.      
Eastman Company includes these investments in other noncurrent assets.          

Other equity investments, for which fair values are not readily       
determinable, are carried at historical cost and are included in other          
noncurrent assets.                                                              

  F-56

DEFS14A
209th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 209th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

OTHER INCOME AND OTHER CHARGES                                                  

Included in other income and other charges are results from equity    
investments, gains or losses on sales of nonoperating assets, royalty income,   
gains or losses on foreign exchange transactions, fees on securitized           
receivables, and other miscellaneous items. Material amounts are separately     
presented in the Consolidated Statements of Earnings (Loss) and Comprehensive   
Income (Loss).                                                                  

PRO FORMA EARNINGS PER SHARE (UNAUDITED)                                        

     Shares used to calculate basic pro forma earnings per share is based on the
number of shares expected to be outstanding at the date of Distribution (assumed
to be equal to the 76.7 million shares of Eastman Chemical common stock         
outstanding on June 30, 2001). Shares used to calculate diluted earnings per    
share is based on the number of shares expected to be issued in the distribution
and the dilutive effect stock option and other stock-based instruments of       
Eastman Chemical, held by Eastman Company employees, that will be converted to  
equivalent instruments in Eastman Company.                                      

INCOME TAXES                                                                    

   Eastman Company does not file separate tax returns. It is included in the
consolidated returns filed by Eastman Chemical and its subsidiaries in various  
U.S. and ex-U.S. jurisdictions. The tax provisions reflected in the Consolidated
Statements of Earnings (Loss) have been computed as if Eastman Company was a    
separate company. The accompanying Consolidated Statement of Financial Position 
includes deferred tax amounts applicable to Eastman Company. Taxes currently    
payable and income tax payments are recorded directly by Eastman Chemical and,  
as a result, amounts related to Eastman Company are included in "Net            
transactions with Eastman Chemical" in the Consolidated Statements of Cash      
Flows. In connection with the distribution, Eastman Company and Eastman Chemical
will enter into a tax matters agreement which will set forth each party's rights
and obligations with respect to tax matters for periods before and after the    
distribution date. This agreement will provide that Eastman Chemical (to be     
renamed "Voridian") will be responsible for the portion of the consolidated tax 
liability as of June 30, 2001 that is attributable to Eastman Chemical and its  
subsidiaries and Eastman Company will be responsible for the portion            
attributable to the Eastman Company Business.                                   

STOCK-BASED COMPENSATION                                                        

As permitted by Statement of Financial Accounting Standard No. 123,   
"Accounting for Stock-Based Compensation," Eastman Company continues to apply   
intrinsic value accounting for its stock option plans. Compensation cost for    
stock options, if any, is measured as the excess of the quoted market price of  
Eastman Company's stock at the date of grant over the amount an employee must   
pay to acquire the stock. Eastman Company's pro forma net earnings and pro forma
earnings per share based upon the fair value at the grant dates for awards under
Eastman Chemical's plans are disclosed in Note 8.                               

RECOGNITION OF GAINS OR LOSSES ON SUBSIDIARY OR AFFILIATE STOCK SALES           

 Gains and losses on subsidiary or affiliate stock sales are recorded in
other income or other charges and are separately disclosed in the Statements of 
Earnings (Loss) and Comprehensive Income (Loss).                                

COMPENSATED ABSENCES                                                            

Eastman Company accrues compensated absences and related benefits as  
current charges to earnings.                                                    

  F-57

DEFS14A
210th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 210th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

COMPUTER SOFTWARE COSTS                                                         

 Certain costs, including internal payroll costs, incurred in connection
with the development or acquisition of software for internal use are            
capitalized. Capitalized software costs are amortized on a straight-line basis  
over three years, the expected useful life of such assets, beginning when the   
software project is substantially complete and placed in service.               

 On January 1, 1999, Eastman Company adopted AICPA Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for  
Internal Use," which requires the capitalization of certain costs, including    
internal payroll costs, incurred in connection with the development or          
acquisition of software for internal use. Capitalized software costs will be    
amortized on a straight-line basis over three years, the expected useful life of
such assets, beginning when the software project is substantially complete and  
placed in service. The adoption of this standard resulted in capitalization of  
$16 million in 2000 and $18 million in 1999 of which approximately $7 million   
and $2 million was amortized, respectively, for certain internal-use software   
costs which otherwise would have been expensed. No restatement of prior year    
results was required.                                                           

ENVIRONMENTAL COSTS                                                             

Eastman Company accrues environmental costs when it is probable that  
Eastman Company has incurred a liability and the amount can be reasonably       
estimated. Estimated costs associated with closure/postclosure are accrued over 
the facilities' estimated remaining useful lives. Accruals for environmental    
liabilities are included in other long-term liabilities at undiscounted amounts 
and exclude claims for recoveries from insurance companies or other third       
parties. Environmental costs are capitalized if they extend the life of the     
related property, increase its capacity, and/or mitigate or prevent future      
contamination. The cost of operating and maintaining environmental control      
facilities is charged to expense.                                               

2. INVENTORIES                                                                  

                                                        [Enlarge/Download Table]

                                                                          DECEMBER 31,  
                                                             JUNE 30,     ------------- 
                                                               2001       2000    1999  
                                                            -----------   -----   ----- 
                                                            (UNAUDITED)                 
                                                               (DOLLARS IN MILLIONS)    
                                                                                        
At FIFO or average cost (approximates current cost)                                     
  Finished goods...........................................    $ 416      $ 344   $ 264 
  Work in process..........................................      125         89      83 
  Raw materials and supplies...............................      136        162     130 
                                                               -----      -----   ----- 
          Total inventories................................      677        595     477 
  Reduction to LIFO value..................................     (142)      (184)   (186)
                                                               -----      -----   ----- 
Total inventories at LIFO value............................    $ 535      $ 411   $ 291 
                                                               =====      =====   ===== 

Inventories valued on the LIFO method were approximately 80% of total 
inventories in each of the periods.                                             

  F-58

DEFS14A
211th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 211th
EASTMAN COMPANY AND SUBSIDIARIES                

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

3. PROPERTIES AND ACCUMULATED DEPRECIATION                                      

PROPERTIES AT COST                                                              

                                                        [Enlarge/Download Table]

                                                                          DECEMBER 31,   
                                                            JUNE 30,     --------------- 
                                                              2001        2000     1999  
                                                           -----------   ------   ------ 
                                                           (UNAUDITED)                   
                                                               (DOLLARS IN MILLIONS)     
                                                                                         
Balance at beginning of year..............................   $5,947      $5,713   $5,551 
  Additions...............................................                               
     Capital expenditures.................................       80         156      191 
     Acquisitions.........................................      157         250      102 
  Deductions..............................................     (392)       (172)    (131)
                                                             ------      ------   ------ 
Balance at end of year....................................   $5,792      $5,947   $5,713 
                                                             ======      ======   ====== 
Properties................................................                               
  Land....................................................   $   62      $   50   $   30 
  Buildings and building equipment........................      760         584      523 
  Machinery and equipment.................................    4,849       5,209    5,062 
  Construction in progress................................      121         104       98 
                                                             ------      ------   ------ 
Balance at end of year....................................   $5,792      $5,947   $5,713 
                                                             ======      ======   ====== 

ACCUMULATED DEPRECIATION                                                        

                                                        [Enlarge/Download Table]

                                                                          DECEMBER 31,   
                                                            JUNE 30,     --------------- 
                                                              2001        2000     1999  
                                                           -----------   ------   ------ 
                                                           (UNAUDITED)                   
                                                               (DOLLARS IN MILLIONS)     
                                                                                         
Balance at beginning of year..............................   $3,338      $3,186   $3,019 
  Provision for depreciation..............................      127         255      237 
  Deductions..............................................     (278)       (103)     (70)
                                                             ------      ------   ------ 
Balance at end of year....................................   $3,187      $3,338   $3,186 
                                                             ======      ======   ====== 

     Construction-period interest of $188 million (unaudited), $187 million, and
$182 million, reduced by accumulated depreciation of $101 million (unaudited),  
$93 million, and $86 million, is included in cost of properties at June 30,     
2001, December 31, 2000 and 1999, respectively.                                 

Depreciation expense was $127 million (unaudited), $255 million, $237 
million and $225 million for the six months ended June 30, 2001 and for the     
years 2000, 1999 and 1998, respectively.                                        

4. EQUITY INVESTMENTS                                                           

Eastman Company owns 25 million shares or approximately 42% of the    
outstanding common shares of Genencor International, Inc. or Genencor, a company
engaged in the discovery, development, manufacture, and marketing of            
biotechnology products for the industrial chemicals, agricultural, and health   
care markets. Prior to its initial public offering in July 2000, Genencor was a 
joint venture in which Eastman Company owned a 50% interest.                    

   In the second quarter 2000, Genencor completed an initial public offering
of 8,050,000 shares of its common stock at a price of $18 per share. Net        
proceeds to Genencor from the sale of the shares of common stock were           
approximately $135 million.                                                     

  F-59

DEFS14A
212th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 212th
EASTMAN COMPANY AND SUBSIDIARIES                

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

 As a result of this initial public offering, Eastman Company recorded a
gain of $38 million due to the change in Eastman Company's percentage ownership 
interest in Genencor. This investment is accounted for under the equity method, 
and is included in other noncurrent assets. At June 30, 2001, December 31, 2000 
and December 31, 1999, Eastman Company's investment in Genencor was $214 million
(unaudited), $209 million and $157 million, respectively.                       

5. PAYABLES AND OTHER CURRENT LIABILITIES                                       

                                                        [Enlarge/Download Table]

                                                                           DECEMBER 31, 
                                                              JUNE 30,     -------------
                                                                2001       2000    1999 
                                                             -----------   -----   -----
                                                             (UNAUDITED)                
                                                                (DOLLARS IN MILLIONS)   
                                                                                        
Trade creditors.............................................    $311       $352    $237 
Accrued payrolls, vacation, and variable-incentive                                      
  compensation..............................................     111        162     114 
Deferred gain on currency options...........................      --         30      -- 
Accrued restructuring charge................................       1          4      36 
Other.......................................................     129        145     192 
                                                                ----       ----    ---- 
          Total.............................................    $552       $693    $579 
                                                                ====       ====    ==== 

6. ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES                                  

FINE CHEMICALS BUSINESS                                                         

During the second quarter 2001, Eastman Company recorded a charge of  
approximately $63 million (unaudited) related to certain fine chemicals product 
lines that do not fit Eastman Company's long-term strategic objectives and for  
assets determined to be impaired. The ongoing restructuring initiatives and     
related asset impairments involve Eastman Company's Performance Chemicals and   
Intermediates segment and include assets at Eastman Company's Tennessee and     
Arkansas sites within the United States, a plant in Wales, and a plant in Hong  
Kong. The restructuring and asset impairments at the domestic sites primarily   
pertain to write-downs of fixed assets associated with product lines that       
Eastman Company will no longer pursue, and are net of the effect of a reversal  
of a customer deposit related to the impacted assets. The assets will be used to
meet current contractual requirements and then be idled. The impairments at the 
foreign sites include the write-down of fixed assets and other long-term        
deposits. The fair value of the impacted assets was determined using current    
market information where available or discounted estimated net cash flows from  
contracts that are currently in effect.                                         

COATINGS OPERATIONS                                                             

  During the second quarter 2001, Eastman Company recorded a restructuring
charge, including related asset write-downs, of approximately $16 million       
(unaudited) related to plans to close two plants in the United States. The      
restructuring charge includes a write-down of the fixed assets at the           
facilities, severance accruals for approximately 50 employees impacted by the   
plant shut-downs, and other costs associated with closing the facilities. The   
facilities are expected to be closed prior to December 31, 2001. In addition, a 
$4 million (unaudited) charge was included in selling and general administrative
expenses related to severance costs for other employees impacted by the         
restructuring of the coatings operations.                                       

In 1999, Eastman Company recorded pre-tax charges to earnings of $10  
million for the write-off of construction in progress related to an epoxybutene,
or EpB, plant project which was terminated and determined to have no future     
value. These charges were recorded in Cost of Sales for the performance         
chemicals and intermediates segment.                                            

  F-60

DEFS14A
213th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 213th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

DISTILLATION PRODUCTS INDUSTRIES                                                

    In first quarter 1999, Eastman Company announced a phase-out of operations
at Distillation Products Industries in Rochester, New York. In 1999, Eastman    
Company recorded pre-tax charges to earnings of $9 million for costs associated 
with employee termination benefits and the write-down of plant and equipment    
used at the site. In 2000, Eastman Company recorded an additional pre-tax charge
of $5 million for costs associated with exiting this site. The property and     
equipment used at this site was disposed of during 2001. These charges were     
recorded in Cost of Sales for the Performance Chemicals and Intermediates       
segment.                                                                        

SORBATES                                                                        

During the fourth quarter 1999, Eastman Company decided to discontinue
production at its sorbates facilities in Chocolate Bayou, Texas. The projected  
economic performance and cash flows for this product line were determined to be 
insufficient for remaining in this business. In 1999, Eastman Company recorded a
pre-tax charge to earnings of $17 million for the write-down of plant and       
equipment used at the site. In 2000, Eastman Company recorded additional pre-tax
charges of $8 million for costs associated with exiting this business. Property 
and equipment used at this site has been disposed of. These charges were        
recorded in Cost of Sales for the Performance Chemicals and Intermediates       
segment.                                                                        

CHDA                                                                            

  In the fourth quarter 1998, Eastman Company recorded a pre-tax charge to
earnings of $20 million for the write-down of property, plant and equipment used
in the production of CHDA, a product sold in the Coatings, Adhesives, Specialty 
Polymers, and Inks and Performance Chemicals and Intermediates segments. Based  
on responses from customers surveyed in the fourth quarter 1998, market outlook 
and estimated future cash flows for this product declined significantly. The    
carrying values of assets related to CHDA production were written down to fair  
market value based on estimated discounted future cash flows. Approximately $15 
million of the charge was recorded in Cost of Sales for the Coatings, Adhesives,
Specialty Polymers, and Inks segment and approximately $5 million was recorded  
in Cost of Sales for the Performance Chemicals and Intermediates segment.       

EASTOTAC                                                                        

   Eastman Company also recorded in the fourth quarter 1998 a pre-tax charge
to earnings of $12 million for the write-off of construction in progress related
to an Eastotac expansion project and an EpB plant project. Process improvements 
leading to increased Eastotac manufacturing capacity at the existing Longview,  
Texas plant and a planned joint venture in China lead to cancellation of the    
Eastotac expansion project. A portion of work done to date on an EpB plant      
project had no future value. The write-off of the Eastotac expansion project was
recorded in Cost of Sales for the Coatings, Adhesives, Specialty Polymers, and  
Inks segment. The write-off of the EpB plant project was recorded in Cost of    
Sales for the Performance Chemicals and Intermediates segment.                  

  Activity with respect to the asset impairments and restructuring charges
was as follows (dollars in millions):                                           

                                                        [Enlarge/Download Table]

                                      BALANCE AT     PROVISION/    NONCASH                 BALANCE AT    
                                    JANUARY 1, 1998  ADJUSTMENTS  REDUCTIONS  SPENDING  DECEMBER 31, 1998
                                    ---------------  -----------  ----------  --------  -----------------
                                                                                                         
Noncash impairments................       $--            $33        $ (33)      $ --           $--       
Severance..........................        --             --           --         --            --       
Closure costs......................         8             --           --         --             8       
                                          ---            ---        -----       ----           ---       
          Total....................       $ 8            $33        $ (33)      $ --           $ 8       
                                          ===            ===        =====       ====           ===       

  F-61

DEFS14A
214th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 214th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

                                                        [Enlarge/Download Table]

                                      BALANCE AT     PROVISION/    NONCASH                 BALANCE AT    
                                    JANUARY 1, 1999  ADJUSTMENTS  REDUCTIONS  SPENDING  DECEMBER 31, 1999
                                    ---------------  -----------  ----------  --------  -----------------
                                                                                                         
Noncash impairments................       $--            $35         $(35)      $--            $--       
Severance..........................        --              3           --        --              3       
Closure costs......................         8             --           --        (2)             6       
                                          ---            ---         ----       ---            ---       
          Total....................       $ 8            $38         $(35)      $(2)           $ 9       
                                          ===            ===         ====       ===            ===       

                                                        [Enlarge/Download Table]

                                      BALANCE AT     PROVISION/    NONCASH                 BALANCE AT    
                                    JANUARY 1, 2000  ADJUSTMENTS  REDUCTIONS  SPENDING  DECEMBER 31, 2000
                                    ---------------  -----------  ----------  --------  -----------------
                                                                                                         
Noncash impairments................       $--            $--         $ --       $ --           $--       
Severance..........................         3             --           --         (3)           --       
Closure costs......................         6             14           --        (10)           10       
                                          ---            ---         ----       ----           ---       
          Total....................       $ 9            $14         $ --       $(13)          $10       
                                          ===            ===         ====       ====           ===       

                                                        [Enlarge/Download Table]

                                      BALANCE AT     PROVISION/    NONCASH               BALANCE AT  
                                    JANUARY 1, 2001  ADJUSTMENTS  REDUCTIONS  SPENDING  JUNE 30, 2001
                                    ---------------  -----------  ----------  --------  -------------
                                                                                                     
Noncash impairments................       $--            $75         $(75)      $--          $--     
Severance..........................        --              5           --        --            5     
Closure costs......................        10              3           --        (5)           8     
                                          ---            ---         ----       ---          ---     
          Total....................       $10            $83         $(75)      $(5)          13     
                                          ===            ===         ====       ===          ===     

7. ACQUISITIONS                                                                 

CERTAIN BUSINESSES OF HERCULES INCORPORATED (UNAUDITED)                         

On May 1, 2001, Eastman Company completed the asset acquisition of the
hydrocarbon resins and select portions of the rosin-based resins business from  
Hercules Incorporated, or Hercules, for approximately $250 million. Hercules'   
resins businesses facilities acquired are located in the United States, the     
Netherlands, England and Mexico. Additionally, certain operating assets acquired
will be operated under contract with Hercules at shared facilities in the United
States.                                                                         

The transaction, which was financed with available cash and commercial
paper borrowings was accounted for by the purchase method of accounting and,    
accordingly, the results of operations of certain Hercules resins businesses for
the period from the acquisition date are included in the accompanying           
consolidated financial statements. Tangible assets acquired were recorded at    
their fair values. Goodwill and other intangible assets totaling approximately  
$30 million are included in other noncurrent assets in the Consolidated         
Statement of Financial Position and will be reclassified pending completion of  
an independent appraisal currently underway. Acquired in-process research and   
development of approximately $8 million was written off during the second       
quarter 2001. Assuming this transaction had been made at January 1, 2001, 2000, 
1999, and 1998 the consolidated pro forma results for the first six months 2001 
and 2000 and the years 2000, 1999 and 1998 would not be materially different    
from reported results.                                                          

MCWHORTER TECHNOLOGIES, INC.                                                    

In July 2000, Eastman Company completed its acquisition of McWhorter  
Technologies, Inc., or McWhorter, for approximately $200 million in cash and the
assumption of $155 million in debt. McWhorter manufactures specialty resins and 
colorants used in the production of consumer and industrial coatings and        
reinforced fiberglass plastics.                                                 

  This transaction, which was funded through available cash and commercial
paper borrowings, was accounted for by the purchase method of accounting and,   
accordingly, the results of operations of                                       

  F-62

DEFS14A
215th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 215th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

McWhorter for the period from the acquisition date are included in the          
accompanying consolidated financial statements. Assets acquired and liabilities 
assumed were recorded at their fair values. Goodwill of approximately $87       
million, which represents the excess of cost over the estimated fair value of   
net tangible assets acquired, and other intangible assets of approximately $103 
million for technology and trademarks, customer lists, and workforce are being  
amortized on a straight-line basis over 11 - 40 years. Acquired in-process      
research and development of approximately $9 million was written off after      
completion of purchase accounting. Assuming this transaction had been made at   
January 1, 2000, 1999, and 1998, the consolidated proforma results for 2000,    
1999, and 1998 would not be materially different from reported results.         

CHEMICKE ZAVODY SOKOLOV                                                         

As of February 21, 2000, Eastman Company acquired 76% of the shares of
Chemicke Zavody Sokolov, or Sokolov, a manufacturer of waterborne polymer       
products, acrylic acid, and acrylic esters located in the Czech Republic. During
the second quarter 2000, Eastman Company acquired an additional 21% of the      
shares resulting in 97% ownership of Sokolov. These transactions, for cash      
consideration totaling approximately $46 million (net of $3 million cash        
acquired) and the assumption of $21 million of Sokolov debt, were financed with 
available cash and commercial paper borrowings. Efforts will continue to        
accumulate additional shares as they become available from the remaining        
minority shareholders.                                                          

The acquisition of Sokolov was accounted for by the purchase method of
accounting and, accordingly, the results of operations of Sokolov for the period
from February 21, 2000 are included in the accompanying consolidated financial  
statements. Assets acquired and liabilities assumed have been recorded at their 
fair values. The minority interest, which is included in other long-term        
liabilities in the Consolidated Statements of Financial Position, is not        
significant. Assuming this transaction had been made at January 1, 2000, 1999,  
and 1998, the consolidated proforma results for 2000, 1999, and 1998 would not  
be materially different from reported results.                                  

LAWTER INTERNATIONAL, INC.                                                      

In June 1999, Eastman Company completed its acquisition of Lawter     
International, Inc., or Lawter, for approximately $370 million (net of $41      
million cash acquired) and the assumption of $145 million in debt. Lawter       
develops, produces and markets specialty products for the inks and coatings     
market.                                                                         

  This transaction, which was funded through available cash and commercial
paper borrowings, was accounted for by the purchase method of accounting. Assets
acquired and liabilities assumed have been recorded at their fair values.       
Goodwill of approximately $253 million, which represents the excess of cost over
the estimated fair value of net tangible assets acquired, and other intangible  
assets of approximately $202 million for technology and trademarks, in-process  
research and development, customer lists, and workforce, are being amortized on 
a straight-line basis over 5 - 40 years. Acquired in-process research and       
development of approximately $25 million was written off during 1999 after      
completion of purchase accounting. Assuming this transaction had been made at   
January 1, 1999 and 1998, the consolidated proforma results for 1999 and 1998   
would not be materially different from reported results.                        

  F-63

DEFS14A
216th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 216th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

DETAILS OF ACQUISITIONS:                                                        

                                                        [Enlarge/Download Table]

                                                         6 MONTHS                       
                                                           ENDED          YEAR ENDED    
                                                         JUNE 30,        DECEMBER 31,   
                                                        -----------   ------------------
                                                        2001   2000   2000   1999   1998
                                                        ----   ----   ----   ----   ----
                                                        (UNAUDITED)                     
                                                             (DOLLARS IN MILLIONS)      
                                                                                        
Fair value of assets acquired, including goodwill...... $250   $96    $635   $662   $42 
Liabilities assumed....................................   --    44     374    281    10 
                                                        ----   ---    ----   ----   --- 
  Net cash paid for acquisitions.......................  250    52     261    381    32 
Cash acquired in acquisitions..........................   --    --       4     41     7 
                                                        ----   ---    ----   ----   --- 
  Cash paid for acquisitions........................... $250   $52    $265   $422   $39 
                                                        ====   ===    ====   ====   === 

8. STOCK OPTION AND COMPENSATION PLANS                                          

   Eastman Chemical has several stock option and compensation plans in which
Eastman Company executives, directors and employees participate. The following  
describes the terms of those plans as they relate to Eastman Chemical.          

1997 OMNIBUS LONG-TERM COMPENSATION PLAN                                        

     Eastman Chemical's 1997 Omnibus Long-Term Compensation Plan, referred to as
the 1997 Omnibus Plan, which is substantially similar to and intended to replace
the 1994 Omnibus Long-Term Compensation Plan, referred to as the 1994 Omnibus   
Plan, provides for grants to employees of nonqualified stock options, incentive 
stock options, tandem and freestanding stock appreciation rights, performance   
shares, and various other stock and stock-based awards. Certain of these awards 
may be based on criteria relating to Eastman Chemical's performance as          
established by the compensation and management development committee of the     
board of directors. No new awards have been made under the 1994 Omnibus Plan    
following the effectiveness of the 1997 Omnibus Plan. Outstanding grants and    
awards under the 1994 Omnibus Plan are unaffected by the replacement of the 1994
Omnibus Plan with the 1997 Omnibus Plan. The 1997 Omnibus Plan provides that    
options can be granted through April 30, 2002, for the purchase of Eastman      
Chemical common stock at an option price not less than 50% of the per share fair
market value on the date of the stock option's grant. Substantially all grants  
awarded under the 1994 Omnibus Plan and under the 1997 Omnibus Plan have been at
option prices equal to the fair market value on the date of grant. Options      
typically become exercisable 50% one year after grant and 100% after two years  
and expire 10 years after grant. There is a maximum of 7 million shares of      
common stock available for option grants and other awards during the term of the
1997 Omnibus Plan. The maximum number of shares of common stock with respect to 
one or more options and/or SARs that may be granted during any one calendar year
under the 1997 Omnibus Plan to the Chief Executive Officer or to any of the next
four most highly compensated executive officers, each, a Covered Employee, is   
200,000. The maximum fair market value of any awards (other than options and    
SARs) that may be received by a Covered Employee during any one calendar year   
under the 1997 Omnibus Plan is equal to the fair market value of 100,000 shares 
of common stock as of December 31 of the preceding year.                        

DIRECTOR LONG-TERM COMPENSATION PLAN                                            

     Eastman Chemicals 1999 Director Long-Term Compensation Plan, referred to as
the Director Plan, which is substantially similar to and intended to replace the
1994 Director Long-Term Compensation Plan, provides for grants of nonqualified  
stock options and restricted shares to nonemployee members of the board of      
directors. No new awards have been made under the 1994 Director Long-Term       
Compensation                                                                    

  F-64

DEFS14A
217th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 217th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

Plan, following the effectiveness of the 1999 Director Plan. Outstanding grants 
and awards under the 1994 Director Long-Term Compensation Plan are unaffected by
the replacement of the 1994 Director Plan with the 1999 Director Plan. Shares of
restricted stock are granted upon the first day of the directors' initial term  
of service and nonqualified stock options and shares of restricted stock are    
granted each year following the annual meeting of shareowners. The Director Plan
provides that options can be granted through the later of May 1, 2003, or the   
date of the annual meeting of shareowners in 2003 for the purchase of Eastman   
Chemical common stock at an option price not less than the stock's fair market  
value on the date of the grant. The options vest in 50% increments on the first 
two anniversaries of the grant date. The maximum number of shares of common     
stock that shall be available for grant of awards under the Director Plan during
its term is 60,000.                                                             

NONEMPLOYEE DIRECTOR STOCK OPTION PLAN                                          

     Eastman Chemical's 1996 Nonemployee Director Stock Option Plan provides for
grants of nonqualified stock options to nonemployee members of the Board of     
Directors in lieu of all or a portion of each member's annual retainer. The     
Nonemployee Director Stock Option Plan provides that options may be granted for 
the purchase of Eastman Chemical common stock at an option price not less than  
the stock's fair market value on the date of grant. The options become          
exercisable six months after the grant date. The maximum number of shares of    
Eastman Chemical common stock available for grant under the Plan is 150,000.    

STOCK OPTION BALANCES AND ACTIVITY                                              

  Eastman Chemical applies intrinsic value accounting for its stock option
plans. If Eastman Chemical had elected to recognize compensation expense based  
upon the fair value at the grant dates for awards under these plans, the Eastman
Company's net earnings and pro forma earnings per share would be reduced as     
indicated below.                                                                

                                                        [Enlarge/Download Table]

                                                            2000         1999         1998  
                                                           -------      -------      -------
                                                           (DOLLARS IN MILLIONS, EXCEPT PER 
                                                                    SHARE AMOUNTS)          
                                                                                            
Net earnings..................... As reported               $ 162        $  70        $ 180 
                                  Pro forma                 $ 155        $  68        $ 179 
Pro forma basic earnings per                                                                
  share.......................... As reported (unaudited)   $2.11        $0.91        $2.35 
                                  Pro forma (unaudited)     $2.02        $0.89        $2.33 
Pro forma diluted earnings per                                                              
  share.......................... As reported (unaudited)   $2.10        $0.91        $2.33 
                                  Pro forma (unaudited)     $2.01        $0.88        $2.32 

     The following information relates to Eastman Chemical's stock option plans.

The fair value of each option is estimated on the grant date using the
Black-Scholes option-pricing model, which requires input of highly subjective   
assumptions. Some of these assumptions used for grants in 2000, 1999, and 1998, 
respectively, include: average expected volatility of 26.98%, 25.48%, and       
20.87%; average expected dividend yield of 3.84%, 4.05%, and 3.07%; and average 
risk-free interest rates of 6.19%, 5.74%, and 5.48%. An expected option term of 
six years for all periods was developed based on historical experience          
information. The expected term for reloads was considered as part of this       
calculation and is equivalent to the remaining term of the original grant at the
time of reload.                                                                 

Because Eastman Chemical's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in  
management's opinion, the existing models do not necessarily provide a reliable 
single measure of the fair value of its employee stock options.                 

  F-65

DEFS14A
218th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 218th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

A summary of the status of Eastman Chemical's stock option plans is   
presented below:                                                                

                                                        [Enlarge/Download Table]

                                           2000                   1999                   1998         
                                   ---------------------  ---------------------  ---------------------
                                               WEIGHTED-              WEIGHTED-              WEIGHTED-
                                                AVERAGE                AVERAGE                AVERAGE 
                                               EXERCISE               EXERCISE               EXERCISE 
                                    OPTIONS      PRICE     OPTIONS      PRICE     OPTIONS      PRICE  
                                   ---------   ---------  ---------   ---------  ---------   ---------
                                                                                                      
Outstanding at beginning of                                                                           
  year............................ 4,784,957    $   50    3,865,101     $  51    3,716,208    $   50  
  Granted......................... 1,263,051        45    1,019,977        47      479,446        57  
  Exercised.......................   202,691        35       81,504        39      316,360        42  
  Forfeited or canceled...........    43,969        60       18,617        57       14,193        64  
                                   ---------    ------    ---------     -----    ---------    ------  
Outstanding at end of year........ 5,801,348    $   50    4,784,957     $  50    3,865,101    $   51  
                                   =========              =========              =========            
Options exercisable at year-end... 3,967,571              3,400,079              3,267,275            
                                   =========              =========              =========            
Weighted-average fair value of                                                                        
  options granted during the                                                                          
  year............................              $11.06                  $9.82                 $12.40  
Available for grant at end of                                                                         
  year............................ 6,927,075              7,503,969              8,439,445            
                                   =========              =========              =========            

   The following table summarizes information about stock options of Eastman
Chemical outstanding at December 31, 2000:                                      

                                                        [Enlarge/Download Table]

                                                   OPTIONS OUTSTANDING                                  
                                          -------------------------------------    OPTIONS EXERCISABLE  
                                                         WEIGHTED-               -----------------------
                                                          AVERAGE     WEIGHTED-                WEIGHTED-
                                            NUMBER       REMAINING     AVERAGE     NUMBER       AVERAGE 
                                          OUTSTANDING   CONTRACTUAL   EXERCISE   EXERCISABLE   EXERCISE 
RANGE OF EXERCISE PRICES                  AT 12/31/00      LIFE         PRICE    AT 12/31/00     PRICE  
------------------------                  -----------   -----------   ---------  -----------   ---------
                                                                                                        
$31 - $40................................    253,881     5.9 Years       $37        163,511       $37   
       42................................     19,500           8.8        42          9,750        42   
 43 -  44................................  1,428,891           3.1        43      1,416,312        43   
 45 -  47................................  1,774,064           7.6        46        370,663        46   
 48 -  63................................  1,775,694           5.5        56      1,458,017        56   
 64 -  74................................    549,318           8.2        65        549,318        65   
                                           ---------                              ---------             
$31 - $74................................  5,801,348           5.8       $50      3,967,571       $51   
                                           =========                              =========             

   Options to purchase Eastman Chemical's common stock under the above plans
will be converted into options to purchase both Eastman Company common stock and
Voridian common stock. The total value of the options prior to the conversion   
will be equal to the combined value of the resulting options at the date of the 
Distribution.                                                                   

EASTMAN INVESTMENT AND EMPLOYEE STOCK OWNERSHIP PLAN                            

   Eastman Chemical sponsors a defined contribution employee stock ownership
plan, or the ESOP, a qualified plan under Section 401(a) of the Internal Revenue
Code which is a component of the Eastman Investment and Employee Stock Ownership
Plan, or EIP/ESOP. Eastman Chemical anticipates that it will make annual        
contributions for substantially all U.S. employees equal to 5% of eligible      
compensation to the ESOP, or for employees who have five or more prior ESOP     
contributions, to either the Eastman Stock Fund or other investment funds within
the Eastman Investment Plan. Through early 2001, Eastman Chemical sponsored, for
its international employees, an employee stock ownership plan which was         
substantially similar to the ESOP. In March 2001, shares in the international   
employee stock ownership plan were distributed to participants in the plan.     
Allocated shares in the ESOP totaled 3,075,739, 3,249,519, and 2,626,880 as of  
December 31, 2000, 1999, and 1998, respectively. Dividends on shares held       

  F-66

DEFS14A
219th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 219th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

by the EIP/ESOP are charged to retained earnings. All shares held by the        
EIP/ESOP are treated as outstanding in computing earnings per share.            

     Charges for contributions to the EIP/ESOP were $19 million (unaudited), $34
million, $37 million, and $36 million for the first six months 2001 and the     
years 2000, 1999 and 1998, respectively. Eastman Company's portion of the       
charges was approximately $14 million (unaudited), $26 million, $29 million and 
$28 million for the first six months 2001 and the years 2000, 1999 and 1998,    
respectively.                                                                   

EASTMAN PERFORMANCE PLAN                                                        

   The Eastman Performance Plan, or EPP, places a portion of each employee's
annual compensation at risk and provides a lump-sum payment to plan participants
based on Eastman Chemical's financial performance. Charges under the EPP were $9
million (unaudited), $55 million, $3 million, and $30 million for the first six 
months 2001 and for the years 2000, 1999, and 1998, respectively. Eastman       
Company's portion of the charges was approximately $6 million (unaudited), $43  
million, $2 million and $23 million for the first six months 2001 and the years 
2000, 1999 and 1998, respectively.                                              

ANNUAL PERFORMANCE PLAN                                                         

Through 2000, Eastman Chemical's managers and executive officers      
participated in an Annual Performance Plan, or the APP, which placed a portion  
of annual cash compensation at risk based upon Eastman Chemical's performance as
measured by specified annual goals. Charges under the APP for the first six     
months 2001 and the years 2000, 1999, and 1998 were $2 million (unaudited), $3  
million, $13 million, and $8 million, respectively. Eastman Company's portion of
the charges was approximately $1 million (unaudited), $2 million, $10 million   
and $6 million for the first six months 2001 and the years 2000, 1999 and 1998, 
respectively.                                                                   

UNIT PERFORMANCE PLAN                                                           

     Beginning in 2000, Eastman Chemical's managers and executive officers began
participating in a new variable compensation plan, the Unit Performance Plan, or
the UPP, under which a portion of annual cash compensation is at risk based upon
organizational unit performance and the attainment of individual objectives and 
expectations. In 2000, the portion of a participant's targeted pay at risk under
the APP and the UPP was equal to the portion of the targeted pay that was       
formerly at risk under the APP prior to the inception of the UPP. Charges under 
the UPP for the first six months 2001 and the year 2000 were $2 million         
(unaudited) and $7 million, respectively. Eastman Company's portion of the      
charges was approximately $1 million (unaudited) and $5 million for the first   
six months 2001 and year 2000, respectively.                                    

  F-67

DEFS14A
220th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 220th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

   Beginning in 2001, all Eastman Chemical's managers and executive officers
will participate in the UPP and not the APP. Accordingly, the portion of each   
participant's total pay that was formerly at risk under the APP will instead be 
at risk under the UPP.                                                          

9. INCOME TAXES                                                                 

   Components of earnings before income taxes and the provision for U.S. and
other income taxes follow:                                                      

                                                        [Enlarge/Download Table]

                                                       SIX MONTHS                       
                                                          ENDED          YEAR ENDED     
                                                        JUNE 30,        DECEMBER 31,    
                                                       -----------   ------------------ 
                                                       2001   2000   2000   1999   1998 
                                                       ----   ----   ----   ----   ---- 
                                                       (UNAUDITED)                      
                                                            (DOLLARS IN MILLIONS)       
                                                                                        
Earnings (loss) before income taxes                                                     
  United States....................................... $(91)  $100   $230   $124   $276 
  Outside the United States...........................   14     24     23    (12)    (5)
                                                       ----   ----   ----   ----   ---- 
          Total....................................... $(77)  $124   $253   $112   $271 
                                                       ====   ====   ====   ====   ==== 
Provision (benefit) for income taxes                                                    
  United States                                                                         
     Current.......................................... $  2   $ 32   $ 20   $ 42   $ 29 
     Deferred.........................................  (35)     1     55     (9)    48 
  Non-United States                                                                     
     Current..........................................    3      5      6      6      2 
     Deferred.........................................   --     --     (1)     2     (1)
  State and other                                                                       
     Current..........................................   (2)     3      5      2      8 
     Deferred.........................................   (4)    --      6     (1)     5 
                                                       ----   ----   ----   ----   ---- 
          Total....................................... $(36)  $ 41   $ 91   $ 42   $ 91 
                                                       ====   ====   ====   ====   ==== 

Differences between the provision for income taxes and income taxes   
computed using the U.S. federal statutory income tax rate follow:               

                                                        [Enlarge/Download Table]

                                                          SIX MONTHS                      
                                                             ENDED          YEAR ENDED    
                                                           JUNE 30,        DECEMBER 31,   
                                                          -----------   ------------------
                                                          2001   2000   2000   1999   1998
                                                          ----   ----   ----   ----   ----
                                                          (UNAUDITED)                     
                                                               (DOLLARS IN MILLIONS)      
                                                                                          
Amount computed using the statutory rate................. $(27)  $43    $89    $39    $95 
State income taxes.......................................   (4)    2      3      2      6 
Foreign rate variance....................................   (4)   (1)     1      6     (1)
Foreign tax credit benefit...............................   --    --     --     --     (1)
Foreign sales corporation benefit........................   (2)   (3)    (7)    (4)   (12)
ESOP dividend payout.....................................   (1)   (1)    (1)    (1)    (1)
Non-deductible...........................................    2     1      6     --      5 
                                                          ----   ---    ---    ---    --- 
Provision (benefit) for income taxes..................... $(36)  $41    $91    $42    $91 
                                                          ====   ===    ===    ===    === 

     The 1998 foreign sales corporation benefit includes $6 million attributable
to amended returns reflecting redetermined foreign sales corporation results for
the years prior to 1998.                                                        

  F-68

DEFS14A
221st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 221st
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

   The significant components of deferred tax assets and liabilities follow:

                                                        [Enlarge/Download Table]

                                                                           DECEMBER 31, 
                                                              JUNE 30,     -------------
                                                                2001       2000    1999 
                                                             -----------   -----   -----
                                                             (UNAUDITED)                
                                                                (DOLLARS IN MILLIONS)   
                                                                                        
Deferred tax assets                                                                     
  Postemployment obligations................................    $100       $ 99    $ 90 
  Payroll and related items.................................      25         23      19 
  Deferred revenue..........................................       2          8       9 
  Miscellaneous reserves....................................      32         30      41 
  Preproduction and start-up costs..........................       2          2       2 
  Other.....................................................      25         26      18 
                                                                ----       ----    ---- 
          Total.............................................    $186       $188    $179 
                                                                ====       ====    ==== 
Deferred tax liabilities                                                                
  Depreciation..............................................    $528       $534    $480 
  Inventories...............................................       7          6       5 
  Purchase accounting adjustments...........................     105        103      68 
  Other.....................................................      37         37       4 
                                                                ----       ----    ---- 
          Total.............................................    $677       $680    $557 
                                                                ====       ====    ==== 

     Unremitted earnings of subsidiaries outside the United States totaling $143
million at December 31, 2000, are considered to be reinvested indefinitely. If  
remitted, they would be substantially free of additional tax. It is not         
practicable to determine the deferred tax liability for temporary differences   
related to those unremitted earnings.                                           

10. FAIR VALUE OF FINANCIAL INSTRUMENTS                                         

                                                        [Enlarge/Download Table]

                                                   DECEMBER 31, 2000    DECEMBER 31, 1999 
                                                   ------------------   ------------------
                                                   RECORDED    FAIR     RECORDED    FAIR  
                                                    AMOUNT     VALUE     AMOUNT     VALUE 
                                                   --------   -------   --------   -------
                                                            (DOLLARS IN MILLIONS)         
                                                                                          
Foreign exchange contracts........................ $     1    $     2   $    11    $    35
Commodity derivative contracts....................      --         30        --          1

DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING 

FOREIGN EXCHANGE CONTRACTS                                                  

    Eastman Company estimates the fair value of its foreign exchange contracts
based on dealer-quoted market prices of comparable instruments. Eastman Company 
had currency options with maturities of not more than two years to exchange     
various foreign currencies for U.S. dollars in the aggregate notional amount of 
$61 million (unaudited), $18 million, and $256 million at June 30, 2001,        
December 31, 2000 and December 31, 1999, respectively. The net unrealized gain  
deferred on such options was $4 million (unaudited), $1 million, and $24 million
as of June 30, 2001, December 31, 2000 and December 31, 1999, respectively.     
Those amounts, based on dealer-quoted prices, represent the estimated gain that 
would have been recognized had those hedges been liquidated at estimated market 
value on the last day of each year presented.                                   

In February 2000, currency options denominated in French franc, German
mark, and Italian lira with a notional amount of $218 million were effectively  
settled, resulting in cash proceeds of $42 million. In October 2000, euro       
currency options with a notional amount of $83 million were effectively settled 

  F-69

DEFS14A
222nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 222nd
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

resulting in cash proceeds of $10 million. Of these amounts, approximately $21  
million, net of premium amortization, was recognized in earnings during 2000.   
The balance, deferred until the underlying hedged transactions are realized, is 
recorded in other current liabilities in the Consolidated Statements of         
Financial Position. The remaining deferred gain will be recognized over a period
ending fourth quarter 2001.                                                     

     Eastman Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts but anticipates no such            
nonperformance. Eastman Company minimizes such risk exposure by limiting the    
counterparties to major international banks and financial institutions.         
Concentrations of credit risk with respect to trade accounts receivable are     
generally diversified because of the large number of entities constituting      
Eastman Company's customer base and their dispersion across many different      
industries and geographies.                                                     

COMMODITY DERIVATIVE CONTRACTS                                              

  Eastman Company utilized commodity derivatives to hedge a portion of its
anticipated purchases of propane and natural gas used in the manufacturing      
process. Eastman Company estimates fair value of its commodity derivative       
contracts based on quotes from market makers of these instruments. The fair     
value represents the amount Eastman Company would expect to receive or pay to   
terminate the agreements at the reporting dates.                                

OTHER FINANCIAL INSTRUMENTS                                                 

    Because of the nature of all other financial instruments, recorded amounts
approximate fair value. In the judgment of management, exposure to third-party  
guarantees is remote and the potential earnings impact pursuant to such         
guarantees is insignificant.                                                    

11. COMMITMENTS                                                                 

LEASE COMMITMENTS                                                               

 Eastman Company leases facilities, principally property, machinery, and
equipment, under cancelable, noncancelable, and month-to-month operating leases.
Future lease payments, reduced by sublease income, follow:                      

                                                                [Download Table]

                                                              (DOLLARS IN
                                                               MILLIONS) 
                                                                         
Year ending December 31, 2001...............................     $ 60    
  2002......................................................       51    
  2003......................................................       44    
  2004......................................................       31    
  2005......................................................       28    
  2006 and beyond...........................................       58    
                                                                 ----    
Total minimum payments required.............................     $272    
                                                                 ====    

If certain operating leases are terminated by Eastman Company, it     
guarantees a portion of the residual value loss, if any, incurred by the lessors
in disposing of the related assets. Management believes, based on current facts 
and circumstances and current values of such equipment, that a material payment 
pursuant to such guarantees is remote.                                          

Rental expense, net of sublease income, was approximately $35 million 
(unaudited) for the first six months 2001 and approximately $75 million for the 
years 2000, 1999, and 1998.                                                     

  F-70

DEFS14A
223rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 223rd
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

OTHER COMMITMENTS                                                               

 Eastman Company had various purchase commitments at the end of 2000 for
materials, supplies, and energy incident to the ordinary conduct of business.   
These commitments, over a period of several years, approximate $0.9 billion.    

    Eastman Chemical is a party to an agreement that allows it to sell certain
domestic accounts receivable under a planned continuous sale program to a third 
party. The agreement permits the sale of undivided interests in domestic trade  
accounts receivable. Receivables sold to the third party totaled $200 million at
June 30, 2001 and December 31, 2000, and $150 million at December 31, 1999.     
Undivided interests in designated receivable pools were sold to the purchaser   
with recourse limited to the receivables purchased. Fees paid by Eastman        
Chemical under this agreement are based on certain variable market rate indices 
and totaled approximately $5 million (unaudited), $12 million, and $4 million in
the first six months 2001 and the years 2000 and 1999, respectively. Average    
monthly proceeds from collections reinvested in the continuous sale program were
approximately $230 million (unaudited), $235 million, and $225 million for the  
first six months 2001 and the years 2000 and 1999, respectively. The portion    
that continues to be recognized by Eastman Chemical in the Statements of        
Financial Position are domestic trade receivables of $110 million (unaudited),  
$73 million, and $103 million for the six months ended June 30, 2001 and the    
years ended December 31, 2000 and December 31, 1999, respectively. For the first
six months 2001 and the years, 2000 and 1999, Eastman Company's portion of the  
receivables sold totaled approximately $107 million (unaudited), $106 million,  
and $79 million, respectively. Additionally, Eastman Company's portion of the   
fees paid under this agreement totaled approximately $3 million (unaudited), $6 
million, and $2 million, respectively, and average monthly proceeds from        
collections reinvested were approximately $123 million (unaudited), $125        
million, and $118 million, respectively. The portion that continues to be       
recognized by Eastman Company in the Statements of Financial Position are       
domestic trade receivables of $58 million (unaudited), $39 million, and $55     
million for the six months ended June 30, 2001 and the years ended December 31, 
2000 and December 31, 1999, respectively.                                       

12. RETIREMENT PLANS                                                            

Eastman Chemical maintains defined benefit plans that provide eligible
employees with retirement benefits. Prior to 2000, benefits were calculated     
using a traditional defined benefit formula based on age, years of service, and 
the employees' final average compensation as defined in the plans. Effective    
January 1, 2000, the defined benefit pension plan, the Eastman Retirement       
Assistance Plan, was amended. Employees' accrued pension benefits earned prior  
to January 1, 2000 are calculated based on previous plan provisions using the   
employee's age, years of service, and final average compensation as defined in  
the plans. The amended defined benefit pension plan uses a pension equity       
formula based on age, years of service, and final average compensation to       
calculate an employee's retirement benefit from January 1, 2000, forward.       
Benefits payable will be the combined pre-2000 and post-1999 benefits.          

    Benefits are paid to employees from trust funds. Contributions to the plan
are made as permitted by laws and regulations.                                  

Pension coverage for employees of Eastman Chemical's international    
operations is provided, to the extent deemed appropriate, through separate      
plans. Eastman Chemical systematically provides for obligations under such plans
by depositing funds with trustees, under insurance policies, or by book         
reserves.                                                                       

Eastman Company's employees participate in Eastman Chemical's defined 
benefit pension plans. No detailed information regarding the funded status of   
the plans and components of net periodic pension costs, as it relates to Eastman
Company is available. The information that follows relates to all of Eastman    
Chemical's pension plans.                                                       

  F-71

DEFS14A
224th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 224th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

    A summary balance sheet of the change in plan assets during 2000 and 1999,
the funded status of the plans, amount recognized in the statement of financial 
position, and the assumptions used to develop the projected benefit obligation  
for Eastman Chemical's U.S. defined pension plans are provided in the following 
tables. Non-U.S. plans are not material.                                        

SUMMARY BALANCE SHEET                                                           

                                                                [Download Table]

                                                              2000     1999  
                                                              -----   ------ 
                                                               (DOLLARS IN   
                                                                MILLIONS)    
                                                                             
CHANGE IN BENEFIT OBLIGATION:                                                
Benefit obligation, beginning of year.......................  $ 877   $1,511 
Service cost................................................     29       41 
Interest cost...............................................     68       87 
Plan amendments.............................................     --     (241)
Actuarial loss (gain).......................................     47      (54)
Curtailments/settlements....................................     --     (429)
Benefits paid...............................................   (101)     (38)
                                                              -----   ------ 
Benefit obligation, end of year.............................  $ 920   $  877 
                                                              =====   ====== 
CHANGE IN PLAN ASSETS:                                                       
Fair value of plan assets, beginning of year................  $ 911   $  990 
Actual return on plan assets................................     47      232 
Eastman Chemical contributions..............................     --      145 
Acquisitions/divestitures/other receipts....................      5       -- 
Benefits paid...............................................    (94)    (456)
                                                              -----   ------ 
Fair value of plan assets, end of year......................  $ 869   $  911 
                                                              =====   ====== 
Benefit obligation in excess of (less than) plan assets.....  $  51   $  (34)
Unrecognized actuarial (gain) loss..........................    (43)       7 
Unrecognized prior service cost.............................    128      140 
Unrecognized net transition asset...........................      8       12 
                                                              -----   ------ 
Net amount recognized, end of year..........................  $ 144   $  125 
                                                              =====   ====== 
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION                    
  CONSIST OF:                                                                
Accrued benefit cost........................................  $ 144   $  125 
Additional minimum liability................................     16       23 
Accumulated other comprehensive income (loss)...............    (16)     (23)
                                                              -----   ------ 
Net amount recognized, end of year..........................  $ 144   $  125 
                                                              =====   ====== 

   Eastman Company's portion of the liability was approximately $106 million
and $97 million as of December 31, 2000 and 1999, respectively.                 

    Eastman Chemical's worldwide net pension cost was $32 million, $58 million
and $93 million in 2000, 1999 and 1998, respectively. Of these amounts,         
approximately $22 million, $43 million and $64 million for 2000, 1999 and 1998, 
respectively, were allocated to Eastman Company.                                

 Eastman Company is expected to retain obligations related to its active
employees following the Distribution. Eastman Chemical will retain obligations  
related to all its retirees as well as its active employees following the       
Distribution. Consequently, future pension costs for Eastman Company after the  
Distribution are likely to be different when compared with historical amounts.  
Separate actuarial calculations will be performed as of the date of the         
Distribution. Eastman Chemical will retain the accrued                          

  F-72

DEFS14A
225th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 225th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

pension liability and related net periodic pension expense for all retired      
employees as of the date of the Distribution.                                   

 A summary of the components of net periodic benefit cost recognized for
Eastman Chemical's U.S. defined benefit pension plans follows:                  

SUMMARY OF BENEFIT COSTS                                                        

                                                                [Download Table]

                                                             2000    1999    1998 
                                                             -----   -----   -----
                                                             (DOLLARS IN MILLIONS)
                                                                                  
COMPONENTS OF NET PERIODIC BENEFIT COST:                                          
Service cost................................................ $ 29    $ 42    $ 47 
Interest cost...............................................   68      86      93 
Expected return on assets...................................  (64)    (78)    (73)
Amortization of:                                                                  
  Transition asset..........................................   (4)     (6)     (4)
  Prior service cost........................................  (12)     (5)      5 
  Actuarial loss............................................    7      14      19 
                                                             ----    ----    ---- 
Net periodic benefit cost................................... $ 24    $ 53    $ 87 
                                                             ====    ====    ==== 

                                                                [Download Table]

                                                             2000   1999   1998 
                                                             ----   ----   ---- 
                                                                                
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:                                 
Discount rate............................................... 7.75%  8.15%  6.75%
Expected return on plan assets.............................. 9.50%  9.50%  9.50%
Rate of compensation increase............................... 4.25%  4.50%  3.75%

 In 1999, Eastman Chemical recorded a pretax gain of $12 million for the
partial settlement of pension benefit liabilities resulting from a large number 
of employee retirements related to a voluntary and involuntary separation       
program. In 1998, a partial settlement and curtailment of pension and other     
postemployment benefit liabilities resulted from the expiration of the Holston  
Defense Corporation contract. This resulted in recognition of approximately $35 
million of previously unrecognized liabilities, but had no effect on earnings   
because Eastman Chemical also recorded a receivable from the Department of Army 
for expected reimbursement of such amounts.                                     

13. POSTRETIREMENT WELFARE PLANS                                                

Eastman Chemical provides life insurance and health care benefits for 
eligible retirees, and health care benefits for retirees' eligible survivors. In
general, Eastman Chemical provides those benefits to retirees eligible under its
U.S. pension plans.                                                             

  A few of Eastman Chemical's non-U.S. operations have supplemental health
benefit plans for certain retirees, the cost of which is not significant.       

Eastman Company is expected to retain obligations associated with the 
postretirement benefits related to its active employees following the           
Distribution. Eastman Chemical will retain obligations associated with          
postretirement benefits related to its retirees as well as its active employees 
following the Distribution. Consequently, future postretirement benefit costs   
after the Distribution are likely to be different when compared with historical 
amounts. Separate actuarial calculations will be performed as of the date of the
Distribution. Eastman Chemical will retain the postretirement benefit obligation
and related net periodic benefit costs for all retired employees as of the date 
of the Distribution.                                                            

  F-73

DEFS14A
226th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 226th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

    The following tables set forth the status of Eastman Chemical's U.S. plans
at December 31, 2000 and 1999:                                                  

SUMMARY BALANCE SHEET                                                           

                                                                [Download Table]

                                                              2000   1999 
                                                              ----   ---- 
                                                              (DOLLARS IN 
                                                               MILLIONS)  
                                                                          
CHANGE IN BENEFIT OBLIGATION:                                             
Benefit obligation, beginning of year.......................  $587   $617 
Service cost................................................     5      7 
Interest cost...............................................    48     43 
Plan participants' contributions............................    --      1 
Actuarial loss (gain).......................................    38    (50)
Benefits paid...............................................   (33)   (31)
                                                              ----   ---- 
Benefit obligation, end of year.............................  $645   $587 
                                                              ====   ==== 
CHANGE IN PLAN ASSETS:                                                    
Fair value of plan assets, beginning of year................  $ 41   $ 45 
Actual return on plan assets................................     2     -- 
Eastman Chemical contributions..............................    26     21 
Plan participants' contributions............................    --      1 
Benefits paid...............................................   (32)   (26)
                                                              ----   ---- 
Fair value of plan assets, end of year......................  $ 37   $ 41 
                                                              ====   ==== 
Benefit obligations in excess of plan assets................  $608   $546 
Unrecognized actuarial loss.................................   (84)   (47)
Unrecognized prior service cost.............................    36     39 
                                                              ----   ---- 
Net amount recognized, end of year..........................  $560   $538 
                                                              ====   ==== 
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION                 
  CONSIST OF:                                                             
Accrued benefit cost........................................  $560   $538 
                                                              ----   ---- 
Net amount recognized, end of year..........................  $560   $538 
                                                              ====   ==== 

   A 1% increase in health care cost trend would increase Eastman Chemical's
2000 service and interest costs by $2 million, and the 2000 benefit obligation  
by $32 million. A 1% decrease in health care cost trend would decrease Eastman  
Chemical's 2000 service and interest costs by $2 million, and the 2000 benefit  
obligation by $28 million.                                                      

   Eastman Company's portion of the liability was approximately $137 million
and $124 million as of December 31, 2000 and 1999, respectively.                

  F-74

DEFS14A
227th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 227th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

The net periodic postretirement benefit cost follows:                 

SUMMARY OF BENEFIT COSTS                                                        

                                                                [Download Table]

                                                             2000     1999     1998 
                                                             -----    -----    -----
                                                              (DOLLARS IN MILLIONS) 
                                                                                    
COMPONENTS OF NET PERIODIC BENEFIT COST:                                            
Service cost................................................  $ 4      $ 7      $ 8 
Interest cost...............................................   48       42       39 
Expected return on assets...................................   (2)      (2)      (2)
Amortization of:                                                                    
  Prior service cost........................................   (3)      (3)      (4)
  Actuarial loss............................................    1        2        1 
                                                              ---      ---      --- 
Net periodic benefit cost...................................  $48      $46      $42 
                                                              ===      ===      === 

   Net periodic benefit costs allocated to Eastman Company in 2000, 1999 and
1998 were $13 million, $12 million and $11 million, respectively.               

                                                                [Download Table]

                                                             2000   1999   1998 
                                                             ----   ----   ---- 
                                                                                
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:                                 
Discount rate............................................... 7.75%  8.15%  6.75%
Expected return on plan assets.............................. 9.50%  9.00%  9.00%
Rate of compensation increase............................... 4.25%  4.50%  3.75%
Health care cost trend                                                          
  Initial................................................... 7.00%  7.00%  7.00%
  Decreasing to ultimate trend of........................... 5.00%  5.25%  4.75%
     in year................................................ 2006   2005   2004 

In 1998, a partial settlement and curtailment of pension and other    
postemployment benefit liabilities resulted from the December 31, 1998,         
expiration of the Holston Defense Corporation contract. This resulted in        
recognition of approximately $35 million of previously unrecognized liabilities,
but had no effect on earnings because Eastman Chemical also recorded a          
receivable from the Department of Army for expected reimbursement of such       
amounts.                                                                        

14. EMPLOYEE SEPARATIONS                                                        

In 1999, Eastman Chemical accrued costs associated with employee      
terminations which resulted from voluntary and involuntary employee separations 
that occurred during the fourth quarter 1999. The voluntary and involuntary     
separations resulted in a reduction of about 1,200 employees. About 760         
employees who were eligible for full retirement benefits left Eastman Chemical  
under a voluntary separation program and approximately 400 additional employees 
were involuntarily separated. Employees separated under these programs each     
received a separation package equaling two weeks' pay for each year of          
employment, up to a maximum of one year's pay and subject to certain minimum    
payments. Eastman Chemical accrued approximately $71 million in 1999 for        
termination allowance payments associated with the separations, of which $6     
million was paid in 1999, $58 million was paid during 2000, and approximately $5
million (unaudited) was paid in the first six months 2001. As of June 30, 2001, 
approximately $2 million (unaudited) remains to be paid. Approximately $42      
million of the $71 million accrued was allocated to Eastman Company.            

  F-75

DEFS14A
228th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 228th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

15. HOLSTON DEFENSE CORPORATION                                                 

Holston Defense Corporation, or Holston, a wholly-owned subsidiary of 
Eastman Chemical, managed the government-owned Holston Army Ammunition Plant in 
Kingsport, Tennessee, referred to as the Facility under contract with the       
Department of Army from 1949 until expiration of the contract, referred to as   
the Contract on December 31, 1998. The Department of Army awarded a contract to 
manage the Facility to a third party effective January 1, 1999.                 

The Contract provided for reimbursement of allowable costs incurred by
Holston. During the fourth quarter 1999, the Department of Army reimbursed      
approximately $20 million of previously expensed pension costs. This            
reimbursement, which was credited to earnings in the fourth quarter 1999, was   
allocated to Eastman Company.                                                   

Holston's net assets and results of operations have historically been 
reported as part of the PCI segment. However, as part of the Distribution       
agreement, Holston's net assets will not be distributed to Eastman Company.     
Consequently its net assets and results of operations will no longer be reported
in such segment.                                                                

16. SEGMENT INFORMATION                                                         

     Eastman Company's products and operations are managed and reported in three
operating segments -- the CASPI segment; the PCI segment; and the SP segment.   

The CASPI segment, which refers to the coatings, adhesives, specialty 
polymers and inks operating segment, manufactures raw materials, additives and  
specialty polymers primarily for the paints and coatings, inks and graphic arts 
and adhesives markets. CASPI's products consist of binders and resins, liquid   
vehicles, pigment concentrates and additives, unsaturated polyester resins and  
polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester
resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as
a key component and in paints and inks to form a protective coating or film and 
bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol 
solvents, maintain the binders in liquid form for ease of application. Pigment  
concentrates and additives, such as cellulosic polymers, Texanol coalescing aid 
and chlorinated polyolefins, provide different properties or performance        
enhancements to the end product. Unsaturated polyester resins are used primarily
in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions
are traditionally used as textile sizes to protect fibers during processing in  
textile manufacturing, and the technology is being extended for use in          
waterbased paints, coatings and inks.                                           

The PCI segment, which refers to the performance chemicals and        
intermediates operating segment, manufactures chemicals for agricultural        
products, fibers, food and beverage ingredients, photographic chemicals,        
pharmaceutical intermediates, polymer compounding, custom synthesis and chemical
manufacturing intermediates.                                                    

   The SP segment, which refers to the specialty plastics operating segment,
manufactures copolyesters and cellulosic plastics for value-added end uses such 
as consumer products, medical devices, electrical connectors, medical packaging,
heavy gauge sheeting for signs and displays, specialty packaging films and tape.

  F-76

DEFS14A
229th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 229th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

                                                        [Enlarge/Download Table]

                                                                            YEAR ENDED DECEMBER 31, 
                                      SIX MONTHS ENDED   SIX MONTHS ENDED   ------------------------
                                       JUNE 30, 2001      JUNE 30, 2000      2000     1999     1998 
                                      ----------------   ----------------   ------   ------   ------
                                                  (UNAUDITED)                                       
                                                          (DOLLARS IN MILLIONS)                     
                                                                                                    
SALES                                                                                               
  Coatings, Adhesives, Specialty                                                                    
     Polymers, and Inks..............      $  748             $  501        $1,219   $  876   $  688
  Performance Chemicals and                                                                         
     Intermediates...................         810                856         1,708    1,616    1,644
  Specialty Plastics.................         361                376           738      695      655
                                           ------             ------        ------   ------   ------
          Consolidated Eastman                                                                      
            total....................      $1,919             $1,733        $3,665   $3,187   $2,987
                                           ======             ======        ======   ======   ======
OPERATING EARNINGS (LOSS)(1)                                                                        
  Coatings, Adhesives, Specialty                                                                    
     Polymers, and Inks..............      $   --             $   77        $  123   $  121   $  147
  Performance Chemicals and                                                                         
     Intermediates...................         (55)                33            87       (2)      88
  Specialty Plastics.................          40                 64           103       80       77
                                           ------             ------        ------   ------   ------
          Consolidated Eastman                                                                      
            total....................      $  (15)            $  174        $  313   $  199   $  312
                                           ======             ======        ======   ======   ======
ASSETS                                                                                              
  Coatings, Adhesives, Specialty                                                                    
     Polymers, and Inks..............      $2,375             $1,612        $2,127   $1,605   $  940
  Performance Chemicals and                                                                         
     Intermediates...................       1,279              1,338         1,327    1,348    1,526
  Specialty Plastics.................         926                980           961      999    1,099
                                           ------             ------        ------   ------   ------
          Consolidated Eastman                                                                      
            total....................      $4,580             $3,930        $4,415   $3,952   $3,565
                                           ======             ======        ======   ======   ======
DEPRECIATION EXPENSE                                                                                
  Coatings, Adhesives, Specialty                                                                    
     Polymers, and Inks..............      $   52             $   44        $   95   $   74   $   60
  Performance Chemicals and                                                                         
     Intermediates...................          42                 47            89       91       92
  Specialty Plastics.................          33                 37            71       72       73
                                           ------             ------        ------   ------   ------
          Consolidated Eastman                                                                      
            total....................      $  127             $  128        $  255   $  237   $  225
                                           ======             ======        ======   ======   ======
CAPITAL EXPENDITURES                                                                                
  Coatings, Adhesives, Specialty                                                                    
     Polymers, and Inks..............      $   23             $   17        $   63   $   42   $   55
  Performance Chemicals and                                                                         
     Intermediates...................          32                 25            55      104      217
  Specialty Plastics.................          25                 13            38       45       86
                                           ------             ------        ------   ------   ------
          Consolidated Eastman                                                                      
            total....................      $   80             $   55        $  156   $  191   $  358
                                           ======             ======        ======   ======   ======

---------------                                                                 

(1) Operating earnings for the first six months 2001 include the effect of      
    nonrecurring charges related to the restructuring of the coatings operations
    and the fine chemicals business and the write-off of in-process research and
    development related to the acquisition of Hercules' resins businesses. These
  nonrecurring items are reflected in segments as follows: CASPI segment $30
million (unaudited) and PCI segment $64 million (unaudited).            

  F-77

DEFS14A
230th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 230th
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

  Operating earnings for 2000 include the effect of nonrecurring charges for
the write-off of in-process research and development related to the     
McWhorter acquisition; charges related to phase-out of operations at    
  Chocolate Bayou, Texas, and Distillation Products Industries in Rochester,
New York; and certain litigation costs. These nonrecurring items are    
  reflected in segments as follows: CASPI segment $9 million and PCI segment
$13 million.                                                            

Operating earnings for 1999 include the effect of a charge for employee 
separations; a charge for the write-off of in-process research and      
 development related to the Lawter acquisition; charges related to certain
discontinued capital projects, underperforming assets, and phase-out of 
operations at certain sites; and other items; partially offset by a gain
  recognized on the reimbursement of previously expensed pension costs and a
gain on pension settlement. These nonrecurring items are reflected in   
    segments as follows: CASPI segment $30 million, PCI segment $32 million, and
SP segment $10 million.                                                 

   Operating earnings for 1998 include the effect of charges related to a fine
    for violation of the Sherman Act; charges related to certain underperforming
  assets and discontinued capital projects; and the impact of a power outage
 at the Kingsport, Tennessee, manufacturing site. These nonrecurring items
    are reflected in segments as follows: CASPI segment $20 million, PCI segment
$27 million, and SP segment $1 million.                                 

GEOGRAPHIC INFORMATION                                                

                                                        [Enlarge/Download Table]

                                                     6 MONTHS                             
                                                      ENDED       YEAR ENDED DECEMBER 31, 
                                                     JUNE 30,     ------------------------
                                                       2001        2000     1999     1998 
                                                   ------------   ------   ------   ------
                                                   (UNAUDITED)                            
                                                            (DOLLARS IN MILLIONS)         
                                                                                          
REVENUES                                                                                  
  United States...................................    $1,308      $2,513   $2,241   $2,248
  All foreign countries...........................       611       1,152      946      739
                                                      ------      ------   ------   ------
          Total...................................    $1,919      $3,665   $3,187   $2,987
                                                      ======      ======   ======   ======
LONG-LIVED ASSETS, NET                                                                    
  United States...................................    $2,128      $2,150   $2,116   $2,196
  All foreign countries...........................       477         459      411      336
                                                      ------      ------   ------   ------
          Total...................................    $2,605      $2,609   $2,527   $2,532
                                                      ======      ======   ======   ======

Revenues are attributed to countries based on customer location. No   
individual foreign country is material with respect to revenues or long-lived   
assets.                                                                         

17. SUPPLEMENTAL CASH FLOW INFORMATION                                          

    Cash flows from operating activities include gains from equity investments
of $3 million (unaudited), $13 million, $9 million, and $11 million for the     
first six months 2001, and the years 2000, 1999, and 1998, respectively.        
Derivative financial instruments and related gains and losses are included in   
cash flows from operating activities. The effect on cash of foreign currency    
transactions and exchange rate changes for all years presented was              
insignificant.                                                                  

   In March 1998, Eastman Chemical issued 536,188 shares of its common stock
with a market value of $35 million to its Employee Stock Ownership Plan as      
partial settlement of the Eastman Performance Plan payout. Eastman Company's    
portion of the market value of shares issued was approximately $28 million. This
noncash transaction is not reflected in the Consolidated Statements of Cash     
Flows.                                                                          

  F-78

DEFS14A
231st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 231st
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

18. ENVIRONMENTAL MATTERS                                                       

    Certain Eastman Chemical manufacturing sites, to be contributed to Eastman
Company in connection with the Distribution, generate hazardous and nonhazardous
wastes, of which the treatment, storage, transportation, and disposal are       
regulated by various governmental agencies. In connection with the cleanup of   
various hazardous waste sites, Eastman Chemical, along with many other entities,
has been designated a potentially responsible party, or PRP, by the U.S.        
Environmental Protection Agency under the Comprehensive Environmental Response, 
Compensation and Liability Act, which potentially subjects PRPs to joint and    
several liability for such cleanup costs. In addition, Eastman Chemical will be 
required to incur costs for environmental remediation and closure/postclosure   
under the federal Resource Conservation and Recovery Act. Adequate reserves for 
environmental contingencies have been established in accordance with Eastman    
Company's policies described in Note 1. Because of expected sharing of costs,   
the availability of legal defenses, and Eastman Chemical's preliminary          
assessment of actions that may be required, it does not believe its liability   
for these environmental matters, individually or in the aggregate, will be      
material to Eastman Company's consolidated financial position, results of       
operations, or competitive position.                                            

Eastman Chemical's environmental protection and improvement cash      
expenditures were approximately $195 million, $220 million and $190 million in  
2000, 1999 and 1998, respectively, including investments in construction,       
operations, and development. Eastman Company's portion of these amounts was     
approximately $109 million, $117 million and $95 million for 2000, 1999, and    
1998, respectively.                                                             

19. LEGAL MATTERS                                                               

GENERAL                                                                         

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

     Under the distribution agreement, Eastman Company has agreed to assume from
Eastman Chemical all potential liabilities relating to these legal proceedings. 
As a result, [although Eastman Chemical will remain the named defendant,]       
Eastman Company will manage the litigation and indemnify Eastman Chemical for   
any costs, expenses or judgments arising from this litigation.                  

SORBATES LITIGATION                                                             

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

  F-79

DEFS14A
232nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 232nd
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

sorbates sold in Canada, and prohibited repetition of the conduct and provides  
for future monitoring. The fine was paid by Eastman Chemical and recognized as a
charge against earnings in the fourth quarter 1999.                             

     In addition, Eastman Chemical, along with other companies, has been named a
defendant in a number of antitrust lawsuits brought subsequent to its plea      
agreements as putative class actions on behalf of certain purchasers of sorbates
in the United States and Canada. In each lawsuit, the plaintiffs allege that the
defendants engaged in a conspiracy to fix the price of sorbates and that the    
plaintiffs paid more for sorbates than they would have paid absent the          
defendants' conspiracy. Seven of the lawsuits are pending in California state   
court in a consolidated action and allege state antitrust and consumer          
protection violations on behalf of classes of indirect purchasers of sorbates;  
six of the lawsuits are pending in the United States District Court for the     
Northern District of California in a consolidated action and allege federal     
antitrust violations on behalf of classes of direct purchasers of sorbates; two 
lawsuits were filed in Tennessee state courts under Tennessee law, on behalf of 
classes of indirect purchasers of sorbates in various states that may permit    
indirect purchaser claims, and one of which actions also included a claim under 
Tennessee law on behalf of a class of direct purchasers of sorbates manufactured
or distributed in Tennessee which has been dismissed in light of the federal    
direct purchaser class settlement; two lawsuits were filed in Wisconsin State   
Court under various state antitrust laws on behalf of a class of indirect       
purchasers of sorbates in those states; two lawsuits were filed in Kansas State 
Court under Kansas antitrust laws on behalf of a class of indirect purchasers of
sorbates in that state; one lawsuit was filed in New Mexico State Court under   
New Mexico antitrust laws on behalf of a class of indirect purchasers of        
sorbates in that state; one lawsuit was filed in the Ontario Superior Court of  
Justice under the federal competition law and pursuant to common law causes of  
action on behalf of a class of direct and indirect purchasers of sorbates in    
Canada; and one lawsuit was filed in the Quebec Superior Court under the federal
competition law on behalf of a class of direct and indirect purchasers of       
sorbates in the Province of Quebec. The plaintiffs in most cases seek damages of
unspecified amounts, attorneys' fees and costs, and other unspecified relief; in
addition, certain of the actions claim restitution, injunction against alleged  
illegal conduct, and other equitable relief. Eastman Chemical reached           
settlements in the direct and indirect purchaser class actions pending in       
California. These settlements were finally approved by the court and Eastman    
Chemical was dismissed with prejudice. One of the two indirect purchaser actions
in Tennessee has been preliminarily approved by the trial court in Davidson     
County, Tennessee, and the claims in the other Tennessee indirect purchaser     
action have been stayed. Eastman Chemical has also reached preliminary          
settlements that would resolve the Wisconsin, New Mexico, and Kansas indirect   
purchaser actions; however, these settlements require further court approval.   
Each of the remaining class actions is in the preliminary discovery stage, with 
no class having been certified to date.                                         

Eastman Chemical has also been included as a defendant in two separate
lawsuits concerning sorbates currently pending in the United States District    
Court for the Northern District of California, one filed on behalf of Dean Foods
Company, Kraft Foods, Inc., Ralston Purina Company, McKee Foods Corporation, and
Nabisco, Inc; and the other filed on behalf of Conopco, Inc. Both lawsuits      
allege that the defendants engaged in a conspiracy to fix the price of sorbates 
in violation of Section One of the Sherman Act and that the plaintiffs were     
direct purchasers of sorbates from the defendants. These plaintiffs elected to  
opt out of the final class action settlement of the federal direct purchaser    
cases in California and are pursuing their claims individually. In addition,    
several indirect purchasers of sorbates have recently opted out of the proposed 
Kansas settlement, and have filed a separate action against Eastman Chemical and
other sorbates producers in state court in Kansas.                              

 Eastman Chemical intends to continue vigorously to defend these actions
unless they can be settled on terms acceptable to the parties. These matters    
could result in Eastman Chemical being subject to monetary damages and expenses.
Eastman Chemical recognized charges to earnings in the fourth quarter 1998, the 
fourth quarter 1999, and the first and second quarters of 2000 for estimated    
costs, including legal                                                          
  F-80

DEFS14A
233rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 233rd
EASTMAN COMPANY AND SUBSIDIARIES                  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)                   

fees, related to the pending sorbates litigation described above. The ultimate  
outcome of these matters cannot presently be determined, however, and they may  
result in greater or lesser liability than that currently provided for in       
Eastman Chemical's financial statements.                                        

20. TRANSACTIONS WITH EASTMAN CHEMICAL                                          

Eastman Company participates in Eastman Chemical's centralized cash   
management system. Under this system, cash received from Eastman Company's      
operations is transferred to Eastman Chemical's centralized cash accounts and   
cash disbursements are funded from the centralized cash accounts. Included in   
the Consolidated Statements of Earnings (Loss) are sales to the Fibers and      
Polymers segments of Eastman Chemical of $337 million (unaudited), $642 million,
$575 million, and $559 million in the first six months 2001 and the years 2000, 
1999 and 1998, respectively. Such sales are made at fully allocated cost. As    
specified in Note 1, Eastman Chemical provided certain general and              
administrative services to Eastman Company. Net interest expense charged to     
Eastman Company represents an allocation from Eastman Chemical of its total     
interest expense. The allocated net interest expense to Eastman Company was $50 
million (unaudited), $88 million, $75 million, and $55 million for the first six
months 2001 and years ended December 31, 2000, 1999 and 1998, respectively.     

21. EASTMAN CHEMICAL EQUITY                                                     

  The following is an analysis of Eastman Chemical's investment in Eastman
Company:                                                                        

                                                        [Enlarge/Download Table]

                                                                    DECEMBER 31,        
                                               JUNE 30,      -------------------------- 
                                                 2001         2000      1999      1998  
                                             ------------    ------    ------    ------ 
                                             (UNAUDITED)                                
                                                       (DOLLARS IN MILLIONS)            
                                                                                        
Balance at beginning of year................    $2,858       $2,634    $2,307    $2,313 
Net income..................................       (41)         162        70       180 
Other comprehensive income (loss)...........       (20)         (44)       (9)        7 
Net transactions with Eastman Chemical......       366          (72)      121      (193)
Acquisition debt assumed by Eastman                                                     
  Chemical..................................        --          178       145        -- 
                                                ------       ------    ------    ------ 
Balance at end of year......................    $3,163       $2,858    $2,634    $2,307 
                                                ======       ======    ======    ====== 

  F-81

DEFS14A
234th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 234th
                                                                      APPENDIX A

DISTRIBUTION AGREEMENT

BETWEEN 

EASTMAN CHEMICAL COMPANY
(TO BE RENAMED VORIDIAN COMPANY)

AND 

EASTMAN COMPANY 

DATED AS OF NOVEMBER 8, 2001

 A-1

DEFS14A
235th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 235th
TABLE OF CONTENTS 

                                                                [Download Table]

                                                                              PAGE
                                                                              ----
                                                                                  
ARTICLE 1        DEFINITIONS.................................................  A-4
  Section 1.01.  Definitions.................................................  A-4
ARTICLE 2        CONTRIBUTIONS AND ASSUMPTION OF LIABILITIES................. A-10
  Section 2.01.  Contribution of Contributed Subsidiaries.................... A-10
  Section 2.02.  Transfers of Certain Assets to Spinco Group................. A-10
  Section 2.03.  Transfers or Retention of Certain Assets by Parent.......... A-10
  Section 2.04.  Transfer of Intellectual Property Rights and Proprietary         
                 Information................................................. A-11
  Section 2.05.  Assumption of Certain Liabilities........................... A-11
  Section 2.06.  Transfer of Agreements; Consent............................. A-11
  Section 2.07.  Resignations................................................ A-12
  Section 2.08.  Limited Representation or Warranties........................ A-12
  Section 2.09.  Guaranties.................................................. A-12
  Section 2.10.  Conveyancing and Assumption Instruments..................... A-13
ARTICLE 3        CERTAIN ACTIONS AT OR PRIOR TO THE DISTRIBUTION; THE             
                 DISTRIBUTION................................................ A-13
  Section 3.01.  Cooperation Prior to the Distribution....................... A-13
  Section 3.02.  Parent Board Action; Conditions Precedent to the                 
                 Distribution................................................ A-14
  Section 3.03.  The Distribution............................................ A-15
  Section 3.04.  Stock Dividend.............................................. A-15
  Section 3.05.  Fractional Shares........................................... A-15
  Section 3.06.  Change of Corporate Name.................................... A-15
ARTICLE 4        ACCESS TO INFORMATION....................................... A-16
  Section 4.01.  Provision of Corporate Records.............................. A-16
  Section 4.02.  Access to Information....................................... A-16
  Section 4.03.  Litigation Cooperation...................................... A-16
  Section 4.04.  Reimbursement............................................... A-17
  Section 4.05.  Treatment of Records........................................ A-17
  Section 4.06.  Preservation of Privilege................................... A-17
  Section 4.07.  Confidentiality............................................. A-18
ARTICLE 5        EMPLOYEE MATTERS............................................ A-18
ARTICLE 6        TAXES....................................................... A-18
ARTICLE 7        CERTAIN OTHER AGREEMENTS.................................... A-18
  Section 7.01.  Intercompany Accounts....................................... A-18
  Section 7.02.  Further Assurances and Consents............................. A-18
  Section 7.03.  Third-Party Beneficiaries................................... A-19
  Section 7.04.  Certain Intercompany Arrangements........................... A-19
ARTICLE 8        INDEMNIFICATION AND OTHER MATTERS........................... A-19
  Section 8.01.  Assumed Liabilities, Exculpation and Indemnification by          
                 Spinco...................................................... A-19
  Section 8.02.  Exculpation and Indemnification by Parent................... A-20
  Section 8.03.  Specific Indemnification Issues............................. A-20
  Section 8.04.  Notice and Payment of Claims................................ A-22
  Section 8.05.  Defense of Third-Party Claims............................... A-22
ARTICLE 9        DISPUTE RESOLUTION.......................................... A-23
  Section 9.01.  Application................................................. A-23
  Section 9.02.  Initial Discussions......................................... A-23
  Section 9.03.  Appeal to Higher Management................................. A-24
  Section 9.04.  Mediation................................................... A-24
  Section 9.05.  Jurisdiction................................................ A-24
ARTICLE 10       MISCELLANEOUS............................................... A-24
  Section 10.01. Notices..................................................... A-24

 A-2

DEFS14A
236th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 236th
                                                                [Download Table]

                                                                            PAGE
                                                                            ----
                                                                                
Section 10.02. Interpretation.............................................. A-25
Section 10.03. Amendments; No Waivers...................................... A-25
Section 10.04. Successors and Assigns...................................... A-25
Section 10.05. Governing Law............................................... A-26
Section 10.06. Counterparts; Effectiveness................................. A-26
Section 10.07. Entire Agreement............................................ A-26
Section 10.08. Severability................................................ A-26
Section 10.09. Termination................................................. A-26
Section 10.10. Survival.................................................... A-26
Section 10.11. Expenses.................................................... A-27

Schedules and Exhibits --                                                       

                                                                [Download Table]
                                                                               
Schedule I    --   Assumed Debt and Debt Realignment Plan                      
Schedule II   --   Contributed Subsidiaries                                    
Schedule      --   Certain Parent Assets                                       
   III                                                                         
Schedule IV   --   Certain Spinco Assets                                       
Schedule V    --   Certain Parent Group Liabilities                            
Schedule VI   --   Certain Spinco Liabilities                                  
Exhibit A     --   Form of Employee Matters Agreement                          
Exhibit B     --   Form of Intellectual Property Transfer and License Agreement
Exhibit C     --   Form of Tax Matters Agreement                               
Exhibit D     --   Form of Amendment to Amended and Restated Certificate of    
                   Incorporation of Eastman Chemical Company                   

 A-3

DEFS14A
237th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 237th
DISTRIBUTION AGREEMENT

This DISTRIBUTION AGREEMENT, dated as of November 8, 2001 (this       
"AGREEMENT") is entered into between EASTMAN CHEMICAL COMPANY, a Delaware       
corporation to be renamed Voridian Company ("Parent"), and EASTMAN COMPANY, a   
Delaware corporation ("Spinco");                                                

WITNESSETH: 

     WHEREAS, Parent is a global chemical company engaged in the manufacture and
sale of a broad portfolio of chemicals, plastics and fibers;                    

    WHEREAS, the Board of Directors of Parent has determined that it is in the
best interests of Parent and its stockholders to separate the businesses of     
Parent into two separate companies, one consisting of the Parent Business (as   
defined herein) and the other consisting of the Spinco Business (as defined     
herein);                                                                        

  WHEREAS, in furtherance of the foregoing, Parent intends to transfer and
assign all of the assets and liabilities related to the Spinco Business to its  
wholly-owned subsidiary, Spinco;                                                

WHEREAS, Parent intends to distribute all of the outstanding shares of
Spinco Common Stock (as defined below) on a pro rata basis to Parent's          
stockholders (provided that all conditions precedent to the Distribution (as    
defined below) have been satisfied or waived);                                  

  WHEREAS, the Board of Directors of Parent has also determined that it is
appropriate and desirable for Parent to change its name to Voridian Company in  
connection with the Distribution;                                               

    WHEREAS, Parent and Spinco intend that the Distribution will be a tax-free
transaction pursuant to the Code (as defined below);                            

WHEREAS, Parent and Spinco propose to enter into prior to or on the   
Distribution Date (as defined below), the Ancillary Agreements (as defined      
below); and                                                                     

WHEREAS, Parent and Spinco desire to set forth herein the principal   
corporate transactions to be effected in connection with the Distribution and   
certain other matters relating to their relationship and their respective rights
and obligations following the Distribution;                                     

NOW, THEREFORE, Parent and Spinco agree as follows:                   

ARTICLE 1 

DEFINITIONS 

    Section 1.01.  Definitions.  The following terms, as used herein, have the
following meanings:                                                             

        "ACTION" means any claim, suit, action, order, arbitration, inquiry,
   investigation or other proceeding of any nature (whether criminal, civil,
    legislative, administrative, regulatory, prosecutorial or otherwise) by or
 before any arbitrator or Governmental Entity or similar Person or body.

          "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2 of the
    Exchange Act (as defined herein) as of the date hereof; provided, however,
   that Parent and Spinco shall not be deemed to be Affiliates of each other
for purposes of this Agreement.                                       

"AGREEMENT" has the meaning set forth in the recitals.      

     "ANCILLARY AGREEMENTS" means all agreements, certificates, deeds,
  instruments, assignments and other written arrangements (other than this
  Agreement) entered into between Parent and Spinco in connection with the
     transactions contemplated hereby, including the Conveyancing and Assumption
     Instruments (as defined herein), the Employee Matters Agreement (as defined
     herein), the Tax Matters Agreement (as defined herein) and the Intellectual
Property Transfer and License Agreement (as defined herein).          

 A-4

DEFS14A
238th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 238th
         "ASSET" or "ASSETS" means any and all assets and properties, tangible
or intangible, real or personal, including the following:             

             (i) cash, notes, accounts receivable (including any and all amounts
    due or to become due under any tariffs, rebates, refunds, discounts,
   insurance policies or similar rights to receive payments) and notes
receivable (whether current or non-current);                    

            (ii) certificates of deposit, banker's acceptances, stock (whether
  certificated or uncertificated), membership interests, partnership
interests, joint venture interests, debentures, evidences of    
indebtedness, certificates of interest or participation in      
profit-sharing agreements, collateral-trust certificates,       
   preorganization certificates or subscriptions, transferable shares,
     investment contracts, voting-trust certificates, fractional undivided
      interests in oil, gas or other mineral rights, puts, calls, straddles,
options and other securities of any kind;                       

    (iii) intangible property rights, inventions, discoveries,
    know-how, United States and foreign patents and patent applications,
    trade secrets, confidential information, registered and unregistered
      trademarks, service marks, service names, trade styles and trade names
and associated goodwill, statutory, common law and registered   
    copyrights, applications for any of the foregoing; rights to use the
foregoing and other rights in, to and under the foregoing;      

            (iv) rights under leases, easements, contracts, licenses, permits,
       distribution arrangements, sales representative or agency arrangements,
sale and purchase agreements, other agreements and business     
arrangements;                                                   

       (v) real estate and buildings and other improvements thereon;

           (vi) leasehold improvements, fixtures, trade fixtures, machinery,
        installations, vehicles, aircraft, railcars, pipelines, containers, fuel
    apparata, equipment (including transportation and office equipment),
tools, dies and furniture;                                      

        (vii) office supplies, production supplies, spare parts, other
miscellaneous supplies and other tangible property of any kind; 

(viii) computer equipment, hardware and software;     

       (ix) raw materials, work-in-process, samples, finished goods,
consigned goods and other inventories;                          

   (x) refundable deposits, prepayments or prepaid expenses;

       (xi) claims, causes of action, choses in action, rights under
express or implied warranties, rights of recovery and rights of 
recoupment or setoff of any kind;                               

           (xii) the rights to receive mail, payments on accounts receivable
and other communications;                                       

        (xiii) lists of customers, records and databases pertaining to
       customers and accounts, personnel records, lists and records pertaining
 to customers, suppliers and agents, and books, ledgers, files and
business records of every kind;                                 

          (xiv) advertising materials, brochures, marketing or promotional
materials, and other printed or written materials;              

           (xv) goodwill as a going concern and other intangible properties;

      (xvi) employee contracts, including any rights thereunder to
restrict an employee from competing in certain respects;        

         (xvii) permits, licenses, applications, filings, notifications,
registrations and authorizations filed with or issued by any    
governmental authority;                                         

(xviii) the capital stock of Subsidiaries;            

 A-5

DEFS14A
239th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 239th
         (xix) manuals, procedures, specifications, standards, schemata,
       designs, drawings, blueprints, studies, surveys, reports and plans; and

             (xx) test data, retained samples, drug master files, laboratory and
toxicological reports and material safety data sheets.          

         "ASSUMED DEBT" means the debt and similar obligations of Parent to be
  assumed by Spinco pursuant to this Agreement as described on Schedule I.

  "BENEFICIAL OWNER" has the meaning set forth in Section 10.04.

        "BUSINESS DAY" means any day other than a Saturday, Sunday or one on
 which banks are authorized or required by law to close in New York, New
York.                                                                 

   "CHANGE OF CONTROL" has the meaning set forth in Section 10.04.

       "CODE" means the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder, including any successor language. 

"COMMISSION" means the Securities and Exchange Commission.  

     "CONTRACT" means any agreement, lease, license, contract, treaty,
  note, mortgage, indenture, franchise, permit, concession, arrangement or
other obligation.                                                     

       "CONTRIBUTED SUBSIDIARIES" means the direct Subsidiaries of Parent,
existing as of the Distribution Date and listed on Schedule II hereto.

"CONTRIBUTION" has the meaning set forth in Section 2.01.   

        "CONTROL" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a  
    Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "CONTROLLING" and "CONTROLLED" have meanings 
correlative to the foregoing.                                         

      "CONVEYANCING AND ASSUMPTION INSTRUMENTS" means, collectively, the
   various agreements, instruments and other documents to be entered into to
effect the transfer of Assets and the assumption of Liabilities in the
manner contemplated by this Agreement, or otherwise arising out of or 
     relating to the transactions contemplated by this Agreement, which shall be
   in such form or forms as Parent and Spinco reasonably agree and as may be
    required by law; provided, however, such agreements, instruments and other
documents may not contain terms inconsistent with the terms of this   
Agreement.                                                            

  "CORPORATE RECORDS" has the meaning set forth in Section 4.01.

    "DAMAGES" means, with respect to any Person, any and all damages
  (including punitive and consequential damages if not otherwise expressly
excluded), losses, Liabilities, fines, costs and expenses incurred or 
suffered by such Person (including all expenses of investigation, all 
reasonable attorneys' and expert witnesses' fees and all other        
     out-of-pocket expenses incurred in connection with any Action or threatened
Action).                                                              

          "DEBT REALIGNMENT PLAN" means the repayment, realignment, refinancing,
exchange and/or modification of certain debt of Parent as described in
Schedule I hereto.                                                    

          "DISTRIBUTION" means the distribution by Parent, pursuant to the terms
   and subject to the conditions hereof, of all of the outstanding shares of
   Spinco Common Stock to the Parent Stockholders of record as of the Record
Date.                                                                 

       "DISTRIBUTION AGENT" means American Stock Transfer & Trust Company.

"DISTRIBUTION DATE" means December 31, 2001.                

"DISTRIBUTION TIME" means midnight on the Distribution Date.

 A-6

DEFS14A
240th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 240th
"DUST CLAIM" has the meaning set forth in Section 8.03(b).  

     "EMPLOYEE MATTERS AGREEMENT" means the Employee Matters Agreement
   substantially in the form attached as Exhibit A hereto to be entered into
 on or before the Distribution Date between Parent and Spinco, with such
changes thereto as Parent and Spinco shall agree.                     

         "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.                 

          "EXCLUSIVE ASSIGNED CONTRACT" means any contract that in Parent's sole
judgment relates exclusively to the Spinco Business.                  

      "FINALLY DETERMINED" means, with respect to any Action, threatened
Action or other matter, that the outcome or resolution of that Action,
threatened Action or other matter either (i) has been decided through 
   binding arbitration or by a Governmental Entity of competent jurisdiction
by judgment, order, award, or other ruling or (ii) has been settled or
 voluntarily dismissed by the parties pursuant to the dispute resolution
   procedure set forth in Section 9.09 or otherwise and, in the case of each
 of clauses (i) and (ii), the claimants' rights to maintain that Action,
  threatened Action or other matter have been finally adjudicated, waived,
 released, discharged, barred or extinguished, and that judgment, order,
     ruling, award, settlement or dismissal (whether mandatory or voluntary, but
     if voluntary that dismissal must be final, binding and with prejudice as to
    all claims specifically pleaded in that Action, threatened Action or other
matter) is subject to no further appeal, vacatur proceeding or        
discretionary review.                                                 

         "FORM 10" means the registration statement on Form 10 filed by Spinco
   with the Commission to effect the registration of Spinco Common Stock (as
defined below) pursuant to the Exchange Act in connection with the    
     Distribution, as such registration statement may be amended or supplemented
from time to time.                                                    

    "GOVERNMENTAL ENTITY" means any federal, state, local or foreign
   government or any court, tribunal, administrative agency or commission or
    other governmental or regulatory authority or agency, domestic, foreign or
supranational.                                                        

        "GROUP" means, as the context requires, the Spinco Group (as defined
below) or Parent and its Subsidiaries (other than the Contributed     
Subsidiaries) and Affiliates.                                         

  "INDEMNIFIED PARTY" has the meaning set forth in Section 8.04.

   "INDEMNIFYING PARTY" has the meaning set forth in Section 8.04.

         "INFORMATION STATEMENT" means the information statement to be sent to
    each Parent Stockholder of record as of the Record Date in connection with
the Distribution.                                                     

      "INSURANCE PROCEEDS" means those monies (i) received by an insured
     from an insurance carrier or (ii) paid by an insurance carrier on behalf of
an insured, in either case net of any applicable premium adjustment,  
  retrospectively-rated premium, deductible, retention, or cost of reserve
paid or held by or for the benefit of such insured.                   

         "INSURED CLAIMS" means those Liabilities that, individually or in the
 aggregate, are covered within the terms and conditions of any insurance
  policy or insurance contract of any kind, current or past, together with
the rights, benefits and privileges thereunder, which prior to the    
    Distribution Time are or at any time were maintained by or on behalf of or
    for the benefit or protection of Parent, Spinco or any of their Affiliates
  (or any of their predecessors) and/or one or more of the current or past
   directors, officers, employees or agents of any of the foregoing, whether
  or not such Liabilities are subject to premium adjustments, deductibles,
retentions, co-insurance, cost of reserve paid or held by or for the  
benefit of the applicable insured(s), uncollectability or             
retrospectively-rated premiums, but only to the extent that such      
 Liabilities are within the limits of any applicable insurance policy or
insurance contract, including aggregates.                             

 A-7

DEFS14A
241st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 241st
    "INTELLECTUAL PROPERTY TRANSFER AND LICENSE AGREEMENT" means the
   Intellectual Property Transfer and License Agreement substantially in the
form attached as Exhibit B hereto to be entered into on or before the 
   Distribution Date between Parent and Spinco, with such changes thereto as
Parent and Spinco shall agree.                                        

"IRS" means the Internal Revenue Service.                   

    "LAW" means any applicable federal, state, local or foreign law,
statute, ordinance, directive, rule, regulation, judgment, order,     
injunction, decree, arbitration award, agency requirement, license or 
permit of any Governmental Entity.                                    

 "LIABILITY" or "LIABILITIES" means any and all claims, debts,
 liabilities, assessments, costs, deficiencies, charges, demands, fines,
penalties, damages, losses, disgorgements and obligations of any kind,
character or description (whether absolute, contingent, matured, not  
matured, liquidated, unliquidated, accrued, known, unknown, direct,   
   indirect, derivative or otherwise) whenever arising, including all costs,
interest and expenses relating thereto (including all expenses of     
     investigation, all reasonable attorneys' and expert witnesses' fees and all
  other out-of-pocket expenses in connection with any Action or threatened
  Action) and expressly including those relating to an Indemnified Party's
own negligence or other misconduct.                                   

"NON-CONTRIBUTED SUBSIDIARIES" means the direct and indirect
Subsidiaries of Parent which are not Contributed Subsidiaries.        

"NYSE" has the meaning set forth in Section 3.01(e).        

"PARENT" has the meaning set forth in the recitals.         

         "PARENT ASSETS" means all Assets, wherever located, real, personal or
    mixed, tangible or intangible, owned, held or used by Parent or any member
  of the Parent Group (including for this purpose any applicable Assets of
the Contributed Subsidiaries) on the Distribution Date and relating   
    primarily to the Parent Business, and shall include: (i) the real property
     listed and personal property described on Schedule III hereto; and (ii) all
    rights of the Parent Group (but excluding any and all rights of the Spinco
Group) under this Agreement and the Ancillary Agreements.             

     "PARENT BUSINESS" means the businesses of the Polymers and Fibers
business segments of Parent and its Subsidiaries and Affiliates, as   
conducted on the Distribution Date.                                   

     "PARENT COMMON STOCK" means the common stock, par value $0.01 per
share, of Parent.                                                     

  "PARENT DAMAGES" has the meaning set forth in Section 8.01(b).

       "PARENT DEBT" means all debt of Parent other than the Assumed Debt.

      "PARENT GROUP" means Parent, all Subsidiaries of Parent other than
   Contributed Subsidiaries and the direct and indirect Subsidiaries thereof
     (including all successors to each of those Persons) and Affiliates thereof.

       "PARENT GROUP LIABILITIES" means all obligations and Liabilities of
     Parent or any member of the Parent Group (including Liabilities arising out
     of any litigation), except the Spinco Group Liabilities, including: (i) the
Parent Debt; (ii) all other Liabilities of Parent under this or any   
    Ancillary Agreement; and (iii) such other Liabilities of Parent as are set
forth on Schedule V hereto.                                           

   "PARENT INDEMNIFIABLE LIABILITIES" has the meaning set forth in
Section 8.02(a).                                                      

   "PARENT INDEMNITEES" has the meaning set forth in Section 8.01.

     "PARENT LITIGATION" has the meaning set forth in Section 8.03(a).

   "PARENT STOCKHOLDERS" means the holders of Parent Common Stock.

 A-8

DEFS14A
242nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 242nd
          "PARTIALLY ASSIGNED CONTRACT" means, with respect to any contract that
    relates, but in Parent's sole judgment does not relate exclusively, to the
  Spinco Business, the portion that relates, in Parent's sole judgment, to
the Spinco Business.                                                  

        "PERSON" means any individual, corporation (including not-for-profit
   corporations), general or limited partnership, limited liability company,
joint venture, estate, trust, association, organization, Governmental 
    Entity or other entity of any kind or nature, unless another definition is
   specifically provided for herein, in which instance such other definition
shall control only in the context in which it is used.                

          "POLICY" means any insurance policy or insurance contract of any kind,
     including any primary, excess or umbrella policy, directors' and officers',
 errors and omissions or commercial general liability policies, life and
     benefits policies and contracts, fiduciary liability, automobile, aircraft,
property and casualty, workers' compensation and employee dishonesty  
    insurance policies, bonds and self-insurance and captive insurance company
     arrangements, together with the rights, benefits and privileges thereunder.

        "PROXY STATEMENT" means the proxy statement of Parent filed with the
Commission pursuant to the Exchange Act in connection with the        
Restructuring.                                                        

          "RECORD DATE" means the date determined by Parent's Board of Directors
     (or by a committee of that Board or any other Person acting under authority
   duly delegated to that committee or Person by Parent's Board of Directors
     or a committee of that Board) as the record date for determining the Parent
Stockholders of record entitled to receive the Distribution.          

"REQUEST" has the meaning set forth in Section 4.03(b).     

       "RESTATED SPINCO BYLAWS" means the restated bylaws of Spinco, which
shall be in such form as the Board of Directors of Spinco reasonably  
determines.                                                           

"RESTATED SPINCO CHARTER" means the restated certificate of 
incorporation of Spinco, which shall be in such form as the Board of  
Directors of Spinco reasonably determines.                            

    "RESTRUCTURING" means the Contributions pursuant to Section 2.01
   hereof, the settlement of intercompany accounts, the Distribution and the
other transactions contemplated by this Agreement and the Ancillary   
Agreements.                                                           

          "SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.                         

       "SPECIAL MEETING RECORD DATE" means the date determined by Parent's
 Board of Directors (or by a committee of that Board or any other Person
acting under authority duly delegated to that committee or Person by  
 Parent's Board of Directors or a committee of that Board) as the record
    date for determining the Parent Stockholders of record entitled to receive
the Proxy Statement and vote on the Restructuring.                    

"SPINCO" has the meaning set forth in the recitals.         

         "SPINCO ASSETS" means all Assets, wherever located, real, personal or
   mixed, tangible or intangible, owned, held or used by Parent or Spinco or
any member of their respective Groups (including for this purpose the 
Contributed Subsidiaries) on the Distribution Date and relating to the
Spinco Business, and shall include: (i) the real property listed and  
   personal property described on Schedule IV hereto; (ii) all rights of the
Spinco Group (but excluding any and all rights of Parent) under this  
 Agreement and the Ancillary Agreements; and (iii) any and all Assets of
Parent that are not Parent Assets.                                    

      "SPINCO BUSINESS" means the businesses of the Coatings, Adhesives,
  Specialty Polymers and Inks, Performance Chemicals and Intermediates and
Specialty Plastics business segments, as well                         

 A-9

DEFS14A
243rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 243rd
as certain strategic initiatives, of Parent and its Subsidiaries and  
Affiliates as conducted on the Distribution Date.                     

    "SPINCO COMMON STOCK" means the common stock, par value $.01 per
share, of Spinco.                                                     

  "SPINCO DAMAGES" has the meaning set forth in Section 8.02(b).

     "SPINCO GROUP" means Spinco, the Contributed Subsidiaries and the
    direct and indirect Subsidiaries thereof (including all successors to each
of those Persons) and Affiliates thereof.                             

         "SPINCO GROUP LIABILITIES" means the following Liabilities (including
Liabilities arising out of any litigation): (i) the Assumed Debt; (ii)
   Liabilities arising from the Spinco Business; (iii) all other Liabilities
of the Spinco Group expressly contemplated by this Agreement or any   
 Ancillary Agreement as Liabilities of or to be assumed by Spinco or any
     member of the Spinco Group; (iv) all Liabilities that would be reflected as
current liabilities or obligations (other than the current portion of 
   long-term debt or Liabilities attributable to Actions) on a balance sheet
 relating solely to the Spinco Business as of the Distribution Date; (v)
  such other Liabilities of Spinco as are set forth on Schedule VI hereto;
and (vi) any other Liabilities that are secured by any Spinco Asset.  

   "SPINCO INDEMNIFIABLE LIABILITIES" has the meaning set forth in
Section 8.01(a).                                                      

      "SPINCO INDEMNITEES" has the meaning set forth in Section 8.02(a).

     "SPINCO LITIGATION" has the meaning set forth in Section 8.03(a).

      "SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which at least a majority of the securities or other  
    ownership interests having by their terms ordinary voting power to elect a
majority of the board of directors or other Persons performing similar
 functions are at the time directly or indirectly owned or controlled by
 such Person or by one or more of its respective Subsidiaries or by such
Person and any one or more of its respective Subsidiaries.            

         "TAX MATTERS AGREEMENT" means the Tax Matters Agreement substantially
in the form of Exhibit C hereto to be entered into on or before the   
   Distribution Date between Parent and Spinco, with such changes thereto as
Parent and Spinco shall agree.                                        

"TRANSFER" has the meaning set forth in Section 2.02.       

ARTICLE 2 

CONTRIBUTIONS AND ASSUMPTION OF LIABILITIES 

  Section 2.01.  Contribution of Contributed Subsidiaries.  Upon the terms
and subject to the conditions set forth in this Agreement and the Ancillary     
Agreements, effective on or prior to the Distribution Time, Parent shall        
contribute to Spinco all of the outstanding shares of capital stock of, or other
ownership interests in, each of the Contributed Subsidiaries (the               
"CONTRIBUTION"), subject to receipt of any necessary consents or approvals of   
third parties or of Governmental Entities.                                      

     Section 2.02.  Transfers of Certain Assets to Spinco Group.  Upon the terms
and subject to the conditions set forth in this Agreement and the Ancillary     
Agreements, effective on or prior to the Distribution Time, subject to receipt  
of any necessary consents or approvals of third parties or of Governmental      
Entities, Parent shall, or shall cause the relevant member of the Parent Group  
to, assign, contribute, convey, transfer and deliver ("TRANSFER") to Spinco or a
member of the Spinco Group designated by Spinco all of the right, title and     
interest of Parent or such member of the Parent Group in and to all Spinco      
Assets that are not owned by Spinco or a Contributed Subsidiary as the same     
shall exist on the Distribution Date or on such later date as a particular      
Transfer may occur.                                                             

Section 2.03.  Transfers or Retention of Certain Assets by Parent.    

      (a) Upon the terms and subject to the conditions set forth in this
   Agreement and the Ancillary Agreements, except as otherwise expressly set
forth therein, effective on or prior to the Distribution              
  A-10

DEFS14A
244th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 244th
  Time, subject to receipt of any necessary consents or approvals of third
parties or of Governmental Entities, Spinco shall, or shall cause the 
   relevant member of the Spinco Group to, Transfer to Parent or a member of
    the Parent Group designated by Parent all of the right, title and interest
    of Spinco or such member of the Spinco Group in and to all Assets relating
primarily to the Parent Business that are not owned by Parent or a    
 Non-Contributed Subsidiary, as the same shall exist on the Distribution
Date or on such later date as a particular Transfer may occur.        

      (b) Notwithstanding anything herein to the contrary, Spinco agrees
   that Parent shall retain all of Parent's right, title and interest in and
   to that certain joint venture known as Primester, and agrees to cooperate
with Parent to allow Parent to, consistent with Section 7.02 hereof,  
maintain the benefits and fulfill its obligations thereunder.         

 Section 2.04.  Transfer of Intellectual Property Rights and Proprietary
Information.  Upon the terms and subject to the conditions set forth in this    
Agreement and the Intellectual Property Transfer and License Agreement,         
effective on or prior to the Distribution Time or as soon as practicable        
thereafter, subject to receipt of any necessary consents or approvals of third  
parties or of Governmental Entities, Parent shall, or shall cause the relevant  
member of the Parent Group to, Transfer to Spinco or a member of the Spinco     
Group designated by Spinco, all intellectual property rights and proprietary    
information that are identified in said agreement.                              

Section 2.05.  Assumption of Certain Liabilities.  Upon the terms and 
subject to the conditions set forth in this Agreement and the Ancillary         
Agreements, except as otherwise expressly set forth therein, effective as of the
Distribution Time (or as of the time of Transfer, if earlier, of the assets to  
which such Liabilities are attributable), Spinco hereby unconditionally (i)     
assumes all Spinco Group Liabilities to the extent not then an existing         
obligation of the Spinco Group and (ii) undertakes to pay, satisfy and discharge
when due in accordance with their terms all Spinco Group Liabilities.           

Section 2.06.  Transfer of Agreements; Consent.                       

         (a) Parent hereby agrees that on or prior to the Distribution Time or
  as soon as reasonably practicable thereafter, subject to the limitations
    set forth in this Agreement, including this Section 2.06 and Section 7.02,
   and the terms of the Ancillary Agreements, it will, and it will cause its
Subsidiaries (other than Spinco or any member of the Spinco Group) to,
assign, transfer and convey to Spinco (or to any member of the Spinco 
   Group) all of Parent's and each such Subsidiary's respective right, title
and interest in and to all Exclusive Assigned Contracts.              

        (b) With respect to Partially Assigned Contracts, on or prior to the
     Distribution Time, or as soon as reasonably practicable thereafter, subject
to the provisions of this Agreement, including this Section 2.06 and  
   Section 7.02, and the terms of the Ancillary Agreements, (i) Parent shall
   use its reasonable efforts to cause each such Partially Assigned Contract
   to be divided into separate contracts for each of the Parent Business and
the Spinco Business or (ii) if such a division is not achieved, Parent
     shall cause the portion of such Partially Assigned Contract that relates to
  the Spinco Business to be assigned to Spinco, or otherwise cause, to the
extent reasonably practicable, the same economic and business terms to
  govern with respect to such portion of such Partially Assigned Contract.

        (c) Notwithstanding anything in this Agreement to the contrary, this
     Agreement shall not constitute an agreement to transfer or assign any Asset
or any claim or right or any benefit arising thereunder or resulting  
     therefrom if an attempted assignment thereof, without the necessary consent
    of a third party, would constitute a breach or other contravention thereof
    or in any way adversely affect the rights of Parent, Spinco, or any member
 of the Parent Group or Spinco Group thereunder. Parent and Spinco shall
  cooperate with each other, keep each other informed and will, subject to
 Section 7.02, use their reasonable efforts to obtain the consent of any
     third party or any Governmental Entity, if any, required in connection with
   the transfer or assignment pursuant to Sections 2.02, 2.03, 2.04, 2.05 or
  this 2.06 of any such Asset or any claim or right or any benefit arising
 thereunder. Until such required consent is obtained, or if such consent
    cannot be obtained or an attempted assignment thereof would be ineffective
    or would adversely affect the rights of the intended transferor thereunder

  A-11

DEFS14A
245th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 245th
     so that the intended transferee would not in fact receive substantially all
  such rights, Parent and Spinco will cooperate in a agreeable arrangement
  under which the intended transferee would obtain the benefits and assume
 the obligations thereunder in accordance with this Agreement, including
    sub-contracting, sub-licensing or sub-leasing to such intended transferee,
     or under which the intended transferor would enforce for the benefit of the
intended transferee and (except as otherwise provided herein or in any
Ancillary Agreement) at the intended transferee's expense any and all 
 rights of the intended transferor against, with the intended transferee
assuming the intended transferor's obligations to, each third party   
   thereto. In the case of any Transfer involving a third party consent, the
transferor shall not agree to any terms of transfer (without the prior
written consent of the transferee) that have the effect of materially 
    altering the rights or benefits arising under any of the particular Parent
   Assets or the Spinco Assets, as the case may be, subject to the Transfer.

Section 2.07.  Resignations.  Parent shall cause all of its employees,
officers or directors who will be employees, officers or directors of the Parent
Group to resign, effective as of the Distribution Time, from all positions as   
officers or directors of any member of the Spinco Group in which they serve, and
Spinco shall cause all its employees, officers or directors to resign, effective
as of the Distribution Time, from all positions as officers or directors of     
Parent or any members of the Parent Group in which they serve.                  

 Section 2.08.  Limited Representation or Warranties.  Parent and Spinco
agree that, except as otherwise expressly provided in any Ancillary Agreement,  
neither is making any representation or warranty whatsoever as to title, freedom
from encumbrances, merchantability, fitness for a particular purpose, or value  
of Assets being transferred. Parent and Spinco also agree that, except as       
otherwise expressly provided in the relevant Conveyancing and Assumption        
Instrument, all Assets transferred to Parent or Spinco, as the case may be,     
shall be conveyed on an "AS IS, WHERE IS" basis and that the party to which such
Assets are to be transferred hereunder shall bear the economic and legal risk   
that such party's or any member of its Group's title to any such Assets shall be
other than good and marketable and free from encumbrances. Parent and Spinco    
agree that, except as otherwise expressly provided in the relevant Conveyancing 
and Assumption Instrument, neither Parent nor Spinco, nor any member of their   
respective Group, is representing or warranting in any way that the obtaining of
any consents or approvals, the execution and delivery of any amendatory         
agreements and the making of any filings or applications contemplated by this   
Agreement will satisfy the provisions of any or all applicable agreements or the
requirements of any or all applicable Laws or judgments, it being agreed that   
the party to which any Assets are transferred or are to be transferred shall    
bear the economic and legal risk that any necessary consents or approvals are   
not obtained or that any requirements of laws or judgments are not complied     
with.                                                                           

Section 2.09.  Guaranties.                                            

        (a) Except as otherwise specified in any Ancillary Agreement, Parent
   and Spinco shall use their commercially reasonable efforts to have, on or
     prior to the Distribution Time or as soon as practicable thereafter, Parent
     and any member of the Parent Group removed as a guarantor in respect of any
guarantees to the extent that they relate to Spinco Liabilities.      

        (b) Except as otherwise specified in any Ancillary Agreement, Parent
   and Spinco shall use their commercially reasonable efforts to have, on or
     prior to the Distribution Time or as soon as practicable thereafter, Spinco
     and any member of the Spinco Group removed as a guarantor in respect of any
guarantees to the extent that they relate to Parent Group Liabilities.

  (c) If Parent or Spinco is unable to obtain, or to cause to be
   obtained, any such required removal as set forth in clauses (a) or (b) of
     this Section 2.09, the applicable guarantor or obligor shall continue to be
  bound as such and, unless not permitted by Law or the terms thereof, the
   relevant beneficiary (i) shall or shall cause one of its Subsidiaries, as
  agent or subcontractor for such guarantor or obligor to pay, perform and
    discharge fully all the obligations or other Liabilities of such guarantor
  or obligor thereunder from and after the date hereof, and (ii) shall not
take any action that would increase the contingent liability of the   
guarantor or obligor thereunder.                                      

  A-12

DEFS14A
246th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 246th
     Section 2.10.  Conveyancing and Assumption Instruments.  In connection with
the transfers of Assets and the assumptions of Liabilities contemplated by this 
Agreement, Parent and Spinco shall execute or cause to be executed by the       
appropriate entities the Conveyancing and Assumption Instruments, including the 
transfer of real property with deeds and the grant of leasehold interests in    
real property as may be appropriate. The transfer of capital stock shall be     
effected by means of delivery of stock certificates and executed stock powers   
and notation on the stock record books of the corporation or other legal        
entities involved, or by such other means as may be required in any non-U.S.    
jurisdiction to transfer title to stock and, to the extent required by          
applicable Law, by notation on public registries.                               

ARTICLE 3 

CERTAIN ACTIONS AT OR PRIOR TO THE DISTRIBUTION; THE DISTRIBUTION 

Section 3.01.  Cooperation Prior to the Distribution.                 

       (a) As promptly as reasonably practicable, but in any case prior to
  the Distribution Date, Parent and Spinco shall prepare, and Spinco shall
   file with the Commission, the Form 10, which shall include or incorporate
   by reference the Information Statement. Parent and Spinco shall use their
reasonable efforts to cause the Form 10 to become effective under the 
   Exchange Act as promptly as reasonably practicable. After the Form 10 has
   become effective, Parent shall mail the Information Statement as promptly
  as reasonably practicable to the Parent Stockholders of record as of the
Record Date.                                                          

       (b) As promptly as reasonably practicable, but in any case prior to
  the Distribution Date, Parent and Spinco shall prepare, and Parent shall
  file with the Commission, the Proxy Statement, which shall include, as a
part thereof or an appendix thereto, the Information Statement. Parent
 shall mail the Proxy Statement as promptly as practicable to the Parent
Stockholders of record as of the Special Meeting Record Date.         

       (c) Parent and Spinco shall cooperate in preparing, filing with the
   Commission and causing to become effective any registration statements or
amendments or supplements thereto that are appropriate to reflect the 
  establishment of, or amendments to, any employee benefit and other plans
contemplated by any of the Ancillary Agreements.                      

        (d) Parent and Spinco shall take all such action as may be necessary
 or appropriate under the securities or blue sky laws of states or other
political subdivisions of the United States in connection with the    
transactions contemplated hereby or by the Ancillary Agreements.      

          (e) Parent and Spinco shall prepare, and Spinco shall file and seek to
   make effective, an application to permit the listing of the Spinco Common
Stock on the New York Stock Exchange (the "NYSE").                    

        (f) Parent and Spinco shall cooperate in preparing and obtaining all
  transferable licenses, permits and authorizations issued by Governmental
   Entities that relate to the Spinco Business but that are held in the name
of Parent or any other member of the Parent Group or any of their     
respective employees, officers, directors, stockholders, agents or    
   otherwise, on behalf of Parent (or its Subsidiaries), which shall be duly
and validly transferred by Parent to Spinco (or a member of the Spinco
Group designated by Spinco). In the event any such Transfer cannot be 
effected prior to the Distribution Date, Parent shall, to the extent  
     permitted by Law, allow Spinco, or the relevant member of the Spinco Group,
to operate under such permits until such Transfer can be effected.    

       (g) Parent and Spinco shall cooperate in taking any and all actions
    necessary to effectuate the Debt Realignment Plan, including provision for
   Spinco to assume all of Parent's rights and obligations under the Assumed
Debt effective on or prior to the Distribution Time.                  

        (h) To the extent that any Transfers contemplated by Article 2 shall
    not have been consummated on or prior to the Distribution Time, Parent and
Spinco shall cooperate to effect such                                 

  A-13

DEFS14A
247th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 247th
Transfers as promptly following the Distribution Time as practicable. 
     Nothing herein shall be deemed to require the Transfer of any Assets or the
  assumption of any Liabilities which, by their terms or operation of law,
cannot be Transferred; provided, however, Parent and Spinco and their 
  respective Subsidiaries and Affiliates shall cooperate to seek to obtain
any necessary consent or approval for the Transfer of all Assets and  
  Liabilities contemplated to be transferred pursuant to Article 2. In the
event that any such Transfer of Assets or Liabilities has not been    
     consummated, from and after the Distribution Date, the party retaining such
   Asset or Liability shall hold such Asset in trust for the use and benefit
of the party entitled thereto (at the expense of the party entitled   
     thereto) or retain such Liability for the account of the party by whom such
  Liability is to be assumed pursuant hereto, as the case may be, and take
    such other action as may be reasonably requested by the party to whom such
    Asset is to be Transferred, or by whom such Liability is to be assumed, as
 the case may be, in order to place such party, insofar as is reasonably
possible, in the same position as would have existed had such Asset or
 Liability been Transferred as contemplated hereby. As and when any such
  Asset or Liability becomes transferable, such Transfer shall be effected
    forthwith. Subject to Section 2.06(c), Parent and Spinco agree that, as of
   the Distribution Date, each shall be deemed to have acquired complete and
     sole beneficial ownership over all of the Assets, together with all rights,
     powers and privileges incident thereto, and shall be deemed to have assumed
     in accordance with the terms of this Agreement, all of the Liabilities, and
  all duties, obligations and responsibilities incident thereto, that such
     party is entitled to acquire or required to assume pursuant to the terms of
this Agreement.                                                       

Section 3.02.  Parent Board Action; Conditions Precedent to the       
Distribution.                                                                   

          (a) Parent's Board of Directors shall establish (or delegate authority
to establish) the Special Meeting Record Date, the Record Date and the
 Distribution Date and any appropriate procedures in connection with the
Distribution.                                                         

  (b) The obligation of both Parent and Spinco to consummate the
Distribution shall be subject to the following conditions:            

         (i) the Form 10 shall have become effective with the Commission
    under the Exchange Act and the Information Statement shall have been
     mailed to all Parent Stockholders of record on or prior to the Record
Date;                                                           

          (ii) the Spinco Common Stock to be delivered in the Distribution
     shall have been approved for listing on the NYSE, subject to official
notice of issuance;                                             

            (iii) the Restated Spinco Charter and Restated Spinco Bylaws shall
be in effect;                                                   

            (iv) all material regulatory approvals necessary to consummate the
    Distribution shall have been received and shall be in full force and
effect;                                                         

   (v) the Contributions, other Transfers and assumptions of
      Liabilities referred to in Article 2 of this Agreement shall have been
effected;                                                       

             (vi) each of the Ancillary Agreements shall have been duly executed
and delivered by the parties thereto;                           

       (vii) no order, preliminary or permanent injunction or decree
      issued by any court or agency of competent jurisdiction or other legal
    restraint or prohibition preventing consummation of the Distribution
      shall be in effect and no other event shall have occurred or failed to
occur that prevents consummation of the Distribution;           

      (viii) the Spinco Board of Directors shall have approved the
Distribution; and                                               

           (ix) the Spinco Board of Directors shall have received an opinion
   from a nationally recognized valuation firm, and shall otherwise be
        reasonably satisfied that, after giving effect to the Restructuring, (i)
    Spinco will not be insolvent or have unreasonably limited capital or
        assets with which to engage in its business, (ii) Spinco will be able to
pay its debts as they become due                                

  A-14

DEFS14A
248th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 248th
        in the usual course of business and (iii) Spinco's total assets will not
be less than the sum of its total liabilities.                  

         (c) The obligations of Parent to consummate the Distribution shall be
subject to the following conditions:                                  

      (i) the Proxy Statement shall have been mailed to all Parent
Stockholders of record on the Special Meeting Record Date;      

     (ii) the Restructuring (including the amendment to Parent's
        certificate of incorporation required by Section 3.06 hereof) shall have
       been approved and adopted by the Parent Stockholders in accordance with
Delaware Law;                                                   

       (iii) Parent shall have received a ruling from the IRS to the
       effect that the Distribution will be a tax-free transaction for federal
   income tax purposes, and such ruling shall be in form and substance
satisfactory to Parent in its sole discretion; and              

           (iv) the Parent Board of Directors shall have received an opinion
   from a nationally recognized valuation firm, and shall otherwise be
       reasonably satisfied that, after giving effect to the Restructuring (i)
    Parent will not be insolvent or have unreasonably limited capital or
        assets with which to engage in its business, (ii) Parent will be able to
    pay its debts as they become due in the usual course of business and
      (iii) Parent's total assets will not be less than the sum of its total
liabilities.                                                    

       (d) Any of the foregoing conditions may be waived by Parent, in its
sole and absolute discretion.                                         

   Section 3.03.  The Distribution.  Subject to the terms and conditions set
forth in this Agreement, (i) immediately prior to the Distribution Time, Parent 
shall deliver to the Distribution Agent, for the benefit of the Parent          
Stockholders of record on the Record Date, a stock certificate or certificates, 
endorsed by Parent in blank, representing all of the then-outstanding shares of 
Spinco Common Stock owned by Parent, (ii) the Distribution shall be effective as
of the Distribution Time and (iii) Parent shall instruct the Distribution Agent 
to distribute, on or as soon as practicable after the Distribution Date, to each
Parent Stockholder of record as of the Record Date one share of Spinco Common   
Stock for every one share of Parent Common Stock so held. Spinco agrees to      
provide all certificates for shares of Spinco Common Stock that Parent shall    
require (after giving effect to Sections 3.04 and 3.05) in order to effect the  
Distribution. Spinco agrees to provide for the Distribution Agent such          
documentation as the Distribution Agent may request in order to effect the      
Distribution. All of the shares of Spinco Common Stock issued in the            
Distribution shall have been duly authorized and shall be fully paid,           
nonassessable and free of preemptive rights, redemption rights, rights of first 
refusal, liens and encumbrances.                                                

    Section 3.04.  Stock Dividend.  On or before the Distribution Date, Spinco
shall issue to Parent as a stock dividend the number of shares of Spinco Common 
Stock that are required to effect the Distribution, as certified by the         
Distribution Agent. In connection with the Distribution, Parent shall deliver to
Spinco for cancellation all of the share certificates currently held by it      
representing Spinco Common Stock.                                               

    Section 3.05.  Fractional Shares.  No certificates representing fractional
shares of Spinco Common Stock will be distributed in the Distribution. The      
Distribution Agent will be directed to determine the number of whole shares and 
fractional shares of Spinco Common Stock allocable to each Parent Stockholder of
record as of the Record Date. Upon the determination by the Distribution Agent  
of such number of fractional shares, as soon as practicable after the           
Distribution Date, the Distribution Agent, acting on behalf of the holders      
thereof, shall sell such fractional shares for cash on the open market in each  
case at the then-prevailing market prices and shall disburse to each holder     
entitled thereto, in lieu of any fractional share, without interest, that       
holder's ratable share of the proceeds of that sale, after making appropriate   
deductions of the amounts required, if any, to be withheld for United States    
federal income tax purposes, and to repay expenses of the Distribution Agent in 
connection with such sale.                                                      

Section 3.06.  Change of Corporate Name.  At or prior to, and to be   
effective immediately after the Distribution Time: (a) Parent shall file with   
the Secretary of the State of Delaware an amendment to its                      
  A-15

DEFS14A
249th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 249th
Amended and Restated Certificate of Incorporation, substantially in the form    
attached hereto as Exhibit D; (b) Parent shall and as applicable, shall cause   
any member of the Parent Group to, file with the applicable Governmental Entity 
amendments to their articles or certificates of incorporation or other          
organizational documents or otherwise take all action necessary to delete from  
their names the word "Eastman" or any names derived therefrom; and (c) Parent   
shall do, or cause to be done, all other acts, including the payment of any fees
required in connection therewith, to cause such amendments or other actions to  
become effective.                                                               

ARTICLE 4 

ACCESS TO INFORMATION 

Section 4.01.  Provision of Corporate Records.  Except as otherwise   
specifically set forth in this Agreement or any Ancillary Agreement, immediately
prior to or as soon as practicable following the Distribution Date, each Group  
shall provide to the other Group all documents, Contracts, books, records and   
data (including minute books, stock registers, stock certificates and documents 
of title) (collectively, "CORPORATE RECORDS") in its possession relating        
primarily to the other Group or its business, assets and affairs (after giving  
effect to the transactions contemplated hereby); provided that if any such      
documents, Contracts, books, records or data relate to both Groups or the       
business and operations of both Groups, each such Group shall provide to the    
other Group true and complete copies of such documents, Contracts, books,       
records or data. Data stored in electronic form shall be provided in the format 
in which it existed at the Distribution Date, except as otherwise specifically  
set forth in this Agreement or any Ancillary Agreement.                         

Section 4.02.  Access to Information.  From and after the Distribution
Date, each Group shall afford promptly to the other Group and its accountants,  
counsel and other designated representatives reasonable access during normal    
business hours to all personnel, documents, Contracts, books, records, computer 
data and other data in such Group's possession relating to such other Group or  
the business and affairs of such other Group (after giving effect to the        
transactions contemplated hereby) (other than data and information subject to   
(i) an attorney-client or other privilege that is not specifically subject to   
the provisions of this Article 4 or (ii) in the case of access provisions in any
joint-defense arrangements between a member or members of one Group and a member
or members of the other Group, the terms of the relevant joint-defense          
agreement), insofar as such access is reasonably required by such other Group,  
including for audit, accounting, litigation, regulatory compliance and          
disclosure and reporting purposes.                                              

 Section 4.03.  Litigation Cooperation.  From and after the Distribution
Date:                                                                           

        (a) Each Group shall use all reasonable efforts to make available to
the other Group and its accountants, counsel, and other designated    
  representatives, upon written request, its current and former directors,
   officers, employees and representatives as witnesses, and shall otherwise
cooperate with the other Group, to the extent reasonably required in  
connection with any Action or threatened Action arising out of either 
     Group's business and operations in which the requesting party may from time
to time be involved and to the extent that there is no conflict in the
Action or threatened Action between the requesting Group and itself.  

         (b) Each Group shall promptly notify the other Group hereto, upon its
   receipt or the receipt by any of its members, of a request or requirement
(by written questions, interrogatories, requests for information or   
documents, subpoenas, civil investigative demands or other similar    
   processes) that relates to the business and operations of the other party
(a "REQUEST") reasonably regarded as calling for the inspection or    
     production of any documents or other information in its possession, custody
    or control, as received from any Person that is a party in any Action, or,
in the event the Person delivering the Request is not a party to such 
 Action, as received from such Person. In addition to complying with the
applicable provisions of Section 4.06, each Group shall assert and    
     maintain, or cause its members to assert and maintain, any applicable claim
   to privilege, immunity, confidentiality or protection in order to protect
such documents and other information from disclosure, and shall seek  

  A-16

DEFS14A
250th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 250th
   to condition any disclosure that may be required on such protective terms
     as may be appropriate. No Group may voluntarily waive, undermine or fail to
  take any action reasonably necessary to preserve an applicable privilege
without the prior written consent of the affected party hereto (or any
affected Group member or Affiliates of any such party) except, in the 
opinion of such party's counsel, as required by law.                  

      (c) As to any Spinco Litigation existing on the Distribution Date,
 Parent hereby waives any conflict that might preclude counsel currently
representing Parent, Spinco or any of their respective Subsidiaries or
Affiliates from representing Spinco or any of its Subsidiaries or     
    Affiliates in connection with Spinco Litigation following the Distribution
Date.                                                                 

      (d) As to any Parent Litigation existing on the Distribution Date,
 Spinco hereby waives any conflict that might preclude counsel currently
representing Parent, Spinco or any of their respective Subsidiaries or
Affiliates from representing Parent or any of its Subsidiaries or     
Affiliates in connection with such Spinco Litigation following the    
Distribution Date.                                                    

         (e) Parent and Spinco shall enter into such joint defense agreements,
in customary form, as Parent and Spinco shall determine are advisable.

    Section 4.04.  Reimbursement.  Except to the extent that any member of one
Group is obligated to indemnify any member of the other Group under Article 9   
for that cost or expense, each Group providing information or witnesses to the  
other Group, or otherwise incurring any expense in connection with cooperating, 
under Sections 4.01, 4.02 or 4.03, shall be entitled to receive from the        
recipient thereof, upon the presentation of reasonably detailed invoices        
therefor, payment for all out-of-pocket costs and expenses that may reasonably  
be incurred in providing such information, witnesses or cooperation.            

   Section 4.05.  Treatment of Records.  Except as otherwise required by law
or agreed to in writing, upon compliance with the requirements set forth in     
Section 4.01, each of Parent and Spinco shall, and shall cause the members of   
its respective Group to, destroy or otherwise dispose of any photocopies or     
similar reproductions of all Corporate Records provided to, or relating         
primarily to, the other Group or its business, assets and affairs (after giving 
effect to the Restructuring); provided, however, that prior to any such         
destruction, the other party shall be provided the opportunity to take          
possession of such records if it so desires. Any Corporate Records received by  
any member of one Group after the Distribution Date and relating primarily to   
the other Group or its business, assets or affairs shall promptly be provided to
such other Group, and retained, in accordance with the procedures set forth in  
Section 4.01 and this Section 4.05. Notwithstanding the above, there shall be no
requirement for Parent or Spinco, or any members of their respective Groups, to 
destroy or otherwise dispose of any Corporate Records (or photocopies or similar
reproductions thereof) to the extent that such Corporate Records relate to its  
business, assets and affairs (after giving effect to the Restructuring).        

     Section 4.06.  Preservation of Privilege.  Parent and Spinco recognize that
as a consequence of the transactions contemplated by this Agreement and the     
Ancillary Agreements, they may have common interests in the defense of certain  
pending or threatened litigation that may necessitate the exchange between      
Parent and Spinco or their counsel of documents or other information that is    
subject to the attorney-client privilege, the work product doctrine or other    
legally recognized privileges, protections or immunities from discovery. Each of
Parent and Spinco agree to take in addition to, and not in limitation of, its   
obligations under Section 4.03(b) all reasonable efforts to protect and         
maintain, and to cause its Affiliates to protect and maintain, any applicable   
claim to privilege, immunity, protection or confidentiality in order to protect 
such documents and other information from improper disclosure or use. In        
addition to, and not in limitation of, its obligations under Section 4.03(b) and
without limiting the generality of the foregoing, neither Parent nor Spinco nor 
their respective Affiliates may voluntarily waive or undermine, or fail to      
defend in a commercially reasonable manner, any privilege or protection or take 
or fail to take any other commercially reasonable action (a) that could result  
in the disclosure of any common-interest or joint-defense materials to any      
Person that is neither a party to this Agreement nor an Affiliate of any such   
party or (b) that would have the effect of waiving or undermining such privilege
or protection, in either                                                        

  A-17

DEFS14A
251st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 251st
case, without the prior written consent of the affected party and any affected  
Affiliate of such affected party.                                               

Section 4.07.  Confidentiality.  Except as may be more specifically   
addressed in any Ancillary Agreement, each party shall hold and shall cause its 
consultants and advisors to hold in strict confidence, unless compelled to      
disclose by judicial or administrative process or, in the opinion of its        
counsel, by other requirements of Law, all information known to be confidential 
or proprietary (other than any such information relating solely to the business 
or affairs of such party) concerning the other party hereto furnished it by such
other party or its representatives pursuant to this Agreement (except to the    
extent that such information can be shown to have been (i) previously known by  
the party to which it was furnished, (ii) in the public domain through no fault 
of the party to which it was furnished or (iii) independently developed by the  
receiving party), and each party shall not release or disclose such information 
to any other person, except its auditors, attorneys, financial advisors, bankers
and other consultants and advisors who shall be advised of the provisions of    
this Section 4.07. Each party shall be deemed to have satisfied its obligation  
to hold confidential information concerning or supplied by the other party if it
exercises the same care as it takes to preserve confidentiality for its own     
similar information.                                                            

ARTICLE 5 

EMPLOYEE MATTERS

   Parent and Spinco agree to effectuate certain understandings with respect
to employee matters and employee benefit arrangements pursuant to the terms and 
conditions of the Employee Matters Agreement.                                   

ARTICLE 6 

TAXES 

  Parent and Spinco hereto agree to effectuate certain understandings with
respect to tax matters generally pursuant to the terms and conditions of the Tax
Matters Agreement.                                                              

ARTICLE 7 

CERTAIN OTHER AGREEMENTS

Section 7.01.  Intercompany Accounts.                                 

          (a) Except as otherwise specifically set forth herein or in any of the
   Ancillary Agreements, all intercompany loan balances, accounts receivable
and accounts payable between any member of one Group and any member of
  another Group in existence at the Distribution Time shall be settled and
     paid in full, in cash or other immediately available funds, by the party or
     parties owing such obligations as soon as practicable (but in no event more
than 60 calendar days after the Distribution Time). If, after the     
  Distribution Time, either party receives payments belonging to the other
   party, the recipient shall promptly account for and remit said payment to
the other party.                                                      

       (b) At or prior to the Distribution Date, each of Parent and Spinco
shall enter into, or, where applicable, shall cause their respective  
Subsidiaries to enter into, the Ancillary Agreements as necessary or  
appropriate in order to effect the transactions contemplated hereby.  

     Section 7.02.  Further Assurances and Consents.  In addition to the actions
specifically provided for elsewhere in this Agreement, each of Parent and Spinco
shall use its reasonable efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, all things, reasonably necessary, proper or         
advisable under applicable Laws, regulations and agreements or otherwise to     
consummate and make effective the transactions contemplated by this Agreement,  
including using its reasonable efforts to obtain any consents and approvals, to 
enter into all amendatory agreements and to make any filings and applications   
necessary or desirable in order to consummate the transactions contemplated by  
this Agreement; provided that no                                                

  A-18

DEFS14A
252nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 252nd
party hereto shall be obligated to pay any consideration therefor (except for   
filing fees and other similar charges) to any third party from whom such        
consents or approvals are requested or to take any action or omit to take any   
action if the taking of or the omission to take such action would be            
unreasonably burdensome to the party, its Group or its Group's business. Parent 
and Spinco agree to enter into and execute such additional documents as may be  
reasonably necessary, proper or advisable to effect the transactions            
contemplated by this Agreement or the Ancillary Agreements; provided, however,  
that such additional documents shall not diminish any of the rights granted or  
increase any of the Liabilities assumed under this Agreement or the Ancillary   
Agreements.                                                                     

Section 7.03.  Third-Party Beneficiaries.  Nothing contained in this  
Agreement is intended to confer upon any Person or entity other than the parties
hereto and their respective successors and permitted assigns, any benefit, right
or remedies under or by reason of this Agreement, except that the provisions of 
Article 8 shall inure to the benefit of the Parent Indemnitees and the Spinco   
Indemnitees.                                                                    

Section 7.04.  Certain Intercompany Arrangements.  Following the      
Distribution Date, Parent and Spinco shall discuss in good faith the provision  
of any services and products to be provided by the other, but which             
inadvertently were not the subject of a written agreement. Nothing in this      
Section 7.04, however, shall require or authorize Parent or Spinco to provide   
and charge each other for any services other than on the terms and conditions   
specified in this Agreement or the Ancillary Agreements.                        

ARTICLE 8 

INDEMNIFICATION AND OTHER MATTERS 

Section 8.01.  Assumed Liabilities, Exculpation and Indemnification by
Spinco.                                                                         

        (a) Subject to the provisions of Section 8.04 hereof, upon, from and
after the Distribution Date, Spinco shall, without any further        
    responsibility or liability of, or recourse to, Parent or any Affiliate of
Parent or any of their respective directors, stockholders, officers,  
     employees, agents, consultants, representatives, successors, transferees or
assignees (collectively, the "PARENT INDEMNITEES"), absolutely and    
irrevocably assume and be solely liable and responsible for the Spinco
   Group Liabilities. Neither Parent nor any of the Parent Indemnitees shall
   be liable to Spinco or any Affiliate of Spinco or any of their respective
directors, stockholders, officers, employees, agents, consultants,    
  customers, representatives, successors, transferees or assignees for any
     reason whatsoever (i) on account of any Spinco Group Liabilities or (ii) on
     account of any Damages arising out of or associated with the conduct of (or
any Action alleged to arise out of or be associated with) the Spinco  
 Business following the Distribution Date or the breach by Spinco or any
    member of the Spinco Group of any of its obligations under this Agreement;
   provided that Parent shall remain liable to Spinco for any willful breach
by Parent or any member of the Parent Group of any of its or their    
    obligations under this Agreement. The matters with respect to which Spinco
  assumes liability pursuant to clauses (i) and (ii) above are referred to
herein as the "SPINCO INDEMNIFIABLE LIABILITIES."                     

         (b) Spinco shall indemnify, defend, save and hold harmless Parent and
     each of the Parent Indemnitees from and against all Liabilities of any kind
or nature whatsoever, (i) arising out of or associated with the Spinco
Indemnifiable Liabilities or (ii) except as otherwise provided in this
    Agreement or any Ancillary Agreement, that otherwise are or are alleged to
be related to, arising from, or associated with the ownership, use,   
possession, operation or conduct of the Spinco Business or the assets,
     business or operations of Spinco before or after the Distribution Date (all
of which are collectively called the "PARENT DAMAGES").               

          (c) Parent Damages with respect to which, but only to the extent that,
    any proceeds are received by Parent, or by any of its Affiliates, from any
    third party insurance policy (and are non-reimbursable by Parent under any
   self insurance policy), shall not be the subject of indemnification under
this Agreement.                                                       

  A-19

DEFS14A
253rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 253rd
Section 8.02.  Exculpation and Indemnification by Parent.             

       (a) Subject to the provisions of Section 8.04 hereof, Parent shall,
    without any further responsibility or liability of, or recourse to, Spinco
or any Affiliate of Spinco or any of their respective directors,      
  stockholders, officers, employees, agents, consultants, representatives,
successors, transferees or assignees (collectively, the "SPINCO       
    INDEMNITEES"), absolutely and irrevocably be solely liable and responsible
for the Parent Group Liabilities. Neither Spinco nor any of the other 
    Spinco Indemnitees shall be liable to Parent or any Affiliate of Parent or
any of their respective directors, stockholders, officers, employees, 
     agents, consultants, customers, representatives, successors, transferees or
assignees for any reason whatsoever (i) on account of any Parent Group
    Liabilities or (ii) on account of any Damages arising out of or associated
with (or any Action alleged to arise out of or be associated with) the
  Parent Business or any other activities of Parent (whether or not in the
    ordinary course of business, and whether occurring before, on or after the
    Distribution Date) or the breach by Parent of any of its obligations under
    this Agreement; provided that Spinco shall remain liable to Parent for any
     willful breach by Spinco or any member of the Spinco Group of any of its or
   their obligations under this Agreement. The matters with respect to which
Parent retains liability pursuant to clauses (i) and (ii) above are   
referred to herein as the "PARENT INDEMNIFIABLE LIABILITIES."         

         (b) Parent shall indemnify, defend, save and hold harmless Spinco and
     each of the Spinco Indemnitees from and against all Liabilities of any kind
or nature whatsoever, (i) arising out of or associated with the Parent
Indemnifiable Liabilities or (ii) except as otherwise provided in this
    Agreement or any Ancillary Agreement, that otherwise are or are alleged to
be related to, arising from, or associated with the ownership, use,   
   possession, operation or conduct of the assets, business or operations of
Parent before or after the Distribution Date, other than the Spinco   
     Indemnifiable Liabilities (all of which are collectively called the "SPINCO
DAMAGES").                                                            

          (c) Spinco Damages with respect to which, but only to the extent that,
any proceeds are received by, or on behalf of, Spinco or by any of its
     Affiliates, from any third party insurance policy (and are non-reimbursable
under any self insurance policy), shall not be the subject of         
indemnification under this Agreement.                                 

Section 8.03.  Specific Indemnification Issues.                       

        (a) The parties hereto acknowledge that the Parent Group Liabilities
   include the litigation identified on Schedule V hereto and any additional
   Actions brought in connection therewith (the "PARENT LITIGATION") and the
   Spinco Group Liabilities include the litigation identified on Schedule VI
hereto and any additional Actions brought in connection therewith (the
 "SPINCO LITIGATION"). Notwithstanding anything in this Agreement to the
contrary: (i) any claims or demands in connection with the Parent     
    Litigation or the Spinco Litigation shall not be deemed third party claims
 for purposes of this Agreement; (ii) Parent, with respect to the Parent
   Litigation, and Spinco, with respect to the Spinco Litigation, shall have
    the exclusive right to (y) control the defense of such litigation, and (z)
 settle, compromise or discharge such litigation; and (iii) Parent, with
  respect to the Spinco Litigation, and Spinco, with respect to the Parent
  Litigation, shall: (y) provide cooperation in litigation pursuant to the
     terms of Section 4.03; and (z) to the extent reasonably requested by Parent
 or Spinco, as the case may be, sign such documents as may be reasonably
necessary to effect or assist in the pursuit, defense, settlement,    
compromise or discharge of such litigation.                           

         (b) Any third party claim brought from or after the Distribution Date
that concerns any matter or state of facts existing prior to the      
Distribution Date with respect to the use, sale, exposure, handling or
    transportation of equipment, products or material alleged to be or contain
asbestos, asbestos-containing material, silica, or silica-containing  
material, and any related claim based on premises liability, successor
liability, co-negligence or strict liability shall constitute a "DUST 
CLAIM." In the event that it is indeterminable whether a Dust Claim   
constitutes a Parent Indemnifiable Liability or a Spinco Indemnifiable
Liability, then notwithstanding anything in this                      
  A-20

DEFS14A
254th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 254th
    Article 8 to the contrary, the Damages from such Dust Claim shall be borne
 75% by Spinco and 25% by Parent, and shall be prosecuted or defended by
   Spinco. Parent hereby appoints Spinco, and Spinco hereby agrees to act as
  Parent's authorized agent to prosecute and defend any such Dust Claim on
    Parent's behalf. Parent agrees to advance expenses and costs in connection
     with such Dust Claim, as and when incurred. Spinco may settle any such Dust
 Claim at any time in Spinco's sole discretion, provided such settlement
   includes a complete, irrevocable and unconditional release of any present
   or future claims that any plaintiff in such Dust Claim might have against
   Parent. Parent agrees to promptly reimburse Spinco for 25% of all Damages
incurred in connection with any Dust Claim upon receipt of reasonably 
detailed invoices therefor.                                           

(c) If the indemnification provided for in this Article 8 is
unavailable to an Indemnified Party with respect to a loss for which  
    indemnification would otherwise be required to be provided pursuant to the
   terms hereof that arises out of or is related to information contained in
the Proxy Statement, Information Statement or Form 10, then the       
   Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
 contribute to the amount paid or payable by such Indemnified Party as a
  result of such loss, in such proportion as is appropriate to reflect the
   relative fault of Parent, on the one hand, and Spinco, on the other hand.
    The relative fault of any party shall be determined by reference to, among
    other things, whether the untrue or alleged untrue statement of a material
   fact or the omission or alleged omission to state a material fact relates
to information supplied by that party or a member of its Group.       

      (d) For the purposes of this Agreement, a claim arising out of the
  sale prior to the Distribution Date of a product to a third party not in
     any way affiliated with Parent or Spinco shall be considered to have arisen
out of the Parent Business or the Spinco Business, and, thus, shall be
considered Parent Litigation or Spinco Litigation, as the case may be,
   depending on whether the product related primarily to the Parent Business
or the Spinco Business, regardless of whether the other party supplied
intermediate, precursor or constituent chemicals.                     

         (e) It is understood and agreed that, with respect to any Liabilities
   or any Actions arising out of or associated with, or alleged to arise out
of or be associated with, an act or omission of any officer, director,
    employee or agent of Parent prior to the Distribution Date, the respective
obligations of Parent and Spinco pursuant to this Agreement (including
   their respective indemnification obligations) shall remain unaffected and
 in full force and effect, regardless of whether such person was, at the
     time of such act or omission, an officer, director, employee or agent whose
     duties related primarily to the Parent Business or the Spinco Business, and
     regardless of whether such Liabilities or Actions are alleged or determined
in any judgment, award or decree after trial to arise out of or be    
     associated with such person's negligence, gross negligence, recklessness or
intentional conduct or culpability.                                   

       (f) It is acknowledged that after the Distribution Date the parties
  will have negotiated business relationships, which relationships will be
    described in contracts, agreements and other documents entered into in the
 normal course of business. Such documents may include agreements by the
parties and their Affiliates and Subsidiaries to supply, after the    
Distribution Date, materials, products and services and to lease      
   facilities, tangible and intangible property. Such business relationships
     shall not be subject to the indemnity provisions hereof, unless the parties
expressly agree to the contrary in the agreements governing such      
relationships.                                                        

      (g) Except as otherwise provided herein, in the event an Action is
brought by a third party in which the liability as between Parent and 
 Spinco is Finally Determined to be joint or in which the entitlement to
  indemnification hereunder is not readily determinable, the parties shall
negotiate in good faith in an effort to agree, as between Parent and  
Spinco, on the proper allocation of liability or entitlement to       
     indemnification, as well as the proper allocation of the costs of any joint
    defense or settlement pursuant to Section 8.05, all in accordance with the
provisions of, and the principles set forth in, this Agreement. In the
    absence of any such agreement, such allocation of liability or entitlement
to indemnification, and such allocation of costs, shall be subject to 
ultimate resolution between Parent and Spinco pursuant to Article 9.  

  A-21

DEFS14A
255th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 255th
Section 8.04.  Notice and Payment of Claims.                          

     (a) If either a party to this Agreement or a person entitled to a
defense and/or indemnification under this Agreement (an "INDEMNIFIED  
PARTY") determines that it is or may be entitled to a defense or      
    indemnification by Parent or Spinco, as the case may be (the "INDEMNIFYING
PARTY"), under this Agreement:                                        

 (i) the Indemnified Party shall deliver promptly to the
Indemnifying Party a written notice and demand for a defense or 
      indemnification, specifying the basis for the claim for defense and/or
       indemnification, the nature of the claim, and, if known, the amount for
    which the Indemnified Party reasonably believes it is entitled to be
indemnified;                                                    

            (ii) the Indemnifying Party shall have 30 days from receipt of the
        notice requesting indemnification within which to either: (w) assume the
     defense of such litigation or claim; (x) pay the claim in immediately
  available funds; (y) reserve its rights pending negotiations under
      Section 8.05 or (z) object in accordance with Section 8.04(b). This 30
day period may be extended by express agreement of the parties. 

  However, if the amount for which the Indemnifying Party may be liable is
not known or reasonably determinable at the time of such notice, the  
    Indemnified Party shall deliver to the Indemnifying Party a further notice
   specifying the amount for which the Indemnified Party reasonably believes
  it is entitled to be indemnified as soon as reasonably practicable after
    such amount is known or reasonably determinable and the Indemnifying Party
     shall have a further opportunity to take action as set forth above. Nothing
in this section shall be interpreted to abrogate or delay a party's   
obligation to provide the other with a defense under this Agreement.  

       (b) An Indemnifying Party may object to, or reserve its rights with
   respect to, the claim for defense and/or indemnification set forth in any
     notice, provided, however, that if the Indemnifying Party does not give the
     Indemnified Party written notice setting forth its objection or reservation
  of rights to such claim (or the amount thereof) and the grounds therefor
  within the same 30-day period (or any extended period), the Indemnifying
Party shall be deemed to have acknowledged its liability to provide a 
defense or for the amount of such claim and the Indemnified Party may 
exercise any and all of its rights under this Agreement and any Law to
    collect such amount or obtain such defense. Any objection to a claim for a
   defense or indemnification shall be resolved in accordance with Article 9
hereof. Anything in this Article to the contrary notwithstanding, the 
    Indemnifying Party shall not without the Indemnified Party's prior written
     consent, which shall not be unreasonably withheld, settle or compromise any
     Action or claim or consent to the entry of any judgment with respect to any
   Action, claim or proceeding for anything other than money damages paid by
the Indemnifying Party unless the settlement does not involve the     
    imposition of any liability on the Indemnified Party or any restriction on
its activities.                                                       

    (c) In addition to and not in derogation of Sections 8.01(c) and
 8.02(c), the right to a defense or indemnification under this Agreement
     applies only insofar as defense and indemnification are not provided for by
   insurance. Nevertheless, the potential availability of insurance coverage
  to Parent or Spinco shall not relieve the other party of its obligations
for defense or indemnification hereunder, or delay either party's     
    obligation to the other to assume a defense or pay any sums due hereunder.

Section 8.05.  Defense of Third-Party Claims.                         

      (a) If the Indemnified Party's claim for Indemnification is based,
 under this Agreement, on an Action, judicial or otherwise, brought by a
third party, and the Indemnifying Party does not object under Section 
    8.04(b) hereof, the Indemnifying Party shall, within the 30-day period (or
    any extended period) referred to in Section 8.04 above, assume the defense
   of such third-party claim at its sole cost and expense. Any such defenses
 shall be conducted by attorneys employed by the Indemnifying Party. The
   Indemnified Party may retain attorneys of its own choosing to participate
in such defense at the Indemnified Party's sole cost and expense.     

  A-22

DEFS14A
256th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 256th
        (b) An Indemnifying Party may object to the claim for defense and/or
 indemnification set forth in any notice, provided, however, that if the
Indemnifying Party does not give the Indemnified Party written notice 
   setting forth its objection to such claim (or the amount thereof) and the
   grounds therefore within the same 30-day period (or any extended period),
   the Indemnifying Party shall be deemed to have acknowledged its liability
  to provide a defense or for the amount of such claim and the Indemnified
   Party may exercise any and all of its rights under this Agreement and any
     Law to collect such amount or obtain such defense. Any objection to a claim
for a defense or indemnification shall be resolved in accordance with 
Article 9 hereof.                                                     

    (c) The Indemnifying Party shall pay to the Indemnified Party in
    immediately available funds the amounts for which the Indemnified Party is
   entitled to be indemnified within 30 days after such third party claim is
Finally Determined (or within such longer period as agreed to by the  
     parties). If the Indemnifying Party does not assume the defense of any such
 third-party claims, the Indemnifying Party shall be bound by the result
 obtained with respect thereto by the Indemnified Party, except that the
 Indemnifying Party has the right to contest that it is obligated to the
Indemnified Party under the terms of this Agreement, provided the     
     Indemnifying Party shall have raised its objection in a timely manner under
Section 8.04(b).                                                      

       (d) In the event an Action is brought by a third party in which the
   liability as between Parent and Spinco is alleged to be joint or in which
     the entitlement to indemnification hereunder is not readily determinable or
as to which there has been a reservation of rights, the parties shall 
     cooperate in a joint defense. Such joint defense shall be under the general
management and supervision of the party which is expected to bear the 
     greater share of the liability; provided, however, that neither party shall
   settle or compromise any such joint defense matter without the consent of
     the other. The costs of such joint defense, any settlement and any award or
    judgment (unless the award or judgment specifies otherwise) shall be borne
   as the parties may agree, or in the absence of such agreement, such costs
shall be borne by the party incurring such costs, subject to ultimate 
resolution pursuant to Article 9 hereof.                              

ARTICLE 9 

DISPUTE RESOLUTION

     Section 9.01.  Application.  Any dispute arising out of or relating to this
Agreement, including the breach or termination hereof, shall be resolved in     
accordance with the procedures specified in this Article 9, which shall be the  
sole and exclusive procedure for the resolution of any such disputes; provided, 
however, that a party may file a complaint to seek a preliminary injunction or  
other provisional judicial relief, if in its sole judgment such action is       
necessary. Despite such action the parties will continue to participate in good 
faith in the procedures set forth in this Article 9 and each party is required  
to continue to perform its obligations under this Agreement pending final       
resolution of any dispute arising out of or relating to this Agreement, unless  
to do so would be impossible or impracticable under the circumstances. All      
negotiations between the parties pursuant to this Article 9 are confidential and
shall be treated as compromise and settlement negotiations for purposes of      
applicable rules of evidence. The requirements of this Article 9 shall not be   
deemed a waiver of any right of termination under this Agreement.               

   Section 9.02.  Initial Discussions.  Any dispute shall be first discussed
by an appropriate senior executive officer of each of the parties or his or her 
designee. Any party may initiate such discussions by giving the other party     
written notice specifying in detail the nature of the dispute. Within 15        
Business Days after delivery of the notice, the receiving party shall submit to 
the other a written response, including a statement of such party's position and
a summary of arguments supporting such position. Within 10 Business Days (or    
such other period as agreed upon by the parties) after receipt of such response,
the executives of both parties shall meet at a mutually acceptable time and     
place, and thereafter as often as they reasonably deem necessary, to attempt to 
resolve the dispute. All reasonable requests for information made by one party  
to the other shall be honored.                                                  

  A-23

DEFS14A
257th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 257th
Section 9.03.  Appeal to Higher Management.  If, in spite of such     
discussions, no mutually acceptable solution is reached within 30 Business Days 
after the delivery of one party's written request to the other party to discuss 
such dispute, any such dispute shall be referred to the respective chief        
executive officers of the parties.                                              

Section 9.04.  Mediation.  If the dispute is not resolved within 30   
Business Days (or such other period as agreed upon by the parties) following the
submission of the dispute to the chief executive officers, the parties shall    
attempt to resolve the dispute employing non-binding mediation under the then-  
current CPR Mediation Procedure. If within 10 Business Days (or any other period
agreed upon by the parties) after the commencement of such mediation the dispute
still has not been resolved, each of the parties may pursue any available legal 
or equitable remedy.                                                            

   Section 9.05.  Jurisdiction.  Any Action seeking to enforce any provision
of, or based on any matter arising out of or in connection with, this Agreement 
or the transactions contemplated hereby may be brought in any court of competent
jurisdiction sitting in the State of Tennessee, and each of the parties hereby  
consents to the jurisdiction of such court (and of the appropriate appellate    
courts therefrom) in any such Action and irrevocably waives, to the fullest     
extent permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such Action in any such court or that any such action
which is brought in any such court has been brought in an inconvenient forum.   
Process in any such Action may be served on any party anywhere in the world,    
whether within or without the jurisdiction of any such court. Without limiting  
the foregoing, each party agrees that service of process on such party as       
provided in this Section 9.05 shall be deemed effective service of process on   
such party.                                                                     

ARTICLE 10

MISCELLANEOUS 

Section 10.01.  Notices.  Any and all notices or other communications 
required or permitted to be given under any of the provisions of this Agreement 
shall be in writing and may be delivered by hand, by certified mail, return     
receipt requested, postage prepaid, or by nationally recognized overnight       
courier service, or by facsimile transmission (with confirmation by return      
facsimile transmission within twenty-four (24) hours) addressed as follows:     

If to Parent:                                                   

Eastman Chemical Company                                    
100 North Eastman Road                                      
Kingsport, Tennessee 37660                                  

Fax No.: (423) 229-1351                                     

Attn: Chief Executive Officer                               

With copy to:                                                   

Eastman Chemical Company                                    
100 North Eastman Road                                      
Kingsport, Tennessee 37660                                  

Fax No.: (423) 229-1351                                     

Attn: General Counsel                                       

If to Spinco:                                                   

Eastman Company                                             
Building 280                                                
200 South Wilcox Drive                                      
Kingsport, Tennessee 37660                                  

Fax No.: (423) 229-1679                                     

Attn: Chief Executive Officer                               

  A-24

DEFS14A
258th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 258th
With copy to:                                                   

Eastman Company                                             
Building 280                                                
200 South Wilcox Drive                                      
Kingsport, Tennessee 37660                                  

Fax No.: (423) 229-1679                                     

Attn: General Counsel                                       

Section 10.02.  Interpretation.  The article, section and paragraph   
headings contained herein are for the purposes of convenience only and are not  
intended to define or limit the contents of said articles, sections or          
paragraphs. Whenever the words "include," "includes" and "including" are used in
this Agreement, they shall be deemed followed by the words "without limitation."
Whenever a reference is made in this Agreement to a "party" or "parties," such  
reference shall be to a party or parties to this Agreement unless otherwise     
indicated. The use of any gender herein shall be deemed to be or include the    
other genders and the use of the singular herein shall be deemed to include the 
plural (and vice versa), wherever appropriate. The use of the words "hereof" and
"herein" and words of similar import shall refer to this entire Agreement and   
not to any particular article, section, subsection, clause, paragraph or other  
subdivision of this Agreement, unless the context clearly indicates otherwise.  
Each party hereto stipulates and agrees that the rule of construction to the    
effect that any ambiguities are to be or any be resolved against the drafting   
party shall not be employed in the interpretation of this Agreement to favor any
party against the other, and that no party, including any drafting party, shall 
have the benefit of any legal presumption (including "meaning of the authors")  
or the detriment of any burden of proof by reason of any ambiguity or uncertain 
meaning contained in this Agreement.                                            

Section 10.03.  Amendments; No Waivers.                               

        (a) Any provision of this Agreement may be amended or waived if, and
    only if, such amendment or waiver is in writing and signed, in the case of
an amendment, by each party, or in the case of a waiver, by the party 
against whom the waiver is to be effective.                           

          (b) No failure or delay by any party in exercising any right, power or
    privilege hereunder shall operate as a waiver thereof nor shall any single
    or partial exercise thereof preclude any other or further exercise thereof
or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any 
rights or remedies provided by law.                                   

   Section 10.04.  Successors and Assigns.  The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their  
respective successors and assigns; provided that neither party may assign,      
delegate or otherwise transfer any of its rights or obligations under this      
Agreement without the prior written consent of the other party hereto, which    
shall not be unreasonably withheld. For purposes hereof, an assignment shall    
include a Change in Control. For purposes of this Section 10.04, a "CHANGE OF   
CONTROL" of a party means the occurrence of any of the following events:        

        (i) such party is merged or consolidated or reorganized into or with
another company or other legal entity, and as a result of such merger,
     consolidation or reorganization less than a majority of the combined voting
power of the then-outstanding securities of such resulting company or 
     entity immediately after such transaction is held directly or indirectly in
     the aggregate by the holders of voting securities of such party immediately
  prior to such transaction, including voting securities issuable upon the
    exercise or conversion of options, warrants or other securities or rights;

         (ii) such party sells or otherwise transfers all or substantially all
    of its assets to another company or other legal entity, and as a result of
     such sale or other transfer of assets, less than a majority of the combined
  voting power or the then outstanding securities of such company or other
entity immediately after such sale or transfer is held directly or    
 indirectly in the aggregate by the holders of voting securities of such
party immediately prior to such sale or transfer, including voting    
 securities issuable upon exercise or conversion of options, warrants or
other securities or rights;                                           

  A-25

DEFS14A
259th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 259th
     (iii) a report is filed on Schedule 13D or Schedule 14D-1 (or any
  successor schedule, form or report), each as promulgated pursuant to the
     Exchange Act, disclosing that any "person" (as that term is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the      
  "BENEFICIAL OWNER" (as that term is used in Rule 13d-3 promulgated under
the Exchange Act) of securities representing 50% or more of the voting
   securities of such party (or any successor thereto by operation of law or
   by reason of the acquisition of all or substantially all of the assets of
such party), including voting securities issuable upon the exercise of
options, warrants or other securities or rights; or                   

       (iv) such party (or any successor thereto by operation of law or by
    acquisition of all or substantially all of the assets of such party) files
a report or proxy statement pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form,
 report or item therein) that a change of control of such party (or such
successor) has occurred;                                              

provided, however, notwithstanding the provisions (c) and (d) above, a "Change  
of Control" shall not be deemed to have occurred solely because (1) the party in
question, (2) an entity in which such party directly or indirectly beneficially 
owns 50% or more of the voting securities or (3) any employee stock ownership   
plan or other employee benefit plan sponsored by such party either files or     
becomes obligated to file a report or proxy statement under or in response to   
Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor form,  
report, schedule or item therein) under the Exchange Act, disclosing beneficial 
ownership by it of voting securities, whether in excess of 50% or otherwise, or 
because such party reports that a change of control of such party has or may    
have occurred or will or may occur in the future by reason of such beneficial   
ownership.                                                                      

Section 10.05.  Governing Law.  Except to the extent governed by the  
Delaware General Corporation Law, this Agreement shall be construed in          
accordance with and governed by the law of the State of Tennessee, without      
regard to the conflict of laws rules thereof.                                   

    Section 10.06.  Counterparts; Effectiveness.  This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.   
This Agreement shall become effective when each party hereto shall have received
a counterpart hereof signed by the other party hereto.                          

Section 10.07.  Entire Agreement.  This Agreement and the Ancillary   
Agreements constitute the entire understanding of the parties with respect to   
the subject matter hereof and thereof and supersede all prior agreements,       
understandings and negotiations, both written and oral, between the parties with
respect to the subject matter hereof and thereof. No representation, inducement,
promise, understanding, condition or warranty not set forth herein or in the    
Ancillary Agreements, has been made or relied upon by any party hereto. This    
Agreement is not intended to address, and should not be interpreted to address, 
the matters specifically and expressly covered by the Ancillary Agreements.     

Section 10.08.  Severability.  If any one or more of the provisions   
contained in this Agreement should be declared invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining      
provisions contained in this Agreement shall not in any way be affected or      
impaired thereby so long as the economic or legal substance of the transactions 
contemplated hereby is not affected in any manner materially adverse to any     
party. Upon such a declaration, the parties shall modify this Agreement so as to
effect the original intent of the parties as closely as possible in an          
acceptable manner so that the transactions contemplated hereby are consummated  
as originally contemplated to the fullest extent possible.                      

Section 10.09.  Termination.  Notwithstanding any provision in this   
Agreement to the contrary, this Agreement may be terminated and the Distribution
amended, modified or abandoned at any time prior to the Distribution, without   
penalty or liability, by and in the sole discretion of Parent and without the   
approval of Spinco or of Parent's stockholders.                                 

Section 10.10.  Survival.  All covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Date and the         
termination of this Agreement.                                                  
  A-26

DEFS14A
260th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 260th
    Section 10.11.  Expenses.  Except as otherwise set forth in this Agreement
or any Ancillary Agreement, all costs and expenses incurred (whether such costs 
and expenses are incurred prior to, on or after the Distribution Date) in       
connection with the preparation, execution, delivery and required implementation
of this Agreement and any Ancillary Agreement, the Proxy Statement, the         
Information Statement (including any registration statement on Form 10 of which 
such Information Statement may be a part) and the Distribution and consummation 
of the transactions contemplated thereby shall be charged to and paid by Parent.
Any amount or expense to be paid or reimbursed by any party hereto to any other 
party hereto shall be so paid or reimbursed promptly after the existence and    
amount of such obligation is determined and demand therefor is made.            

IN WITNESS WHEREOF the parties hereto have caused this Distribution   
Agreement to be duly executed by their respective authorized officers as of the 
date first above written.                                                       

            "PARENT"

                            EASTMAN CHEMICAL COMPANY
                                    (to be renamed Voridian Company)

                                         By:   /s/  Earnest W. Deavenport, Jr.

                                            ------------------------------------

                                            Name: Earnest W. Deavenport, Jr.

                                          Title: Chief Executive Officer

            "SPINCO"

                   EASTMAN COMPANY

                                By:   /s/  J. Brian Ferguson

                                            ------------------------------------

                                   Name: J. Brian Ferguson

                            Title: President

  A-27

DEFS14A
261st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 261st
                                                                      APPENDIX B

(HOULIHAN LOKEY HOWARD & ZUKIN LETTERHEAD)

October 25, 2001                                                                

To The Board of Directors                                                       

of Eastman Chemical Company                                                     

100 North Eastman Road                                                          

Kingsport, TN 37660                                                             

Dear Directors:                                                                 

We understand that Eastman Chemical Company (the "Company") intends to
spin-off all of the outstanding stock of a newly-formed, wholly owned subsidiary
("Eastman Company") that will be a global manufacturer of coatings, adhesives,  
specialty polymers and inks, performance chemicals and intermediates and        
specialty plastics, as well as own the Company's strategic investments. Prior to
the spin-off, the Company will have contributed to Eastman Company substantially
all of the assets, liabilities, and operations of the Company's businesses      
comprising the coatings, adhesives, specialty polymers and inks, performance    
chemicals and intermediates and specialty plastics businesses of the Company, as
well as the Company's strategic investments. Following the spin-off, the Company
will be a global manufacturer of polyethylene terephthalate polymers, acetate   
fibers and polyethylene products. In connection with the spin-off, the Company  
will change its name to Voridian Company ("Voridian"). The spin-off and other   
related transactions are referred to collectively herein as the "Transaction."  

    You have requested our opinion (the "Opinion") as to the matters set forth
below. This Opinion values Eastman Company and Voridian respectively as         
going-concerns (including goodwill), on a pro forma basis, immediately after and
giving effect to the Transaction and the associated indebtedness. For purposes  
of this Opinion, with respect to each of Eastman and Voridian, "fair value"     
shall be defined as the amount at which such company would change hands between 
a willing buyer and a willing seller, each having reasonable knowledge of the   
relevant facts, neither being under any compulsion to act, with equity to both; 
and "present fair saleable value" shall be defined as the amount that may be    
realized if such company's aggregate assets (including goodwill) are sold as an 
entirety, with reasonable promptness in an arm's length transaction under       
present conditions for the sale of comparable business enterprises, as such     
conditions can be reasonably evaluated by Houlihan Lokey Howard & Zukin         
Financial Advisors, Inc. ("Houlihan Lokey"). We have used the same valuation    
methodologies in determining fair value and present fair saleable value for     
purposes of rendering this Opinion. The term "identified contingent liabilities"
shall mean the stated amount of contingent liabilities identified to us and     
valued by responsible officers of Eastman Company and Voridian, upon whom we    
have relied without independent verification. Being "able to pay its debts as   
they become absolute and mature" shall mean that, with respect to each of       
Eastman and Voridian, assuming the Transaction has been consummated as proposed,
such company's financial forecasts for the period 2002 through 2004 indicate    
positive cash flow for such period, including                                   

(HOULIHAN LOKEY HOWARD & ZUKIN LETTERHEAD ADDRESS)

 B-1

DEFS14A
262nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 262nd
(and after giving effect to) the payment of installments due under loans made   
pursuant to the indebtedness incurred in the Transaction, as such installments  
are scheduled at the close of the Transaction. It is Houlihan Lokey's           
understanding, upon which it is relying, that the Company's Board of Directors  
and any other recipient of this Opinion will consult with and rely solely upon  
their own legal counsel with respect to said definitions. No representation is  
made herein, or directly or indirectly by the Opinion, as to any legal matter or
as to the sufficiency of said definitions for any purpose other than setting    
forth the scope of Houlihan Lokey's Opinion hereunder.                          

     Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value," we have not been engaged to identify prospective purchasers or 
to ascertain the actual prices at which and terms on which, Eastman Company and 
Voridian can currently be sold, respectively. Because the sale of any business  
enterprise involves numerous assumptions and uncertainties, not all of which can
be quantified or ascertained prior to engaging in an actual selling effort, we  
express no opinion as to whether Eastman Company or Voridian would actually be  
sold for the amount we believe to be its fair value and present fair saleable   
value.                                                                          

  In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.  
Among other things, we have:                                                    

        1. reviewed the Company's annual reports to shareholders and on Form
10-K for the five fiscal years ended December 31, 2000 and quarterly  
   reports on Form 10-Q for the fiscal quarters ended March 31, and June 30,
2001;                                                                 

    2. reviewed unaudited and pro forma income statements of Eastman
Company for the fiscal year ended December 31, 2000 and the six months
ended June 30, 2001;                                                  

    3. reviewed the unaudited and pro forma balance sheet of Eastman
Company dated June 30, 2001;                                          

         4. reviewed unaudited and pro forma income statements of Voridian for
 the three fiscal years ended December 31, 2000 and the six months ended
June 30, 2001;                                                        

     5. reviewed the unaudited and pro forma balance sheet of Voridian
dated June 30, 2001;                                                  

    6. reviewed forecasts and projections, prepared by the Company's
management and presented on a pro forma basis, with respect to Eastman
  Company and Voridian for the three fiscal years ending December 31, 2002
through December 31, 2004;                                            

7. reviewed draft copies of the following agreements:       

- Distribution Agreement revised October 22, 2001;              

- Tax Sharing and Indemnification Agreement;                    

- Employee Matters Agreement revised October 18, 2001;          

      - Intellectual Property Transfer and License Agreement revised October
22, 2001;                                                                       

- Ethylene Supply Agreement revised October 23, 2001;           

- Acetyl Stream Agreement revised September 28, 2001;           

 - Polyester Products Supply Agreement from the Company to Eastman
revised October 23, 2001;                                     

 - Polyester Products Supply Agreement from Eastman to the Company
revised October 23, 2001;                                     

- Information Services Agreement revised October 1, 2001;       

       - Procurement Agreement from the Company to Eastman revised October 23,
2001;                                                         

     - Procurement Agreement from Eastman to the Company dated October 23,
2001; and                                                     

 B-2

DEFS14A
263rd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 263rd
        - Amendment No. 1 and Waiver to the Company's Five-Year Credit Agreement
dated as of July 13, 2001, revised October 22, 2001.          

8. reviewed the Form 10/A-1, dated October 23, 2001;        

    9. reviewed draft term sheets for proposed debt facilities to be
entered into by both Eastman and Voridian in conjunction with the     
Transaction ("Transaction Bank Facilities");                          

         10. met with certain members of the senior management of the Company,
Eastman Company and Voridian to discuss the operations, financial     
     condition, future prospects and projected operations and performance of the
Company, Eastman Company and Voridian, respectively;                  

11. held discussions with representatives of the independent
   accounting firms and counsel of the Company, Eastman Company and Voridian
to discuss certain matters;                                           

       12. visited certain facilities and business offices of the Company,
Eastman Company and Voridian;                                         

        13. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;                                 

        14. reviewed other publicly available financial data for the Company
and certain companies that we deem comparable to Eastman Company and  
Voridian;                                                             

   15. reviewed drafts of certain documents to be delivered at the
     closing of the Transaction, including, but not limited to, the certificates
of the Company's chief financial officer and/or treasurer; and        

       16. conducted such other studies, analyses and investigations as we
have deemed appropriate.                                              

     We have relied upon and assumed, without independent verification, that the
Eastman Company and Voridian financial forecasts and projections provided to us 
have been prepared in good faith based upon reasonable assumptions, and that    
there has been no material adverse change in the assets, financial condition,   
business or prospects of the Company, Eastman Company or Voridian since the date
of the most recent financial statements made available to us.                   

 We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company, Eastman Company or      
Voridian and do not assume any responsibility with respect to it. We have not   
made any physical inspection or independent appraisal of any of the properties  
or assets of the Company, Eastman Company or Voridian. Our Opinion is           
necessarily based on business, economic, market and other conditions as they    
exist and can be evaluated by us at the date of this letter.                    

    We have assumed that the Transaction Bank Facilities will be refinanced on
or before their respective proposed maturity dates (which occur on or prior to  
December 31, 2004) and, if necessary, will continue to be refinanced through    
December 31, 2004, having material terms and conditions, no less favorable,     
taken as a whole, than those entered into under the respective proposed draft   
term sheets, which assumptions are incorporated in the projections provided to  
us by management.                                                               

   As you are aware, the financing arrangements for both companies following
completion of the Transaction (the "Financing"), the terms of which could have a
material effect on Eastman Company's and Voridian's post-Transaction financial  
results and condition and on our Opinion, have not been finalized; the only     
documentation with respect thereto that we have received is referred to above in
Items 7, 9 and 15 and reflected in Item 6 above. Accordingly, this Opinion is   
subject to the following assumptions and is qualified to the extent thereof. We 
are assuming that:                                                              

      (i) the Financing, including the covenants and terms thereof, will
conform in all material respects to the provisions of the documents   
referred to in Items 7, 9 and 15 above;                               

 B-3

DEFS14A
264th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 264th
       (ii) the Financing, including the covenants and terms thereof, will
     not adversely affect the ability of Eastman Company and Voridian to operate
   following the consummation of the Transaction in a manner consistent with
the information described in Item 6 above;                            

         (iii) Eastman Company and Voridian will be able to borrow the maximum
 amount available at any particular time under the working capital loans
 that will be obtained by the Eastman Company and Voridian in connection
with the Transaction, in accordance with the original terms of the    
applicable loan documents;                                            

     (iv) sources of funds that would be permitted under the Financing
documents to be utilized to supplement operating cash flow of Eastman 
     Company and Voridian, if needed for the payment of debts of Eastman Company
  and Voridian, will include, but not be limited to, sales of assets, sale
and leaseback arrangements and refinancing of debt; and               

        (v) the debt incurred in connection with the Transaction will remain
     outstanding as contemplated by the projections referred to in Item 6 above,
without acceleration or prepayment.                                   

     Based upon and subject to the foregoing, and in reliance thereon, it is our
opinion as of the date of this letter that, with respect to each of Eastman     
Company and Voridian, assuming the Transaction has been consummated as proposed,
immediately after and giving effect to the Transaction:                         

      (a) on a pro forma basis, the fair value and present fair saleable
value of such company's assets would exceed such company's stated     
liabilities and identified contingent liabilities;                    

       (b) such company should be able to pay its debts and liabilities as
they become absolute and mature; and                                  

         (c) the capital remaining in such company after the Transaction would
not be unreasonably small for the business in which it is engaged, as 
management has indicated it is now conducted and is proposed to be    
conducted following the consummation of the Transaction.              

   This Opinion is delivered subject to the conditions, scope of engagement,
limitations and understandings set forth in our engagement letter with the      
Company, dated September 6, 2001, and subject to the understanding that the     
obligations of Houlihan Lokey in the Transaction are solely corporate           
obligations, and no officer, director, employee, agent, shareholder or          
controlling person of Houlihan Lokey shall be subjected to any personal         
liability whatsoever to any person, nor will any such claim be asserted by or on
behalf of you or your affiliates.                                               

                      /s/ HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.

                          HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.

 B-4

DEFS14A
265th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 265th
[FORM OF PAPER PROXY -- FRONT]

EASTMAN CHEMICAL COMPANY LOGO                                                   

C/OCORPORATE ELECTION SERVICES                                                  

P.O. BOX 1150                                                             

PITTSBURGH, PA 15230-1150                                                 

                                                                [Download Table]
                                                   
Shareholder Address Line 1                         
Shareholder Address Line 2  Your Control Number is:
Shareholder Address Line 3  xxxx xxx xxxx          
Shareholder Address Line 4                         
Shareholder Address Line 5                         
Shareholder Address Line 6                         

VOTE BY TELEPHONE OR INTERNET 

QUICK ---- EASY ---- IMMEDIATE

Your telephone or Internet vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card.       

                                                                [Download Table]
                                                                                   
TO VOTE BY TELEPHONE:  CALL TOLL FREE 1-800-542-1160 ANYTIME.                      
                       THERE IS NO CHARGE FOR THIS CALL.                           
                       YOU WILL BE ASKED TO ENTER THE CONTROL NUMBER IN THE BOX    
                       ABOVE.                                                      
                       To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0.   
                       When asked, please confirm your vote by pressing 1.         
TO VOTE BY INTERNET    ACCESS http://www.proxyvoting.com/eastman; YOU WILL BE ASKED
OR REVIEW THE PROXY    TO ENTER THE CONTROL NUMBER IN THE BOX ABOVE.               
STATEMENT:                                                                         

IF YOU VOTE BY TELEPHONE OR INTERNET -- DO NOT MAIL THE PROXY CARD. 

THANK YOU FOR VOTING. 

- PLEASE FOLD AND DETACH CARD AT PERFORATION BEFORE MAILING - 

--------------------------------------------------------------------------------

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS                     

FOR THE SPECIAL MEETING OF SHAREOWNERS TO BE HELD ON DECEMBER 18, 2001 FOR THE  
PURPOSE OF APPROVING THE SEPARATION OF EASTMAN CHEMICAL COMPANY INTO TWO        
INDEPENDENT, PUBLICLY-TRADED COMPANIES, EASTMAN COMPANY AND VORIDIAN COMPANY.   

The undersigned hereby appoints James P. Rogers and Theresa K. Lee as proxies   
with power to act without the other and with power of substitution, and hereby  
authorizes them to represent and vote, as designated on the other side of this  
proxy card, all the shares of stock of Eastman Chemical Company held of record  
as of November 2, 2001 by the undersigned with all the powers that the          
undersigned would possess if present at the special meeting of shareowners of   
Eastman Chemical Company to be held December 18, 2001 or any adjournment or     
postponement thereof. Said proxies will vote on the proposal set forth in the   
Notice of Special Meeting of Shareowners and Proxy Statement as specified on the
reverse side of this card and are authorized to vote in their discretion on any 
other business that may properly come before the meeting. IF A VOTE IS NOT      
SPECIFIED, SAID PROXIES WILL VOTE FOR PROPOSAL 1.                               

Control Number      Account Number      Shares                                  

Shareholder Address Line 1                                                      

Shareholder Address Line 2                                                      

Shareholder Address Line 3                                                      

Shareholder Address Line 4                                                      

Shareholder Address Line 5                                                      

Shareholder Address Line 6                                                      

    ------------------------------------------------------

Signature(s)                                      

    ------------------------------------------------------

Signature(s)                                      

               Date: -----------------                                    , 2001

BAR CODE                                                                        

                                                 Please sign exactly as your
                                                   name(s) appear on this proxy.
                                                 If shares are held jointly,
                                                   all joint owners should sign.
                                             If signing as executor,
                                              administrator, attorney,
                                                trustee or guardian, etc.,
                                                  please give your full title.

DEFS14A
266th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 266th
[FORM OF PAPER PROXY -- BACK] 

ADMISSION TICKET

PLEASE BRING THIS TICKET IF YOU CHOOSE TO ATTEND THE SPECIAL MEETING. 

IT WILL EXPEDITE YOUR ADMITTANCE WHEN PRESENTED UPON YOUR ARRIVAL.

EASTMAN CHEMICAL COMPANY

SPECIAL MEETING OF SHAREOWNERS

TUESDAY, DECEMBER 18, 2001

11:00 A.M.

TOY F. REID EMPLOYEE CENTER 

400 SOUTH WILCOX DRIVE

KINGSPORT, TENNESSEE 37660

--------------------------------------------------------------------------------

- PLEASE FOLD AND DETACH CARD AT PERFORATION -

- PLEASE FOLD AND DETACH CARD AT PERFORATION BEFORE MAILING - 

--------------------------------------------------------------------------------

PROXY                       EASTMAN CHEMICAL COMPANY                       PROXY

THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATION INDICATED. IF NO  
SPECIFICATION IS MADE, IT WILL BE VOTED IN FAVOR OF PROPOSAL 1.                 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1 TO AUTHORIZE THE        
SPIN-OFF OF EASTMAN COMPANY TO SHAREOWNERS OF EASTMAN CHEMICAL COMPANY          

1.PROPOSAL OF THE BOARD OF DIRECTORS TO APPROVE A SPECIAL DIVIDEND TO THE OWNERS
OF THE OUTSTANDING SHARES OF EASTMAN CHEMICAL COMPANY COMMON STOCK OF ALL OF
THE OUTSTANDING SHARES OF COMMON STOCK OF EASTMAN COMPANY, A WHOLLY-OWNED   
SUBSIDIARY OF EASTMAN CHEMICAL COMPANY, ON A PRO RATA BASIS, TO BE COMPLETED
 IN ACCORDANCE WITH THE TERMS OF A DISTRIBUTION AGREEMENT ENTERED INTO BETWEEN
EASTMAN CHEMICAL COMPANY AND EASTMAN COMPANY.                               

                                                                [Download Table]
                                                             
FOR                       AGAINST                     ABSTAIN
[ ]                         [ ]                         [ ]  

2.In their discretion, the proxies are authorized to vote upon such other       
business as may properly come before the meeting.                           

Proxy to be signed and dated on the reverse side

DEFS14A
267th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 267th
[SCRIPT OF DIALOGUE FOR 

REGISTERED SHAREOWNER PROXY VOTING BY TELEPHONE]

SHAREOWNER HEARS THIS SCRIPT                                                    

                                                                [Download Table]
                                                                            
Speech 1        Welcome. Please enter the control number located in the box 
                on the form.                                                

Speech 2        To vote as the Eastman Chemical Company Board recommends    
                Press 1 now; if not, Press 0.                               

Speech 2A       You have voted as the Board recommended. If this is correct,
                press 1. If incorrect, Press 0.                             

Speech 3        Proposal 1:                                                 
                To vote FOR, Press 1; AGAINST, Press 9; ABSTAIN, Press 0.   

Speech 4        Your votes have been cast as follows:                       
                Proposal 1: [For], [Against], [Abstain]                     
                If this is correct, Press 1; if incorrect, Press 0.         

Speech 5        If you would like to vote another proxy, Press 1 now; to end
                this call Press 0 now.                                      

Closing A       Thank you for voting.                                       

Closing B       Your votes have been canceled. Please call again, or mark,  
                sign, date and return your proxy card in the envelope       
                provided. Goodbye.                                          

Closing C       I'm sorry you're having difficulty, please call again or    
                mark, sign, date and return your proxy card in the envelope 
                provided. Goodbye.                                          

DEFS14A
268th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 268th
[TEXT OF COMPUTER SCREENS FOR 

ELECTRONIC DELIVERY OF PROXY STATEMENT TO, AND INTERNET PROXY 

VOTING BY, REGISTERED SHAREOWNERS]

--------------------------------------------------------------------------------

[EASTMAN CHEMICAL COMPANY LOGO] 

--------------------------------------------------------------------------------

WELCOME TO THE

EASTMAN CHEMICAL COMPANY

2001 PROXY VOTING SITE

CLICK HERE TO CONTINUE TO THE SECURE VOTING SITE. 

IF YOUR BROWSER DOES NOT SUPPORT SSL ENCRYPTION, CLICK HERE.

--------------------------------------------------------------------------------

DEFS14A
269th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 269th
--------------------------------------------------------------------------------

[EASTMAN CHEMICAL COMPANY LOGO] 

--------------------------------------------------------------------------------

ENTER YOUR 11-DIGIT CONTROL NUMBER LOCATED ON THE PROXY FORM. 

DO NOT ENTER ANY SPACES. [                  ] 

ENTER YOUR CONTROL NUMBER AND CLICK HERE TO BEGIN 

--------------------------------------------------------------------------------

DEFS14A
270th Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 270th
--------------------------------------------------------------------------------

[EASTMAN CHEMICAL COMPANY LOGO] 

--------------------------------------------------------------------------------

YOUR INTERNET VOTE AUTHORIZES THE PROXIES TO VOTE YOUR SHARES IN THE SAME 

MANNER AS IF YOU MARKED, SIGNED, AND RETURNED YOUR PROXY CARD.

BEFORE YOU VOTE, IF YOU WOULD LIKE TO REVIEW

THE PROXY STATEMENT -- CLICK HERE 

RETURN BY SIMPLY CLOSING THE NEWLY OPENED BROWSER WINDOW. 

IF YOU ENCOUNTER PROBLEMS VIEWING THE JOINT PROXY STATEMENT/INFORMATION 
STATEMENT FOR SPIN-OFF, PLEASE DOWNLOAD THE LATEST VERSION OF ADOBE ACROBAT BY
CLICKING ON THE ICON AND TRY AGAIN. 

[ADOBE LOGO -- GET ACROBAT READER]

THE BOARD OF DIRECTORS RECOMMENDS A VOTE

FOR PROPOSAL 1. 

--------------------------------------------------------------------------------

CLICK HERE TO VOTE AS THE BOARD OF DIRECTORS RECOMMENDS 

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

CLICK HERE TO VOTE AT YOUR DISCRETION 

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

DEFS14A
271st Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 271st
[VOTING SUMMARY -- IF CLICKED "VOTE AS THE BOARD RECOMMENDS"] 

--------------------------------------------------------------------------------

[EASTMAN CHEMICAL COMPANY LOGO] 

--------------------------------------------------------------------------------

I VOTE AS THE BOARD RECOMMENDS

COMMENTS: (150 CHARACTERS)

--------------------------------------------------------------------------------

IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER 

BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, OR AT ANY ADJOURNMENT THEREOF.

CLICK HERE TO REGISTER YOUR VOTE

BACK                                                                            

--------------------------------------------------------------------------------

DEFS14A
272nd Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 272nd
[FIRST SCREEN IF CLICKED "VOTE AT YOUR DISCRETION"] 

--------------------------------------------------------------------------------

[EASTMAN CHEMICAL COMPANY LOGO] 

--------------------------------------------------------------------------------

TO VOTE ON THE PROPOSAL -- CHECK THE APPROPRIATE BOX BELOW: 

THE BOARD RECOMMENDS A VOTE FOR PROPOSAL 1. 

PROPOSAL 1                                                                      

PROPOSAL OF THE BOARD OF DIRECTORS TO APPROVE A SPECIAL DIVIDEND TO THE OWNERS  
OF THE OUTSTANDING SHARES OF EASTMAN CHEMICAL COMPANY COMMON STOCK OF ALL OF THE
OUTSTANDING SHARES OF COMMON STOCK OF EASTMAN COMPANY, A WHOLLY-OWNED SUBSIDIARY
OF EASTMAN CHEMICAL COMPANY, ON A PRO RATA BASIS, TO BE COMPLETED IN ACCORDANCE 
WITH THE TERMS OF A DISTRIBUTION AGREEMENT ENTERED INTO BETWEEN EASTMAN CHEMICAL
COMPANY AND EASTMAN COMPANY.                                                    

FOR   [ ]            AGAINST   [ ]            ABSTAIN   [ ] 

--------------------------------------------------------------------------------

COMMENTS: (150 CHARACTERS)

IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER 

BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, OR AT ANY ADJOURNMENT THEREOF.

CLICK HERE TO REGISTER YOUR VOTE

--------------------------------------------------------------------------------

DEFS14A
Last Page of 273
TOC
1st
Previous
Next
↓Bottom
Just 273rd
[VOTING SUMMARY]

--------------------------------------------------------------------------------

[EASTMAN CHEMICAL COMPANY LOGO] 

--------------------------------------------------------------------------------

THANK YOU FOR VOTING ELECTRONICALLY 

VOTING SUMMARY

YOUR REGISTRATION NUMBER: ____________

PROPOSAL 1:                                                                     

YOU VOTED:         [FOR]         [AGAINST]         [ABSTAIN]                    

COMMENTS:                                                                       

THANK YOU FOR VOTING

--------------------------------------------------------------------------------

IF ANY OF THE ABOVE INFORMATION IS INCORRECT, RETURN TO THE PROXY BALLOT FORM BY
USING THE BACK FEATURE OF YOUR BROWSER PROGRAM.                                 

TO VOTE ANOTHER PROXY -- CLICK HERE                                             

IF THE ABOVE INFORMATION IS CORRECT, THERE IS NO NEED TO MAIL BACK YOUR PROXY   
CARD. PLEASE EXIT YOUR BROWSER PROGRAM AS YOU NORMALLY DO.