-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SPkOqYxGW6JhoBFcWrfBzwj1Jbon1HZ0Tt1lwepSfjdaxQPNkEGdQgZlYaahCHt3 S6KughgLv+jx3HtZYSoEfw== 0000950157-02-000074.txt : 20020414 0000950157-02-000074.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950157-02-000074 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020206 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIBA SPECIALTY CHEMICALS HOLDING INC /FI/ CENTRAL INDEX KEY: 0001035497 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-56040 FILM NUMBER: 02528608 BUSINESS ADDRESS: STREET 1: KLYBECKSTRASSE 141 CITY: CH 4002 BASEL BUSINESS PHONE: 4161696341 MAIL ADDRESS: STREET 1: KLYBECKSTRASSE 141 CITY: CH 4002 BASEL 20-F 1 form_20f.txt FORM 20-F As Filed with the Securities and Exchange Commission on February 6, 2002 _______________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F (Mark One) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Ciba Specialty Chemicals Holding Inc. (Exact name of Registrant as specified in its charter) Switzerland (Jurisdiction of incorporation or organization) Klybeckstrasse 141 4002 Basel Switzerland (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class Name of each exchange - ------------------------------------------ on which registered ----------------------- American Depositary shares, New York Stock Exchange Each representing one half of one ordinary share, nominal value CHF 10 per share Ordinary shares, par value CHF 10 per share* *Not for trading but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission. Securities registered or to be registered pursuant to Section 12(g) of the Act. None ---------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None ---------- (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report, December 31, 2001. 72,130,117 Registered Shares -------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 Item 18 X ----- ----- _______________________________________________________________________________ Table of Contents Page ---- Introduction............................................................1 Currency Translation....................................................1 Cautionary Statement Regarding Forward-Looking Statements...............1 PART I ...............................................................2 Item 1. Identity of Directors, Senior Management and Advisors..........2 Item 2. Offer Statistics and Expected Timetable........................2 Item 3. Key Information................................................2 Item 4. Information on the Company.....................................9 Item 5. Operating and Financial Review and Prospects..................38 Item 6. Directors, Senior Management and Employees....................68 Item 7. Major Shareholders and Related Party Transactions.............76 Item 8. Financial Information.........................................77 Item 9. The Offer and Listing.........................................78 Item 10. Additional Information........................................81 Item 11. Quantitative and Qualitative Disclosures About Market Risk....88 Item 12. Description of Securities Other than Equity Securities........88 PART II ..............................................................89 Item 13 Defaults, Dividend Arrearages and Delinquencies...............89 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds...........................................89 Item 15. [Reserved] Item 16. [Reserved] PART III ..............................................................89 Item 17. Financial Statements..........................................89 Item 18. Financial Statements..........................................89 Item 19. Exhibits......................................................89 Signature..............................................................92 i Introduction This Annual Report on Form 20-F relates to the registered shares with a nominal value of 10 Swiss francs per share (the "Shares") of Ciba Specialty Chemicals Holding Inc., the American Depositary Shares ("ADSs"), each representing one half of one Share, and the American Depositary Receipts ("ADR") evidencing the ADSs under the Deposit Agreement among the Company, Citibank, N.A. (the "Depositary"), and the registered holders and beneficial owners from time to time of the ADRs. In this Annual Report, "Company" refers to Ciba Specialty Chemicals Holding Inc. and its consolidated subsidiaries. In certain cases, where indicated or where the context requires it, "Company" refers to Ciba Specialty Chemicals Holding Inc. The consolidated financial statements and selected consolidated financial data as of December 31, 2001, 2000, 1999, 1998 and 1997, and for each of the years in the five-year period ended December 31, 2001 (the "Consolidated Financial Statements"), included in this Annual Report, have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). Statements in this Annual Report with respect to such financial information are based on U.S. GAAP information. All market share data contained in this Annual Report is based on management's estimates. Currency Translation Unless otherwise indicated, all amounts herein are expressed in Swiss francs ("CHF") or United States dollars ("U.S. dollars", "dollars", "USD", "US$" or "$"). Amounts stated in U.S. dollars, unless otherwise indicated, have been translated from Swiss francs at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") on December 31, 2001, which was CHF 1.6598 per US$ 1.00. This rate should be used solely for convenience and should not be construed as a representation that the Swiss franc amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated, or at all. This rate may differ from the actual rates used in the preparation of the Consolidated Financial Statements of the Company as of December 31, 2001, 2000 and 1999, and for each of the years in the three year period ended December 31, 2001, included in Item 18 of this Annual Report, which are expressed in Swiss francs. Accordingly, U.S. dollar amounts appearing herein may differ from the actual U.S. dollar amounts that were translated into Swiss francs in the preparation of such financial statements. Cautionary Statement Regarding Forward-Looking Information This document contains certain forward-looking statements and information with respect to the financial condition, results of operations and business of the Company and certain of the plans, objectives and market position of the Company with respect to these items that are based on beliefs of the Company's management as well as assumptions made by and information currently available to the Company. In particular, among other statements, certain statements in "Item 4. Information on the Company" and "Item 5. Operating and financial review and prospects" with regard to trends, revenues, costs, net income, market size, market share, market demands, volumes, prices, margins, research and development, capital expenditures, cash flows, debt levels, patents, outlook for 2002 and beyond, the effect of technological developments, strategy and management objectives, opinions and beliefs and sufficiency of environmental reserves and insurance arrangements are forward-looking in nature. Such statements reflect the current views of the Company with respect to market conditions and future events and are subject to certain risks, uncertainties and assumptions. Investors are cautioned that all forward-looking statements involve risks and uncertainty as there are certain important factors that could cause actual results, performance or events to differ materially from those anticipated including, but not limited to, the following: the timing and strength of new product offerings, pricing strategies of competitors, introduction of competing products by other companies, lack of acceptance of new products and services by the Company's targeted customers, changes in the Company's business strategy, the Company's ability to continue to receive adequate raw materials from its suppliers on acceptable terms, or at all, or to continue to obtain sufficient financing to meet its liquidity needs, the effects of the Company's reorganization and restructuring and changes in the political and regulatory framework in which the Company operates or in economic or technological trends or conditions, including currency fluctuations, inflation and consumer confidence, on a global, regional or national basis and various other factors. Furthermore, the Company does not assume any obligation to update these forward looking statements. For more information regarding some of these factors, see "Item 3. Key Information-Risk Factors." 1 PART I Item 1. Identity of Directors, Senior Management and Advisors Not applicable. Item 2. Offer Statistics and Expected Timetable Not applicable. Item 3. Key Information Selected Financial Data The tables below set forth selected consolidated financial data for the Company for the periods indicated and are qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and the Notes thereto, which are included elsewhere in this Annual Report, and "Item 5. Operating and Financial Review and Prospects". The selected consolidated financial data as of December 31, 2001, 2000, 1999, 1998 and 1997, and for each of the years in the five-year period ended December 31, 2001, have been taken or are derived from the audited consolidated financial statements of the Company for the relevant periods. The selected financial data have been prepared in accordance with U.S. GAAP.
2001 2000 1999 1998 1997 ------------------------------------------------------ (in millions of CHF, except percentages, share, per share and number of employees data) Results of operations Net sales .................................................. 7 367 7 902 7 244 6 632 6 196 Operating income (loss) .................................... 761 876 632 (528) 357 Income (loss) from continuing operations(1) ................ 380 418 238 (971) 222 Income (loss) from discontinued operations, net of - 34 87 (13) 60 tax(2)(3) .................................................. Cumulative effect of change in accounting principles, net of 2 - - - - tax(4) ..................................................... Net income (loss)(5) ....................................... 382 452 325 (984) 282 - ------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per share: Continuing operations(1) ................................. 5.72 6.31 3.58 (14.65) 3.25 Discontinued operations(3) ............................... - 0.50 1.31 (0.20) 0.88 Cumulative effects of change in accounting principles .... 0.04 - - - - Net income (loss) per share(5) ........................... 5.76 6.81 4.89 (14.85) 4.13 - ------------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share: Continuing operations(1) ................................. 5.72 6.31 3.58 (14.65) 3.25 Discontinued operations(3) ............................... - 0.50 1.31 (0.20) 0.88 Cumulative effects of change in accounting principles .... 0.04 - - - - Net income (loss) per share(5) ........................... 5.76 6.81 4.89 (14.85) 4.13 - ------------------------------------------------------------------------------------------------------------------- Equity per share(6) ........................................ 59.08 56.82 54.74 48.94 68.58 Dividend per share(7) ...................................... 2.00 2.00 2.00 2.00 2.00 Capital reduction per share(7) ............................. 1.00 - - - - - ------------------------------------------------------------------------------------------------------------------- Weighted average number of Shares outstanding: Basic ....................................................66 419 147 66 311 879 66 454 357 66 293 130 68 158 845 Diluted ..................................................66 419 147 66 311 879 66 462 898 66 293 130 68 158 845 - ------------------------------------------------------------------------------------------------------------------- Other data - continuing operations Net sales development percentage ........................... (7)% 9% 9% 7% 14% Restructuring and special charges(8) ....................... 0 2 0 1 286 296 EBITDA(9), before restructuring and special charges ........ 1 230 1 348 1 086 1 175 972 EBITDA margin(10), before restructuring and special charges 16.7% 17.1% 15.0% 17.7% 15.7% Capital expenditures ....................................... 259 249 267 396 413 Depreciation and amortization .............................. 469 470 454 418 319 Research and development ................................... 276 293 256 249 250 Personnel costs ............................................ 1 796 2 047 1 836 1 883 1 650 Number of employees at year end ............................ 19 683 20 306 20 117 21 148 18 137 - ------------------------------------------------------------------------------------------------------------------- 2 2001 2000 1999 1998 1997 ------------------------------------------------------ (in millions of CHF, except percentages, share, per share and number of employees data) Balance sheet data Current assets ............................................. 4 827 4 797 4 272 4 284 4 734 Property, plant and equipment, net ......................... 3 565 3 787 3 914 3 853 3 454 Total assets ............................................... 11 718 12 105 12 407 12 045 10 151 Short-term debt ............................................ 316 371 1 174 1 905 1 814 Long-term debt ............................................. 3 678 3 859 4 265 3 648 294 Common stock ............................................... 721 721 721 721 721 Shareholders' equity ....................................... 3 908 3 754 3 638 3 252 4 553 - ------------------------------------------------------------------------------------------------------------------- Business Segment data(11) Plastic Additives Net sales ................................................ 1 834 1 959 1 784 1 609 1 781 Operating income ......................................... 271 314 276 273 246 EBITDA(9) ................................................ 388 423 377 375 352 EBITDA margin(10) ........................................ 21.1% 21.6% 21.1% 23.3% 19.8% - ------------------------------------------------------------------------------------------------------------------- Coating Effects Net sales ................................................ 1 944 2 118 1 955 1 823 1 820 Operating income ......................................... 304 366 305 298 280 EBITDA(9) ................................................ 411 475 403 392 373 EBITDA margin(10) ........................................ 21.1% 22.4% 20.6% 21.5% 20.5% - ------------------------------------------------------------------------------------------------------------------- Water & Paper Treatment(12) Net sales ................................................ 1 486 1 558 1 408 1 100 385 Operating income ......................................... 82 111 68 94 26 EBITDA(9) ................................................ 157 187 151 168 45 EBITDA margin(10) ........................................ 10.6% 12.0% 10.7% 15.3% 11.7% - ------------------------------------------------------------------------------------------------------------------- Textile Effects Net sales ................................................ 1 673 1 841 1 683 1 678 1 776 Operating income ......................................... 183 204 117 111 162 EBITDA(9) ................................................ 248 275 179 172 223 EBITDA margin(10) ........................................ 14.8% 14.9% 10.6% 10.2% 12.6% - ------------------------------------------------------------------------------------------------------------------- Home & Personal Care ....................................... Net sales ................................................ 430 426 414 422 434 Operating income ......................................... 67 58 62 68 58 EBITDA(9) ................................................ 95 80 85 91 80 EBITDA margin(10) ........................................ 22.2% 18.8% 20.5% 21.5% 18.4% - ------------------------------------------------------------------------------------------------------------------- Discontinued operations(13) Performance Polymers business Net sales ................................................ - 774 1 729 1 791 1 626 Operating income (loss) .................................. - 57 131 (17) 82 Gain on sale, net of tax ................................. - 34 - - - EBITDA(9) ................................................ - n.m. 193 140 217 EBITDA margin(10) ......................................... - n.m. 11.2% 7.8% 13.3% - -------------------------------------------------------------------------------------------------------------------
(1) Included in income from continuing operations is restructuring and special charges, net of tax of CHF 2 million or CHF 0.03 per share in 2000, CHF 1 274 million or CHF 19.22 per share in 1998 and CHF 222 million or CHF 3.27 per share in 1997. (2) The 2000 income from discontinued operations of CHF 34 million represents the gain on sale of discontinued operations, net of tax for the Company's Performance Polymers business which was sold on May 31, 2000. This gain includes income from operations, net of taxes, of CHF 37 million and a CHF (3) million loss from the sale of the net assets of the Performance Polymers business. (See footnote (13) below). (3) Included in income from discontinued operations is restructuring and special charges, net of tax of CHF 68 million or CHF 1.03 per share in 1998 and CHF 56 million or CHF 0.82 per share in 1997. (4) On January 1, 2001, the Company adopted the Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133", which replaced existing pronouncements and practices with a single, integrated accounting framework for derivatives and hedging activities. (5) Included in net income is restructuring and special charges, net of tax of CHF 2 million or CHF 0.03 per share in 2000, CHF 1 342 million or CHF 20.24 per share in 1998 and CHF 278 million or CHF 4.09 per share in 1997. 3 (6) Equity per share is calculated by dividing the total shareholders' equity by the number of outstanding common shares (total common shares issued less treasury shares outstanding) at the balance sheet date. (7) The Board of Directors proposes a payment to the Company's shareholders in 2002 of an unchanged dividend of CHF 2 per share, based on 2001 results and a capital reduction of CHF 1 per Share. If approved, the capital reduction will take the form of a reduction in the nominal value of each Share from CHF 10 per share to CHF 9 per share. Both the dividend and capital reduction are subject to shareholder approval at the Annual General Meeting on March 22, 2002. If approved, the Company expects that the dividend will be distributed on March 27, 2002 and expects, subject to various conditions, that the payments from capital reduction will be made on June 28, 2002. The dividend per share and capital reduction for 2001, based on the US$ exchange rate of December 31, 2001, are US$ 1.20, and US$ 0.60, respectively. Based on the US$ exchange rate at the respective payment dates of the 2000, 1999, 1998 and 1997 dividends, the US$ equivalent of the dividend per share were US$ 1.23, US$ 1.25, US$ 1.36 and US$ 1.34, respectively. (8) Included in the 1998 restructuring and special charges is CHF 1 012 million for the write-off of acquired in-process research and development costs associated with the acquisition of Allied Colloids. (9) EBITDA is calculated as operating income plus depreciation and amortization. (10) EBITDA margin is EBITDA expressed as a percentage of net sales. (11) In the first half of 2001, the Company implemented a new organizational structure which created five Segments focused on specific customer markets. The five reporting Segments are Plastic Additives, Coating Effects, Water & Paper Treatment, Textile Effects and Home & Personal Care. Amounts reported for the previous periods have been restated to conform to the 2001 presentation. (12) The 1998 Financial data for the Water & Paper Treatment Segment includes the results of the Water & Paper treatment business acquired from Allied Colloids for the nine month period commencing April 1, 1998, the date of the Allied Colloids acquisition. (13) Reflects the results of the Performance Polymers business as a discontinued operation due to its sale on May 31, 2000. The results represent substantially all of the operations of the Performance Polymers division's business and do not include an allocation of the Company's interest costs or unallocated corporate general and administrative expenses. For 2000, the results are for the five month period ended May 31, 2000, the date of the divestment (see Note 3 to the Consolidated Financial Statements). n.m. Data is not meaningful as the Performance Polymers business was sold on May 31, 2000 (see footnote (13) above). Exchange Rate Information The table below sets forth, for the periods indicated, the average, high, low and period-end Noon Buying Rate for Swiss francs expressed in Swiss francs per U.S. dollar. Average(1) High Low Period End -------------------------------------------------------------------------- Year 1997 .......................... 1.4526 1.5136 1.4051 1.4547 1998 .......................... 1.4509 1.5255 1.3485 1.3789 1999 .......................... 1.5151 1.5991 1.4163 1.5991 2000 .......................... 1.6930 1.8250 1.5526 1.6202 2001 .......................... 1.6893 1.8185 1.5878 1.6598 -------------------------------------------------------------------------- Months 2001 January ....................... 1.6582 1.6025 1.6425 February ...................... 1.6920 1.6330 1.6736 March ......................... 1.7360 1.6465 1.7360 April ......................... 1.7375 1.6926 1.7345 May ........................... 1.7970 1.7255 1.7970 June .......................... 1.8046 1.7648 1.7968 July .......................... 1.8185 1.7145 1.7285 August ........................ 1.7165 1.6552 1.6698 September ..................... 1.7075 1.5878 1.6188 October ....................... 1.6642 1.6157 1.6347 November ...................... 1.6680 1.6315 1.6405 December ...................... 1.6920 1.6307 1.6598 2002 January ....................... 1.7190 1.6417 1.7190 -------------------------------------------------------------------------- (1) Represents the average of the Noon Buying Rates on the last business day of each month during the relevant year. Fluctuations in the exchange rate between the Swiss franc and the U.S. dollar will affect the U.S. dollar equivalent of the Swiss franc price of the Shares on the Swiss Exchange and, as a result, will likely affect the market price of the ADSs in the United States, and vice versa. Such fluctuations will also affect the U.S. dollar conversion by the Depositary of any cash dividends paid in Swiss francs on the shares of the Company represented by the ADSs. In addition, such fluctuations (as well as fluctuations between the Swiss franc and other currencies) affect the presentation of the Company's operating results and financial condition in its financial statements, which are denominated in Swiss francs, and the results of its operations and financial condition. See "Item 5. Operating and Financial Review and Prospects". 4 Risk Factors Prospective purchasers of the ADRs of the Company should consider carefully all of the information set forth in this Annual Report and, in particular, should evaluate the following risks in connection with an investment in the ADRs. Information contained or incorporated by reference in this Annual Report contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes", "opinion", "expects," "may", "will", "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such statements include, without limitation, the Company's beliefs about trends in the global economy, in the specialty chemicals industry and its views about the long-term future of the industry and the Company. See, e.g., "Item 5. Operating and Financial Review and Prospects" and "Item 4. Information on the Company." No assurance can be given that the future results covered by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors `with respect to such forward-looking statements, including certain risks and uncertainties that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. The Company is subject to various changing competitive, economic, political, legal and social conditions. These conditions are described below: As an international business, the Company is exposed to various global economic, political, social and local business risks that may have a material adverse effect on its financial condition and results of operations. The Company has a small home market for its products and has for many years operated on a global basis. The Company currently has manufacturing facilities in 25 countries and sales organizations in more than 120 countries. This means the Company is confronted with different complex legal and regulatory requirements in many jurisdictions. These include tariffs and trade barriers, requirements relating to withholding taxes on remittances and other payments by subsidiaries and different intellectual property regimes. The Company's international operations also expose it to different local business risks and challenges. The Company's overall success as a global business depends, in part, upon its ability to succeed in differing economic, social and political conditions. The Company may not continue to succeed in developing and implementing policies and strategies that are effective in each location where it does business. The Company's results of operations and financial position also are affected by developments and trends in the world economy. The year 2001 was, for example, characterized by a continuous weakening of the economic environment. The slowdown was first evident in the United States and the impact spread throughout the NAFTA region. European economies, particularly Germany and France, also began to slow down in mid-year, with the slowdown accelerating towards year-end. Performance in South America remained strong and was only mildly affected by the Argentine economic crisis. In the Asia-Pacific region, the Japanese market has not yet recovered from its lows of 1999, remaining sluggish throughout 2001. The China Region remained the global growth engine with real GDP growth remaining at approximately 7 percent. In most of the regions of the world, with the exception of China, the industrial sector growth was below total GDP growth. This was particularly accentuated in the United Kingdom. In the United States consumer demand remained relatively stable due to significant incentives and rebates in several market sectors, particularly in the automotive sector. This resulted in a net decrease of inventories at the Company's customers. The economic conditions in the NAFTA, Europe, and parts of Asia-Pacific, particularly Japan may continue to worsen or not fully recover which depending on the extent of the severity of any adverse economic situations in these regions, may have a material adverse effect on the Company's results and financial condition. The Company currently has operations in more than 120 countries, and its results of operations may be adversely affected by currency fluctuations. The results of the operations and the financial position of the Company's subsidiaries outside of Switzerland are reported in the relevant foreign currencies and then translated into Swiss francs at the applicable exchange rates for inclusion in the Company's Consolidated Financial Statements. The exchange rates between these currencies and the Swiss franc may fluctuate substantially. Because the Company generates a significant percentage of its revenues and a substantially lower percentage of its operating expenses in currencies other than the Swiss franc, fluctuations in the value of the Swiss franc against other currencies have had in the past, and may have in the future, a material effect on the Company's operating margins as well as its competitive position compared with local producers in affected markets. Currency fluctuations also may significantly affect the comparability of the Company's results between financial periods. The Company's results and financial condition are particularly affected by significant changes in the value of the euro, U.S. dollar, Japanese yen, British pound and Swiss franc relative to each other. For more information, see "Item 5. Operating and Financial Review and Prospects--Currency Trends" in this Annual Report. 5 Significant competition may force the Company to reduce its product prices which may adversely impact its results of operations. The Company faces significant competition in the markets in which it operates. Although competition in specialty chemicals is based upon a number of considerations, such as product innovation, product range and quality, relationships with customers, reliability of delivery, technical support and distribution capability, price competition does exist in certain of the Company's markets due to factors such as industry overcapacity and low-cost local competition. Increased price competition may also occur in certain product areas due to consolidation and globalization among the Company's customers and competitors and as industry segments mature. As a result of the trends toward global expansion and consolidation by competitors, the Company anticipates that it will continue to face new competitive challenges as well as additional risks inherent in international operations in developing regions. The Company's inability to remain technologically innovative and to offer improved products and applications cost-effectively could negatively impact its operating results. The Company's operating results depend to a significant extent on its ability to be a low-cost producer of its core products and to continue to introduce new products and applications that offer distinct value in use for its customers. In many of the industry sectors to which the Company sells its products, products are subject to a traditional product life cycle. The Company must devote significant resources to the development of new technologically advanced products and applications. The cyclicality in the various industries served by the Company may have a material adverse effect on the Company's business and financial condition. The Company's results are affected by cyclicality in various industries served directly or indirectly by the Company, including the automotive, plastics, textiles and clothing, paper, packaging, paint and coating, electronics and construction industries. Such cyclicality in specialty chemicals is, however, less pronounced than in base chemicals. Industry cyclicality may affect particular business segments of the Company at different times and in different geographical regions. In the past, to some extent there have been offsetting effects because of these timing differences with one business segment being affected by a downturn of the economy while others were not affected or affected to a lesser extent. There is no guarantee that this may continue in the future. The Company's results of operations and financial position have in the past been affected adversely, for example, by slow growth in the textile and paper industries, reduced demand in the automotive industry and by declining demand in a number of industries. The cyclical nature of pricing and investment in the specialty chemicals business is likely to continue, and the Company will continue to experience periods of overcapacity, declining prices and lower profit margins. In addition, external factors beyond the Company's control, such as general economic conditions, competitors' actions, international events and circumstances and governmental regulation in the United States and in other foreign jurisdictions, can cause volatility in raw material prices and product demand, as well as fluctuations in the Company's prices, volumes and margins. The Company depends upon proprietary technologies, and its competitive position may be adversely affected if it fails to protect its intellectual property rights or is subject to claims that it is infringing upon the rights of others. Proprietary rights are important to the success and competitive position of the Company. If the Company is unable to maintain the relative exclusivity of certain of its products following patent expiration, through manufacturing scale, technical know-how, advanced applications and service expertise, increased competition may result with consequent erosion of profit margins. Actions taken by the Company to protect its proprietary rights may be insufficient to prevent others from developing similar products to those of the Company. In addition, the laws of many foreign countries do not protect the Company's intellectual property rights to the same extent as the laws of Switzerland, other European countries, the United States and Japan. In the past the Company has received communications asserting that its products or their applications infringe on the proprietary rights of others. Currently, there is no material pending litigation against the Company regarding any intellectual property claim but there could be claims in the future. Such claims, with or without merit, and whether initiated by the Company or another party, could subject the Company to costly and time-consuming litigation and divert its technical and management personnel from their regular responsibilities. Furthermore, successful claims against the Company could suspend the manufacture of products using the contested invention. Any disruption or deterioration in the quality of the raw materials available for the Company's products may have a material adverse effect on the results of the Company's operations. The Company utilizes specialty chemicals and base chemicals as its main raw material in its manufacturing process. Raw material costs represent a significant component of the Company's cost of goods sold. The prices and availability of these raw materials vary with market conditions and can be highly volatile. As a result of these 6 factors, the Company's operating margins may decrease if it cannot pass on increased raw material prices to customers, if prices for its products decrease faster than raw material prices or if the price it pays under long-term supply contracts is above the market price. There have been in the past, and may be in the future, periods of time during which raw material price increases cannot be passed on to customers in whole or in part. Even in periods during which raw material prices decrease the Company may suffer decreasing operating profit margins if raw material price reductions occur at a slower rate than decreases in the selling prices of its products. Historically, the Company typically has not entered into hedging arrangements with respect to prices of raw materials but the Company has entered into long-term supply contracts for some raw materials. Any major dislocation in the supply or price of these raw materials or any material difference between the price the Company pays under its supply contracts and market price may have a material adverse effect on its financial condition and results of operations. Additionally, the Company requires raw materials to be of a satisfactory standard for manufacturing its products. Any deterioration in the quality of the raw materials available to the Company may adversely impact the Company's ability to manufacture its products to an acceptable standard and may have a material adverse effect on the results of its operations. Even if it could obtain acceptable substitute raw materials, the Company could incur increased expenses in securing the raw materials from an alternative source and suffer reduced profit margins and an adverse impact on its business. Environmental laws and regulations may expose the Company to liability and result in increased costs. The Company's business is subject to stringent environmental laws and regulations in the various countries in which it operates. Such laws and regulations govern, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and groundwater contamination. As with other companies engaged in similar activities, a risk of environmental liability is inherent in its current and historical activities. See "Item 4. Information on the Company--Environmental Matters" in this Annual Report. The Company's business may be adversely affected by rigorous health and safety regulation. Certain of the Company's products are subject to rigorous health and safety regulations. There is a risk that key raw materials or one of the Company's products may be recharacterized as having a toxicological or health related impact on the environment or on its customers or employees. Health and safety regulations are continually strengthened and relevant raw materials or products may be banned or the Company may incur increased costs in complying with new requirements. Liabilities arising from the development, manufacturing and use of the Company's products may adversely impact the Company's financial condition. The Company's operations are subject to various hazards associated with the production of chemicals, including the use, handling, processing, storage and transportation of hazardous materials. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, and environmental damage, and may result in the suspension of operations and the imposition of civil and criminal liabilities. The Company has been subject to claims of injury from direct exposure to such materials and from indirect exposure when such materials are incorporated into other companies' products. As a result of past or future operations, there may be additional claims of injury by employees or members of the public due to exposure, or alleged exposure, to such materials. Furthermore, the Company also has exposure to present and future claims with respect to workplace exposure, workers' compensation and other matters arising from events both prior to and after the date of this Annual Report. The Company cannot accurately predict the actual amount of these liabilities or the timing thereof, if any. Change of control provisions and limitations on shareholder voting rights may render the Company an unattractive target for any transaction in which the Company's investors could receive a premium for their Shares or ADRs. Certain tax considerations, contractual arrangements with Novartis and restrictions on the voting rights of shareholders of the Company may make an acquisition of the Company less likely, and thus may limit any opportunity for the Company's shareholders to receive a premium for their Shares or ADRs. Because the spin-off of the Company from Novartis qualified as a tax exempt transaction under Swiss tax law, the Company may be restricted from disposing of certain assets, and may face adverse Swiss tax consequences if a change of control in the Company occurs. Similarly, the Company may face adverse tax consequences in foreign jurisdictions if certain material parts of the business are divested. Accelerated vesting provisions and the elimination of restriction periods under one or more employee incentive plans instituted by the Company could result in a significant cost to the Company in the event of a change of control not recommended by the Company's board of directors. Additionally, a change in control of the Company or a sale of substantially all the assets of the Company could relieve Novartis of its contractual obligation to indemnify the Company for a portion of specified 7 environmental liabilities arising from prior activities of the predecessor of the Company in the United States. Pursuant to the Company's articles of association, no shareholder or group of shareholders of the Company will be recognized in the Company share register as owning the voting rights of more than 2 percent of the Company's share capital. No shareholder or group of shareholders may represent more than 5 percent, by proxy or otherwise, of the Company's share capital at a shareholders' meeting. Under certain circumstances, the Company may not be permitted to continue to use the name "CIBA", which could adversely affect its brand name recognition and its results of operations. Pursuant to an agreement between the Company and Novartis, the Company is permitted to use "Ciba Specialty Chemicals" as part of its registered corporate name, while Novartis may continue to use the name "Ciba" in the Ciba Vision Group and in certain other cases. The Company is entitled to use the "Ciba" trademarks and trade names outside the core business of Novartis (pharma specialties, pharma OTC and generics, eyecare, crop protection, seeds, animal health and nutrition). Novartis remains entitled to continue to use trademarks and trade names containing the term "Ciba" as they were being used at the date of the Spin-off. In addition, Novartis is entitled to use trademarks and tradenames containing the term "Ciba" in the areas for its marketing concept for the "Ciba" line of pharmaceutical products and for products and services of the Ciba Vision Group. In addition, the Master Spin-off Agreement entered into by the Company and Novartis includes provisions which specify that upon the occurrence of certain change of control events or acquisitive transactions involving the Company or other members of the Company, or in the event any member of the Company begins to compete materially with Novartis' business as in existence as of the time of the Spin-off, the Company may be required to cease using "Ciba" as a corporate name or to pay Novartis significant liquidated damages for its continued use. The above restrictions could affect the Company's ability to conduct its business with its present and future customers. Even if the Company is able to establish brand name recognition under a new name, it may incur significant expenses in doing so, which could adversely affect its future results of operations. The introduction of the euro and the replacement of currencies in which the Company presently conducts business may adversely affect the operations of the Company. On January 1, 1999, eleven (2001: twelve) of fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and adopted the euro as their new common currency. The euro trades on currency exchanges while the legacy currencies remained legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. The Company conducts a portion of its operations in the EU and in countries that have adopted the euro, and therefore the introduction of the euro may still likely have an impact on these operations. For more information, see "Item 5. Operating and Financial Review and Prospects--Supplemental Information--Euro conversion" in this Annual Report. The Company's share price may be highly volatile and subject to sudden and significant drops. The trading price of the Shares and the ADRs has been, and could in the future continue to be, subject to significant fluctuations in response to variations in the Company's financial performance, regulatory and business conditions in the specialty chemicals industry, general international economic trends and other factors, some of which are unrelated to the operating performance of the Company. From time to time, following periods of volatility in the market price of a company's securities, securities litigation has been instituted against that company. The institution of any such litigation against the Company could result in substantial costs and a diversion of the Company's management's attention and resources, which could materially adversely affect its business, results of operation and financial condition. 8 Item 4. Information on the Company History and Development Ciba Specialty Chemicals Holding Inc.'s registered office is located at Klybeckstrasse 141, CH-4002 Basel, Switzerland, telephone +41 61 636 1111. Ciba Specialty Chemicals Holding Inc. was first registered as a corporation in Switzerland on April 24, 1996, and began to conduct the specialty chemicals business of the former Ciba-Geigy Limited ("Ciba-Geigy") as of January 1, 1997. Until the merger of Ciba-Geigy and Sandoz Limited ("Sandoz") into Novartis AG ("Novartis"), as described below, the businesses of the Company were part of Ciba-Geigy. Ciba-Geigy was formed in 1970 through the merger of CIBA Aktiengesellschaft ("CIBA") and J.R. Geigy AG ("Geigy"), two Basel, Switzerland-based chemicals and pharmaceuticals multinationals. The Company's roots go back to 1757 when Geigy, the oldest chemical company in Basel began trading in chemicals and dyes. In 1925, Geigy began research into textile chemicals and in the 1930s turned its attention to agrochemicals. A pharmaceuticals division was formed in 1938. In 1970, Geigy merged with CIBA, a chemical company founded in 1884 in Basel. CIBA developed its first pharmaceutical products in 1889 and added other products such as textile auxiliaries and finishing products, cosmetics and plastics in the 1920s. It introduced epoxy resins in 1946 and began to manufacture plant protection products in 1954, followed by products for animal health and hygiene in 1959. On March 7, 1996, the boards of directors of Ciba-Geigy and Sandoz announced the merger of the two companies to form Novartis (the "Merger"). The Merger was approved at the shareholders' meetings of Ciba-Geigy and Sandoz on April 23, 1996 and April 24, 1996, respectively. As part of their vote on the Merger, the shareholders of Ciba-Geigy and Sandoz also approved the spin-off to the stockholders of Novartis of Ciba-Geigy's specialty chemicals divisions Additives, Consumer Care, Performance Polymers, Pigments and Textile Dyes (the "Spin-off") (in 1998, Pigments and Textile Dyes were combined by the Company to form the Colors division). The Merger became effective on December 20, 1996. On March 13, 1997, the former Ciba-Geigy specialty chemical divisions were listed on the Swiss Exchange as an independent new enterprise, Ciba Specialty Chemicals Holding Inc. In connection with the Spin-off, the Company issued 72 105 116 Shares and an equal number of rights to subscribe for such Shares at a subscription price equal to CHF 10 per Share. On February 25, 1997, holders of shares of Novartis were issued one right for each Novartis share held by them. A syndicate of banks subscribed for all the Shares issued by the Company for CHF 721 051 160. The Company used substantially all of the proceeds of such subscription to repay an advance made by Novartis in connection with the Spin-off. In a rights offering, the banks offered the Shares for subscription by the holders of rights. In addition, the banks made a rights bid in which they offered to purchase any rights tendered to them for CHF 90 per right. Following the consummation of the rights offering and the rights bid, on March 13, 1997, the banks sold in a global offering 3 013 489 Shares at a price of CHF 110 per Share. The Shares sold in the global offering consisted of Shares acquired by the banks through the exercise of rights purchased by them in the rights bid and Shares sold to the banks by Novartis. The Company did not receive any proceeds from the global offering. In early 2001, the Company implemented a new organizational structure comprising five segments ("Segments") focused on specific customer markets. The five reporting Segments are Plastic Additives, Coating Effects, Water & Paper Treatment, Textile Effects and Home & Personal Care. Each Segment is responsible for marketing, research and development, technology, production and sales. The mission of the Segments is to provide the best and most complete service to its customers' industries and strive for market leadership in its respective area. To ensure that innovation efforts are successfully shared across Segments a corporate technology office under the leadership of a Chief Technology Officer was created. All Segments share support functions such as finance and accounting, human resources, communications, legal and supply chain services. While each Segment has a lasting role in providing for a well-balanced portfolio for the Company, they are positioned for growth and higher profitability through different approaches: innovation (Plastic Additives and Coating Effects), cost leadership (Textile Effects) and by concentrating on business growth (Water & Paper Treatment and Home & Personal Care). To accelerate the speed of decision-making and implementation, the Company's new structure ended the dual business responsibility between divisions and business units and allocated the full responsibility to the Segments. This will speed up decision-making and implementation allowing the Company to become faster and more flexible, gaining a competitive advantage in a fast-changing environment. Support functions are provided through shared structures on a global basis. As part of the reorganization, the Company initiated an integration of its previous three supply chains into a single global supply chain. This initiative is ongoing. Additionally, the Company is moving towards an integrated e-business platform and standardized core processes for finance, human resources, information technology and communications. These integration and standardization actions 9 allows the Segments to devote their full attention to meeting customer needs. Acquisition and divestiture activities Effective January 1, 1998, the Company and Witco Corporation (Witco) exchanged, in a one-for-one transaction, the then Additives division's PVC heat stabilizer business for Witco's epoxy systems and adhesives business. The transaction was accounted for as a sale and a purchase. The business acquired was integrated into the Performance Polymers division, which was sold on May 31, 2000, and is included in discontinued operations in the Consolidated Financial Statements. The resulting goodwill was being amortized over 20 years. The Company's non-cash gain on the assets sold is included in the 1998 restructuring and special charges in the Consolidated Statements of Income. On April 1, 1998, the Company completed the acquisition of Allied Colloids Group PLC, a leading global water treatment company organized and listed in the United Kingdom ("Allied Colloids"), for CHF 3 615 million, including acquisition costs of CHF 110 million. The acquisition of Allied Colloids resulted in the creation, in 1998, of a new Water Treatments division in the Company. As a part of on-going efforts to achieve operational efficiency, management, in April 1999, integrated the Water Treatments business into the then Additives division. In 2001, under the reorganization of the Company into five segments, the Water Treatments business was combined with the Company's paper chemicals business to create a new segment Water & Paper Treatment. In March 1999, the Company sold its 30 percent interest in Cerdec AG for net cash proceeds of CHF 70 million (DEM 85 million), resulting in a pre-tax gain of CHF 39 million or CHF 37 million after tax. In March 2000, the Company completed the purchase of Prochimica s.r.l., the Company's key photoinitiator supplier of its Coating Effects Segment. The Company paid CHF 85 million. On May 31, 2000, the Company completed the sale of the Performance Polymers business to Vantico, a company established by Morgan Grenfell Private Equity, the private equity arm of Deutsche Bank AG, and to certain Asian joint venture partners. Total gross proceeds from the sale were CHF 1.6 billion, which includes net debt assumed of approximately CHF 160 million. Net debt consists of approximately CHF 71 million of third party debt and approximately CHF 121 million of debt to Ciba Specialty Chemicals, offset by approximately CHF 32 million of cash. This divestiture underscores the Company's strategy of focusing its portfolio on specialty chemicals rather than specialty materials. The Company realized an after tax net gain from discontinued operations of CHF 34 million, after consideration of the Performance Polymers business operating results through May 31, 2000, the results of the divestment transaction taxes and costs of selling the business. In November 2000, the Company concluded the acquisition of certain paper-chemical product lines and technology from Cytec Industries for a total purchase price of approximately CHF 40 million (USD 23 million). The acquisition complements and expands the Water & Paper Treatment's product offerings to the paper industry, one of its strategic industry segments. In December 2000, the Company sold approximately 81 percent or 14 525 000 shares of its holding in its equity affiliate Hexcel Corporation ("Hexcel") to an investor group led by Goldman Sachs for CHF 277 million (USD 160 million), of which CHF 62 million (USD 36 million) is payable with a 7 percent interest bearing note, due December 31, 2004. This divestment underscores the Company's strategy to exit joint ventures which have little strategic fit with its core business. Hexcel is focused on specialty materials and not on specialty chemicals. As a result, after the sale of the Performance Polymers business, this investment no longer supported or supplemented the growth of the Company's remaining core businesses and therefore, divestment steps were undertaken. In 2000, the Company recognized a pre-tax gain on this divestment of approximately CHF 71 million or CHF 50 million after tax. In order to optimize the Plastic Additives Segment's global manufacturing network, the Company acquired, in January 2001, a controlling interest in Musashino-Geigy Co. Ltd. ("Musashino-Geigy"), increasing its holdings from 50 percent to 60 percent. Musashino-Geigy has a facility in Isohara, Japan and produces antioxidants, UV absorbers and blends for plastics. As part of its focus on core businesses, in March 2001, the Company sold its 50 percent interest in TFL Ledertechnik GmbH & Co. KG, an international chemical company whose products and technical services are geared exclusively to the needs of the leather industry. The net proceeds received of CHF 62 million approximated the carrying value of the investment at the date of sale. To expand Coating Effects service business and its high value added products offerings, in June 2001, the Company acquired Efka Additives B.V. ("Efka") for a total purchase price of approximately CHF 65 million. Efka manufactures, markets and distributes additives for the coatings and inks industries. Capital expenditures Ciba Specialty Chemicals' aggregate capital expenditures for property, plant and equipment were CHF 259 10 million in 2001, CHF 249 million in 2000 and CHF 267 million in 1999. In 2001 and 2000, capital expenditures were focused primarily on efficiency and safety improvement-related items. The Company has also continued to make some major investments in the Imaging & Inks, Coatings and Plastics business lines of Coating Effects (the quinacridone project in the United States) and the core Water & Paper Treatment business (increasing the production for Cationic Monomers in the United States). Business Overview Ciba Specialty Chemicals is one of the world's leading developers and producers of specialty chemicals which are high value added chemical products used as key components and in a wide variety of consumer and industrial products. The Company operates on a global basis with manufacturing facilities in 25 countries and sales organizations in more than 120 countries. In 2001, the Company had net sales from continuing operations of CHF 7 367 million, operating income of CHF 761 million and net income of CHF 382 million. Net sales, by geographic region of the Company for the past three years were as follows: 2001 2000 1999 ------------- ------------ ------------- amounts in CHF millions Sales in % Sales in % Sales in % Europe ................ 2 755 37% 2 913 37% 2 826 39% Americas(1) ........... 2 654 36% 2 936 37% 2 620 36% Asia Pacific(2) ....... 1 958 27% 2 053 26% 1 798 25% --------------------------------------------------------------------------- Total net sales ....... 7 367 100% 7 902 100% 7 244 100% -------------------------------------------------------------------------- (1) The Americas are comprised of North, Central and South America. (2) Asia Pacific is comprised of Asia, Africa, the Middle East, Australia and New Zealand. Organization In 2001, the Company implemented a new organizational structure which created five Segments focused on specific customer markets. The five reporting Segments are Plastic Additives, Coating Effects, Water & Paper Treatment, Textile Effects and Home & Personal Care. The Company's reportable Segments develop, manufacture and market different products, services and solutions. They are managed separately because each Segment has different customer markets and requires different technology and marketing strategies. Each Segment is responsible for marketing, research and development, technology, production and sales. The mission of the Segments is to provide the best and most complete service to its customers' industries and strive for market leadership in its respective area. To ensure that innovation efforts are successfully shared across Segments a corporate technology office under the leadership of a Chief Technology Officer was created. All Segments share support functions such as finance and accounting, human resources, communications, legal and supply chain services. Segments Net sales, by Segment, of the Company for the past three years were as follows: 2001 2000 1999 ------------- ------------ ------------- amounts in CHF millions Sales in % Sales in % Sales in % Plastic Additives ..... 1 834 25% 1 959 25% 1 784 25% Coating Effects ....... 1 944 26% 2 118 27% 1 955 27% Water & Paper Treatment ........... 1 486 20% 1 558 20% 1 408 19% Textile Effects ....... 1 673 23% 1 841 23% 1 683 23% Home & Personal Care .. 430 6% 426 5% 414 6% --------------------------------------------------------------------------- Total net sales(1) .... 7 367 100% 7 902 100% 7 244 100% --------------------------------------------------------------------------- (1) On May 31, 2000, the Company completed the sale of its Performance Polymers business and therefore excluded it from the segment data in 2000 and 1999. 11 The Segment Plastic Additives is one of the leading global suppliers of additives to the polymers and lubricants industries. The Segment develops manufactures and markets products and provides services to the plastic and lubricant industries. The Segment's products are additives which are ingredients added in small quantities to polymers and lubricants that prevent aging and corrosion and help improve processing appearance, durability and performance of finished goods such as polyolefins and engineering plastics as well as high-performance motor oils and lubricants. The service business adds value to customers by providing solutions in product applications. Coating Effects is a leading global manufacturer of organic pigments and the leading supplier of photoinitiators and lightstabilizers to the coatings, graphic arts and electronic industries . The Segment develops, manufactures and markets additives, synthetic pigments, pigment and additive concentrates for the coatings, printing, imaging, electronic, plastics and fibers industries. The end-user markets for its products and services are, among others, the automotive, packaging, publication, electronics, construction, photographic and digital printing industries. Water & Paper Treatment is one of the leading global suppliers to the paper industry and the municipal and industrial waste-water treatment industries. It offers products and services for paper production starting at the wet-end and progressively moving towards dry end application. The range of products and services offered increase mill productivity as well as determining appearance, handle and performance of the paper by making it water repellent, glossy or white. The Segment also offers products and services used to help clean industrial and municipal effluents and to improve the efficiency of mineral and oil processing. Textile Effects is the world's second largest manufacturer of textile dyes, the largest manufacturer of dyes for wool, polyamide carpets and automotive fabrics and the second largest manufacturer of reactive dyes and dispersive dyes for polyester. It serves the textile industry, offering dyes and chemicals, services and integrated solutions to customers along the whole textile value chain. Products include dyes and chemicals for dyeing and printing of almost all textile fibers, optical brighteners and textile finishing products for protection and easy-care. Services offered by the Segment include color matching via the Internet and technical consultancy regarding textile color and effects management for international brand houses and retailers. Home & Personal Care is one of the leading global manufacturers of whiteners and a leading supplier of antimicrobials to the personal care market. It develops, manufactures and markets products for home and personal care end-use industries. Among its broad product offerings are whiteners for detergents, antimicrobials for a variety of home and personal care products, UV absorbers for sun screens and innovative hair dyes. Discontinued Operations: On May 31, 2000, the Company completed the sale of the Performance Polymers business to Vantico, a company established by Morgan Grenfell Private Equity, the then private equity arm of Deutsche Bank AG, and to certain Asian joint venture partners. Total gross proceeds from the sale were CHF 1.6 billion, which includes net debt assumed of approximately CHF 160 million. Net debt consists of approximately CHF 71 million of third party debt and approximately CHF 121 million of debt to Ciba Specialty Chemicals, offset by approximately CHF 32 million of cash. The Performance Polymers business that was sold includes substantially all of the Performance Polymers division which produces epoxy resins and other high performance thermosets that provide durability, extraordinary strength and resistance to heat and corrosion. The Performance Polymers business achieved sales of CHF 774 million for the five-month period ended May 31, 2000 (for the year 1999 CHF 1 729 million). Group Services The Company has established a number of Group Service Units that are responsible for providing cost efficient support services to the Segments. The utilization of these centralized Group Service Units has two primary benefits to the Company (i) they allow the Segments to fully concentrate on serving their markets and customers and (ii) they reduce the overall costs as a consequence of increased economies of scale. The functions of the main Group Service Units of the Company are described in the following paragraphs. The Supply Chain Service organization is responsible for distribution of all the finished products and order processing, warehousing and transportation of products. Shared order desks are maintained on a regional/country level that service all Segments with regards to order taking and order processing, shipping and invoicing to the customer. A global network of warehouses and distribution centers, both externally and internally will be introduced and operated by the Supply Chain Service organization to ensure adequate coverage of the Company's distribution requirements. They also are responsible for negotiating and managing the Company's major transport partners, including the negotiation of the service contracts. The objective of the Supply Chain Service organization is to significantly reduce the number of partners in the transportation area with the ultimate goal to co-operate with one global Lead Logistics Provider. Supply Chain Service is currently working on the integration of the Company's three supply chains into a single global supply chain. 12 The Global Infrastructure group, working with outsourcing partners, manages the Company's information technology infrastructure including its wide area networks. This Group Services Unit objective is to ensure that the Company's global and regional information technology infrastructure set-up is optimized. The Company maintains twelve Business Support Centers that provide finance and accounting services to the regions, instead of using numerous country organizations. The Business Support Centers, using standardized financial systems, provide control, treasury and information management services to the Company for financial and corporate applications. They are responsible for ensuring the accuracy, validity and timeliness of financial reporting. Corporate functions such as legal, environmental, communications and human resources are managed through eight Regional Presidents Offices. Headquarters is responsible for strategy and corporate governance. Equity Affiliates The Company, from time to time, acquires and disposes of interests in entities to balance its portfolio of businesses and help achieve strategic objectives. The Company's investments in equity affiliates resulted in total income from earnings of equity affiliates of CHF 8 million in 2001, CHF 113 million in 2000 and CHF 15 million in 1999. The Company invests in equity affiliates where its analysis indicates that such investment will support and supplement the growth of its core business. Some of these investments are made in countries where legislation requires or custom dictates local investor control or participation. The Company holds an active interest in its equity affiliates. The Company's most significant investments in equity affiliates as of December 31, 2001 are a 50 percent interest in each of CIMO Compagnie Industrielle de Monthey SA and Daihan Swiss Chemical Corp. CIMO Compagnie Industrielle de Monthey SA is a joint venture with Syngenta that provides infrastructure services and utilities to the partner plants of Monthey Switzerland. Daihan Swiss Chemical Corp. is a joint venture with Daihan Color Ind. Co., Ltd., which has a pigments facility in Ulsan, Korea, and makes classical pigments for inks, paints, plastics and synthetic fibers. In order to optimize the Plastic Additives Segment's global manufacturing network, the Company acquired, in January 2001, a controlling interest in Musashino-Geigy Co. Ltd. ("Musashino-Geigy"), increasing its holdings from 50 percent to 60 percent. Musashino-Geigy has a facility in Isohara, Japan and produces antioxidants, UV absorbers and blends for plastics. As part of its focus on core businesses, in March 2001, the Company sold its 50 percent interest in TFL Ledertechnik GmbH & Co. KG, an internationally active chemical company whose products and technical services are geared exclusively to the needs of the leather industry. The net proceeds received of CHF 62 million approximated the carrying value of the investment at the date of sale. The Company's most significant investment in equity affiliates during 2000 was a 49.3 percent interest in Hexcel, a leading producer of advanced structural materials. Hexcel develops, manufactures and markets lightweight, high-performance reinforcement products, composite materials and engineered products for use in the aerospace, space, electronics and industrial markets. In December 2000, the Company sold approximately 81 percent or 14 525 000 shares of its holdings in Hexcel to an investor group led by Goldman Sachs at USD 11 per share. Total proceeds were CHF 277 million (USD 160 million), of which CHF 62 million (USD 36 million) is payable with a 7 percent interest bearing note, due December 31, 2004. In 2000, the Company recognized a gain on this divestment of approximately CHF 71 million or CHF 50 million after tax or CHF 0.75 per share. This divestment underscores the Company's strategy to exit joint ventures which have little strategic fit with its core business. Hexcel is focused on specialty materials and not on specialty chemicals. As a result, after the sale of the Performance Polymers business, this investment no longer supported or supplemented the growth of the Company's remaining core businesses and therefore, divestment steps were undertaken. Hexcel's 2000 results increased operating income of the Company by CHF 66 million or approximately 8 percent. Included in this income from earnings of equity affiliates is CHF 57 million, representing the Company's share of the operating gain recognized by Hexcel on the sale of its Bellingham Aircraft business. Hexcel's 1999 results reduced the Company's operating income by CHF 17 million or approximately 3 percent in 1999. 13 Company Strategy Value Beyond Chemistry Ciba Specialty Chemicals' objectives are to build upon its leading positions in selected segments of the specialty chemicals industry and is committed to be number one in all of its chosen markets. The Company strives to be the partner of choice for customers seeking innovative effects to enhance the performance of their products. The Company brings the benefits of leading-edge research to the real world to improve the quality of people's lives and deliver value to its customers, shareholders and employees. The Company's strategy for achieving these objectives contains the following elements: Build upon Strong Global Market Positions. The Company will continue its efforts to build upon its strong global market positions in existing product areas. The Company will seek to capitalize upon its leading positions, and to reduce its exposure to regional or industry-specific economic conditions, by further expanding in Asia and other rapidly growing markets through economical expenditures for research and development and capital improvements and by pursuing selective acquisitions and strategic alliances. Management expects opportunities for growth to arise from increasing globalization and continuing consolidation within industries it serves. Strategically, the Company will seek to achieve an appropriate level of diversity within its businesses, while at the same time maintaining focus and containing risk within naturally linked business sectors where the Company can achieve and maintain leading market positions. Focus on Serving the Customer. The Company's management is of the opinion that producing high quality products and providing high quality technical service with dependable supply are key factors in the Company's ability to compete successfully in the specialty chemicals market. Management is of the opinion that the Company's commitment to customer service has resulted in strong customer relationships and a high degree of customer loyalty. In response to the trend of increasing globalization among the Company's customers, the Company is emphasizing key account management for global customers. The Company has aligned itself more closely with its customer industries by forming five strong business Segments with clear direction, market focus and global business responsibility. Management is of the opinion that customers want a single point of contact for accessing the Company's products and services and they want fully integrated solutions tailored to their needs, their industries. Each Segment has the mission of meeting these needs - serving the customer under one strong brand and one corporate identity - and understanding and anticipating customer needs to help make the Company's customers and their products more competitive and profitable. The Company strives for leading positions in all of its activities. Build upon Three Business Models. The Company has shifted its focus from selling specialty chemicals to providing high value-added effects to its customers' products. The Company is pursuing a strategy of managing its extensive portfolio with three separate business models to accommodate its broad and interconnected customer base. o `Specialty' products, which comprise approximately two thirds of the Company's portfolio, offer broad growth opportunities, are protected either by patents or proprietary knowledge and bring considerable value to the Company's customers through differentiation. o `Semi-specialties' represent about one-third of the Company's portfolio. They provide growth opportunities in attractive niche markets while offering somewhat lower differentiation. Key to managing these products is operational excellence - consistent high quality, low-cost production and supply performance. o Comprehensive customer `Services' is an emerging area, whereby the Company leverages and markets its unique competencies, expertise, advice and consulting talents to its customers. This offers strong revenue growth potential, although from a lower base. The Company's recent acquisition and divestment activities underscores the commitment to the strategy focusing on high value-added products and technologies in specialty chemicals that generate innovative effects for customers and consumers. This strategy allows the Company to focus its resources on the high potential market segments in its portfolio and on funding further innovation in these and related areas for future profitable growth. The Company will continue its efforts to explore and capture needs and opportunities across the total value chain and to provide total fully integrated solutions to its customers. Promote and Accelerate Innovation. The Company's management is of the opinion that it is widely recognized in the markets in which it serves as a leading innovator for technologically advanced products. The Company's research and development activities are conducted on a decentralized basis through each of its Segments in order to respond more effectively and efficiently to market trends and specific customer requirements. To facilitate the sharing and leveraging of core technical competencies and identifying new 14 fields to explore in attractive markets, the Company has introduced a corporate technology office under the leadership of a Chief Technology Officer and a Research and Technology Board, which includes representation from all of the Segments. Historically, the Company has invested approximately 3 to 4 percent of net sales in research and development activities. Management intends to continue to invest in research and development at a similar level in the future. Management also intends to continue to invest in product innovation in order to provide products that offer distinct "value in use". Value in use encompasses not only the price and physical performance of the Company's products but also the beneficial impacts they have on the Company's customers' products and production processes (for instance, by reducing energy consumption and environmental costs). The Company's management is of the opinion that the Company's substantial investments in environmentally compatible product technologies and processes will enable the Company to take advantage of business opportunities created by increasingly stringent regulatory standards. Achieve Best in Class Manufacturing. Management is committed to increasing the cost competitiveness of the Company's businesses by improving the efficiency of existing operations and reducing costs. The Company's Manufacturing Council is responsible for worldwide coordination with the Segments of the Company's manufacturing assets, including utilization of production capacities and associated capital expenditure requirements. The Company intends to increase its production capacity through continued productivity improvements, debottlenecking, improved utilization of existing plants and outsourcing when such activities are more economical than constructing new plants. Identification and rationalization of underutilized assets will be a priority, complemented by a new focus on reducing capital intensity and costs, to match or exceed benchmark industry standards. The Company has initiated an integration of its previous three supply chains into a single streamlined global supply chain system that will increase efficiency across the Company. This initiative is ongoing. Chemicals Industry Overview The chemicals industry is generally divided into three major categories: commodity chemicals, intermediates and specialty chemicals. Commodity chemicals and intermediates are produced in large volumes using established manufacturing processes and generally have multiple producers and do not command high premiums. Specialty chemicals, such as those produced by the Company, are high value-added products used in the manufacture of a wide variety of products. They are produced in relatively low volumes which must satisfy well-defined performance requirements and specifications. Specialty chemicals are often critical components of the end products in which they are used. Consequently, they are often developed for customers' specific manufacturing requirements, making substitution of alternative products more difficult and resulting in a close relationship between the specialty chemicals producer and the customer. Rapid response to customers, consistent product quality and reliability of supply are important competitive factors in specialty chemicals businesses, with price competition generally increasing as particular industry segments mature and customers or other chemical companies consolidate or otherwise become more global. Continuous innovation and development of new product applications and process improvements give scope for long-term value added and attractive profit margins. Management is of the opinion that patent protection and trademarks alone do not create a sustainable competitive advantage in the specialty chemicals industry. A specialty chemicals company's ability to extract value from its patent protected products and processes is dependent upon its ability to apply its technical expertise in the manufacturing process to meet customer requirements. The Company estimates that the global specialty chemicals market is valued at around CHF 100 billion and consists of some 40 market segments. Plastic Additives Overview Plastic Additives maintain or improve the desirable properties, or suppress the adverse properties, of materials and improve the stability of these materials during processing, thereby facilitating or improving the efficiency of industrial processes. In addition, additives can improve quality and provide long-term stability and economical viability for the final product by, for example, protecting the product against aging, corrosion or wear. Plastic Additives business has for many years experienced strong growth and profitability resulting from its leadership in the additives markets. The Segment is the leading supplier of stabilizers and stabilizer systems to the plastics industry. In addition, the Segment is a leading supplier of ashless antioxidants and extreme pressure and antiwear agents to the lubricant industry. Plastic Additives is managed as an integrated global business and primarily focuses on three market segments: (i) Polymer Products, (ii) Base Polymers, (iii) Process and Lubricant Additives. The additives market is affected by shorter-term economic and industrial cycles experienced by its customers, 15 particularly in the plastics and oil industries, which in turn are dependent on the automotive, construction and packaging industries. Increasing environmental and safety regulations governing the industries of the Company's customers have also affected the additives market. These regulations have resulted in an increased demand for more innovative products with lower environmental impacts. The Company's products are developed for sensitive applications, such as use with food and drinking water. These applications are subject to a higher degree of regulatory control. Other regulatory initiatives being introduced in the area of environmental control (for example, the removal of volatile organic chemicals) have led to the reformulation of some products and greater engineering oversight in production by the Company. Management estimates that the additives market in which the Segment operates was approximately CHF 9 billion in 2001, of which the polymer products and base polymers market represented CHF 7 billion and the lubricant additives market CHF 2 billion. Management is of the opinion that many industries served by Plastic Additives will experience significant growth in future periods. In certain areas of these industries demand for additive products is expected to be equal to or in excess of this industry growth. The Segment's extension beyond stabilization into additives for properties modification should contribute to above market growth. Additives for lubricants also have the potential for sales growth in excess of market growth, principally due to replacement of older formulations by more effective and environmentally compatible products. Management is of the opinion that the Company's Segment Plastic Additives is well positioned to participate in these growth areas with its products. The table below sets forth certain historical combined financial information and the percentage contribution to the consolidated Company net sales from continuing operations for Plastic Additives for the years ended December 31, 2001, 2000 and 1999. (amounts in millions of CHF) 2001 2000 1999 ---- ---- ---- Total Segment net sales ................. 1 834 1 959 1 784 Operating income ........................ 271 314 276 Capital expenditures .................... 80 67 54 Research and development expenditures ... 73 82 64 Contribution to the consolidated Company net sales from continuing operations, in percentage .............. 25% 25% 25% -------------------------------------------------------------------------- Strategy Leveraging industry leadership The Plastic Additives Segment will continue to leverage its leading position in the global polymer additives market through innovation and marketing alliances to provide new effects, integrated customized solutions and one-stop shopping to the plastics industry. Growth is supported by operational excellence in particular, lowest-cost manufacturing. Innovation supports differentiation in the traditional stabilizer business and provides technology platforms for new areas such as surface modifiers and flame retardants. In the lubricant additives market, meeting the ever-increasing trend toward higher engine performance with environmentally friendly products provides substantial growth opportunities. New business opportunities will continue to be developed either through research and development activities or selective acquisitions. Products Plastic Additives products add value to the polymer and lubricant industries. The Segments product offerings for the polymer industry include: o Polymer Protection products such as antioxidants, processing stabilizers, UV absorbers and hindered amine light stabilizers (HALS) o Special Effects such as antifogging agents, antistatic agents, slip agents, antimicrobials, clarifying agents, shelf life extension, flame retardants, optical brighteners and additives for degradable plastics. o Polymer Recycling such as antioxidants and light stabilizer systems. o Specialized product forms and multicomponent product packages which simplify the incorporation process and improve worker hygiene and resin quality. o Polymer Design such has polymerization regulators. The Segment's leading product lines in the polymer protection category are Ciba(R) IRGANOX(R) antioxidants, Ciba(R) IRGAFOS(R) processing stabilizers, Ciba(R) FIBERSTAB(R) L phenol-free processing stabilizers, Ciba(R) IRGASTAB(R) FS phenol-free processing stabilizers, Ciba(R) CHIMASSORB(R) light stabilizers /UV absorbers, Ciba(R) TINUVIN(R) light stabilizers /UV absorbers. 16 In addition to the Segments traditional IRGANOX(R) heat stabilizer range, IRGANOX(R) HP and IRGANOX(R) XP are examples of how additives support the polymer industry with new, innovative products and services. Both the IRGANOX(R) HP and IRGANOX(R) XP ranges combine HP-136, the Company's innovative lactone technology, with established high-performance phosphites. Some examples of applications for these products are IRGANOX(R) HP which ensures excellent stabilization for polyurethane foams and provides excellent protection of polyolefin during processing. The IRGAFOS(R) processing stabilizer range ensures efficiency in processing and maintenance of polymer properties across a broad range of processing conditions. FIBERSTAB(R) L & IRGASTAB(R) FS phenol-free processing stabilizers systems set a new standard in the processing stabilization of polyolefin fibers with excellent gas-fade resistance. They provide outstanding processing stability to polyolefin fibers while virtually eliminating any gas-fade discoloration that may occur when phenolic systems are used. The systems also provide good long-term thermal stability and enhanced light stability. FIBERSTAB(R) L is particularly suited for PP fiber applications such as carpets and hygienic non-wovens. CHIMASSORB(R) 2020 is a new high performance hindered amine light stabiliser with high molecular weight. Optimizing the balance between exceptional UV stabilisation, long-term thermal stabilisation, minimal pigment interaction, and improved melt flow control, CHIMASSORB(R) 2020 exemplifies Ciba's continuing efforts to achieve the best performance in UV light protection possible, complimenting our already comprehensive range of CHIMASSORB(R) light stabilisers. Ciba(R) TINUVIN(R) light stabilizers /UV absorbers TINUVIN(R) 123 S is the preferred solution for demanding polyolefin outdoor applications. TINUVIN(R) 1577 is the innovative UV absorber for glazing, thin films and laminates. Ciba(R) POLYAD(R) customer-specific blends are multi-component additive packages in easy-to-handle forms. The Segment's leading product lines in the special effects additives category are ATMER(TM)- antifogging agents, ATMER(TM)- antistatic agents, ATMER(TM) SA - slip agents, Ciba(R) IRGAGUARD(TM) antimicrobial line, including Ciba(R) IRGAGUARD(R) A - antialgae and Ciba(R) IRGAGUARD B - antibacterial, Ciba(R) IRGAGUARD(R) B - antimicrobials, Ciba(R) IRGASTAT - antistatic agents, Ciba(R) IRGACLEAR(R) - clarifying agents, Ciba(R) SHELFPLUS(TM) - shelf life extension, Ciba(R) FLAMESTAB(TM) NOR - flame retardant, Ciba(R) UVITEX(R) optical brighteners. The Segments polymer products are branching out from their core polymer protection and stabilization business to take advantage of new market opportunities in the area of property enhancement. With this new focus on surface modification, the Segment is improving materials with special physical effects, thereby improving surface properties and product performance. A step in that direction has been the expansion of an antistatic and antifogging product range, which modifies surfaces to temper the buildup of static charge or water as fog. The Segment is identifying opportunities along the polymer product value chain and promoting property enhancements by entering into branding partnerships. For example, OTTO Entsorgungssysteme GmbH, the leading waste container manufacturer in Europe, developed a garbage bin whose plastic contains Ciba(R) IRGAGUARD(TM) B 1000(R), an antimicrobial that helps reduce the proliferation of bacteria and mold, cutting down on odors. The trend of plastics replacing other materials, such as glass and wood, is expected to continue. This offers the Segment opportunities with its base polymers and polymer products to further work with customers to develop new applications for the Segments products, for example, in the automotive industry where engineering plastics are replacing traditional materials. In addition, in the area of base polymers the Segment is continuously expanding its services businesses area to provide customers with tailor-made additives blends as part of a marketing approach that emphasizes customer contact and quick response times. In 2001, Plastic Additives Segment introduced "Ciba Expert Services" which will enhance the customers' business performance via the delivery of knowledge-based services. This will be accomplished by applying a global services network possessing Plastic Additives' comprehensive expertise and experience in the plastics industry. "Ciba Expert Services" is an innovative business approach drawing on more than 50 years of experience in supporting the Company's global plastics business. This well recognized know-how and experience is now available on the open market. For the lubricant industry, the Segment offers: o Single components for engine oils and industrial lubricants such as antioxidants, extreme pressure/ antiwear additives, friction modifiers, corrosion inhibitors and metal deactivators. o Services such as preblends o Additives packages for industrial lubricants. o Segments product offerings are used in almost every plastic product or lubricant application. 17 Product offerings in the polymer additives field include high performance plastic additives that extend and enhance the performance of polymers. In this area, the Segment offers polymer stabilizers, clarifying agents, optical brighteners, surface modifiers, antimicrobials and preblends. In the Process and Lubricant Additives business, the focus is on working with customers to develop additives for lubricants, such as Ciba(R) IRGALUBE(R) F10, that enhance the performance of engine oils while providing environmental benefits. Management is of the opinion that products such as additives for plastics recycling, ashless antioxidants for lubricants are becoming more important with increased environmental awareness and regulation. Customers and End-User Markets In 2001, end-user markets such as the packaging industry accounted for approximately 28 percent, the construction industry for 18 percent, the plastic industry for 15 percent, automotive industry for 8 percent and the lubricants industries for 8 percent of the Segment's sales. A number of other smaller end-user markets account for the remaining 23 percent of the Segment's sales. The top ten customers of the Segment accounted for approximately 30 percent of the Segment's 2001 sales. Research and Development Plastic Additives spends approximately 4 percent of sales each year on research and development activities (CHF 73 million in 2001). The primary objective of these research and development activities is to achieve and maintain a high level of the Segment sales of "innovative products". Innovative products are defined as patent protected products or products and applications younger than five years. Certain patents covering some of the Segment's important products such as light stabilizers, antioxidants and processing stabilizers expired in 2001. Management is of the opinion that expiration of these patents will not have a material effect on its result of operations because of the Company's level of customer service associated with these products and processes. In addition, management is of the opinion that Plastic Additives has a strong product pipeline and its goal is to increase substantially the percentage of sales of patent protected products over the medium to long term. Products currently being developed include new classes of light stabilizers, anti-static additives, process stabilizers for plastics, flame retardants and process chemicals for reactive monomers. In addition, in response to increasing environmental and safety regulations, Plastic Additives is developing additives for plastics recycling, a metal-free replacement for zinc dithiophosphates in lubricants and a replacement for stabilizers and corrosion inhibitors containing heavy metals. Research and development activities focus on new product development as well as process improvements that aim at lowering costs and increasing productivity, speeding time-to-market of new products and improving responsiveness to customers by increased integration of manufacturing processes with the Segment's distribution network. Competition Historically, the majority of Plastic Additives competitors have operated only in selected markets and produced narrow product ranges. However, competitors are consolidating and expanding their product ranges and geographical reach. The Segment's main competitors include BASF, Clariant, Cytec and Great Lakes. In addition to these competitors, Plastic Additives has a number of smaller competitors, particularly in Asia, many of whom offer off-patent products at low prices. Management is of the opinion that the Segment's competitive strengths are its global leadership position, global presence, consistency in product quality, excellence in innovation, broad product range, ability to provide customer specific solutions and its relationships with multinational customers. Coating Effects Overview Coating Effects develops, manufactures and markets additives, synthetic pigments, pigment and additive concentrates for the coatings, printing, imaging, electronic and plastics and fibers industries. Coating Effects is a leading global manufacturer of organic pigments and the leading supplier of photoinitiators and lightstabilizers to the coatings, graphic arts and electronic industries. Coating Effects is managed as an integrated global business and primarily focuses five market segments: (i) coatings, (ii) plastics, (iii) electronic materials, (iv) imaging & inks and (v) masterbatches. Pigments are insoluble coloring materials used for the coloration of printing inks, paints, plastics and synthetic fibers in products such as automotive paints, transportation coatings, synthetic carpets and upholstery, 18 printed materials and publications, building paints, packaging, cables, flooring, toys, industrial goods and equipment, furniture, consumer goods and electronics. Additives maintain or improve the desirable properties, or suppress the adverse properties, of materials and improve the stability of these materials during processing, thereby facilitating or improving the efficiency of industrial processes. In addition, additives can improve quality and provide long-term stability and economical viability for the final product by, for example, protecting the product against aging, corrosion or wear. Management estimates that the market in which Coating Effects competes was approximately CHF 14 billion in 2001. Growth in the global pigments market tends to track GDP development. There is a move towards high value pigments and improved additives as customers upgrade their products and the technical performance requirements of the colorants and additives they incorporate in their formulations. Changes in technology in the customer base provide opportunities for new products, for example in the fast changing electronics industry. In recent years, environmental pressure to replace heavy metals such as cadmium and lead has led to an increased demand in organic pigments. The impact of the low volatile organic content (VOC) regulations is that solvent usage is being reduced in the printing ink and coatings industries with alternative technologies, such as UV-curing, powder coatings, high solid paint systems and water-based systems. With the Segment's current portfolio and innovation projects it is well placed to take advantage of these trends. There also is a need for products which make processing easier and more cost effective for customers, in all the traditional served industries. In particular, there is a focus on ease of product handling, for example, low dusting colorants and additives. The Segment's range of products includes liquid forms, granules, dispersions and concentrates. As pigment manufacturers have traditionally had strong market positions in particular colors (for example, the Segment has a strength in high performance, opaque red pigments used in automotive paint), color trends can benefit particular producers while negatively affecting others. The high performance and high value pigments market are characterized by capital-intensive production facilities and demanding standards for high and constant quality. The major applications for these pigments are automotive paints, general industrial paints, decorative paints, plastics and packaging and specialty inks, with competition based mainly upon the technical properties of the products. In contrast, the classical pigments market is characterized by relatively mature products with minimal patent protection and strong competition from low cost manufacturers in emerging countries. The major application for these pigments is printing inks. The dispersions market for organic and inorganic pigments is characterized primarily by the provision of customer-specific solutions and delivery service. The major application for dispersions is the plastics industry and the major applications for inorganic pigments are plastics and industrial paint. The additives market is affected by shorter-term economic and industrial cycles experienced by its customers, particularly in the coatings industry, which in turn is dependent on the automotive industry. Increasing environmental and safety regulations governing the industries of the Company's customers also have affected the additives market. These regulations have resulted in an increased demand for more innovative products with lower environmental impacts. The Company's products are developed for sensitive applications, such as use with food and drinking water. These applications are subject to a higher degree of regulatory control. Management is of the opinion that many industries served by Coating Effects will experience significant growth in future periods. The Segment's extension into polymer specialties for coatings should contribute to above market growth. In addition, management is of the opinion that the radiation curing industry shows high growth potential. The table below sets forth certain historical combined financial information and the percentage contribution to the consolidated Company net sales from continuing operations for Coating Effects for the years ended December 31, 2001, 2000 and 1999. (amounts in millions of CHF) 2001 2000 1999 -------------------------------------------------------------------------- Total Segment net sales ............... 1 944 2 118 1 955 Operating income ...................... 304 366 305 Capital expenditures .................. 66 65 78 Research and development expenditures . 96 102 97 Contribution to the consolidated Company net sales from continuing operations, in percentage ............ 26% 27% 27% -------------------------------------------------------------------------- Strategy Expansion through innovative technology The goal for the Coating Effects Segment is to expand the business through growth beyond the traditional 19 core markets and by seizing opportunities from new technology developments. It intends to build upon and extend its leading positions in high-performance pigments, photoinitiators and UV absorbers in its various coatings markets by launching innovative new product ranges to bring improved value to its customers. Research and development is a key driver for entering new markets, particularly in the fast-paced world of electronic materials. The Segment plans to (i) increase sales and market share in its high potential market segments, inks, coatings, electronic materials and plastics, by emphasizing product innovation, (ii) fully exploit its high performance pigments product lines in automotive paints, (iii) expand into high value pigments markets such as general industrial paints, decorative paints, plastics and packaging inks, (iv) develop a service business offering color matching and formulation advice and (v) maintain its position as a low cost manufacturer of its core classical pigments through further productivity improvements. The Coatings business line is promoting its recent entry into the polymer specialties sector, particularly with its dispersants, rheology agents and specialty binders for water based inks. This new business activity, which is based on technologies acquired from Allied Colloids and Efka, is a key growth platform for coatings. In automotive coatings, the Segment continues to focus on developing environmentally friendly technologies, such as the promising HPT(hydroxy-phenyl-triazine) based UV absorbers for use in solvent-free powder coatings applied on cars. The business is also developing the next generation of photoinitiators for pigmented coatings. Products The Segment's leading colorant product lines include the high performance pigments, Ciba(R) IRGAZIN(R), Ciba(R) CINQUASIA(R) and Ciba(R) CROMOPHTAL(R), used in coatings, inks, plastics and synthetic fibers, the ULTRAGREEN and SUPERGREEN functional dye products used in the Optical Information Storage business (CD-R) and Ciba(R) IRGALITE(R) classical pigments used primarily in printing inks. The Segment also produces pigment dispersions and masterbatches. The Segment's management is of the opinion that its Diketo-Pyrrolo-Pyrrol (DPP) technology offers distinct advantages to users of its high performance pigments for coatings and plastics. DPP pigments are currently being used in automotive paints and high performance plastics materials. Current environmental pressure on cadmium pigments opens up good growth opportunities for DPP pigments in the plastics industry. The Segment does not believe it has yet fully exploited the benefits of DPP technology in the automotive industry or in other paint, plastics or inks applications. The Segment's leading additives products lines include, Ciba(R) TINUVIN(R) light stabilizers for coatings, inks and photographs, Ciba(R) IRGACURE(R) photoinitiators for ultraviolet curing of coatings, paints, inks and electronic materials and the polymer specialty rheology agents and dispersants for coatings. The Segment also produces corrosion inhibitors for metal coatings, stabilizers and process chemicals for photographic and photo-reproduction systems, algaecides for antifouling and dispersion paints. Management is of the opinion that products such as photoinitiators for solvent-free coatings are becoming more important with increased environmental awareness and regulation. Customers and End-User Markets In 2001, Coating Effects supplied pigments and additives to the paint and coatings industries, the printing ink industry, the plastics industry, the synthetic fibers industries and the electronic materials industry. The top ten customers of the Segment accounted for approximately 31 percent of the Segment's 2001 sales. In 2001, the end-user markets such as the automotive industry accounted for approximately 22 percent, the imaging and publication industry for 14 percent, the packaging industry for 18 percent, the electronics industry for 14 percent and the construction industry for 10 percent of the Segment's sales. A number of other smaller end-user markets account for the remaining 22 percent of the Segment's sales. Consolidation and globalization have occurred in certain of the customer industries served by the Segment, particularly in the coatings and printing ink industries. The effect of such consolidation and globalization is that pressure is exerted on suppliers towards global pricing. Research and Development Coating Effects spends approximately 5 percent of sales each year on research projects (CHF 96 million in 2001). The primary objective of these research and development activities is to achieve and maintain a high level of the Segment sales of "innovative products". Innovative products are defined as patent protected products or products and applications younger than five years. Pigment products currently being developed by the Segment include high value pigments with a new standard of performance to price ratio (a novel range of polymer soluble dyes), novel granule forms of pigments, solvent-free dispersions, pigments for optical storage and color filters. The Segment is also developing colorants for digital ink jet printing on paper and plastic. 20 Certain patents covering some of the Segment's important products such as a hindered amine light stabilizer an algaecide expired in 2001. Management is of the opinion that expiration of these patents will not have a material effect on its result of operations because of the Company's level of customer service associated with these products and processes. Although patent protection for part of the DPP product range will expire in 2002, the Company has newer patents covering more recently launched or yet to be launched products. Additive products currently being developed include high performance photoinitiators for coatings, imaging and information storage, new classes of light stabilizers, UV-absorbers, sterically hindered amines for coatings as well as algaecides for antifouling paints. In addition, in response to increasing environmental and safety regulations, Coating Effects is developing various additives like waterborne, powder or radiation curable systems. Competition Although the pigments market is highly competitive, particularly in the classical pigment sector, the high capital and know-how requirements have resulted in a relatively limited number of pigment manufacturers in the high performance and high value pigments sectors. The Segment's principal competitors in the pigments field, include BASF, Dainippon Ink and Clariant, and in the photoinitiators and in the photoinitiators and light stabilizers fields, Lamberti, BASF, Clariant and Asian producers. The Segment competes in the high performance pigments, high value pigments, photoinitiators and light stabilizers markets on the basis of innovation and technical competence, relationships with global customers and quality. The Segment competes in the classical pigments market on the basis of its relationships with global customers, quality of service and price. Despite a certain trend toward commoditization in the classical pigments market, management is of the opinion that Coating Effects can continue to compete effectively through innovation and a continued focus on remaining a low cost producer. Price competition is prevalent in the classical pigments segment and has been led by Asian producers seeking to gain market share outside Asia. Management is of the opinion that the Segment's competitive strengths are its commitment to technological innovation, quality and process leadership, global presence and competitive cost structure, as well as its relationships with global customers and major retailers. Water & Paper Treatment Water & Paper Treatment offers products and services for the market segment paper and broad production starting with wet-end and progressively moving towards dry end application. The range of products and services offered increase mill productivity as well determining appearance, handle and performance of the paper by making it water repellent, glossy or white. The Segment also offers products and services in the market segment water treatments that are used to help clean industrial and municipal effluents and to improve the efficiency of mineral and oil processing. Water & Paper Treatment is one of the leading global suppliers to the paper industry and the municipal and industrial waste-water treatment industries and is managed as an integrated global business. Management estimates that the Water & Paper Treatment market in which the Segment operates was approximately CHF 16 billion in 2001, of which the paper market represented CHF 7 billion and the water treatment market represented CHF 9 billion. The Water & Paper Treatment market has been affected by increasing environmental and safety regulations governing the industries of the Company's customers. These regulations have resulted in an increased demand for more innovative products with lower environmental impacts. Management is of the opinion that many industries served by Water & Paper Treatment will experience significant growth in future periods. In certain areas of these industries demand for water treatment and paper chemicals is expected to be equal to or in excess of this industry growth. The table below sets forth certain historical combined financial information and the percentage contribution to the consolidated Company net sales from continuing operations for Water & Paper Treatment for the years ended December 31, 2001, 2000 and 1999. 21 (amounts in millions of CHF) 2001 2000 1999 -------------------------------------------------------------------------- Total Segment net sales ................. 1 486 1 558 1 408 Operating income ........................ 82 111 68 Capital expenditures .................... 52 52 90 Research and development expenditures ... 34 36 31 Contribution to the consolidated Company net sales from continuing operations, in percentage ......................... 20% 20% 19% -------------------------------------------------------------------------- Strategy Provider of choice in Water & Paper Treatment Water & Paper Treatment intends to complete the turnaround and establish a growth platform. To do this, the Segment has to rationalize its total cost base, drive productivity and efficiency in its manufacturing base, and align all processes in terms of business process excellence. The paper group intends to grow from its strong base in whiteners, colors, specialty effects, and retention aids while filling the necessary gaps in its range of functional chemicals to offer a total package solution to customers where necessary. Simultaneously, the water treatment group will focus on driving geographic expansion into Asia and South America. As businesses come under increased pressure to recycle and meet stringent environmental regulations, the Segment will look to enhance its strong position in the market of delivering clean water. Management is of the opinion that increasing literacy rates and e-commerce packaging needs will create higher demand in the paperboard and printing paper markets. Products Leading product lines in the paper market segment include retention and drainage aids, Ciba(R) TINOPAL(R) whiteners for paper and Ciba(R) PERGASOL(R) dyes for paper coloration. In the paper industry, there is an ongoing demand for more efficient production processes and this is where the patented technology of the Company in retention and drainage aids brings value to the customers. At the same time consumers are demanding more innovative paper products and here the Company's range of effect chemicals - whiteners, colors, color formers & barrier effects - allow the Company to be a leading innovator in meeting consumer requirements. The rapid change of technology, the globalization of the customer base and the growing importance of emerging economies are likely to shape the future direction of these markets. Of particular importance are the growing environmental regulations which are expected to contribute to a growth in chemical demand in excess of that of the paper and board industry. The Segment develops, produces and sells the following products to the water treatments market segment: Ciba(R) Zetag(R), Ciba(R) Magnafloc(R) and Ciba(R) Magnasol(TM) polyacrylamide polymers, organic coagulants, and poly acrylic acid polymers. The main usage of these products is as flocculants for separation of solid particles from water. The water treatments product range also includes, dispersants to reduce the viscosity and increase the performance of inorganic pigments and fillers in water systems and monomers as building blocks used in water treatment, mineral recovery, adhesives, synthetic fibers and antistatic finishes. Management is of the opinion that products such as delivery of clean water are becoming more important with increased environmental awareness and regulation. Customers and End-User Markets In 2001 Water & Paper Treatment supplied products and services to the paper and municipal and industrial waste-water treatment industries. The top ten customers of the Segment accounted for approximately 18 percent of the Segment's 2001 sales. In 2001, end-user markets such as the paper industry accounted for approximately 52 percent, the pollution control industry for 28 percent, the extraction industry for 13 percent and the agricultural industry for 3 percent of the Segment's sales. A number of other smaller end-user markets account for the remaining 4 percent of Segment sales. 22 Research and Development Water & Paper Treatment spends approximately 2 percent of sales each year on research and development activities (CHF 34 million in 2001). The primary objective of these research and development activities is to achieve and maintain a high level of the Segment sales of "innovative products". Innovative products are defined as patent protected products or products and applications younger than five years. Products currently being developed include new whiteners and direct dyes for paper application, novel color formers for use in carbonless and thermal papers and a new retention and drainage systems designed to further improve mill productivity. A new generation of water-soluble flocculants is being developed for the treatment of drinking water and to clarify polluted water. Competition Historically, the majority of Water & Paper Treatment's competitors have operated only in selected markets and produced narrow product ranges. However, competitors are consolidating and expanding their product ranges and geographical reach. The Segment's main competitors include BASF, Clariant, Crompton & Knowles, Floerger, Nalco, Hercules/BetzDearborn, Buckman, Calgon and Stockhausen. The Water Treatments business line competes primarily with (i) production focused companies, which focus primarily on low cost production and volume, (ii) service focused companies, which concentrate on offering a broad range of products and high levels of technical products, and (iii) partially integrated companies, which only focus on production and sales. Competition in the whiteners segment has been intense due to overcapacity, which is likely to continue for several years. Significant surplus capacity also exists in the paper dye segment of the specialty colors market. Management is of the opinion that the Segment's competitive strengths are its global leadership position, global presence, consistency in product quality, excellence in innovation, broad product range, ability to provide customer specific solutions and its relationships with multinational customers. Textile Effects Overview Textile Effects develops, manufactures and markets organic and inorganic synthetic dyes and other chemicals for natural and synthetic fibers, focusing on cellulose, polyester, wool and polyamide and their blends. Based on 2001 sales, management estimates that the Segment Textile Effects is one of the largest textile effects businesses in the world. The Segment is the world's second largest manufacturer of textile dyes, the largest manufacturer of dyes for wool, polyamide carpets and automotive fabrics, the second largest manufacturer of reactive dyes and disperse dyes for polyester and one of the leading suppliers of textile chemicals to the textile industry. Other major product offerings into these industries are whiteners, antimicrobials, UV (ultraviolet) protection products and specialty colors for textile processing and finishing for the textile industries. The textile chemicals business provides customers with an integrated range of products and services for fabric processing and finishing, including sizing, pretreatment, dyeing and printing auxiliaries, whiteners, comfort and easy care, UV protection, oil and water repellents, flame retardants and coating chemicals. Management estimates that the total textile dyes and treatments market was approximately CHF 14 billion in 2001. Demand for textile dyes is mainly driven by developments in the textiles markets, such as fashion trends, and by environmental regulations. The textile industry is shifting to Asia, where production of textiles is moving from higher wage countries (such as Japan, South Korea and Taiwan) to lower wage countries, particularly those with fast growing internal markets (such as China, India and Vietnam). 23 The table below sets forth certain historical combined financial information and the percentage contribution to the consolidated Company net sales from continuing operations for Textile Effects for the years ended December 31, 2001, 2000 and 1999. (amounts in millions of CHF) 2001 2000 1999 -------------------------------------------------------------------------- Total Segment net sales ................. 1 673 1 841 1 683 Operating income ........................ 183 204 117 Capital expenditures .................... 32 37 24 Research and development expenditures ... 39 44 41 Contribution to the consolidated Company net sales from continuing operations, in percentage ......................... 23% 23% 23% -------------------------------------------------------------------------- Strategy The provider of Integrated Textile Solutions The Textile Effects Segment will focus on growing its high quality line of products and services while at the same time continuing its considerable efforts in managing production at a low cost. It intends to combine its experience in textile dyes, its full range of chemicals for the pretreatment, dyeing, printing and finishing of textiles and its expertise and related services for both natural and synthetic fabrics and garments to offer total customer solutions for all major fibers, everywhere along the whole textile value chain. Products The Segment's leading dyestuffs product lines include CIBACRON reactive dyes for cellulose, Ciba(R) LANASET(R) and Ciba(R) NEOLAN(R) for wool, Ciba(R) TECTILON(R) acid dyes for carpet and Ciba(R) TERASIL(R) and Ciba(R) TERATOP(R) disperse dyes for polyester. In addition, the Segment manufactures vat and direct dyes for cellulose, and cationic dyes for polyacrylonitril. The Segment's leading textile chemical product lines include Ciba(R) UVITEX(R) whiteners for textiles, CIBATEX(R) UV absorbers for the protection of textiles against ultraviolet radiation; Ciba(R) PYROVATEX(R) flame retardants and Ciba(R) ALCOPRINT(R) print thickeners. Ultraviolet (UV) absorbers are supplied to the textile industry. UV absorbers are used to provide protection to the skin against the harmful effects of ultraviolet A (UVA - long wave-length) and ultraviolet B (UVB - short wave-length) radiation, both of which are identified as high-risk causes of skin cancer. UV absorbers are integrated into the base manufacturing of textiles and fibers, to provide protection against ultraviolet radiation, in items such as clothing, tents, outdoor awnings and umbrellas. Immediate growth prospects are particularly strong in regions where concerns for effective broadband (both UVA and UVB) protection from sunlight are high as well as in regions where awareness is growing on the issues of rising skin cancer rates and the consequences of ozone depletion. Textile Chemicals include a full range of products provided to the textile industry, which serves three end-user segments: (i) apparel, (ii) home furnishing and (iii) technical textiles. The main factors influencing growth in textile chemicals are fashion trends, and the level of personal disposable incomes. The Segment's core European markets are experiencing a plateau in demand, however, substantial growth continues in Eastern Europe, Asia and Latin America. Customers and End-User Markets In 2001 Textile Effects supplied the clothing/apparel industry, the home furnishing industry and the industrial textile industry (including automotive textiles). In 2001, the top ten customers of the Segment accounted for approximately 7 percent of the Segment's 2001 sales. The customer base of the textile dyes market is highly fragmented. In 2001, the end-user markets of the fibers, carpets, textiles industries accounted approximately for 94 percent with the automotive industry accounting for the remaining 6 percent of the Segment's sales. While the clothing/apparel industry is predominant in Asia, the automotive textiles and the carpet industry is focused in North America and Europe. 24 Research and Development Textile Effects spends approximately 2 percent of sales each year on research projects (CHF 39 million in 2001). The primary objective of these research and development activities is to achieve and maintain a high level of the Segment sales of "innovative products". Innovative products are defined as patent protected products or products and applications younger than five years. Textile dyes currently being developed by the Segment include reactive dyes with improved ecological and economical performance, a range of economically and technically superior reactive dyes for printing, a range of wetfast reproducible and economical disperse dyes, metal free dyes for wool, replacements for indigo, and sulphur and naphthol dyes. Textile chemicals currently being developed by the Segment include ecologically improved flame retardants for cotton textiles Competition The markets in which Textile Effects operates are highly competitive. There are worldwide overcapacities in both the textile dyes and the textile processing markets. Until the mid-1980's the Segment's principal competitors were BASF, Bayer, Hoechst, Sumitomo Chemical, Sandoz and ICI. Over the last 18 years, however, a large number of smaller, low-cost textile dyes producers, located primarily in Asia, have entered the market and a number of the traditional manufacturers have consolidated or divested their operations. For example, Bayer and Hoechst combined their textile dye operations to form DyStar in 1995, ICI divested Zeneca in 1993, BASF acquired the textile dyes business of Zeneca in 1996. In 2000, DyStar and BASF merged their dyes businesses retaining the "DyStar" corporate name. Sandoz divested its specialty chemicals operations (including textile dyes) with the formation of Clariant in 1995 and finally Clariant and Hoechst specialty chemicals merged in 1997. Management is of the opinion that the Segment's competitive strengths are its commitment to technological innovation, quality and process leadership, global presence and competitive cost structure, as well as its relationships with global customers and major retailers. Home & Personal Care Overview Home & Personal Care is managed as an integrated global business and develops, manufactures and markets products for two end-use industries: (i) home and fabric care and (ii) cosmetic and hygiene. Among its major product offerings into these industries are whiteners for detergents, hygiene effects for home and fabric care and personal care products; UV (ultraviolet) absorbers for fabric and personal care as well as specialty colors for home and personal care products. Based on 2001 sales, management estimates that the Home & Personal Care is the leading global manufacturer of whiteners and the leading provider of hygiene effects, mainly to the personal care market segments. Home & Personal Care is dedicated to the production of high value chemical ingredients for manufacturers of non-durable home and personal care consumer goods. Management estimates that the total market for specialty chemicals which are incorporated into home and personal care products was approximately CHF 19 billion in 2001. The table below sets forth certain historical combined financial information and the percentage contribution to the consolidated Company net sales from continuing operations for Home & Personal Care for the years ended December 31, 2001, 2000 and 1999. (amounts in millions of CHF) 2001 2000 1999 -------------------------------------------------------------------------- Total Segment net sales ................. 430 426 414 Operating income ........................ 67 58 62 Capital expenditures .................... 25 23 16 Research and development expenditures ... 24 21 19 Contribution to the consolidated Company net sales from continuing operations, in percentage ......................... 6% 5% 6% -------------------------------------------------------------------------- Strategy Technology opportunities building a bright future The Home & Personal Care Segment aims to gain fast access to new markets with novel products and solutions by building on its technological strengths and customer relationships in the fields of whiteners for laundry detergents and hygiene effects. The Segment seeks to match the kind of success achieved with the rapid market acceptance of its line of UV absorbers in sunscreens and laundry detergents and rinse conditioners by pursuing profitable growth in the personal care market, including moisturizers, hair dyes and conditioners. The Segment's 25 marketing strategies are tailored to the specific needs of its customers who are marketing directly to the end consumer. Complementary opportunities for other segments, for example, those serving the packaging industry, may result. Products The Segment's leading product lines include Ciba(R)TINOPAL(R) whiteners for detergents; Ciba(R) TINOSORB(R) UV absorbers for the protection of skin against ultraviolet radiation; Ciba(R) IRGASAN(R), Ciba(R) IRGACARE(R) and Ciba(R) TINOSAN hygiene effects for soaps, toothpaste, detergents, and disinfectants; Ciba(R) SALCARE(R) rheology modifiers and conditioning polymers; Ciba(R) TINODERM(TM) carrier systems for personal care applications; and Ciba(R) TINOTEX(TM) laundry additives for comfort enhancement. The Segment's main product categories and their characteristics can be broadly summarized as follows: Whiteners are supplied to the detergents industry: In detergents, the demand for whiteners has stagnated in the European and United States markets, while the Asian markets continue to show signs of growth. Overall supplier capacity utilization are now running at high levels. Hygiene effects are high value-adding ingredients supplied to the cosmetic and hygiene, home and fabric care industries. They are mainly used in soaps, deodorants, toothpastes, dishwashing liquids, detergents and disinfectants for hospitals and medical purposes. The Segment's products IRGASAN(R), IRGACARE(R) and TINOSAN continue to be recognized as the industry standard for efficiency, performance and safety by key customers. Ultraviolet (UV) absorbers are supplied to the fabric, cosmetic and hygiene industries. UV absorbers are used to provide protection to the skin against the harmful effects of ultraviolet A (UVA - long wave-length) and ultraviolet B (UVB - short wave-length) radiation, both of which are identified as high-risk causes of skin cancer. UV absorbers are manufactured for use in a variety of products applied directly to the skin, including sunscreens and lotions and are used in detergents. Immediate growth prospects are particularly strong in regions where concerns for effective broadband (both UVA and UVB) protection from sunlight is high. Personal care specialties, such as rheology modifiers, ingredient protectants, colors, moisturizers and carrier systems, enhance the quality of end consumer products in the cosmetic and hygiene industries. Rheology modifiers allow customers to produce formulations to the highest standards of quality and consistency without using heat or neutralizing agents. Colorants are used in products ranging from soaps to toothpaste. The Segment also utilizes microscopic nanocolloid technology to deliver active ingredients for more direct application of effects. In addition, the Segment researches various natural substances for use in the field of personal care as active ingredients. Customers and End-User Markets In 2001 Home & Personal Care supplied the home and fabric care and the cosmetic and hygiene industries. The top ten customers of the Segment accounted for approximately 63 percent of the Segment's 2001 sales. The home and fabric care market is dominated by a small number of large global customers with strong purchasing power and a desire to form strategic alliances with suppliers. In 2001, the end-user markets for home and fabric care accounted for the majority of the Segment's sales, with the cosmetic and hygiene industries accounting for the remainder. Research and Development Home & Personal Care spends approximately 6 percent of sales each year on research and development activities (CHF 24 million in 2001). The primary objective of these research and development activities is to achieve and maintain a high level of the Segment's sales with "innovative products". Innovative products are defined as patent protected products or products and applications younger than five years. Products recently developed by the Segment include new UV absorbers for sunscreens, a new photobleach agent for laundry detergents, a new antimicrobial for use in Home & Fabric Care applications and new nanocolloid encapsulated active ingredients for skin care products. Competition The Home & Personal Care Segment mainly competes with other large global producers of specialty chemicals such as BASF, Clariant, ISP and Sigma-Aldrich. The Segment primarily competes on the basis of innovation, product quality and technical performance, reliability of delivery, technical support, price, as well as customer contacts and relationships. The importance of these competitive factors varies among the customer industries served by the Segment. 26 The Performance Polymers Division (Discontinued Operations) On May 31, 2000, the Company completed the sale of the Performance Polymers business to Vantico, a company established by Morgan Grenfell Private Equity, the private equity arm of Deutsche Bank AG, and to certain Asian joint venture partners. Total gross proceeds from the sale were CHF 1.6 billion, which includes net debt assumed of approximately CHF 160 million. Net debt consists of approximately CHF 71 million of third party debt and approximately CHF 121 million of debt to Ciba Specialty Chemicals, offset by approximately CHF 32 million of cash. In connection with the sale of the Performance Polymers business to Vantico, the Company agreed to provide certain infrastructure related services, such as utility services and railroad access, to the Performance Polymers business at shared production facilities. The Performance Polymers business that was sold includes substantially all of the Performance Polymers division which operated in many industrial applications with performance specialty materials. Management is of the opinion that synergies with the Company's overall strategic portfolio emphasizing high value-added specialty chemicals were limited. The Performance Polymers business achieved sales of CHF 774 million for the five-month period ended May 31, 2000 (for the year 1999 and 1998, CHF 1 729 million and CHF 1 791 million, respectively). For more information, see Note 3 to the Consolidated Financial Statements. Manufacturing The Company has 64 manufacturing sites in 25 countries in important regions of the world. Currently, 40 of these sites are used primarily for chemical synthesis and the others are used to manufacture formulations that meet customer specific requirements. Europe and North America account for over 85 percent of the fixed asset base of the Company, with over 75 percent of the Company's assets located in Switzerland, the United States, Germany and the United Kingdom. All of the Company's major manufacturing facilities have qualified for International Organization for Standardization ("ISO") 9001 or ISO 9002 certification. The Company has also entered into several manufacturing arrangements and participates with shares of up to 50 percent in 4 non-consolidated joint ventures, predominantly in Asia. The Company's production costs, excluding raw materials, amounted to approximately 22 percent of sales in 2001 and in 2000. In recent years, the Company has achieved significant capacity increases at its facilities, through process and production improvements. For example, through de-bottlenecking, production capacities have been increased for high performance pigments, whiteners and antioxidants and newly developed production processes have increased capacities for hindered amine stabilizers and antimicrobials. Management is of the opinion that capacity utilization is satisfactory and provides adequate growth potential. However, improved asset utilization is a priority for the Company generally and the Company conducts an ongoing monitoring study of capacity utilization on a cross-segmental basis to improve asset utilization. The Company owns all of its principal manufacturing facilities and substantially all of the land on which such facilities are located. The Company's manufacturing strategy is to be a low cost producer, to increase productivity and to concentrate production on higher value-added products. To this end, after a period of considerable investments in new facilities, all Segments plan to focus capital expenditure on capacity, product and process improvements with a total spending of more than CHF 500 million over the next five years. Plastic Additives plans to invest over the next three years approximately, CHF 70 million in the Hindered Amine Stabilizer area, primarily in the NAFTA region. Coating Effects has concluded investments of approximately CHF 280 million for new manufacturing facilities in the UK and the USA for granules, DPP and Quinacridone pigments. In the past three years, Water & Paper Treatment has invested approximately CHF 80 million in a production site in West Memphis, Arkansas, USA, which allows for backward integration in the field of cationic monomers. Water & Paper Treatment plans to invest approximately CHF 20 million to upgrade its production site at Bradford, United Kingdom. Textile Effects invested approximately CHF 14 million from 1998 to 2000 in a consolidated production joint venture in Thailand. Textile Effects is currently implementing a new Key Manufacturing Base Concept in China, with an estimated total investment of approximately CHF 12 million. Home & Personal Care is investing in Grenzach (Germany) and Basel (Switzerland) CHF 10 million in a production facility for a new UV absorber for skin protection. 27 The Company is strengthening its position in emerging markets, particularly Asia, by expanding its facilities in these areas. For example, Plastic Additives invested approximately CHF 100 million during the last five years in a new facility in Shanghai, China and approximately CHF 15 million in an antioxidants plant in Goa, India. The Company is not dependent on any single production site. The five largest production sites of the Company are in Basel (Switzerland), Grenzach (Germany), McIntosh, Alabama (United States), Bradford (United Kingdom) and Monthey (Switzerland). Sales, Marketing and Distribution The Company sells its products in more than 120 countries through a global sales network. The sales and marketing functions are decentralized within the Company, with each Segment having its own sales and marketing strategy for its products and services. The organization of these functions varies from Segment to Segment. Sales in all Segments are generally on a purchase order basis. However, the Company has established longer-term arrangements with certain key customers or where required by customers. Such arrangements generally do not extend beyond one year. Bidding on one to three year supply arrangements has become common in the paper and detergent whiteners markets, with contracts in the paper industry tending to be for longer periods. Such bidding has tended to increase price pressure in these product segments. All distribution and order processing, warehousing and transportation are centrally managed by the Supply Chain Service organization on behalf of the Segments. Shared order desks on a regional/country level service all Segments with regards to order taking and processing, shipping and invoicing. A global network of warehouses and distribution centers, both externally and internally operated, ensures adequate coverage of the Company's distribution requirements. Contracts with major transport partners are negotiated/managed centrally. The strategy is to significantly reduce the number of partners in this field with the ultimate goal to co-operate with one global Lead Logistics Provider. In 2000, the Company was one of the first chemical companies to offer a comprehensive e-business service to all its customers: mybusiness@cibasc. The site is a secure, user-customized one-stop shop which lets customers place and track orders from all Segments, get access to product and safety information, receive technical support and learn about new applications. In addition, the Company participates in Elemica, a specialized business-to-business exchange which allows the Company, in one step, to link its Enterprise Resource Planning system directly to those of major suppliers and customers, allowing the Company to achieve higher efficiency and reduce supply-chain costs. The Company is focusing production and process development efforts on better integration of the manufacturing process with the supply chain in order to increase customer responsiveness while at the same time reducing inventories by increasing the volume of products shipped directly from the production facility to the customers. Sourcing of Raw Materials The Company utilizes a large number of specialty chemicals and base chemicals as its main raw materials in its manufacturing process. Raw material costs represent a significant component of the Company's cost of goods sold. The prices and availability of these raw materials vary with market conditions and can be highly volatile. The Company purchases raw materials and chemical intermediates from a large number of third parties from around the world and strives to optimize the supply chain for each Segment. The Company has limited backward integration and out-sources production where economically practical. The Company has entered into long-term arrangements with respect to certain strategic raw materials. In the aggregate, these commitments are not in excess of current market prices and reflect normal business operations. In 2001, due to increases in market prices, the Company experienced a slight increase in its overall prices paid for its raw materials purchased. Some of the more significant raw materials used by the Company include di-tert-butylphenol, methyl acrylate, acrylonitrile, dimethylaminoethanol and allyl chloride. The function of product sourcing is decentralized, with each Segment having responsibility for its own global sourcing. The Company's Purchasing Council is responsible for identifying potential synergies and coordinating cross-segmental sourcing. Although the Segments purchase certain raw materials from single suppliers, management does not believe that the loss of any supplier would have a material adverse effect on the Company's business or financial condition. 28 Intellectual Property Where appropriate, the Company covers its new products and processes by patent applications in the relevant regional markets. The Company has over 19,000 granted patents and pending applications world-wide and has trademark protection for over 400 product names. The Company relies on its know-how and technical expertise in many of its manufacturing processes for developing and maintaining its market position. Management is of the opinion that intellectual property rights as sole measure do not create a sustainable competitive advantage in the specialty chemicals industry. The Company's ability to extract the maximum value from its patent protected products and processes is dependent upon the Company's ability to apply its technical expertise in its manufacturing process to meet customer requirements. In general, the Company historically has not licensed or sold its intangibles to third parties. In addition, separate cash flow streams cannot, in general, be identified with intangible assets separately from the cash flows associated with the related productive assets. The value of patent and process protection is, therefore, generally inseparable from the Company's productive assets and processes. In connection with the Spin-off, Novartis assigned to the Company certain patents relating to the specialty chemicals business. Pursuant to the Master Spin-off Agreement, Novartis has also granted the Company a non-exclusive royalty-free worldwide license with respect to (i) certain patents that were originally registered by Ciba-Geigy's central research department and (ii) those patents remaining with Novartis which the Company was using, or had a specific plan to use, at the effective date of the Spin-off. The Master Spin-off Agreement also provides that Novartis and the Company may enter into other arrangements with respect to certain patents pursuant to which royalties would be payable. Although relative exclusivity can be maintained for certain products following patent expiration through know-how and technical expertise, the expiration of a basic patent can result in intense competition, including from lower cost producers, and erosion of profit margins. Prior to and following expiration of the basic patent for a key product, the Company will generally focus efforts on developing patentable enhancements to the product or new patentable formulations for which the product is used. Management is of the opinion that the loss of patent protection for any particular product or process would not have a material adverse effect on the Company's results of operation or financial condition. The Company and Novartis have concluded an agreement on the use of the name and the trademark "Ciba". Pursuant to such agreement, the Company and its subsidiaries and affiliates may use "Ciba Specialty Chemicals" as part of their registered corporate names, while Novartis may continue to use the name "Ciba" in connection with the Ciba Vision Group and in some other special cases. The Company and its subsidiaries and affiliates are entitled to use the "Ciba" trademarks and trade names outside of the core business of Novartis (pharma specialties, pharma over-the-counter and generics, eyecare, crop protection, seeds, animal health and nutrition). Novartis is entitled to continue to use trademarks and trade names containing the term "Ciba" as they are currently used and to use new and existing trademarks and trade names containing the term "Ciba" to market the "Ciba" line of pharmaceutical products and for products and services of the Ciba Vision Group. Industry Regulatory Matters Production and marketing of chemical substances are regulated by national and international laws. Although almost every country has its own legal procedure for registration and import, laws and regulations in the European Union, the United States and Japan, including the European inventory of existing commercial chemical substances, the European list of notified chemical substances, the United States Toxic Substances Control Act and the chemicals list of the Japanese Ministry of Trade and Industry are most significant to the Company's business. Chemicals which are on one or more of the above lists can usually be registered and imported without additional testing in any other country, although additional administrative requirements may exist. The Company also actively seeks approvals from the United States Food and Drug Administration ("FDA") for certain specialty chemicals that it produces, principally where the Company's management is of the opinion that such specialty chemicals will or may be used in the manufacture of products that will come in contact with food. In addition, the Company has worked with certain of its customers in a joint effort to obtain FDA approval of the antimicrobial triclosan, which was obtained. Agreements with Novartis in Connection with the Spin-off Novartis and the Company entered into a Master Spin-off Agreement dated December 20, 1996, which governed the separation of the specialty chemicals business from Novartis. In addition, this agreement, together with certain ancillary agreements, established various interim and ongoing relationships between Novartis and the Company. 29 Pursuant to the Master Spin-off Agreement, Novartis and the Company continue to provide each other with chemical products and intermediates and certain services, such as provision of utilities, waste handling and security at shared production sites, that they had provided to each other prior to the Spin-off. Such products and intermediates are provided at market prices or, in the absence of market prices, at cost, and such services are provided at the lower of market price or cost. Local and site-specific agreements govern, among other things, the management and administration of production sites and contract manufacturing arrangements. In addition, pursuant to the Master Spin-off Agreement, the Company and Novartis agreed on the allocation of taxes relating to the transaction and past operations of the businesses. The Company is responsible for taxes relating to the past operations of entities engaged exclusively in the specialty chemicals business and Novartis is responsible for transaction related taxes and taxes relating to the past operations of entities other than those engaged exclusively in the specialty chemicals business. Pursuant to the Cooperation Agreement Regarding the Use of "Ciba" as Corporate Name and as a Mark, the Company is permitted to use "Ciba Specialty Chemicals" as part of its registered corporate name, while Novartis may continue to use the name "Ciba" in the Ciba Vision Group and in certain other cases. See "Intellectual Property". Novartis and the Company have also entered into certain arrangements with respect to the responsibility for environmental liabilities associated with operation of the specialty chemicals business prior to the Spin-off. See "Environmental Matters." Insurance Management is of the opinion that the Company's insurance arrangements regarding property, liability and marine are adequate and sufficient. 30 Organizational Structure Ciba Specialty Chemicals Holding Inc. is the ultimate holding company of the Ciba Specialty Chemicals group. Its Shares are listed on the Swiss Exchange, traded on virt-x, and its ADRs trade on the New York Stock Exchange (see Item 9 - The Offer and Listing).
Group Holdings in % Principle Function of company --------- --------------------------------------- Manufac- Service/ Selling turing Research Finance ------- -------- -------- ------- EUROPE Austria Ciba Spezialitaetenchemie GmbH, Wien ................................. 100 o Belgium Ciba Specialty Chemicals N.V., Groot-Bijgaarden ...................... 100 o Finland Ciba Specialty Chemicals Finland OY, Helsinki ........................ 100 o France Ciba Specialites Chimiques SA, Rueil-Malmaison ....................... 100 o o Societe Nouvelle de Chimie Industrielle (S.N.C.I.) SA, Saint Jeoire en Faucigny ......................................................... 100 o o o Societe Pyreneenne de coloration "Sopyco" Sarl, Abidos Mourens ....... 100 o o Germany Ciba Spezialitaetenchemie Grenzach GmbH, Grenzach-Wyhlen ............. 100 o o Ciba Spezialitaetenchemie Holding Deutschland GmbH, Lampertheim ...... 100 o Ciba Spezialitaetenchemie Lampertheim GmbH, Lampertheim .............. 100 o o o Ciba Spezialitaetenchemie Pfersee GmbH, Langweid/Lech ................ 100 o o o Greece Ciba Specialty Chemicals Hellas ABEE, Athens ......................... 100 o o Hungary Ciba Specialty Chemicals Magyarorszag, Kft., Budapest ................ 100 o Italy Ciba Specialty Chemicals S.p.A., Sasso Marconi (Bologna) ............. 100 o o o Magenta Master Fibres, S.p.A., Milano ................................ 60 o o o Netherlands Ciba Specialty Chemicals International Nederland B.V., Maastricht .... 100 o Ciba Specialty Chemicals (Maastricht) B.V., Maastricht ............... 100 o o o EFKA Additives B.V., Heerenveen ...................................... 100 o o Portugal Ciba Especialidades Quimicas Lda., Porto ............................. 100 o Spain Ciba Especialidades Quimicas S.L., Barcelona ......................... 100 o o Sweden Ciba Specialty Chemicals Sweden AB, Goteborg ......................... 100 o Switzerland Ciba Specialites Chimiques Monthey SA, Monthey ....................... 100 o Ciba Spezialitaetenchemie AG, Basel .................................. 100 o o o Ciba Spezialitaetenchemie Finanz AG, Basel ........................... 100 o Ciba Spezialitaetenchemie International AG, Basel .................... 100 o Ciba Spezialitaetenchemie Kaisten AG, Kaisten ........................ 100 o Ciba Spezialitaetenchemie Schweizerhalle AG, Muttenz ................. 100 o Ciba Spezialitaetenchemie Services AG, Basel ......................... 100 o CIMO Compagnie Industrielle de Monthey SA, Monthey ................... 50 o 31 Group Holdings in % Principle Function of company --------- --------------------------------------- Manufac- Service/ Selling turing Research Finance ------- -------- -------- ------- Turkey Ciba Ozel Kimyevi Urunler Sanayi ve Ticaret Ltd., Istanbul ........... 100 o United Kingdom Ciba Specialty Chemicals PLC, Macclesfield ........................... 100 o o o Ciba Specialty Chemicals Investment PLC, Macclesfield ................ 100 o Ciba Specialty Chemicals Water Treatments Ltd., Bradford ............. 100 o o o AMERICAS Argentina Ciba Especialidades Quimicas S.A., Buenos Aires ...................... 100 o Bermuda Chemical Insurance Company Ltd., Hamilton ............................ 100 o Ciba Specialty Chemicals International Finance Ltd., Hamilton ........ 100 o Ciba Specialty Chemicals Investment Ltd., Hamilton ................... 100 o Brazil Ciba Especialidades Quimicas Ltda., Sao Paulo ........................ 100 o o Canada Ciba Specialty Chemicals Canada Inc., Mississauga .................... 100 o o Ciba Specialty Chemicals Water Treatments Corp., Brampton ............ 100 o Chile Ciba Especialidades Quimicas Ltd., Santiago de Chile ................. 100 o Ciba Especialidades Quimicas Conosur S.A., Santiago de Chile ......... 67 o Colombia Ciba Especialidades Quimicas S.A., Bogota ............................ 100 o o Guatemala Ciba Especialidades Quimicas, S.A. (ACC), Guatemala .................. 100 o o Mexico Ciba Especialidades Quimicas Mexico S.A. de C.V., Mexico ............. 100 o o Panama Ciba Especialidades Quimicas Colon S.A., Colon ....................... 100 o United States of America Ciba Specialty Chemicals Corporation, Tarrytown, NY .................. 100 o o o Ciba Specialty Chemicals Water Treatments Inc., Suffolk, VA .......... 100 o o o ASIA-PACIFIC Australia Ciba Specialty Chemicals Pty. Ltd., Thomastown ....................... 100 o o 32 Group Holdings in % Principle Function of company --------- --------------------------------------- Manufac- Service/ Selling turing Research Finance ------- -------- -------- ------- China Ciba Specialty Chemicals (China) Ltd., Beijing ....................... 100 o Ciba Specialty Chemicals (Hong Kong) Ltd., Hong Kong ................. 100 o Ciba Specialty Chemicals (Shanghai) Ltd., Shanghai ................... 100 o Guangdong Ciba Specialty Chemicals Co. Ltd., Panyu, Guangdong ........ 95 o o Guangzhou Ciba Specialty Chemicals Co. Ltd., Guangzhou ............... 80 o o Qingdao Ciba Dyes Co. Ltd., Qingdao .................................. 94 o o Qingdao Ciba Pigments Co. Ltd., Qingdao .............................. 91 o o Shanghai Ciba Gao-Qiao Chemical Co. Ltd., Shanghai ................... 67 o o Shenzhen Ciba Specialty Chemicals Co. Ltd., Shenzhen ................. 85 o o Xiangtan Chemicals & Pigments Co. Ltd., Xiangtan ..................... 49 o o India Ciba India Private Ltd., Mumbai ...................................... 100 o Ciba Specialty Chemicals (India) Ltd., Mumbai ........................ 51 o o o Diamond Dye-Chem Limited, Mumbai ..................................... 51 o o Swathi Organics & Specialities Pvt. Ltd., Pondicherry ................ 22 o o Indonesia P.T. Ciba Specialty Chemicals Indonesia, Jakarta ..................... 80 o o Japan Chemipro Fine Chemical Kaisha Ltd., Kobe ............................. 51 o o Ciba Specialty Chemicals K.K., Takarazuka/ Tokyo ..................... 100 o o Musashino-Geigy Co. Ltd., Tokyo ...................................... 60 o o Nippon Alkyl Phenol Co. Ltd., Tokyo .................................. 46 o o Republic of Korea (South Korea) Ciba Specialty Chemicals Korea Ltd., Seoul ........................... 100 o Daihan Swiss Chemical Corp., Seoul ................................... 50 o o o Doobon Fine Chemical Co., Ltd., Chongwon-kun ......................... 63 o Malaysia Ciba Specialty Chemicals (Malaysia) SDN. BHD., Klang ................. 70 o o New Zealand Ciba Specialty Chemicals N.Z. Ltd., Auckland ......................... 100 o o Singapore Ciba Specialty Chemicals (Singapore) Pte Ltd., Singapore ............. 100 o o South Africa Ciba Specialty Chemicals (Pty) Ltd., Spartan ......................... 100 o Taiwan Ciba Specialty Chemicals (Taiwan) Ltd., Kaohsiung .................... 100 o o Thailand Ciba Specialty Chemicals (Thailand) Ltd., Bangkok .................... 100 o o Ciba Specialty Chemicals Industries Ltd., Bangkok .................... 95 o o - --------------------------------------------------------------------------------------------------------------------------
(1) The shares of Ciba Specialty Chemicals (India) Ltd., Mumbai are listed on the Mumbai Stock Exchange. The total market value of the 13 280 819 shares of the company as of December 31, 2001 was approximately CHF 33 million (INR 971 million). Property, Plant and Equipment; Manufacturing The Company owns all of its principal manufacturing facilities and owns substantially all the land on which such facilities are located. In certain cases, infrastructure is either shared with Novartis or with its recent spin-off Syngenta or outsourced to third parties as in some Swiss facilities. The Company also has other properties, including office buildings, research laboratories and warehouses. The principal office buildings are the 33 headquarters in Basel, Switzerland. The principal research and development facilities are located in Basel, Switzerland and Tarrytown, New York, USA. The following table sets forth the Company's principal manufacturing facilities by geographic region together with the Segment or Segments that maintain principle responsibility for the management and production at the site and the major product lines that each facility is designed to manufacture. Size in Location hectares(1) Major Product Lines - ------------------------------------------------------------------------------- EUROPE Basel, Switzerland 14 Textile Effects (reactive dyes for cellulose and wool, disperse, vat and acid dyes) Monthey, Switzerland (2) 11 Home & Personal Care (whiteners) Coating Effects (high performance pigments) Schweizerhalle, Switzerland 1 Coating Effects (polymer additives, Imaging and coating additives) Textile Effects (standardization) Kaisten, Switzerland 59 Plastic Additives (polymer additives) Grenzach, Germany 52 Home & Personal Care (whiteners, specialty colors, antimicrobials, new businesses) Coating Effects (high performance pigments) Textile Effects (cationic and solvent soluble dyes) Lampertheim, Germany 80 Plastic Additives (polymer additives, imaging and coating additives and process and lubricant additives) Langweid/Lech, Germany 29 Textile Effects (fabric finishing and dyeing and printing auxiliaries) Paisley, United Kingdom 17 Coating Effects (classical pigments) Clayton, United Kingdom 22 Textile Chemicals (direct, disperse and acid dyes, specialty colors) Bradford, United Kingdom 20 Water & Paper Treatment (water treatment chemicals, imaging and coating additives and textile chemicals) Grimsby, United Kingdom 19 Water & Paper Treatment (water treatment chemicals) Huningue, France 12 Coating Effects (high performance pigment preparations, imaging and coating additives) Plastic Additives (polymer additives and process and lubricant additives) St-Fons, France 9 Textile Effects (metal-complex and acid dyes) St-Jeoire, France 5 Coating Effects (masterbatches) Mortara, Italy 17 Coating Effects (imaging and coating additives) Pontecchio Marconi, Italy 12 Plastic Additives (polymer additives and production of insecticides for a third party) Maastricht, Netherlands 11 Coating Effects (dispersions and inorganic pigments) Heerenveen, Netherlands 2 Coating Effects (defoamers, slip and leveling, high molecular weight dispersants, wetting and dispersing agents) AMERICAS McIntosh, Alabama United 637 Plastic Additives (polymer additives States of America (USA) and imaging and coating additives) Home & Personal Care (whiteners, toll manufacturing of pesticides for Syngenta) Newport, Delaware USA 15 Coating Effects (high performance pigments) St. Gabriel, Louisiana USA 81 Textile Effects (reactive and acid dyes) Charlotte, North Carolina USA 6 Textile Effects (dyeing and printing auxiliaries) Old Bridge, New Jersey USA(3) 13 Water & Paper Treatment (water treatment chemicals) Suffolk, Virginia USA 89 Water & Paper Treatment (water treatment chemicals) West Memphis, Arkansas USA 60 Water & Paper Treatment (water treatment chemicals) 34 Size in Location hectares(1) Major Product Lines - ------------------------------------------------------------------------------- Albermarle, North Carolina USA 21 Textile Effects (textile chemicals) Mississauga, Canada 2 Plastic Additives (polymer additives) Estrada do Colegio, Brazil 4 Home & Personal Care (whiteners, fabric finishing) Camacari, Brazil 14 Plastic Additives (polymer additives) Atotonilquillo, Mexico 43 Textile Effects (disperse and cationic dyes) Home & Personal Care (whiteners, fabric finishing) Puebla, Mexico 22 Plastic Additives (polymer additives and process and lubricant additives) ASIA-PACIFIC Ulsan, South Korea(4) 7 Coating Effects (classical pigments) Shanghai, China(5) 6 Plastic Additives (polymer additives) Qingdao, China(6) 1 Coating Effects (classical pigments) Qingdao, China(7) 1 Textile Effects (wool and disperse dyes) Panyu, China(8) 5 Textile Effects (textile chemicals) Isohara, Japan(9) 8 Plastic Additives (polymer additives) Ai-oi, Japan(10) - Plastic Additives (polymer additives and imaging and coating additives) Chiba, Japan(11) - Plastic Additives (polymer additives) Kaohsiung, Taiwan 4 Plastic Additives (polymer additives) Goa, India 14 Plastic Additives (polymer additives) Candra Sari, Indonesia 5 Textile Effects (fabric finishing, standardization) Mahachai, Thailand 4 Textile Effects (textile dyes) Perth, Australia 2 Water & Paper Treatment (water treatment chemicals) - -------------------------------------------------------------------------------- (1) One hectare is equal to 2.471 United States acres. (2) Most of the infrastructure facilities are shared with Syngenta through a joint venture in which the Company holds a 50 percent interest. (3) In December 2000, the Company announced a restructuring program that included the closure of this manufacturing site. The closure was begun in 2001 and will be completed in 2002. (4) Joint venture with Daihan Color Ind., Co., Ltd., in which the Company holds a 50 percent interest. (5) Joint venture with Shanghai Gao-Qiao Petrochemical Company and Nippon Alkyl Phenol Company, in which the Company holds a 60 percent direct interest and a 6.9 percent indirect interests. (6) Venture with Qingdao Double Peach, in which the Company holds a 91.4 percent interest. (7) Venture with Qingdao Double Peach, in which the Company holds a 94 percent interest. (8) Venture with Panyu City Shilou Town Economical Development Company Limited, in which the Company holds a 95 percent interest. (9) Effective January 2001, the Company acquired a controlling interest in Musashino-Geigy Co. Ltd., increasing its holdings from 50 percent to 60 percent in this joint venture with Musashino Chemical Laboratory Co. Ltd. (10) Joint venture with Chemipro Kasai Kaisha, Ltd., in which the Company holds a 51 percent interest. (11) Joint venture with Mitsui Petrochemical and Musashino-Geigy, in which the Company holds a 40 percent interest. The Company's management is of the opinion that its principal manufacturing facilities and other significant properties are in good condition and that they are adequate to meet its needs. Except as disclosed in this Annual Report, the Company does not currently plan to construct, expand or improve facilities significantly. Environmental Matters Operating in the chemical industry, the Company is subject to stringent environmental, health and safety laws and regulations. It is the Company's policy to continuously develop and improve the environmental performance of key manufacturing processes through an active program to address environmental matters. In addition to process improvements, the Company uses advanced waste treatment and disposal facilities at all major manufacturing sites that allow the sites to comply with recent laws and regulations applicable to waste streams. Management believes that the Company substantially complies with all such laws. For outstanding environmental matters that are currently known and estimable by the Company, provisions of approximately CHF 748 million at December 31, 2001 and CHF 798 million at December 31, 2000 have been recorded in the accompanying Consolidated Balance Sheets. The main difference between 2001 and 2000 relates to changing foreign currency exchange rates, usage of the provisions, and updates to the estimated costs to 35 complete outstanding claims and issues. The Company's environmental protection and improvement cash expenditures were approximately CHF 43 million in 2001 (CHF 47 million in 2000), including investments in construction, operations and development. In the agreement on the Company's spin-off from Novartis, Novartis agreed to reimburse the Company 50 percent of United States environmental liabilities arising from past operations of the Company in excess of the agreed reserves. Outside the United States, environmental liabilities are allocated between Novartis and the Company based on ownership of the site or, if environmental liabilities do not relate to production sites or these are not owned by either entity, according to the polluter pays principle. If causation between the parties cannot be determined, costs are shared equally. The agreement with Novartis is not subject to any time or amount limits but could terminate for certain liabilities in the United States (i) upon a sale of substantially all of the Company's assets, (ii) upon a change in control of the Company, or (iii) for individual facilities, upon the sale of the facility (unless the Company retains responsibility for any clean-up at such site). In 1998, certain litigation matters related to sites located in the United States were settled with the insurance companies. The Company received the cash of approximately CHF 43 million, net of related legal costs incurred, in 1999 and such amount was included as a reduction in selling, general and administrative expenses in 1998. The Company has not reflected any potential insurance recoveries that may be available in the future. The Company continues to participate in environmental assessments and clean-ups at a number of locations, including operating facilities, previously owned facilities and United States Superfund sites. The Company accrues reserves for all known environmental liabilities for remediation costs when a clean-up program becomes probable and costs can be reasonably estimated. Clean-up of the most significant sites has been or is nearly completed, except for two major sites where remediation measures are still in discussion, as described in the following paragraphs. At its Toms River, New Jersey remediation site the Company agreed with the United States Environmental Protection Agency to implement the selected remedy, which involves design and construction of a large bio-remediation project over the next eight to ten years. Based on management's current estimates, the Company's environmental provisions are adequate to cover the expected costs to complete this remediation plan. In connection with the former operation of the Ciba-Geigy plant in Toms River, the Company and two other companies were contacted by attorneys representing the interests of approximately 70 families, each of which has or had a child with cancer. These families claimed that the cancer was caused by exposure to contaminated drinking water and that the contamination was partly caused by the former operations at the plant. All parties engaged themselves in informal dispute resolution proceedings over the past 4 years, which led to a settlement in 2001. The total amount owed by the Company has been sufficiently provided for in its environmental provisions and will not have a material adverse effect on the Company's financial position or results of operations. In 2000, several actions were filed against the Company's subsidiary in the United States in New Jersey state court seeking medical monitoring as well as payment of damages for alleged personal injuries and property damage. The individual plaintiffs in these suits claim that the manufacturing operations at the Toms River plant from 1952 through its closure in 1996 are linked to and caused their damages. None of these plaintiffs were involved in the settlement described in the preceding paragraph. These cases are in the discovery stage of litigation. The Company does not believe these claims have merit and it is vigorously defending itself. The planning for the total clean-up of the waste disposal site in Bonfol, Switzerland, which was closed in 1976, is ongoing. The responsibility for the clean-up lies with eight chemical companies, including among others the Company. The responsible companies cooperate with the governmental authorities to define the necessary measures in view of a final remediation of the site. The remediation effort could require up to fifteen years to complete. In management's opinion, based on the current remediation plans, the Company's environmental provisions are adequate to cover the Company's share of the expected costs to complete the remediation at this site. The contractual terms of the sale of the Performance Polymers business stipulate that, in general, the Company will retain responsibility for environmental claims relating to the operations of the Performance Polymers business prior to May 31, 2000, whereby damages for remediation in connection with sites outside the United States shall cover only 80 percent of the respective costs. The responsibility with respect to any non-United States sites covers environmental liabilities incurred within fifteen years from May 31, 2000 and is limited to CHF 75 million. With respect to any such environmental liabilities in the United States, the Company's obligation to indemnify is unlimited in time or amount. Novartis' environmental indemnification obligations to the Company described above are not affected by the sale of the Performance Polymers business. In management's opinion, the environmental reserves accrued are sufficient to meet all currently known and estimable environmental claims and contingencies. Because of the nature of the Company's operations, however, there can be no assurance that significant costs and liabilities from ongoing or past operations will not be incurred 36 in the future. In addition, environmental clean-up periods are protracted in length and environmental costs in future periods are subject to changes in environmental remediation regulations. See "Item 3. Key Information--Risk Factors--Environmental laws and regulations may expose the Company to liability and result in increased costs." 37 Item 5. Operating and Financial Review and Prospects. Management's Discussion and Analysis of Financial Condition and Results of Operations. The discussion in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("Management's Discussion and Analysis") is based on, and should be read in conjunction with "Item 3 Key Information" and the Consolidated Financial Statements and the Notes thereto, which are prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP") and are included elsewhere in this Annual Report. For a definition of certain financial terms used herein, see "-Glossary of Financial Terms" at the end of this Management's Discussion and Analysis. Except for percentages, share, per share data or exchange rate data and except as otherwise stated, all numbers in tables are in millions of Swiss francs (CHF). Introduction In certain sections of this Management's Discussion and Analysis, the reported results have been adjusted to exclude restructuring and special charges. In addition, one time gains and non-recurring expenses have been highlighted and commented upon in order to facilitate comparability of ongoing business performance. To facilitate a meaningful analysis and interpretation of the Company's results in 2001 compared to 2000 and in 2000 compared to 1999, the Management's Discussion and Analysis for these periods focuses on the discussion and analysis of the results of continuing operations, which excludes the results of the Performance Polymers operations, which have been reported as discontinued operations for the years 1999 and 2000, until May 31, 2000, the date of the divestment (see Note 3 to the Consolidated Financial Statements). Currency Trends 2001 Compared to 2000 The average exchange rates for the major currencies used to translate the consolidated statements of income into Swiss francs were significantly different in 2001 as compared to 2000, except for the U.S. dollar (USD). The average rate for the British pound (GBP) the euro (EUR) and the Japanese yen (JPY) depreciated against the Swiss franc. With respect to the U.S. dollar, the average rate used for translating the statement of income was relatively stable at CHF 1.68 per USD in 2001, as compared to CHF 1.69 per USD in 2000. The December 31, 2001 year-end currency exchange rates for the major currencies used in translating the Company's consolidated balance sheet into Swiss francs depreciated against the Swiss franc, as compared to December 31, 2000. These currency trends resulted in currency effects on the Swiss franc statement of income and on the Swiss franc balance sheet items. Effective January 1, 2001, the Company's subsidiaries in the twelve countries that adopted the euro, converted their transaction systems and their reporting currency to the euro. For further discussion on the effect of different year-end exchange rates and information on the Company's currency risk management, see the sections in "Year in Review - 2001 Compared to 2000" of this Management's Discussion and Analysis - "Treasury management", "Consolidated balance sheets", "Liquidity and capital resources" and "Supplemental Information - Euro conversion", as well as "Item 11. - Quantitative and qualitative disclosures about market risk". 2000 Compared to 1999 The average exchange rates for the major currencies used to translate the consolidated statement of income into Swiss francs were significantly different in 2000 as compared to 1999. The appreciation in the average rate for the U.S. dollar, the British pound and the Japanese yen against the Swiss franc was slightly offset, however, by the depreciation of the euro. With respect to the U.S. dollar, the average rate used for translating the statement of income was CHF 1.69 per USD in 2000, as compared CHF 1.50 per USD in 1999. With the exception of the U.S. dollar, which appreciated substantially against the Swiss franc, the December 31, 2000 year-end currency exchange rates for the major currencies used in translating the Company's consolidated balance sheet into Swiss francs depreciated against the Swiss franc, as compared to December 31, 1999. The appreciation of the U.S. dollar against Swiss franc was partly offset, however, by the depreciation in the British pound, the Japanese yen and the euro against the Swiss franc. These currency trends resulted in currency effects on the Swiss franc statement of income and to a lesser extent, on the Swiss franc balance sheet items. 38 For further discussion on the effect of different year-end exchange rates and information on the Company's currency risk management, see the sections in "Year in Review - 2000 Compared to 1999" of this Management's Discussion and Analysis - "Treasury management", "Consolidated balance sheets", "Liquidity and capital resources" and "Supplemental Information - Euro conversion", as well as "Item 11. - Quantitative and qualitative disclosures about market risk". Use of Certain Supplementary Financial Indicators The following comparative discussion of the results of operations and financial condition of the Company includes, among other items, an analysis of a number of non-U.S. GAAP financial indicators that form part of the Company's value based management reporting system and that are used by management for purposes of analyzing the results of operations and financial condition of the Company. These financial indicators are derived from U.S. GAAP financial items. Such indicators include EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), EBITDA margin, free cash flow and velocity. For a definition of these terms and other financial terms, see "Glossary of Financial Terms" at the end of this Management's Discussion and Analysis. Management is of the opinion that these financial indicators are an important measure of comparative operating performance of the businesses of the Company and, in the case of EBITDA, when used in comparison to debt levels or the coverage of interest expense, as a measure of financial stability. However, these supplementary financial indicators should be considered in addition to, and not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with U.S. GAAP. Year in Review - 2001 Compared to 2000 -------------------------------------- Results of operations 2001 2000 -------------------------------------------------------------------------- Net sales ...................................... 7 367 7 902 Gross profit ................................... 2 379 2 569 Operating income ............................... 761 876 Income from continuing operations .............. 380 418 Net income ..................................... 382 452 Basic and diluted earnings per share: Income from continuing operations per share .. 5.72 6.31 Net income per share ......................... 5.76 6.81 EBITDA, before restructuring and special charges(1) .................................... 1 230 1 348 Restructuring and special charges, net ......... 0 2 Operating cash flows, before restructuring payments(2) .................................. 1 100 1 065 Free cash flow ................................. 779 638 Net debt ....................................... 2 351 2 983 Shareholders' equity at year end ............... 3 908 3 754 Dividend per share(3) .......................... 2.00 2.00 Capital reduction per share(3) ................. 1.00 - Key performance ratios -------------------------------------------------------------------------- Sales development .............................. (7)% 9% Sales development in local currencies .......... (3)% 2% Expressed as a percentage of sales: Gross profit ................................. 32.3% 32.5% Operating income ............................. 10.3% 11.1% Income from continuing operations ............ 5.2% 5.3% Net income ................................... 5.2% 5.7% EBITDA, before restructuring and special charges ............................. 16.7% 17.1% Velocity ....................................... 0.75 0.80 -------------------------------------------------------------------------- (1) Including restructuring expenses and special charges of CHF 2 million in 2000, EBITDA was CHF 1 346 million in 2000. (2) From continuing operations. Including restructuring payments of CHF 46 million in 2001 and CHF 35 million in 2000, operating cash flows from continuing operations were CHF 1 054 million in 2001 and CHF 1 030 million in 2000. (3) The Board of Directors proposes a payment to the Company's shareholders in 2002 of an unchanged dividend of CHF 2 per Share, based on 2001 results, and a capital reduction of CHF 1 per Share. If approved, the capital reduction will take the form of a reduction in the nominal value of each Share, from CHF 10 per share to CHF 9 per share. Both the dividend and the capital reduction are subject to shareholder approval at the Annual General Meeting on March 22, 2002. If approved, the Company expects that the dividend will be distributed on March 27, 2002 and expects, subject to various conditions, that the payment from the capital reduction will be made on June 28, 2002. 39 Overview The year 2001 was characterized by a continuous weakening of the economic environment. The slowdown was first evident in the United States and the impact spread throughout the NAFTA region. European economies, particularly Germany and France, also began to slow down in mid-year, with the slowdown accelerating towards year-end. Performance in South America remained strong and was only mildly affected by the Argentine economic crisis. In the Asia-Pacific region, the Japanese market has not yet recovered from its lows of 1999, remaining sluggish throughout 2001. The China Region remained the global growth engine with real GDP growth remaining at approximately 7 percent. In most of the regions of the world, with the exception of China, the industrial sector growth was below total GDP growth. This was particularly accentuated in the United Kingdom. In the Unites States consumer demand remained relatively stable due to significant incentives and rebates in several market sectors, particularly in the automotive sector. This resulted in a net decrease of inventories at the Company's customers. Operational review The Company is positioned for future growth with an organization focused on the customer During 2001, the Company successfully implemented a new organizational structure comprising five Segments focused on specific customer markets. The five reporting Segments are Plastic Additives, Coating Effects, Water & Paper Treatment, Textile Effects and Home & Personal Care. Each Segment is responsible for marketing, research and development, technology, production and sales. The mission of the Segments is to provide the best and most complete service to its customers' industries and strive for market leadership in their respective areas. To ensure that innovation efforts are successfully shared across Segments a corporate technology office under the leadership of a Chief Technology Officer was created. All Segments share support functions such as finance and accounting, human resources, communications, legal and supply chain services. As part of the reorganization, the Company initiated an integration of the original three supply chains into a single global supply chain. This initiative is ongoing. Decisive and timely action protects profitability Net sales at CHF 7 367 million decreased in local currencies by 3 percent and in Swiss francs decreased by 7 percent compared to the previous year. This decline was largely a consequence of the slowing global economy. The Company took timely and decisive action to protect profitability in this adverse business environment. Despite strong competitive pressures, the Company successfully maintained sales prices at relatively stable levels compared to the prior year. The Company's continued focus on global sourcing of raw materials and its position in the chemicals value chain kept raw material cost increases to a minimum. Rightsizing initiatives that commenced in 2000 and initiatives implemented with the reorganization into five customer-focused Segments in 2001 has resulted in headcount reductions in excess of 600. In response to the economic downturn, worldwide cost-saving programs were introduced. Additionally, in order to tightly control inventory levels and save costs temporary production plant shutdowns were implemented where feasible. The 2001 productivity initiatives will continue to be implemented during 2002. Their objective is to continue to improve the Company's overall operational efficiencies. The most significant of these initiatives is streamlining the organization through the establishment of the single supply chain to be used by all Segments. The completion of these initiatives will result in further headcount reductions and a lower cost base. While these proactive actions to protect profitability were generally successful, they were unable to fully compensate for unfavorable currency conditions. The weakening of most currencies against the Swiss franc, particularly the euro, the Japanese yen and the British pound, had a significant negative effect on the Company's results. The Company's gross profit margin remained relatively stable at 32.3 percent compared to 32.5 percent of sales in the prior year. In absolute terms, gross profit decreased to CHF 2 379 million from CHF 2 569 million in the prior year. Most of this decline is attributable to unfavorable currency conditions. The positive impact of cost saving initiatives resulted in lower operating costs, however, these savings could not fully compensate for the lower gross profit, resulting in operating income of CHF 761 million compared to CHF 876 million in the prior year. Income from continuing operations was CHF 380 million or CHF 5.72 per share compared to CHF 418 million or CHF 6.31 per share in the prior year. Net income was CHF 382 million or CHF 5.76 per share compared to CHF 452 million or CHF 6.81 per share in the prior year. The Company's EBITDA and EBITDA margin were CHF 1 230 million and 16.7 percent, respectively, in 2001 compared to CHF 1 348 million and 17.1 percent, respectively, in 2000. Free cash flow of more than CHF 750 million enhances the Company's financial position Throughout 2001, in view of the negative economic conditions, the Company placed a high priority worldwide on managing its cash flows, even though certain actions taken to improve cash flows had some short-term 40 negative effects on earnings. For example, temporary production plant shutdowns generate cash through the reduction of inventory levels, but negatively affected earnings through increased idle capacity costs. As a result of these actions, cash provided by operating activities again exceeded CHF 1 billion. This positive cash flow was generated by significant reductions in inventories and accounts receivable. These reductions were due to a number of proactive initiatives, such as the temporary plant shutdowns and continued effective management of operational assets, especially inventories. Capital expenditures have remained relatively stable at 2000 levels and continues to be focused on efficiency improvement projects, remaining below the level of annual depreciation. The combination of cash flows generated from operations and tight asset management resulted in free cash flow increasing to CHF 779 million in 2001 compared to CHF 638 million in 2000. The continuing focus on operational efficiencies, cash flow and portfolio management has resulted in a reduction of the Company's net debt to CHF 2 351 million in 2001, an improvement of CHF 632 million from 2000 levels and from 1999 levels, an improvement of CHF 2 617 million. EBITDA interest cover has improved to 9.18 from 6.47 in 2000. The Company continues to optimize its business portfolio through selective acquisitions and divestments to strengthen its focus on its core businesses and to improve profitability As part of its focus on core businesses, in March 2001, the Company sold its 50 percent interest in TFL Ledertechnik GmbH & Co. KG, an international chemical company whose products and technical services are geared exclusively to the needs of the leather industry. The net proceeds received approximated the carrying value of the investment at the date of sale. In order to optimize the Plastic Additives Segment's global manufacturing network, the Company acquired, in January 2001, a controlling interest in Musashino-Geigy Co. Ltd. ("Musashino-Geigy"), increasing its holdings from 50 percent to 60 percent. Musashino-Geigy has a facility in Isohara, Japan and produces antioxidants, UV absorbers and blends for plastics. To expand Coating Effects service business and its high value added products offerings, in June 2001, the Company acquired Efka Additives B.V. ("Efka"). Efka manufactures, markets and distributes additives for the coatings and inks industries. The Board of Directors of the Company proposes an unchanged dividend per share of CHF 2 and an extraordinary distribution in the form of a capital reduction of CHF 1 per share The Board of Directors proposes a payment to the Company's shareholders in 2002 of an unchanged dividend of CHF 2 per share, based on 2001 results. Additionally, in consideration of the improved financial structures of the Company, an extraordinary payment to the shareholders' is proposed in the form of a capital reduction of CHF 1 per share. The Company is able to make this additional extraordinary cash distribution to its shareholders and still have sufficient capital available to pursue its strategic objectives. If approved, the capital reduction will take the form of a reduction in the nominal value of each common share from CHF 10 per share to CHF 9 per share. Both the dividend and capital reduction are subject to shareholder approval at the Annual General Meeting on March 22, 2002. If approved, the Company expects that the dividend will be distributed on March 27, 2002, and expects, subject to various conditions, that payments from the capital reduction will be made on June 28, 2002. Financial review Sales decline as a result of a weak economic environment Sales in local currencies decreased by 3 percent. In Swiss francs sales decreased by 7 percent to CHF 7 367 million. Sales development in 2001 compared to 2000 resulted from the following factors: Consolidated sales development 2001 compared to 2000 -------------------------------------------------------------------------- Volume/product mix ................................ (2)% Price ............................................. (1)% Currency .......................................... (4)% -------------------------------------------------------------------------- Total in Swiss francs ............................. (7)% -------------------------------------------------------------------------- The continued weakness of the economic environment, which began in the United States during the fourth quarter of 2000, continued to worsen in the NAFTA region through most of 2001. Starting in May 2001, the European economies, particularly Germany and France, also began to show signs of weakness, becoming more evident in the later part of 2001. Contributing to the Swiss 41 franc sales decline was the strengthening of the Swiss franc compared to other currencies, particularly against the euro, British pound and the Japanese yen, resulting in a reduction in sales in Swiss franc terms by 4 percent when compared to 2000. Despite these difficult economic conditions, sales price erosion and volume reduction were not significant; underlying the overall quality of the Company's product portfolio and customer partnerships. Sales in local currencies in most of the major markets in Europe, except Germany, were stable. This reflects the overall impact of the modest sales growth that was achieved during the first half of the year, offset by the effects of the slowdown during the second half of the year. In Swiss francs, sales declined. In the Americas, sales decreased in North and Central America, in both Swiss francs and in local currencies. The sales in South America increased by double digits in local currency, but declined in Swiss francs. In Asia Pacific, for most major markets except in Japan and the China Region, sales increased in local currencies, however, declined in Swiss francs terms. In Japan, sales decreased in both Swiss francs and in local currency. In the China Region, sales increased in both Swiss francs and in local currencies. Geographic sales distribution 2001 2000 -------------------------------------------------------------------------- Europe .................................... 37 % 37 % Americas(1) ............................... 36 % 37 % Asia Pacific(2) ........................... 27 % 26 % -------------------------------------------------------------------------- (1) The Americas are comprised of North, Central and South America. (2) Asia-Pacific is comprised of Asia, Africa, the Middle East, Australia and New Zealand. Profit margins remained relatively stable and benefited from the Company's cost reduction programs Gross profit margin remained relatively stable at 32.3 percent of sales compared to 32.5 percent in the prior year. The stable gross profit margin was achieved through maintaining raw material prices at stable levels with the prior year's levels, tight control on other production costs, combined with the relatively stable selling prices. The ability to maintain relatively stable raw material prices was achieved as a result of the continuation of the Company's policy to optimize procurement of raw materials by purchasing supplies globally through its worldwide organization and partnerships and its position in the chemicals value chain. While proactive inventory reduction initiatives led to increased idle capacity charges, these additional costs were offset by production cost reductions. Costs were reduced as a consequence of the rightsizing initiatives that were announced in 2000, which involved permanent plant shutdowns in the United States, ongoing efficiency initiatives, such as debottlenecking and productivity improvements, and selective temporary plant shutdowns worldwide. Selling, general and administrative expenses decrease Selling, general and administrative expenses expressed as a percentage of sales decreased to 17.1 percent from 17.9 percent in the prior year. In absolute terms, selling, general and administrative expenses decreased by CHF 159 million to CHF 1 258 million, compared to CHF 1 417 million in the prior year, a decrease of 11 percent in Swiss francs and 8 percent in local currencies. This improvement has been achieved as a result of the Company's continuous efforts to streamline its operational structures. Cost savings and headcount reductions have been achieved as a consequence of the rightsizing initiatives that were announced in 2000, and of the reduction in personnel under the Company's "Fit For Growth!" reorganization program, which was announced in early 2001. Also, in response to the deteriorating market conditions, the Company has implemented other targeted cost control programs that are mostly focused on reducing discretionary spending and delaying expenditures where possible. The Company had lower variable compensation expenses in 2001 compared to 2000, as compensation levels are partly linked to achieving performance targets, which were only partly met in 2001. Additionally, the Company had non-recurring income related to providing third party services to Vantico, the company established by the purchaser of the Company's Performance Polymers business. These service contracts have expired and will not be renewed. In 2002, selling, general and administrative expenses will be adversely affected by the reduction in non-recurring income and the necessity to incur expenditures that were delayed in 2001. Offsetting these negative effects will be the positive impacts from the completion of a number of previously announced operational improvement programs. Continuing commitment to research and development Research and development expenses as a percentage of sales remained stable at 3.8 percent in 2001 compared to 3.7 percent in the prior year. In absolute terms, research and development expenses decreased by CHF 17 million to CHF 276 million in 2001 compared to CHF 293 million in 2000, a decrease of 6 percent in Swiss francs or 5 percent in local currencies. The Company has historically invested and plans to continue to invest approximately 3 to 4 percent of sales in research and development activities. The Company's research and development program focuses on generating new business and defending leading market positions by continuous innovation. As part of the reorganization, announced in February 2001, certain research and development activities mostly focused on innovative new ideas 42 and opportunities were transferred to a central group managed directly by the Chief Technology Officer. The Company's research and development strategy is to enter both new and existing markets with innovative formulations and solutions that will satisfy customer needs. Some examples of entering new markets with new formulations are "soft pigment" formulations for both textile printing and textile dyeing. These formulations have superior characteristics as they can be used for printing and bath dyeing, they maintain the soft handle of the textile in the finished product and they are environmentally friendly. A further example are new UV absorber systems that are added to laundry detergents, which when applied regularly increase the sun-protection of a fabric up to a factor of 30. Innovative product range extensions and customer focused solutions within existing markets include a new compound for optical information storage on recordable Compact Discs (CDs) and Digital Versatile Discs (DVDs) with improved data storage quality, warp free pigments for use in plastics, and new colors for color filters used in color flat-screen displays (LCD-TFT). The Segment Water & Paper Treatment introduced a series of environmentally friendly fluoro-chemicals for the paper market, which prevents, for example, food-packaging papers from being stained by fatty content. Also, the Company continues to develop new and improved manufacturing processes, which are cost competitive and meet all environmental, health and safety requirements. Amortization of goodwill and other intangibles remains constant Amortization of goodwill and other intangibles remained relatively constant at CHF 92 million, a decrease of CHF 2 million from 2000. Effective January 1, 2002, in accordance with new U.S. GAAP accounting rules, the Company will no longer amortize any goodwill to earnings, but instead will be required to review its recoverability through annual impairment testing. Other identifiable intangibles will continue to be amortized to earnings over their estimated useful lives. As a result of goodwill not being amortized, the Company's operating income in 2002 will be improved by approximately CHF 61 million, the annual goodwill amortization expense in 2001. For further information see "Supplemental Information - Change in accounting policy and new accounting standards" section below of this Management's Discussion and Analysis and Note 1 to Consolidated Financial Statements. Income from earnings of equity affiliates decreases due to Hexcel sale Income from earnings of equity affiliates (investments in unconsolidated companies with greater than 20 percent and less than or equal to 50 percent ownership), before income taxes, decreased to CHF 8 million in 2001 from CHF 113 million in 2000. The related income taxes on earnings of equity affiliates are recorded separately in the Company's provision for income taxes. The reduction in income from earnings of equity affiliates is primarily due to the sale, in December 2000, of the majority of the Company's investment in Hexcel Corporation ("Hexcel") and to the sale in March 2001, of the Company's 50 percent interest in TFL Ledertechnik GmbH & Co. KG ("TFL"). The net proceeds received from the sale of the TFL interest approximated the carrying value of the investment at the date of sale. In 2000, the Company realized a gain of CHF 71 million from the sale of its majority stake in Hexcel, which is included in the restructuring and special charges reported in the Consolidated Statements of Income. For further discussion related to this sale refer to the section "Restructuring and special charges, net" of this Management's Discussion and Analysis.. Operating income and EBITDA adversely affected by lower sales levels and unfavorable currency developments 2001 2000 -------------------------------------------------------------------------- Operating income (EBIT)......................... 761 876 EBITDA, before restructuring and special charges ....................................... 1 230 1 348 EBIT margin ................................... 10.3% 11.1% EBITDA margin, before restructuring and special charges ....................................... 16.7% 17.1% 2001 compared to 2000 --------------------------------------------------------- Operating income (EBIT) ...................... (13)% EBITDA ....................................... (9)% -------------------------------------------------------------------------- Operating income and EBITDA were adversely affected by lower sales levels, unfavorable currency developments, and by increased idle capacity costs that resulted from the proactive actions undertaken by the Company to lower its investment in inventories in view of the weak economic environment. The strengthening of the Swiss franc against most currencies negatively impacted operating income by approximately CHF 100 million. 43 These adverse effects were offset by tight cost controls, reduced performance based compensation payments and non-recurring service income. The net result is a reduction in the EBITDA margin from 17.1 percent to 16.7 percent. Restructuring and special charges, net The Company evaluates the performance of its Segments operating incomes before restructuring and special charges. Accordingly, restructuring and special charges are not included in the Segments' operating results. In 2001, the Company implemented a program ("Fit For Growth!") that aligned the Company's operational activities with its customers' industries. This new structure was designed to bring the Company's businesses closer to its customers and allow for a greater focus on providing not just products, but total integrated solutions. This program resulted in the establishment of five new business Segments, a Chief Technology Officer at the Executive Committee level and a new, cross Segment Research and Technology Board, which was formed to leverage the Company's existing technological core competencies and to identify new technology platforms for future growth. The "Fit for Growth!" program also was designed to speed up decision-making by eliminating the former divisional layer, as well as to improve efficiency by harmonizing several support areas. The major initiatives in these efficiency projects are the merging of the existing three supply chains into one coordinated global supply chain system, the rationalization of Information Technology support structures and infrastructure and the reduction of personnel in the Water & Paper Treatment Segment as part of the strategy to streamline operations, improve profitability and grow the business. During 2001, under the "Fit For Growth!" program, the Company has eliminated 262 full-time equivalents ("FTEs") under severance programs. The total cost of these severances was approximately CHF 33 million. The Company also released to income excess restructuring provisions of CHF 8 million and special charges provisions of CHF 25 million that were established in prior years. In 2000, the Company incurred net restructuring and special charges of CHF 2 million. This charge includes a CHF 71 million gain on the sale of 14 525 000 shares of the Company's investment in Hexcel Corporation, at USD 11.00 per share, which represents approximately 81 percent of the Company's holdings (see Notes 3 and 8 to the Consolidated Financial Statements). Also included is a charge of CHF 21 million which relates to an impairment loss on certain equity investments. The restructuring projects, totaling CHF 52 million, comprised primarily the restructuring of certain operations of the Water & Paper Treatment Segment in the United States (mainly relating to the closure of a manufacturing facility), the reorganization of the Company's administration functions in Southern Europe and the reduction of personnel, principally at a Plastic Additives and Home & Personal Care manufacturing facility in the United States. Severance costs incurred in 2000 relate to the elimination of approximately 238 FTEs in the United States and southern Europe, principally in the administration, sales and marketing functions and, in addition, the production function in the United States. As of December 31, 2001, 58 FTEs are still to be terminated. The remaining terminations relating to these restructuring programs are expected to be substantially completed during 2002. The costs and activity associated with the 2000 restructuring programs during 2001 are summarized below: Severance Other costs costs Total -------------------------------------------------------------------------- January 1, 2001 .................... 30 22 52 Amounts utilized(1) ................ (25) (15) (40) -------------------------------------------------------------------------- December 31, 2001 .................. 5 7 12 --------------------------------------------------------------------------- (1) Includes currency adjustments and a release of excess reserves of CHF 8 million. Management believes that the remaining restructuring provision is adequate to complete all of its programs. Plastic Additives results Sales decreased to CHF 1 834 million in 2001 or by 6 percent in Swiss francs and by 3 percent in local currencies. Sales development in 2001 compared to 2000 resulted from the following factors: Sales development 2001 compared to 2000 -------------------------------------------------------------------------- Volume/product mix ................................ (1)% Price ............................................. (2)% Currency .......................................... (3)% -------------------------------------------------------------------------- Total in Swiss francs ............................. (6)% -------------------------------------------------------------------------- Sales growth in lubricant additives compensated for slower sales in base polymers and polymer products resulting in overall stable volumes. Maintaining stable volumes in challenging market conditions was achieved 44 through continuing innovation and close customer partnerships. Continuing competitive pressure and a slower economic environment in major customer industries, particularly in the automotive industry, caused the sales price declines. Unfavorable currency developments between years adversely affected sales performance. Geographically, despite a slowing trend towards year-end, sales in Europe in local currencies exceeded prior year. Sales in the Americas were lower, although sales declines stabilized in the United States in the second half. In Asia-Pacific, sales were stable in local currencies. 2001 2000 -------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ................................ 271 314 As a percentage of sales (EBIT margin) ......... 14.8% 16.0% EBITDA -------------------------------------------------------------------------- Absolute in CHF ................................ 388 423 As a percentage of sales (EBITDA margin) ....... 21.1% 21.6% -------------------------------------------------------------------------- Operating income and EBITDA, in absolute terms, were adversely affected by lower sales. EBITDA margin declined marginally from the prior year. Continued high volumes, stable raw material prices and tight cost controls in production resulted in stable gross profit margin levels. Unfavorable currency developments had an adverse effect on results as proportionately more costs than sales are incurred in Swiss francs. Selling, general and administrative costs, on a comparable basis, were held at similar levels to prior years. Investment in future growth through research and development continues at the level of approximately 4 percent of sales. Asset management 2001 2000 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF .............................. 420 415 As a percentage of sales ..................... 23% 21% Capital expenditure in CHF ..................... 80 67 Net assets (invested capital) in CHF ........... 1 403 1 458 Velocity ....................................... 1.28 1.37 -------------------------------------------------------------------------- In 2001 the Segment maintained its good asset management record. Effective inventory management resulted in an improvement in both absolute and intensity terms. Receivables reduced in absolute terms. These reductions were, however, offset by reduced payables. Capital expenditures were invested mostly in efficiency improvement projects in the Segment's major production facilities. The combination of currency effects, lower investment than annual depreciation in fixed assets, and tight current asset management led to a reduction in net assets. These reductions could not offset the decline in net sales, resulting in a decline in velocity to 1.28 from 1.37 in the prior year. Coating Effects results Sales decreased to CHF 1 944 million in 2001 or by 8 percent in Swiss francs and by 4 percent in local currencies. Sales development in 2001 compared to 2000 resulted from the following factors: Sales development 2001 compared to 2000 -------------------------------------------------------------------------- Volume/product mix ............................... (2)% Price ............................................ (2)% Currency ......................................... (4)% -------------------------------------------------------------------------- Total in Swiss francs ............................ (8)% -------------------------------------------------------------------------- The weak economic environment, particularly in the United States and in the automotive paint industry, negatively affected sales. Despite this generally negative economic environment, sales into the imaging and inks industry remained stable. The strong growth in sales into the electronics materials industry due to innovative products could not fully compensate for the challenging competitive conditions encountered in the automotive coatings and plastic fiber industries. Unfavorable currency developments between years also adversely affected sales performance. Geographically, despite a slowing trend towards year-end, sales in Europe in local currencies were only marginally below prior year. Sales in the Americas, especially in the United States, were lower. In the second half, however, sales levels stabilized, albeit at a lower level. In Asia-Pacific sales grew in local currencies and were stable in Swiss francs. 45 2001 2000 -------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ................................ 304 366 As a percentage of sales (EBIT margin) ......... 15.6% 17.3% EBITDA -------------------------------------------------------------------------- Absolute in CHF ................................ 411 475 As a percentage of sales (EBITDA margin) ....... 21.1% 22.4% -------------------------------------------------------------------------- Operating income and EBITDA, in absolute terms, were adversely affected by lower sales and unfavorable currency developments. Proactive actions to reduce inventory levels and increase cash, including the temporary shutdown of certain production plants, negatively affected the gross profit margin. Selling, general and administrative costs were reduced as a consequence of the new Segment structure and targeted cost reduction initiatives implemented in the second half of the year. Investment in future growth through research and development continues at the high level of approximately 5 percent of sales. In addition, during 2001 Efka Additives B.V., a manufacturer of additives for the coatings and inks industries was acquired. The business will expand the service element and the Segments high value added products offering. Asset management 2001 2000 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF .............................. 658 740 As a percentage of sales ..................... 34% 35% Capital expenditure in CHF ..................... 66 65 Net assets (invested capital) in CHF ........... 1 852 1 904 Velocity ....................................... 1.03 1.10 -------------------------------------------------------------------------- In 2001, the Segment continued its focus on asset management. Net current operating assets reduced both in absolute and intensity terms. The main reason for this improvement is more effective inventory management. Capital expenditure was invested mainly in efficiency improvement projects. The combination of currency effects, lower investment than annual depreciation in fixed assets, and effective current asset management led to a reduction in net assets. These reductions could not offset the decline in net sales, resulting in a decline in velocity to 1.03 from 1.10 in the prior year. Water & Paper Treatment results Sales decreased to CHF 1 486 million in 2001 or by 5 percent in Swiss francs and by 1 percent in local currencies. Sales development in 2001 compared to 2000 resulted from the following factors: Sales development 2001 compared to 2000 -------------------------------------------------------------------------- Volume/product mix ............................... (1)% Price ............................................ 0% Currency ......................................... (4)% -------------------------------------------------------------------------- Total in Swiss francs ............................ (5)% -------------------------------------------------------------------------- Despite the difficult economic environment, sales in paper chemical products increased in local currencies. This positive result was supported by growth in the barrier effects and imaging markets. Sales in water treatments products declined in local currencies partly due to aggressive pricing from competitors. Sales into the extractive industries were adversely impacted by the energy crisis in the United States that led to a reduction in aluminum and steel production. Unfavorable currency developments adversely affected sales performance. Geographically, in Europe, sales decreased both in Swiss francs and in local currencies. Performance of the individual countries, however, was mixed. In the Americas, sales remained relatively stable in Swiss francs and increased in local currencies. South America showed a strong sales performance both in Swiss francs and in local currencies. In Asia-Pacific, sales decreased in the major Asian markets, in both Swiss francs and in local currencies. 46 2001 2000 -------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ................................ 82 111 As a percentage of sales (EBIT margin) ......... 5.5% 7.1% EBITDA -------------------------------------------------------------------------- Absolute in CHF ................................ 157 187 As a percentage of sales (EBITDA margin) ....... 10.6% 12.0% -------------------------------------------------------------------------- Operating income and EBITDA decreased both in absolute and intensity terms. This decline is partly due to raw material price increases and to under utilization of production capacities. Significant actions have been taken and continue to be taken to both improve operational efficiency and to either improve utilization of production facilities or eliminate the idle capacities. As part of this process, during 2001, the Segment reorganized its business in the United States, including the closure of a production facility. While these actions started to have a noticeable positive impact on gross profit margins during the fourth quarter of 2001, overall margins for the entire year declined slightly. Selling, general and administrative costs decreased marginally in Swiss francs, but increased in local currencies, partly due to one-time rightsizing costs. These ongoing rightsizing initiatives have resulted in a significant reduction in headcount and a lower cost base for the Segment. Research and development costs remained stable at approximately 2 percent of sales. Asset management 2001 2000 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF ............................ 357 398 As a percentage of sales ................... 24% 26% Capital expenditure in CHF ..................... 52 52 Net assets (invested capital) in CHF ........... 1 092 1 149 Velocity ....................................... 1.33 1.35 -------------------------------------------------------------------------- During 2001, the Segment initiated actions to reduce the current asset level resulting in a reduction of net current operating assets, both in absolute and intensity terms. Inventories and receivables decreased significantly due to tighter asset management. These reductions were partly offset by reduced payables. Capital expenditures remained stable in absolute terms. The effect of lower investment than annual depreciation in fixed assets, currency effects and reduced net current operating assets resulted in a reduction in net assets. As a result of these actions, velocity remained relatively stable at 1.33 compared to 1.35 in the prior year. Textile Effects results Sales decreased to CHF 1 673 million in 2001 or by 9 percent in Swiss francs and by 6 percent in local currencies. Sales development in 2001 compared to 2000 resulted from the following factors: Sales development 2001 compared to 2000 -------------------------------------------------------------------------- Volume/product mix ................................ (5)% Price ............................................. (1)% Currency .......................................... (3)% -------------------------------------------------------------------------- Total in Swiss francs ............................. (9)% -------------------------------------------------------------------------- The general economic slow down that accelerated in the second quarter of 2001 adversely affected the sales performance. The industries participating in the wool sector recorded a particularly low level of activity for the year. On the positive side, effect chemicals matched last year's performance in local currencies, owing to continued customer demands for functional effects. Despite the challenging business environment, innovative products and close customer partnerships, in areas such as reactive dyeing and effect chemicals, resulted in positive sales developments. The relatively stable price effect was achieved through the Segment's continued focus on profitable sales growth. Unfavorable currency conditions in 2001 adversely impacted the sales development of the Segment. Geographically, Europe posted lower sales in both Swiss francs and in local currencies. Performance of the individual countries, however, was mixed. The Americas were particularly weak, both in Swiss francs and in local currencies. All major markets in the region were affected by the downward trend in sales. In Asia-Pacific, sales were stable in local currencies, but declined in Swiss francs. 47 2001 2000 -------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ................................ 183 204 As a percentage of sales (EBIT margin) ......... 10.9% 11.1% EBITDA -------------------------------------------------------------------------- Absolute in CHF ................................ 248 275 As a percentage of sales (EBITDA margin) ....... 14.8% 14.9% -------------------------------------------------------------------------- Operating income and EBITDA, in absolute terms, reflect the adverse effects of the decline in sales. EBITDA margin remained stable. Ongoing productivity improvement initiatives, together with the continuing effect of reduced raw material prices, resulted in improved gross profit margin levels. Currency adversely affected the results, as proportionately more costs than sales are incurred in Swiss francs. Selling, general and administrative costs decreased in Swiss francs and decreased even more significantly in local currencies, due principally to reductions in headcount. Research and development costs remained stable at approximately 2 percent of sales. Asset management 2001 2000 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF .............................. 641 739 As a percentage of sales ..................... 38% 40% Capital expenditure in CHF ..................... 32 37 Net assets (invested capital) in CHF ........... 1 270 1 385 Velocity ....................................... 1.26 1.34 -------------------------------------------------------------------------- During 2001, the Segment reduced its net current operating assets, both in absolute and intensity terms. The benefits of the initiatives to reduce inventories and receivables that began in mid-year 2001 led to this decrease. Payables remained stable in absolute terms. In 2001 capital expenditures decreased both in absolute and intensity terms. The effects of the tight current asset management, lower investment than annual depreciation in fixed assets, together with currency effects, resulted in a reduction in net assets. These reductions could not offset the decline in net sales, resulting in a decline in velocity to 1.26 from 1.34 in the prior year. Home & Personal Care results Sales increased to CHF 430 million in 2001 or by 1 percent in Swiss francs and by 6 percent in local currencies. Sales development in 2001 compared to 2000 resulted from the following factors: Sales development 2001 compared to 2000 -------------------------------------------------------------------------- Volume/product mix ............................... 6% Price ............................................ 0% Currency ......................................... (5)% -------------------------------------------------------------------------- Total in Swiss francs ............................ 1% -------------------------------------------------------------------------- Sales growth in home and fabric care was mainly driven by an upturn in sales in the detergent market, while personal care recorded strong sales of UV absorbers, particularly in European markets, and of products for use in hair dyes. These growth areas more than compensated for the declines in the hygiene effects market, which was most notably seen in the United States, resulting in an overall positive volume development. Selling prices remained stable compared to the previous year while unfavorable currency developments adversely affected sales performance. Geographically, sales in Europe increased in both Swiss francs and in local currencies. Performance among individual countries was, however, mixed. In the Americas, sales increased in local currencies but were flat in Swiss francs. This performance resulted from an increase in sales in South America, both in Swiss francs and local currencies, while sales in North America decreased. In Asia-Pacific, sales increased in both Swiss francs and to an even more significant extent in local currencies. 48 2001 2000 -------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ................................ 67 58 As a percentage of sales (EBIT margin) ......... 15.7% 13.7% EBITDA -------------------------------------------------------------------------- Absolute in CHF ................................ 95 80 As a percentage of sales (EBITDA margin) ....... 22.2% 18.8% -------------------------------------------------------------------------- Operating income and EBITDA increased both in absolute and intensity terms. Stable volumes and a continuing focus on cost controls led to constant gross profit margin levels. Tight cost controls in discretionary spending and operational improvements resulted in a decrease in selling, general and administrative costs, both in Swiss francs and in local currencies. Investment in research and development increased to approximately 6 percent of sales reflecting the commitment to future growth. Asset management 2001 2000 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF .............................. 98 95 As a percentage of sales ..................... 23% 22% Capital expenditure in CHF ..................... 25 23 Net assets (invested capital) in CHF ........... 286 271 Velocity ....................................... 1.54 1.61 -------------------------------------------------------------------------- The Segment maintained its good asset management record during 2001. The increase in sales led to higher inventories both in absolute and intensity terms while receivables remained relatively stable. The increase in inventories was partly offset by increased payables. Capital expenditures increased both in absolute and intensity terms. The combination of currency effects and the increase in net current operating assets, partly compensated by the effect of lower investment than annual depreciation in fixed assets, led to an increase in net assets. The increase in net assets led to a decline in velocity to 1.54 from 1.61 in the prior year. Treasury management The international financial markets in 2001 continued to be volatile. The major trends in the markets, which were the focus of the Company's treasury management, included the weakening of certain currencies against the U.S. dollar, the weakening of the U.S. dollar against the Swiss franc, the weakening of the euro against the Swiss franc, as well as against other European currencies, the weakening of the Japanese yen against the Swiss franc and movements in interest rates. In 2001, the Swiss franc strengthened against most of the major currencies. During 2001, the U.S. dollar fluctuated against the Swiss franc from a high of approximately CHF 1.81 to a low of approximately CHF 1.59. At the end of 2001, the Swiss franc was at a level of CHF 1.63 against the U.S. dollar versus CHF 1.67 at the end of 2000. As a consequence of the economic slowdown in the United States and the flat growth development in Europe, global interest rates fell below 2000 levels. Through the effective anticipation of market conditions and the use of financial instruments available in the financial markets, the Company was able to further reduce the average cost of its total borrowings in 2001 to 4.8 percent, which is below 2000 levels. The Company's net interest costs decreased by CHF 75 million to CHF 134 million in 2001 compared to CHF 209 million in 2000. This decrease resulted from a reduction in interest rates globally and effective treasury management. The Company, in accordance with its stated risk management policy, continues to monitor its currency exposures and, where appropriate, enters into transactions to minimize its overall exposures to volatility in the currency markets. The Company selectively executes foreign currency transactions to protect the cash flows of its operating companies against unfavorable foreign currency movements. In 2001, other financial income (expense) including foreign currency exchange gains and losses and net hedging expenses, increased by CHF 45 million, to a net expense of CHF 59 million in 2001 as compared to a net expense of CHF 14 million in 2000. This increase is a consequence of currency exchange losses caused by the devaluation of (i) the Brazilian real against the U.S. dollar of CHF 15 million, (ii) the Turkish lira against the U.S. dollar of CHF 6 million, (iii) the South African rand against the Swiss franc of CHF 5 million, (iv) the Mexican peso against the U.S. dollar of CHF 2 million and (v) the Argentine peso against the U.S. dollar of CHF 2 million. Also included are increases in miscellaneous bank fees of CHF 5 million and premiums paid on currency options of CHF 10 million that were incurred to hedge the Company's exposure in various currencies. The Company continued its debt repayment program, which commenced in 1999, utilizing free cash flow to further reduce its short-term debt. Cash flow utilized for this purpose amounted to CHF 48 million in 2001 and 49 CHF 844 million in 2000. When economically feasible, the Company also selectively retires portions of its long-term debt. Free cash flow utilized for this purpose amounted to CHF 110 million in 2001 versus CHF 499 million in 2000. The Company's remaining cash reserves will be utilized in future periods to maintain short-term debt at stable levels and for the repayment of long-term debt when it is economically advantageous to the Company. Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133", which replaces existing pronouncements and practices for derivatives and hedging activities with a single, integrated accounting framework. These statements expand the previous accounting definition of derivatives to include embedded derivatives and many commodity contracts. Upon adoption of these statements, the Company recorded a net transition adjustment gain after taxes of CHF 2 million in net income. The adoption did not have any effect on accumulated other comprehensive income. For further information, see Note 1 to the Consolidated Financial Statements and "Supplemental Information - Change in accounting policy and new accounting standards" of this Management's Discussion and Analysis. Effective tax rate The Company reported an effective tax rate of 32 percent in 2001 versus 35 percent in 2000. In 2001, the effective tax rate was impacted by several non-recurring events. The tax rate was negatively impacted by the effect of a tax payment in Italy (the "Imposta Sostitutiva") that permitted the future tax deductibility of Prochimica s.r.l.'s goodwill amortization and a tax adjustment. Both of these negative effects were substantially offset by the benefit received from the effect of certain taxable expenses in one of the Company's subsidiaries that were recognized for income tax purposes but were not recognizable for financial reporting purposes. In 2000, the effective tax rate was impacted by several non-recurring events. The tax rate was positively impacted by the realization of tax loss carryforwards for which the Company had previously recorded a valuation allowance, as at the time of their origination, realization was uncertain. Offsetting this positive effect on the effective tax rate were three events that generated additional income tax expense in 2000. First, statutory tax rates were further reduced in Germany from 50 percent to 38 percent. This tax rate reduction required the Company to re-value its net deferred tax asset of its German subsidiaries. This revaluation reduced the net deferred tax asset, resulting in additional tax expense in 2000. Second, additional tax expense was recorded for financial reporting purposes from certain taxable income in one of the Company's subsidiaries that was not recognized for financial reporting purposes. Third, the Company experienced a change in the profitability mix of its subsidiaries to countries with higher fiscal tax rates. Excluding the impact of the non-recurring events discussed above, for comparability with the 2001 effective tax rate, the effective tax rate in 2000 would have been 34 percent. Net income and earnings per share Net income 2001 2000 -------------------------------------------------------------------------- Income from continuing operations .............. 380 418 Discontinued operations (1) .................... - 34 Cumulative effects of change in accounting principles ................................... 2 - -------------------------------------------------------------------------- Net income .................................... 382 452 -------------------------------------------------------------------------- (1) In 2000, discontinued operations reported is the gain on sale of discontinued operations, net of tax. Earnings per share, basic and diluted 2001 2000 -------------------------------------------------------------------------- Continuing operations ......................... 5.72 6.31 Discontinued operations ....................... - 0.50 Cumulative effects of change in accounting principles ................................... 0.04 - -------------------------------------------------------------------------- Net income .................................... 5.76 6.81 -------------------------------------------------------------------------- Earnings per share amounts were computed by dividing income from continuing operations, discontinued operations, cumulative effects of change in accounting principles and net income, respectively, by the weighted average number of shares outstanding. 50 Consolidated balance sheets Strong focus on asset management continues to reduce investment in assets and net debt Selected balance sheet data as of December 31, 2001 2000 -------------------------------------------------------------------------- Cash and cash equivalents and short-term investments .................................. 1 643 1 247 Total assets ................................... 11 718 12 105 Total shareholders' equity ..................... 3 908 3 754 -------------------------------------------------------------------------- The continued emphasis on the management of operational assets led to a reduction in total assets, excluding cash and cash equivalents and short-term investments, of CHF 783 million. This reduction was achieved through continued proactive asset management in the areas of inventories and accounts receivable and through focusing the Company's capital expenditures on efficiency and safety improvement related items. Proposed investments in additional production capacity are carefully evaluated to ensure that sufficient market demand exists to justify the investment. The Company continues its practice of maintaining total investments in property, plant and equipment at less than the annual depreciation cost. In addition to operational effects, the change in year-end exchange rates, between December 31, 2001 and 2000, used for translating the balance sheet into Swiss francs, had a significant effect. Most major currencies including the U.S. dollar, the British pound, the euro and the Japanese yen depreciated against the Swiss franc. The continued focus on cash and asset management resulted in significantly lower net debt in 2001. The table below shows the movement in net debt from December 31, 2000 to December 31, 2001. Net debt roll from Total Cash & cash Short-term Total 2000 to 2001 debt equivalents investments Net Debt -------------------------------------------------------------------------- December 31, 2000 .............. 4 230 1 179 68 2 983 Cash flows increase (decrease), net .......................... (152) 445 (27) (570) Currency effects and other ..... (84) (22) 0 (62) -------------------------------------------------------------------------- December 31, 2001 .............. 3 994 1 602 41 2 351 -------------------------------------------------------------------------- The continued generation of cash flows from operations in excess of 1 billion Swiss francs allowed the Company to reduce net debt levels in Swiss franc terms by CHF 632 million in 2001. Net debt amounted to CHF 2 351 million in 2001 compared to CHF 2 983 million in 2000. Short-term debt was reduced from CHF 371 million in 2000 to CHF 316 million in 2001. Long-term debt was reduced from CHF 3 859 million in 2000 to CHF 3 678 million in 2001. This reduction in total debt was achieved through the Company's continued debt repayment program, which began in 1999. When economically feasible, the Company selectively retires portions of its long-term debt. In 2001 and 2000, there were no material gains or losses being realized from debt retirements. Decrease in sales combined with stable invested capital level leads to a lower velocity December 31, 2001 2000 -------------------------------------------------------------------------- Net assets (invested capital), end of year ..... 9 814 9 804 Velocity ....................................... 0.75 0.80 -------------------------------------------------------------------------- Velocity is a measurement designed to measure the effectiveness of the Company's asset utilization. The combination of invested capital remaining relatively stable and decreasing sales led to a decline in velocity in 2001 to 0.75 from 0.80 in 2000. Liquidity and capital resources Liquidity - Free cash flow improves to CHF 779 million from CHF 638 million Cash flows from operating activities 2001 2000 1999 -------------------------------------------------------------------------- Net cash from continuing operations, before restructuring payments ..................... 1 100 1 065 1 054 Cash used for restructuring payments ......... (46) (35) (148) Net cash provided by discontinued operations . 0 1 174 -------------------------------------------------------------------------- Net cash provided by operating activities .... 1 054 1 031 1 080 -------------------------------------------------------------------------- The Company's continued focus on cash flow and asset management generated operating cash flows from continuing operations of CHF 1 100 million in 2001 compared to CHF 1 065 million in 2000 and CHF 1 054 million in 1999, before restructuring payments. Successful operating assets management programs resulted in reduced funding requirements for working capital. 51 Cash flows from investing activities 2001 2000 1999 ------------------------------------------------------------------------- Capital expenditures ..................... (259) (249) (267) Sale (acquisition) of businesses, net of cash ................................ (144) 1 566 70 Proceeds from sale of assets and changes in loans and other long-term assets...... 69 (42) 102 Cash flows used in investing activities, discontinued operations ................ 0 (4) (36) ------------------------------------------------------------------------- Net cash (used in) provided by investing activities ............................. (334) 1 271 (131) ------------------------------------------------------------------------- In 2001, the net cash used in acquisition and divestment activities amounted to CHF 144 million. The most significant costs incurred related to cash payments for separation and transaction taxes attributable to the divestment of the Performance Polymers business. Cash payments made in 2001 for these purposes was approximately CHF 145 million. This differs from the Company's prior year estimate of CHF 270 million, as a result of a delay in certain transaction taxes and separation cost payments beyond the Company's control. The Company's current estimate is that the majority of the remaining costs will be paid during 2002. The net cash effects of the Company's other 2001 business portfolio management activities substantially offset each other. In 2000, the net proceeds received from acquisition and divestment activities were CHF 1 566 million. Included in this amount were the net proceeds from the sale of the Performance Polymers business and the net proceeds from the sale of the majority of the Company's interest in its equity affiliate, Hexcel. These net proceeds from divestment activities were offset by several strategic acquisitions of businesses and technology, including the purchase of Prochimica s.r.l., Coating Effects' key photoinitiators supplier, at a cost of CHF 85 million and the purchase of certain paper chemical product lines and technologies from Cytec Industries for CHF 40 million to expand Water & Paper Treatment's product offerings to the paper industry, one of its strategic industry segments. The 1999 investment activities focused on the sale of non-strategic assets and investments, the most significant being the sale of the equity investment in Cerdec AG for CHF 70 million. Cash flows from financing activities 2001 2000 1999 ------------------------------------------------------------------------- Decrease in short-term and long-term debt, net ............................... (152) (1 339) (634) Dividends paid ............................ (132) (133) (133) Treasury stock transactions and other ..... 9 (36) 2 ------------------------------------------------------------------------- Cash flows used in financing activities ... (275) (1 508) (765) ------------------------------------------------------------------------- Free cash flow amounted to CHF 779 million in 2001 compared to CHF 638 million in 2000 and CHF 720 million in 1999. This increase is primarily a result of the continued strong focus on cash flow and the positive effects being realized from the completion of the prior years restructuring programs. Free cash flow was used, for debt repayment, where it was economically advantageous to the Company, for restructuring programs and for small strategic acquisitions. For information on the 2001 proposed distributions to the Company's shareholders to be made in 2002, see the Operational Review section of this Managements' Discussion and Analysis above. Capital resources The Company's policy is to maintain a high degree of flexibility in its funding process by using a broad variety of financial instruments and currencies depending on market conditions. The Company enters into derivative financial instruments in the ordinary course of business to mitigate its exposure to adverse changes in foreign exchange rates and to manage its interest rate exposures. Various risk exposures, arising from existing assets and liabilities, from future transactions in which the Company is firmly committed and from future anticipated transactions, are assessed and managed centrally by the Company's treasury group based on the Company's aggregate exposure. Under the Company's written hedging policy, treasury management continuously monitors and reports the results of its risk management programs to senior management and may choose to partially or fully hedge exposures. In accordance with its hedging policy, the Company primarily utilizes foreign exchange currency forwards, swaps and options contracts. The Company's risk management policies do not permit the utilization of financial instruments for speculative or trading purposes. For further information see Note 8 to the Consolidated Financial Statements and "Item 11. - Quantitative and Qualitative Disclosures About Market Risks". In recent years, the Company's sources of liquidity have primarily been provided by operations and funds from capital markets. The management of the Company is of the opinion that the funding available to it from these sources will be sufficient to satisfy its working capital and debt service requirements for the foreseeable future. The Company's capital requirements are primarily dependent on management's business plans regarding the levels and timing of capital expenditures and investments. Subject to developments affecting the Company which cannot be predicted or controlled, management currently intends to maintain the Company's capital expenditure levels 52 generally in the range of the past three years. The Company is not currently subject to any commitment for capital expenditures which individually is material to the Company. For further information on capital resources available to the Company, see Notes 11 and 12 to the Consolidated Financial Statements and to "Supplemental information - Capital Resources" section of this Management's Discussion and Analysis of Results of Operations and Financial Condition. Outlook for 2002 and beyond Macroeconomic conditions during the first quarter of 2002, and probably the second quarter as well, are expected to be recessionary, which would lead to weaker sales and margins in these quarters as compared to the stronger, corresponding quarters of 2001. For the full year of 2002, however, the Company expects both sales and earnings to be above the levels of 2001, assuming an economic recovery later in the year in the United States and, afterwards, in Europe. The early measures taken in 2001 to improve productivity will result in a structurally lower cost base and thus provide a sound basis for improvements in profitability once the general economic conditions improve. Lower interest expenses are expected, due to the reduced net debt position of the Company. Overall, the Company is striving to achieve a free cash flow for 2002 in excess of CHF 500 million. These forecasts are based on the assumption of an improving global economic situation in the second half of 2002 and reasonably stable exchange rates vis-a-vis the Swiss franc. See "Cautionary Statement Regarding Forward-Looking Information". Year in Review - 2000 Compared to 1999 Results of operations 2000 1999 ------------------------------------------------------------------------- Net sales .................................. 7 902 7 244 Gross profit ............................... 2 569 2 288 Operating income ........................... 876 632 Income from continuing operations .......... 418 238 Net income ................................. 452 325 Basic and diluted earnings per share: Income from continuing operations per share ................................ 6.31 3.58 Net income per share ................... 6.81 4.89 EBITDA, before restructuring and special charges(1) ............................... 1 348 1 086 Restructuring and special charges .......... 2 0 Operating cash flow(2) ..................... 1 065 1 054 Free cash flow ............................ 638 720 Shareholders' equity at year end ........... 3 754 3 638 Dividend per share(3) .................... 2.00 2.00 Key performance ratios ------------------------------------------------------------------------- Sales development .......................... 9% 9% Sales development in local currencies Expressed as a percentage of sales: Gross profit ........................... 32.5% 31.6% Operating income ....................... 11.1% 8.7% Income from continuing operations ...... 5.3% 3.3% Net income ............................. 5.7% 4.5% EBITDA, before restructuring and special charges ...................... 17.1% 15.0% ------------------------------------------------------------------------- (1) Including restructuring expenses and special charges of CHF 2 million in 2000, EBITDA was CHF 1 346 million. (2) From continuing operations. Including restructuring payments of CHF 35 million in 2000 and CHF 148 million in 1999, operating cash flows from continuing operations were CHF 1 030 million and CHF 906 million, respectively. (3) The 2000 dividend per share reflects the dividend payment proposal, based on 2000 results, that was approved at the shareholders' meeting on March 23, 2001. 53 Overview Market conditions in the Company's customer industries in 2000 were characterized, for most of the year, by the continuation of the improved economic environment, which commenced in the second half of 1999. Many European markets, fueled in part by the weakness of the euro against the U.S. dollar, continued to improve throughout 2000. In the United States, a slow-down in market demand was noted near the end of the year 2000. In Asia, the Japanese market had not fully recovered from its lows of 1999, remaining sluggish throughout 2000. In other Asian markets, there was a continuation throughout most of 2000 of the steady growth that began in the second half of 1999. Market demand in Brazil and Mexico remained at high levels during the entire year. Operational review Profitability grew through innovation, customer focus and continuing operational improvements Net sales in 2000 at CHF 7 902 million grew 9 percent in Swiss francs and 2 percent in local currencies compared to the previous year. The Company's gross profit increased in 2000 to CHF 2 569 million or 32.5 percent of sales from CHF 2 288 million or 31.6 percent of sales in 1999. Operating income improved in 2000 to CHF 876 million or 11.1 percent of sales from CHF 632 million or 8.7 percent of sales in 1999. Net income in 2000 increased to CHF 452 million or CHF 6.81 per share from CHF 325 million or CHF 4.89 per share in 1999. The Company's EBITDA and EBITDA margin increased to CHF 1 348 million and 17.1 percent, respectively, in 2000 compared to CHF 1 086 million and 15.0 percent, respectively, in 1999. Favorable currency conditions, particularly the strengthening of the U.S. dollar and the Japanese yen against the euro and the Swiss franc, contributed 7 percent to the total sales growth in 2000. The Company's continued focus on innovation and meeting customer needs led to an increase in net sales in 2000, contributing to the 5 percent volume and product mix increase. Pricing pressure continued in many of the Company's markets. Selective price increases, however, helped to contain price erosion, ending the year with a negative 3 percent price effect on net sales. The combination of volume growth and product mix changes coupled with continuing operational efficiency improvements more than compensated for selling price reductions and modest raw material price increases leading to higher profits in both absolute and intensity terms. Hexcel, the Company's major equity affiliate, realized a one time gain in 2000 on the sale of its Bellingham aircraft business. The Company's share of this gain, recorded in the line "income from earnings of equity affiliates", amounted to CHF 57 million. This one time gain was, however, offset by a number of non-recurring expenses relating primarily to a thorough review of the Company's liabilities including environmental liabilities and an increase in performance based compensation expenses. In addition, in the fourth quarter the Company realized a gain of CHF 71 million from the sale of its majority stake in Hexcel, which is included in the line "restructuring and special charges" in the 2000 Consolidated Statement of Income. A number of restructuring and special charges relating to business reorganization and anticipated impairments of equity affiliate amounted to CHF 73 million. Overall, the one time gains described in this paragraph were offset by non-recurring expenses, resulting in only a small net effect on the Company's income. The Company announced several restructuring initiatives in the fourth quarter of 2000. These initiatives were driven by the Company's focus on improving its overall operational efficiencies and by the deteriorating external market conditions, especially in the United States. The initiatives primarily included the closure of a Water & Paper Treatments facility in the United States, the reduction of Plastic Additives and Home & Personal Care headcount at a shared production facility in the United States and the reorganization of the administrative functions of the Company's Southern Europe organization. The closure of the Water & Paper Treatments facility will improve efficiencies of its business as well as in other United States based manufacturing facilities, improving operating margins and market competitiveness. The Plastic Additives, Home & Personal Care and Southern Europe programs are designed to reduce operating costs in response to the reduced infrastructure requirements resulting from the sale of the Performance Polymers business. Strategic focus on innovation The Company continued its strategic initiatives of innovation and development of environmentally friendly products. Significant investments in research and development underscore the importance of innovation as a key success factor. The Company's research and development program continued to focus on generating new business and defending leading market positions. Research and development expenses as a percentage of sales were 3.7 percent in 2000 compared to 3.5 percent in 1999. In absolute terms, research and development expenses increased by CHF 37 million to CHF 293 million in 2000 compared to CHF 256 million in 1999, an increase of 15 percent in Swiss francs or 12 percent in local currencies. 54 The Company continued to optimize its business portfolio through selective acquisitions and divestments to strengthen its focus on core businesses and improve profitability The most significant portfolio change was the completion on May 31, 2000 of the sale of the Performance Polymers business to Vantico, a company established by Morgan Grenfell Private Equity, the then private equity arm of Deutsche Bank AG, and to certain Asian joint venture partners. Total gross proceeds from the sale were CHF 1.6 billion, which includes net debt assumed of approximately CHF 160 million. This divestiture underscored the Company's strategy of focusing its portfolio on specialty chemicals rather than specialty materials. The Performance Polymers business that was sold comprised substantially all of the previously reported Performance Polymers division. The Company realized a net gain from discontinued operations of CHF 34 million, after consideration of the Performance Polymers business operating results through May 31, 2000, the results of the divestment transaction taxes and the costs of selling the business. In the first half of 2000, the Company concluded the acquisition of Prochimica s.r.l. for a total purchase price of approximately CHF 85 million. This acquisition secures an uninterrupted supply of key photoinitiators and supports the already high EBITDA margins of the Coating Effects Segment. In the second half of 2000, the Company concluded the acquisition of certain paper-chemical product lines and technology from Cytec Industries for a total purchase price of approximately CHF 40 million (USD 23 million). This acquisition complements and expands the Water & Paper Treatment's product offerings to the paper industry, one of its strategic industry segments. In December 2000, the Company sold approximately 81 percent or 14 525 000 shares of its holdings in its most significant equity affiliate, Hexcel, to an investor group led by Goldman Sachs for CHF 277 million (USD 160 million). This divestment underscores the Company's strategy to exit joint ventures which have little strategic fit with its core business. Hexcel is focused on the sale of specialty materials and not on specialty chemicals. As a result, after the sale of the Performance Polymers business, this investment no longer supported or supplemented the growth of the Company's remaining core businesses and therefore, divestment steps were undertaken. Cash flows higher due to operational improvements and divestment activities Continued improvements in net income and effective asset management led to a growth in cash flows provided by continuing operations to CHF 1 065 million in 2000 as compared to CHF 1 054 million in 1999, before restructuring payments of CHF 35 million in 2000 and CHF 148 million in 1999. This reflects high levels of net income and successful asset management. The Company's focus on tight asset management continued to show positive results with both inventories and accounts receivable, expressed as a percentage of sales, below the levels achieved in 1999. During 1999, significant reductions in current assets were realized in comparison with prior years as a result of the completion of asset improvement initiatives commenced during 1998. The combination of the effects from the Company's net business portfolio changes and the continued emphasis on cost effective capital expenditures contributed to increased cash flows from investing activities in 2000, providing cash of CHF 1 271 million, compared to a use of cash in 1999 of CHF (131) million. It should be noted, however, that certain cash payments relating to separation costs arising from the Polymers divestment had not yet been made in 2000 and will become payable in the future. As a result of continued operating cash flows in excess of one billion Swiss francs, the positive contributions to cash from divestment activities, the level of free cash flow, including cash provided by discontinued operations, cash from sale (acquisition) of businesses and restructuring payments, improved to CHF 2 169 million compared to CHF 816 million in 1999. Free cash flow was used for debt repayment, when economically advantageous to the Company, restructuring payments and small strategic acquisitions. In 2000, free cash flow (excluding cash provided by discontinued operations, cash from sale (acquisition) of business and cash used for restructuring payments) was CHF 638 million compared to CHF 720 million in 1999. 55 Financial review Strong volume growth in positive economic environment through most of the year Sales increased to CHF 7 902 million in 2000 or by 9 percent in Swiss francs and by 2 percent in local currencies. Sales development compared to 1999 resulted from the following factors: Consolidated sales 2000 compared to 1999 ------------------------------------------------------------------------- Volume/product mix ................................... 5% Price ................................................ (3)% Currency ............................................. 7% ------------------------------------------------------------------------- Total in Swiss francs ................................ 9% ------------------------------------------------------------------------- The strong volume growth and the positive economic environment, which began during the second half of 1999, continued through most of 2000. The Company's global market presence, selective price increases and favorable currency effects enabled the Company to benefit from the positive economic environment. Price declines arose from competitive conditions in certain markets. In addition, during 2000, prices were negatively impacted for products delivered into regions such as the United States where, due to the recent appreciation of the U.S. dollar, customers were demanding a share of the suppliers' currency gains. The economic environment began to show signs of weakness late in the fourth quarter of 2000. Sales increases were posted in all the major markets in Europe, both in Swiss francs and in local currencies, with the exception of the United Kingdom where sales declined slightly in local currency. In the Americas, sales increased in Swiss francs but remained flat in local currencies. The sales development during the year was characterized by a strong first half, followed by a slowdown in the second half, particularly in the United States. As a consequence of this economic slowdown, noted in the fourth quarter of 2000, sales in the United States declined in local currency. In Asia Pacific, sales increases were posted by most major markets both in Swiss francs and in local currencies, with the exception of Japan where sales declined in local currency. In the China Region and in the Rest of Asia strong sales growth was posted in both Swiss francs and in local currencies. Geographic sales distribution 2000 1999 ------------------------------------------------------------------------- Europe ..................................... 37% 39% Americas(1) ................................ 37% 36% Asia Pacific(2) ............................ 26% 25% ------------------------------------------------------------------------- (1) Americas is comprised of North, Central and South America. (2) Asia-Pacific is comprised of Asia, Africa, the Middle East, Australia and New Zealand. Profit margins improve Gross profit margin improved to 32.5 percent of sales compared to 31.6 percent in the prior year. This improvement reflects the impact of strong volume growth and product mix changes coupled with improvements in production and process efficiencies, which led to an increase in overall capacity utilization. These positive factors more than compensated for both the reductions in selling prices and the 2 to 3 percent increase in raw material prices. This relatively stable increase in raw material prices, in comparison to overall market conditions, was achievable due to the Company's ability to optimize procurement of raw materials by purchasing supplies globally through its worldwide organization and partnerships. This global reach allows the Company to take advantage of availability of supply as well as favorable foreign currency movements. In addition, the margin benefited from the impact of the U.S. dollar strengthening against the euro in 2000, as the Company has a higher proportion of its production costs than its sales concentrated in Europe. Despite ongoing investments in the future and unfavorable foreign currency effects, costs decreased as a percentage of sales Selling, general and administrative expenses expressed as a percentage of sales decreased from 18.5 percent in 1999 to 18.0 percent in 2000. In absolute terms, selling, general and administrative expenses increased by CHF 84 million to CHF 1 425 million, compared to CHF 1 341 million in 1999, an increase of 6 percent in Swiss francs but only 2 percent in local currencies. Despite only modest cost increases in local currencies, foreign exchange currency movements led to higher annual costs when these local costs were translated into Swiss francs. Apart from this large foreign exchange currency movement effect, a number of other factors affected expenses. The Company conducted a thorough review of its liabilities, including environmental liabilities, to ensure that all known and quantifiable liabilities were adequately provided for and disclosed. Continued focus on future growth, through investments in promising new technologies, together with a number of smaller initiatives relating to streamlining operations, also increased costs. In addition, an improved business performance in 2000 resulted in higher employee compensation costs, as compensation levels are partly linked to achieving performance targets. 56 These cost increases were offset by a number of cost reductions which resulted from the completion of key reorganizations and business improvement initiatives implemented by the Company over the past several years. Overall, the company was able to improve its selling, general and administrative expenses to sales ratio by a structural half percentage point. Continuing commitment to research and development Research and development expenses as a percentage of sales were 3.7 percent in 2000 compared to 3.5 percent in 1999. In absolute terms, research and development expenses increased by CHF 37 million to CHF 293 million in 2000 compared to CHF 256 million in 1999, an increase of 15 percent in Swiss francs or 12 percent in local currencies. The Company has historically invested and plans to continue to invest approximately 3 to 4 percent of sales in research and development activities. The Company's research and development program focuses on generating new business and defending leading market positions by continuous innovation. The Company's research and development strategy is to enter both new and existing markets with innovative formulations and solutions which satisfy customer needs. Some examples of entering new markets with new formulations are the development of textile dyes products for use in the manufacture of transparent colored plastics, which have many applications including in colorful translucent computers and notebooks and applying Water & Paper Treatments' nanocolloids technology in Home & Personal Care's detergent chemicals sector, thereby enhancing the products stain removal capability. Innovative product range extensions and customer focused solutions within existing markets include improvements in the pre-blend business in Polymer Additives, where in-house or toll-manufactured additives are mixed and formulated to fulfill specific customer needs and pigment granules from the Inks, Paints and Plastics business that have been developed from pigment powder, thereby reducing dosage levels in the customers manufacturing process. Also, the Company continues to develop new and improved manufacturing processes which are cost competitive and meet all environment, health and safety requirements. Amortization of goodwill and other intangibles Amortization of goodwill and other intangibles increased to CHF 94 million in 2000, an increase of CHF 17 million. This increase was primarily related to the additional goodwill and intangible amortization that resulted from the year 2000 business acquisitions. Effective January 1, 2002, in accordance with new U.S. GAAP accounting rules, the Company will no longer amortize any goodwill to earnings, but instead will be required to review its recoverability through annual impairment testing. Other identifiable intangibles will continue to be amortized to earnings over their estimated useful lives. For further information see the Supplemental Information - Change in accounting policy and new accounting standards section below of this Management's Discussion and Analysis and Note 1 to Consolidated Financial Statements. Increased income from earnings of equity affiliates Income from earnings of equity affiliates (investments in unconsolidated companies with greater than 20 percent and less than or equal to 50 percent ownership), before income taxes, increased to CHF 113 million in 2000 from CHF 15 million in 1999. The related income taxes on earnings of equity affiliates are recorded separately in the Company's provision for income taxes. In 2000, income from earnings of equity affiliates was positively impacted by Hexcel. In 2000, the Company's share of Hexcel's income amounted to CHF 66 million, as compared to a loss of CHF (17) million in 1999. Also included in Hexcel's 2000 income from earnings of equity affiliates is CHF 57 million, representing the Company's share of the gain recognized by Hexcel on the sale of its Bellingham Aircraft business. In December 2000, the Company sold a majority of its interest in its investment in Hexcel. The Company realized a gain of CHF 71 million from this sale, which is included in the line "restructuring and special charges" on the Consolidated Income Statement. For further discussion related to this sale, refer to the section "Restructuring and special charges, net" of this Management's Discussion and Analysis of Financial Condition. 57 Profitable growth and operational improvements led to an increase in operating income and EBITDA 2000 1999 ------------------------------------------------------------------------- Operating income (EBIT) ....................... 876 632 EBITDA, before restructuring and special charges .................................... 1 348 1 086 EBIT margin .................................. 11.1% 8.7% EBITDA margin, before restructuring and special charges ............................ 17.1% 15.0% 2000 compared to 1999 ------------------------------------------------------------------------- Operating income (EBIT) ................... 39% EBITDA ................................... 24% ------------------------------------------------------------------------- Improved operating income and EBITDA is reflective of the profitable sales growth, the optimization of procurement of raw materials to minimize the impact of raw material price increases, favorable currency conditions and the effects of cost reductions which have been achieved from the completion of key reorganizations and business improvement initiatives implemented over the past several years. As discussed above, operating performance in 2000 was affected by the equity income from Hexcel, which included the Company's share of the gain recognized by Hexcel on the sale of its Bellingham aircraft business, and by a number of non-recurring expenses recorded in selling, general and administrative expenses. The net effect of the one time gain and the non-recurring expenses is not material to the Company's income. Restructuring and special charges, net The Company evaluates the performance of its Segments operating incomes before restructuring and special charges. Accordingly, restructuring and special charges are not included in the Segments' operating results. For a discussion of the 2000 restructuring programs and special charges refer to the discussion above in the section "Year in Review - 2001 Compared to 2000 - Financial Review - Restructuring and special charges, net" of this Management's Discussion and Analysis. In 1999, the Company implemented a program in its Water & Paper Treatments Segment to eliminate approximately 250 FTEs, principally in the production, sales and administration areas. These programs were completed in 1999 for a total cost of CHF 10 million. The Company also released to income excess restructuring provisions of CHF 10 million that were established in prior years. In 2000, the Company completed all of its outstanding restructuring programs that were announced in prior years. For further information see Note 10 to the Consolidated Financial Statements. Plastic Additives results Sales increased to CHF 1 959 million in 2000 or by 10 percent in Swiss francs and by 3 percent in local currencies. Plastic Additives sales were marked by strong volume growth through most of the year. This sales development reflects the positive economic environment during the first nine months of the year, followed by the expected slowdown in the United States economy towards the end of the year. In addition, some price erosion was caused by customers located in strong currency regions, such as the United States, who purchased products manufactured in weaker currency regions, such as the euro region, requesting a share of the suppliers' currency gains. The Segment realized sales growth in polymer product, base polymers and particularly in lubricant additives, both in Swiss francs and local currencies. The results were driven by continuing innovation in meeting customer needs and by favorable global market conditions. Geographically, in Europe, a strong performance was posted in most major markets. In the Americas, sales were strong in South and Central America, both in Swiss francs and in local currencies. Sales in North America decreased moderately in local currencies, but increased in Swiss francs due to the strengthening of the U.S. dollar. In Asia-Pacific, strong sales performances were posted in most major Asian markets in both Swiss francs and in local currencies. 58 2000 1999 ------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ............................. 314 276 As a percentage of sales (EBIT margin) ...... 16.0% 15.5% EBITDA ------------------------------------------------------------------------- Absolute in CHF ............................. 423 377 As a percentage of sales (EBITDA margin) .... 21.6% 21.1% ------------------------------------------------------------------------- Operating income improved to CHF 314 million and EBITDA improved to CHF 423 million. This growth was largely attributable to higher sales and continued improvement in operational efficiency. In addition, raw material price increases were minimized as a result of favorable currency effects in the procurement process. In addition, as relatively more production costs as compared to sales are incurred in Europe, the prevailing euro and Swiss franc weakness relative to the U.S. dollar and the Japanese yen positively impacted the results. EBIT margin rose to 16.0 percent and EBITDA margin rose to 21.6 percent. In anticipation of the changing market conditions in the United States, a reorganization of the Segment's McIntosh manufacturing plant was initiated to reduce costs and to meet the expected future manufacturing requirements. Coating Effects results Sales increased to CHF 2 118 million in 2000 or by 8 percent in Swiss francs and by 2 percent in local currencies. Sales in the major business areas of the Segment improved both in Swiss francs and local currencies. In particular, sales continued to be strong in publication inks, decorative paints, powder coatings and coil coatings. The Segment's sales in the overall coatings business line were strong in the first half of the year but were unfavorably affected by a slowdown in the United States automotive industry in the fourth quarter. However, business line electronic materials showed a promising sales growth. Geographically, in Europe, a strong performance was posted in most major markets, except Germany where sales were relatively flat. In the Americas, sales were strong in South and Central America, both in Swiss francs and in local currencies. Sales in North America decreased in local currencies, but increased in Swiss francs due to the strengthening of the U.S. dollar. In Asia-Pacific, strong sales performances were posted in most major Asian markets in both Swiss francs and in local currencies, except Japan which posted a decline in local currency. 2000 1999 ------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ............................. 366 305 As a percentage of sales (EBIT margin) ...... 17.3% 15.6% EBITDA ------------------------------------------------------------------------- Absolute in CHF ............................. 475 403 As a percentage of sales (EBITDA margin) .... 22.4% 20.6% ------------------------------------------------------------------------- Operating income improved to CHF 366 million and EBITDA improved to CHF 475 million. This increase reflects the positive impact of volume growth coupled with increased capacity utilization and ongoing process improvements. These positive effects have more than offset selling price declines. The integration of Prochimica s.r.l., the company's former key photoinitiator supplier, which was purchased in March 2000, has started to positively contribute to the Segment's results. In addition, as relatively more production costs as compared to sales are incurred in Europe, the prevailing euro and Swiss franc weakness relative to the U.S. dollar and the Japanese yen positively impacted the results. EBIT margin rose to 17.3 percent and EBITDA margin rose to 22.4 percent. Water & Paper Treatment results Sales increased to CHF 1 558 million in 2000 or by 11 percent in Swiss francs and by 4 percent in local currencies. Sales growth in business line paper increased strongly in both Swiss francs and in local currencies, reflecting the continued positive impacts of the firm paper markets. This was particularly evident in the paper whitener and paper barrier effects businesses. Sales in business line water treatments faced continuing competitive pressure on prices, especially with respect to the highly regulated municipal pollution control market. Extractive Industries sales increased significantly, as a result of increased drilling activity, fueled by continuing high price levels for oil. 59 Geographically, in Europe, sales growth in most major markets was posted in Swiss francs and was stable to slightly higher in local currencies. In the Americas, sales increased in most major markets, in both Swiss francs and in local currencies, except for the United States, which posted a moderate decline in local currency. In Asia-Pacific, sales increased in the major Asian markets, in both Swiss francs and in local currencies. 2000 1999 ------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF .............................. 111 68 As a percentage of sales (EBIT margin) ....... 7.1% 4.9% EBITDA ------------------------------------------------------------------------- Absolute in CHF .............................. 187 151 As a percentage of sales (EBITDA margin) ..... 12.0% 10.7% ------------------------------------------------------------------------- Operating income of CHF 111 million and EBITDA of CHF 187 million in 2000 reflect an improvement compared to the 1999 results. This is largely due to reorganization programs introduced in the first half-year of 1999 which continue to yield positive results. More actions have been initiated to further improve operational performance. In the fourth quarter the company announced that it would reorganize its Water & Paper Treatments business in the United States. This is in response to more difficult market conditions in that region and the need to reorganize the Water & Paper Treatments business in order to assure continued profitability. The program includes the closure of the Old Bridge manufacturing facility and the streamlining of logistics and manufacturing processes at other facilities. This initiative will improve efficiencies across the business and in other United States based manufacturing facilities, improving operating margins and market competitiveness. EBIT margin rose to 7.1 percent and EBITDA margin rose to 12.0 percent. Textile Effects results Sales increased to CHF 1 841 million in 2000 or by 9 percent in Swiss francs and by 4 percent in local currencies. The colors for textiles business showed strong growth throughout most of the year, continuing the sales recovery that began in the third quarter of 1999. The increase in sales was noted in all major dyeing industries. Sales in the textile chemicals business also posted an increase in both Swiss francs and in local currencies, benefiting from innovative products for the fabric finishing market. Geographically, Europe posted relatively flat sales in both Swiss francs and in local currencies, performance between individual countries, however, was mixed. In the Americas, sales were higher in Central and South America in both Swiss francs and in local currencies. In North America, sales were higher in Swiss francs but decreased in local currencies. North American sales were affected by the continued relocation of the United States textile industry to the Asian region and to Central and South America. In Asia-Pacific, sales were strong in the Asian markets, in both Swiss francs and in local currencies, except in Japan, which posted a decline in local currency. 2000 1999 ------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ............................. 204 117 As a percentage of sales (EBIT margin) ...... 11.1% 6.9% EBITDA ------------------------------------------------------------------------- Absolute in CHF ............................. 275 179 As a percentage of sales (EBITDA margin) .... 14.9% 10.6% ------------------------------------------------------------------------- Operating income of CHF 204 million and EBITDA of CHF 275 million in 2000 reflect a strong improvement compared to the 1999 results. This increase reflects the positive impact of volume growth coupled with increased capacity utilization and ongoing process improvements. These positive effects have more than offset selling price declines. The full benefits of process improvement initiatives became visible in lower production and selling, general and administrative expenses as a percentage of sales and consequently, led to 11.1 percent EBIT margin and a 14.9 percent EBITDA margin. 60 Home & Personal Care results Sales increased to CHF 426 million in 2000 or by 3 percent in Swiss francs but declined by 5 percent in local currencies. The Home & Personal Care business faced difficult market conditions for most of the year, due to the effects of intense price competition among key detergent manufacturers, and pricing pressures from new producers in Asia in the antimicrobials business. Towards the end of 2000 there was, however, an upturn in sales in the detergent market. In addition, sales of recently introduced new products in the personal care market, such as products for use in hair-dyes, grew during 2000. Geographically, in Europe sales increased in both Swiss francs and in local currencies. Performance among individual countries, however, was mixed. In the Americas, sales increased in South and Central America in Swiss francs but were relatively flat in local currencies. In North America, sales increased slightly in Swiss francs but were decreased in local currencies. In Asia-Pacific, sales decreased in most major Asian markets in both Swiss francs and in local currencies. 2000 1999 ------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ............................. 58 62 As a percentage of sales (EBIT margin) ...... 13.7% 15.0% EBITDA ------------------------------------------------------------------------- Absolute in CHF ............................. 80 85 As a percentage of sales (EBITDA margin) .... 18.8% 20.5% ------------------------------------------------------------------------- Due to the challenging sales conditions in the Home & Personal Care markets, coupled with increased expenditures in research and development led to a decrease in operating income to CHF 58 million and in EBITDA to CHF 80 million. This led to a 13.7 percent EBIT margin and a 18.8 percent EBITDA margin. Treasury management The international financial markets in 2000 continued to be volatile. The major trends in the markets, which were the focus of the Company's treasury management, included the strengthening of the U.S. dollar against the Swiss franc, the weakening of the euro against the Swiss franc and other European currencies, the volatility in the Japanese yen and the movements in interest rates. In the first half of 2000, the Swiss franc strengthened against most of the major currencies, with the exception of the U.S. dollar and Japanese yen. In the second half of 2000, the Swiss franc continued to strengthen against these major currencies, however, the U.S. dollar and the Japanese yen continued to strengthen, with a weakening occurring in December 2000. During 2000, the U.S. dollar fluctuated against the Swiss franc from a high of approximately CHF 1.82 to a low of approximately CHF 1.56. At the end of the year 2000, the Swiss franc was at a level of CHF 1.67 against the U.S. dollar versus CHF 1.58 at the end of 1999. As a consequence of the continued economic expansion in the United States and Europe, global interest rates continued to rise over 1999 levels. In particular, a significant increase was seen in short-term Swiss franc borrowing rates. Through the effective anticipation of market conditions and the use of financial instruments available in the financial markets, the Company was able to further reduce the average cost of its total borrowings in 2000 to 5.2 percent, which is below 1999 levels. The Company's net interest costs decreased by CHF 56 million to CHF 209 million in 2000 compared to CHF 265 million in 1999. This decrease resulted from a combination of effective treasury management and the use of proceeds received from the divestment of the Performance Polymers business on May 31, 2000, to further reduce net debt levels during the second half of 2000. The Company, in accordance with its stated risk management policy, continued to monitor its currency exposures and, where appropriate, had entered into transactions to minimize its overall exposures to volatility in the currency markets. The Company selectively executed foreign currency transactions to protect the cash flows of its operating companies against unfavorable foreign currency movements. In 2000, other financial income (expense) including foreign currency exchange gains and losses and net hedging expenses, increased by CHF 9 million, to a net expense of CHF 14 million in 2000 as compared to a net expense of CHF 5 million in 1999. Through the use of effective treasury management, the Company was able to maintain net other financial income (expense) at a relatively stable level as compared to 1999, despite the volatility in the financial markets during 2000. In addition, the Company continued to realize benefits from the introduction of the euro in Europe, which has enabled the Company to further improve cash management, reduce costs and simplify risk management by reducing the number of currencies requiring attention. 61 The Company continued its debt repayment program, which commenced in 1999, utilizing its free cash flow to substantially reduce its short-term debt. Cash flow utilized for this purpose amounted to CHF 844 million in 2000 and CHF 915 million in 1999. When economically feasible, the Company also selectively retired portions of its long-term debt. Free cash flow utilized for this purpose amounted to CHF 499 million in 2000 versus CHF 49 million in 1999. Effective tax rate The Company reported an effective tax rate of 35 percent in 2000 versus 33 percent in 1999. In 2000, the effective tax rate was impacted by several non-recurring events. The tax rate was positively impacted by the realization of tax loss carryforwards for which the Company had previously recorded a valuation allowance, as at the time of their origination, realization was uncertain. Offsetting this positive effect on the effective tax rate were three events that generated additional income tax expense in 2000. First, statutory tax rates were further reduced in Germany from 50 percent to 38 percent. This tax rate reduction required the Company to re-value its net deferred tax asset of its German subsidiaries. This revaluation reduced the net deferred tax asset, resulting in additional tax expense in 2000. Second, additional tax expense was recorded for financial reporting purposes from certain taxable income in one of the Company's subsidiaries that was not recognized for financial reporting purposes. Third, the Company experienced a change in the profitability mix of its subsidiaries to countries with higher fiscal tax rates. Excluding the impact of the non-recurring events discussed above, for comparability with the 1999 effective tax rate, the effective tax rate in 2000 would have been 34 percent. Net income and earnings per share Net income 2000 1999 ------------------------------------------------------------------------- Income from continuing operations ............ 418 238 Discontinued operations (1) .................. 34 87 ------------------------------------------------------------------------- Net income ................................... 452 325 ------------------------------------------------------------------------- (1) In 2000, discontinued operations reported is the gain on sale of discontinued operations, net of tax. In 1999, discontinued operations reported is the income from operations of discontinued operations, net of tax. In 2000, discontinued operations reported is the gain on sale of discontinued operations, net of tax. Improving operational business performance, favorable currency conditions and effective treasury management, which reduced overall financing costs, led to an increase in net income. Earnings per share, basic and diluted 2000 1999 ------------------------------------------------------------------------- Continuing operations ........................ 6.31 3.58 Discontinued operations ...................... 0.50 1.31 ------------------------------------------------------------------------- Net income ................................... 6.81 4.89 ------------------------------------------------------------------------- Earnings per share amounts were computed by dividing income from continuing operations, discontinued operations and net income, respectively, by the weighted average number of Shares outstanding. Discontinued operations - Performance Polymers business sold Divestment underscores specialty chemical focus On May 31, 2000, the Company completed the sale of its Performance Polymers business to Morgan Grenfell Private Equity ("MGPE"), the then private equity arm of Deutsche Bank AG. The total gross proceeds from the sale of the Performance Polymers business to MGPE and Asian joint venture partners were CHF 1.6 billion, which included net debt assumed of approximately CHF 160 million. The assumed net debt consisted of approximately CHF 71 million of third party debt and approximately CHF 121 million of debt to Ciba Specialty Chemicals, offset by approximately CHF 32 million of cash. In connection with the sale of the Performance Polymers business to MGPE, the Company agreed to provide certain administrative support services and infrastructure related services, such as utility services and railroad access, at shared production facilities to Vantico, the company established by MGPE that operates the Performance Polymers business it acquired. These administrative service contracts have expired and will not be renewed. The Performance Polymers division produced epoxy resins and other high performance thermosets that provide durability, extraordinary strength and resistance to heat and corrosion. The Performance Polymers division supplied its products to the coatings, aircraft, electrical and electronic industries, among others. 62 This divestiture underscores the Company's strategy of focusing its portfolio on specialty chemicals rather than specialty materials. The Performance Polymers business that was sold is substantially all of the previously reported Performance Polymers division. The Performance Polymers business is reported as a discontinued operation. This requires the Company to report separately, in the 2000 and 1999 Consolidated Statements of Income, the Performance Polymers business' results of operations. The Performance Polymers business achieved sales of CHF 774 million for the five-month period ended May 31, 2000 and CHF 1 729 million for the year ended December 31, 1999. The Company recorded, in the Consolidated Statement of Income, a gain on sale of discontinued operations, net of tax of CHF 34 million in 2000. For the year ended December 31, 1999, income from discontinued operations, net of tax amounted to CHF 87 million. The 2000 gain on sale of discontinued operations, net of tax, of CHF 34 million, consists of the Performance Polymers business operating results through May 31, 2000 of CHF 37 million offset by the loss from the sale of the net assets of the business of CHF 3 million, which includes the expenses for transaction taxes and the costs of selling the business. See Note 3 to the Consolidated Financial Statements for further information. Supplemental Information Inflation The movements in the annual rates of inflation in Switzerland and the other major markets in which the Company operates have not been significant in the last three fiscal years. Capital resources The Company maintains multicurrency loan facilities, commercial paper programs and bank overdraft and credit line facilities to finance its working capital requirements. The total amounts outstanding under all the Company's short-term debt facilities was CHF 316 million as of December 31, 2001 (2000: CHF 371 million). The Company's most significant multicurrency revolving loan agreement provides for borrowings in multiple currencies up to CHF 400 million at an interest rate of LIBOR plus 21.5 basis points. This facility expires on July 11, 2002. As of December 31, 2001 and 2000, there were no borrowings outstanding under this facility. The Company's other multicurrency facility, which provided for borrowings of CHF 300 million at LIBOR plus 20.0 basis points, expired on June 30, 2000 and was not renewed by the Company. There were no borrowings outstanding under this facility during 2000. The Company's principle commercial paper programs are in the United States and provide for short-term borrowings up to USD 1 billion. At December 31, 2001 no amounts were outstanding and at December 31, 2000, CHF 1 million (USD 0.6 million) were outstanding under these programs. As of December 31, 2001, the Company had available unused credit lines under its other bank overdraft and credit facilities of a total of approximately CHF 1 040 million (2000: CHF 1 229 million). The Company's long-term debt consists primarily of Euro Medium-Term Notes, convertible bonds, and straight bonds. The total amounts outstanding under all of the Company's long-term debt facilities was CHF 3 678 million as of December 31, 2001 (2000: CHF 3 859 million). The Company maintains a Euro Medium-Term Note program under which the Company may issue up to USD 2.0 billion (CHF 3.3 billion) multicurrency, unsecured, unsubordinated notes with a minimum maturity of one month and at fixed, floating or indexed interest rates. As of December 31, 2001 the Company had available borrowings under this program of approximately CHF 2 251 million (USD 1 380 million) and as of December 31, 2000, had available approximately CHF 2 305 million (USD 1 380 million). The Company, in July 1998, issued USD 687 million (CHF 1 billion) unsecured, unsubordinated convertible bonds due 2003 with a fixed interest rate of 1.25 percent that are convertible into the Company's common stock from September 2, 1998 to July 10, 2003 at a conversion price of CHF 254.14 per share (the exchange rate to the USD being fixed at 1.505 until the maturity of the bond), the conversion price being subject to the usual adjustments. In 2001, the Company repurchased approximately CHF 91 million (USD 59 million) of these bonds. The Company also has outstanding at both December 31, 2001 and 2000, CHF 1 300 million, 3.25 percent Straight Bonds, of which CHF 1 000 million is due in 2008 and CHF 300 million is due in 2009. Environmental matters Operating in the chemical industry, the Company is subject to stringent environmental, health and safety laws and regulations. It is the Company's policy to continuously develop and improve the environmental performance of key manufacturing processes through an active program. In addition to process improvements, the Company uses advanced waste treatment and disposal facilities at all major manufacturing sites that allow the sites to comply with recent laws and regulations applicable to waste streams. Management believes that the Company 63 substantially complies with all such laws. For further information, see Note 20 to the Consolidated Financial Statements and "Item 4. Information on the Company--Property, Plant and Equipment; Manufacturing--Environmental Matters." Euro conversion On January 1, 1999, eleven (2001: twelve) of fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and adopted the euro as their new common currency. The euro traded on currency exchanges while the national currency units remained legal tender in the participating countries for a transition period between January 1, 1999 and December 31, 2001. During the transition period, cashless payments were made in the euro and parties elected to pay for goods and services and transact business using either the euro or a national currency unit. Between January 1, 2002 and July 1, 2002, the new euro banknotes and coins are being put into circulation in substitution for banknotes and coins in the old national currency units. By July 1, 2002, at the latest, euro banknotes and coins will be the only banknotes and coins to have legal tender status in participating member states. The Company has in place a joint team representing affected functions within the Company. This team has established and implemented actions and performed the necessary systems changes to address the potential impact to the Company from the euro conversion. These issues include, but are not limited to (i) the technical challenges of adapting information systems to accommodate euro transactions, (ii) the competitive impact of cross-border price transparency, (iii) the impact on currency exchange rate risks, (iv) the impact on existing contracts and (v) tax, legal and accounting implications. Effective January 1, 2001, the Company's subsidiaries in the twelve countries that adopted the euro, converted their transaction systems and their reporting currency to the euro. Based on the Company's progress to date, management is of the opinion that the introduction of the euro and the phasing out of the national currency units will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. See "Item 3. Key Information - Risk Factors." Taxes In their tax audit of the Company's operations in Grenzach, Germany, the German tax authorities have made a substantial tax adjustment. In accordance with the Master Spin-off Agreement with Novartis and with Swiss commercial law, management is of the opinion that the total liability owed is the responsibility of Novartis. In 2001, arbitration proceedings have been initiated in relation to this matter. In management's opinion, the ultimate outcome of this matter will not have a material adverse effect on the financial position or results of operations of the Company. Change in accounting policy and new accounting standards Derivative financial instruments Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133". For further information, see the "Treasury management" section of this Management's Discussion and Analysis and Notes 1 and 8 to Consolidated Financial Statements. Business combinations In July 2001, the FASB issued SFAS No. 141 "Business Combinations". SFAS No. 141 requires that all business combinations completed after June 30, 2001, be accounted for under the purchase method of accounting. Use of the pooling-of-interests method (also known as the "uniting of interest method") is no longer permitted. The new standard requires the recording, as a separate asset apart from goodwill, of all intangible assets that can be identified and named if the intangible asset meets the criteria as defined in SFAS No. 141. In addition, the disclosure requirements related to business combinations have been expanded to include, for material business combinations, the disclosure of the reason for the acquisition and the allocation of the purchase price paid to the assets and liabilities assumed by major balance sheet caption. The adoption of this standard did not have any effect on the Company's 2001 results of operations and financial position. 64 Goodwill and intangible assets In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed annually for impairment. Other identifiable intangibles will continue to be amortized to earnings over their estimated useful lives. The amortization of goodwill ceases upon adoption of SFAS No. 142. The standard is required to be adopted as of July 1, 2001, for any goodwill acquired in an acquisition completed after June 30, 2001. For all other existing goodwill, the new standard is required to be adopted as of January 1, 2002. In addition, the disclosure requirements related to goodwill and intangible assets have been expanded to include information about changes in the carrying value of goodwill, the value of intangible assets by major type and the estimated intangible asset amortization expense for the next five years. The Company is required to and has adopted SFAS No. 142 as of January 1, 2002. Management estimates that the adoption will not have a material effect on the Company's 2002 results of operations and financial position other than the impacts described in the following paragraphs. In connection with past acquisitions, the Company has included, for financial reporting purposes, goodwill and certain identifiable intangibles in the same balance sheet caption. SFAS No. 141 and SFAS No. 142 require the carrying amount of identifiable intangibles to be stated separately from goodwill on the balance sheet. For previously acquired intangible assets that were reported together with goodwill, the Company, starting on January 1, 2002, will report them separately. This is expected to result in goodwill and intangibles of CHF 2 147 million (2000: CHF 2 240 million) being reported separately on the Consolidated Balance Sheets as goodwill of CHF 1 417 million (2000: CHF 1 543 million) and identifiable intangibles of CHF 730 million (2000: CHF 697 million). In 2002, as a result of goodwill not being amortized, the Company estimates a reduction in amortization expense of CHF 61 million. As a consequence, the Company expects a reduction in its effective tax rate of approximately 2 percent. Accounting for asset retirement obligations In June 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 retirement costs. The Company is required to adopt this new standard as of January 1, 2003, and currently does not expect the adoption to have a material effect on its results of operations and financial position. Accounting for the impairment or disposal of long-lived assets In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes a single accounting model to be used for long-lived assets to be disposed of by sale or otherwise, whether previously held and used or newly acquired, and broadens the presentations of discontinued operations to include disposal transactions below the reportable segment level, if certain criteria are met. The Company is required to and has adopted this standard as of January 1, 2002. Management estimates that the adoption will not have a material effect on the Company's 2002 results of operations and financial position. Forward-Looking Statements Forward-looking statements and information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are qualified in their entirety as there are certain important factors that could cause results to differ materially from those anticipated. Such statements reflect the current views of the Company with respect to market conditions and future events and are subject to certain risks, uncertainties and assumptions. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed above, among the factors that could cause actual results to differ materially are the following: the timing and strength of new product offerings, pricing strategies of competitors, introduction of competing products by other companies, lack of acceptance of new products and services by the Company's targeted customers, changes in the Company's business strategy, the Company's ability to continue to receive adequate raw materials from its suppliers on acceptable terms, or at all, and to continue to obtain sufficient financing to meet its liquidity needs, and changes in the political and regulatory framework in which the Company operates or in economic or technological trends or conditions, including currency fluctuations, inflation and consumer confidence, on a global, regional or national basis and various other factors. Furthermore, the Company does not assume any obligation to update these forward-looking statements. For more information, see "Item 3. Key Information - Risk Factors." 65 Glossary of Financial Terms Average Invested Capital is the sum of invested capital at year end plus the invested capital as of the beginning of the year divided by two; the result is adjusted for an annualizing adjustment for acquisitions and divestitures that occurred during the reporting period, plus the current year goodwill amortization. The annualizing adjustment amends average invested capital in a way which ensures that invested capital relating to an acquisition/divestment is proportional to the period during which the investment was consolidated. To illustrate, for an acquisition where the operations are consolidated for nine months, invested capital is proportionately adjusted to reflect 75 percent of the amount that would normally be expected for a full year. Basic Earnings per Share is defined as net income divided by the weighted average number of common shares outstanding during the reporting period. Cash Flows from Operating Activities is the net cash provided from the principal revenue-producing activities of the business. It excludes financing and investing activities. Commercial Paper are short-term borrowings that are typically due within 30 to 270 days from the date of issuance and are issued by companies with good credit ratings. Comprehensive Income is the change in equity of the Company during the year from transaction and other events, other than dividends paid, treasury stock and common stock transactions. It includes (i) net income for the year; (ii) the current year's currency translation adjustment; (iii) the current year's unrealized gains and losses on available-for-sale securities, net of tax; (iv) the changes in the effective portion of a derivative financial instruments' fair values, net of tax, that qualify and that are designated as cash flow hedges; and (v) the change in the minimum pension liability less the change in the corresponding intangible asset, net of tax. Convertible Bonds are debt instruments that may be converted into shares based on predefined conditions as stipulated in the debt agreement. Diluted Earnings per Share is similar to basic earnings per share (net income divided by the weighted average number of common shares outstanding) except that it reflects the potential dilution that could occur if dilutive securities, such as stock options and convertible debt, were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the Company. Antidilutive effects are not considered. Derivatives, Derivative Financial Instruments are financial contracts or agreements, the value of which is linked to current or future interest rates, exchange rates, prices of securities, or financial or commodity indices. Derivative financial instruments currently used by the Company are forward exchange contracts, options and interest and currency swaps. The Company uses these instruments to reduce its exposure to adverse fluctuations in interest and exchange rates and other market risks. EBIT (Earnings Before Interest and Taxes) is calculated as operating income. EBIT Margin is EBIT expressed as a percentage of net sales (EBIT divided by net sales). EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is calculated as operating income plus depreciation and amortization. EBITDA Interest Cover is calculated as EBITDA divided by net interest expense (interest expense less interest income). EBITDA Margin is EBITDA expressed as a percentage of net sales (EBITDA divided by net sales). Embedded Derivative Financial Instruments are derivatives that are included within another type of contract ("host contract") that affect some or all of the cash flows or value of other exchanges required by the host contract in a manner similar to a derivative financial instrument. Free Cash Flow is Cash Flows from Operating Activities from continuing operations before restructuring payments, less net cash from investing activities before sale (acquisition) of businesses, net of cash, less dividends paid. The Company uses free cash flows for reinvestment in the business, for repayment of debt and for restructuring programs. Goodwill is recognized in an acquisition of a business if the amount of the consideration paid by the Company is in excess of the fair value of the acquired entity's tangible and identifiable intangible net assets. Gross Profit is defined as net sales less costs of goods sold. Gross Profit Margin is Gross Profit expressed as a percentage of net sales (Gross Profit divided by net sales). A Hedge is an economic relationship between a hedged item and a derivative financial instrument whereby 66 losses or gains are expected to offset each other in whole or in part. A Hedged Item is specifically identified as either all or a specific portion of a recognized asset, liability, a forecasted transaction or of an unrecognized firm commitment. Identifiable Intangible Assets are assets (excluding financial assets) that lack physical substance, not including goodwill. They may include, but are not limited to, such assets as trademarks; trade names; patented and unpatented developed technology and know how; trade secrets, including processes and formulations; certain agreements such as licensing, royalty, not-to-compete, supply contracts, operating permits; and customer relationships, lists and contracts. Intensities are amounts expressed as a percentage of net sales. Intensity of inventories is equal to the inventories divided by net sales. Intensities of accounts receivable and accounts payable are calculated correspondingly. Invested Capital is the sum of total assets less non-interest bearing current liabilities (i.e. accounts payable, income taxes payable as well as accruals and other current liabilities, except the current portion of deferred tax liabilities) less deferred tax assets. Minimum Pension Liability is the additional pension liability required to be recognized for a pension plan if the accumulated benefit obligation of the plan exceeds the fair value of the plan's assets (this excess obligation is the "unfunded accumulated benefit obligation") and the pension accrual recorded on the balance sheet is not equal to or greater than the unfunded accumulated benefit obligation. Net Assets are defined as Invested Capital. Please refer to the definition of Invested Capital. Net Current Operating Assets is the sum of inventories and accounts receivable less accounts payable. Net Debt is the sum of short-term debt and long-term debt less cash and cash equivalents and short-term investments. Net Sales Development percentage is the change in the current period's net sales in Swiss francs over the previous period's net sales in Swiss francs expressed as a percentage. Net Sales Development percentage, in Local Currencies is the change in the current period's net sales in local currencies over the previous period's net sales in local currencies expressed as a percentage. Notional Value (of a derivative financial instrument) is the stated contract amount or the notional principal amount if there is no stated contract amount for the financial instrument. Velocity is calculated by dividing net sales by average invested capital for the period. 67 Item 6. Directors, Senior Management and Employees Directors and Senior Management The members of the Board are as follows:
Year Year appointed term Significant positions Name Age to Board expires outside the Company - ---------------------------------------------------------------------------------------------------------------------- Armin Meyer, 52 1997 2004 Member of the Board of Directors, Zurich Financial Services Chairman of the Board Kurt Feller, 64 1999 2003 Chairman of the Board of Directors, Rieter Group Vice Chairman of the Board Chairman of the Board of Directors, Geberit AG Member of the Board of Directors, Daetwyler Holding AG Member of the Board of Directors, Scintilla AG Erwin W. Heri 47 1997 2003 Chief Investment Officer, Credit Suisse Financial Services Professor of Finance, University of Basel Member of the Board of Directors, Hilti Member of the Board of Directors, Clariden Bank Member of the Board of Directors, DBV Winterthur Gertrud Hoehler 61 1997 2004 Professor of Humanities and author Member of the Board of Directors, Baloise-Holding Member of the Board of Directors, Georg Fischer Ltd. Management consultant Jean-Marie Pierre Lehn(1) 62 1997 2002 Professor of Chemistry and Chair of Chemistry of Molecular Interactions, College de France Nobel prize for Chemistry in 1987 Peter Littmann(1) 54 1997 2002 Professor of Marketing, University Witten/Herdecke Former Chief Executive, Hugo Boss AG Former Chief Executive Wunsche AG Chairman of the Board of Directors, Beautynet AG Member of the Board of Directors, Compass Ltd. (Bata Shoe Company) Uli Sigg 55 1999 2003 Chairman of the Board of Directors, Ringier Group Hans-Ulrich Mueller, 60 1997 N/A Chairman of the board of directors, Hermann Buehler AG. Secretary (not member of the Board) - ----------------------------------------------------------------------------------------------------------------------
(1) At the Company's Annual General Meeting of Shareholders to be held on March 22, 2002, Messieurs Lehn and Littmann will be proposed to be re-elected as members of the Board for an additional term of four years. Corporate Governance The Board of Directors of Ciba Specialty Chemicals defines the strategic direction and supervises the overall affairs of the Company, while the day-to-day management is vested in the Executive Committee. The Board also reviews the Company's key plans and objectives, identifies external opportunities and risks, and initiates the required activities. The Members of the Board are elected by the General Meeting of Shareholders for a term of between one and four years; re-election is possible. The Chairman is elected by the Board. 68 The Board continues to commit to maintaining the highest standards of integrity and transparency in its governance of the Company. The Board's charter reflects the most recent developments in Corporate Governance principles and the Board is confident that it is in compliance with international standards, in particular with regard to: o Broad supervisory and reviewing powers being held by the Board directly supported by Internal Auditing o A majority of the Directors being independent from the Company o Having Board Committees in which the outside Directors hold the majority o Having an Audit Committee comprised of financially literate outside Directors o Providing continuous and comprehensive information to Board Members A written charter sets out in detail the powers and responsibilities of the Board and its Committees. The three standing Board Committees in the areas of audit, finance, human resources and compensation provide modern Corporate Governance guidance and support to the full Board: o Audit Committee: Erwin W. Heri (Chairman), Kurt Feller, Uli Sigg Mission: Evaluates the independence, objectivity and effectiveness of external and internal auditors, evaluates business risk assessment, evaluates scope and overall audit plan, assesses the quality of financial accounting and reporting, reviews audit results and monitors compliance with laws and regulations governing the preparation and filing of financial statements. o Finance Committee: Armin Meyer (Chairman) Kurt Feller, Erwin W. Heri Mission: Develops principles for financial planning, accounting/reporting, disclosure and control, reviews concepts of financial objectives to optimize shareholder value, develops finance policy, is regularly briefed on application/implementation of principles of finance policy, approves financial transactions, investments and acquisitions, supports the preservation and enhancement of the company's reputation in the financial markets. o Human Resources and Compensation Committee: Kurt Feller (Chairman), Gertrud Hoehler, Peter Littmann, Armin Meyer (Member of the Human Resources Committee only) Mission: Develops objectives and principles of human resources policy and internal communication, reviews the management development situation, develops compensation guidelines in line with overall company strategies, is informed about benefit plans for employees, is briefed in applications/implementation of principles of human resources policy, nomination and assessment of candidates to be made by the Board, supports the preservation and enhancement of the company's reputation in the human resource area, assesses the specific compensation received by the Members of the Board and the Committees and presents its findings to the Board. The Compensation Committee assesses the emoluments and terms of employment of the Chairman and Delegate of the Board, the Chairman of the Executive Committee and the Members of the Executive Committee and presents its findings to the Board. Topics of the Board in 2001 In 2001, the Board focused on the following key topics: New organizational structure of the group ("Fit for Growth!"); strategic direction and vision of the group and the new Segments, financial control; management development; monitoring of key strategic projects, cases and risks; technology position of the group; recent developments in Corporate Governance principles (Swiss Code of Best Practice and draft of the SWX's amended listing rules) and performance review for the Board members and the Chairman and exchange views of the Board under the leadership of the Vice Chairman without the Chairman being present. 69 Senior Management The responsibility for the day-to-day management of the Company is vested in the Executive Committee. There are currently nine members of the Executive Committee:
Significant positions Name Age Function outside the Company - -------------------------------------------------------------------------------------------------------- Armin Meyer 52 Chief Executive Officer Member of the Board of Zurich Financial Services, Zurich. Michael Jacobi 49 Chief Financial Officer None Brendan Cummins 50 Executive Vice President, International None Coordination and Human Resources Martin Riediker 49 Chief Technology Officer None Hermann Angerer 54 Head Segment Coating Effects None Christoph Biedermann 44 Head Segment Textile Effects None Mark Garrett 39 Head Segment Water & Paper Treatment None Felix Meyer 48 Head Segment Plastic Additives None Tim Schlange 39 Head Segment Home & Personal Care None - -------------------------------------------------------------------------------------------------------- Mr. Armin Meyer and Mr. Felix Meyer are not related.
Armin Meyer been Chairman of the Board of Ciba Specialty Chemicals since November 17, 2000 and became Chief Executive Officer as of January 1, 2001. He has been a Member of the Board since 1997 and became Vice-Chairman in 1999. His experience includes 25 years with ABB in Switzerland as Business Segment Head (Power Generation as of 1995, Building Technologies as of 1998) and a Member of its Group Executive Committee since 1995. Michael Jacobi joined Ciba-Geigy in 1978 in the finance area. In 1990, he was appointed Company Controller with responsibility for overall financial accounting and reporting. His international management experience includes long-term assignments in finance, accounting and planning in both Brazil and the U.S.A. He has held his present position with the Company since the Spin-off in 1997. Brendan Cummins, was appointed head of International Coordination and Human Resources on December 1, 2001. Held a number of leading international positions before serving as Regional President China and as Head of the Business Unit Home and Personal Care. He joined Ciba-Geigy in 1971. Martin Riediker, was appointed Chief Technology Officer in 2001. Previously global president of the Consumer Care division as well as head of the USA Polymers division and member of the Executive Committee. Broad experience in research and development and in resins, polymers, detergents and cosmetics chemistry. He joined Ciba-Geigy in 1982. Hermann Angerer, was appointed Head of Coating Effects Segment in 2001. Formerly head of Additives division Central Europe region and Additives division Japan. Extensive experience in marketing and sales, development chemistry, radiation curing and lubricant additives. He joined Ciba-Geigy in 1981. Christoph Biedermann, was appointed Head of Textile Effects Segment in 2001 (effective April 1). Formerly, President of ABB Industrie AG, Switzerland from 1997 to 2001. Member of the ABB Switzerland Management Committee since 1999. Wide experience in engineering, automation and process optimization. Mark Garrett, was appointed Head of Water and Paper Treatment Segment in 2001. Previously global head of Business Unit Textile Chemicals, Business Segment Whiteners and Business Unit Paper. Wide experience in business planning and development. He joined Ciba-Geigy in 1986. Felix Meyer, was appointed Head of Plastic Additives Segment in 2001. Previously global head of Polymer Additives Business Unit and member of the Additives division management committee and, prior to that, Strategic Affairs, Additives division. Wide experience in marketing and sales, additives chemistry, purchasing and materials management. He joined Ciba-Geigy in 1981. Tim Schlange, was appointed Head of Home and Personal Care Segment in 2001. Previously Head of Strategic Business Development for the Consumer Care division and Transition Manager for the divestment of the Performance Polymers division. Management experience in corporate planning, marketing and sales. He joined Ciba-Geigy in 1992. 70 Changes in senior management During 2001, the following changes occurred in senior management of the Company: Franz Gerny retired effective December 1, 2001. Until his retirement, he held the position of Executive Vice President International Coordination and Human Resources, since the Spin-off in 1997. He became head of Ciba-Geigy Human Resources in 1987, following assignments in Spain, Brazil and Switzerland in areas such as Planning, Financing and Control, and New Business Development, for Crop Protection. He also served as Personal Assistant to the Chairman of Ciba-Geigy and head of the Executive Secretariat. Jean-Luc Schwitzguebel left the Company effective February 2001. Until his departure, he held the position as Global President of the former Colors division, a position that he held since September 1, 1998. He was appointed head of Ciba-Geigy's Textile Dyes division in 1995. Prior to this, he held several positions including Managing Director of Ciba Pigments in Paisley, Scotland and worldwide head of the Classical Pigments business unit, also based in Paisley. At the time of the Spin-off, he became Global President of the former Textile Dyes division, which in 1998 was combined with the former Pigments divisions to form the then Colors division. Executive and senior officers In addition to the members of the Executive Committee, the following persons currently serve as executive and senior officers of the Company in the following positions: Hans-Ulrich Muller, Head Group Service Law & Environment, Secretary to the Board of Directors, age 59, joined Ciba-Geigy in 1990 as Head of Legal Service. Prior to joining Ciba-Geigy, he held positions at Basler & Hoffman in Zurich and Head of Legal Service at Rieter Holding Ltd. in Winterthur and was in private practice. He has held his present position with the Company since the Spin-off in 1997. He is also Chairman of the board of Hermann Buhler AG in Winterthur. Reinhard Neubeck, Senior Corporate Officer, age 62, became global head of Ciba-Geigy's Additives division in 1996. Prior to this he was responsible for the Polymer Additives business unit. He has broad international experience as a result of management positions in Japan and in Germany. He has held his present position with the Company since February 2001. He joined Ciba-Geigy in 1972. He is also member of the board of Sarna Kunststoff Holding AG, Sarnen. Rodolfo Ciucci, Head of Corporate Communications, age 42, joined Ciba Specialty Chemicals in 1999. Prior to joining the Company, he started his career as a journalist for the Swiss Italian Radio and subsequently held positions as Head of Corporate and Marketing communication at Intercontainer, an international railway subsidiary in Basel, as Head of PR and Information at Patria Insurances in Basel, as Head of the Press and Information Department of Hilti AG in Schaan (Principality of Liechtenstein), and Head of Corporate Communications at Swiss Re (Schweizerische Rueckversicherungsgesellschaft AG), Zurich. He has held his present position with the Company since October 1999. Willy Rohrbach, Head of Internal Audit, age 63, retired effective December 31, 2001. He held this position since the Spin-off in 1997. Michael Loechle, Head of Internal Audit, age 40. He has held a wide range of experience in audit management in the pharmaceutical industry. He has also held project management positions in Latin America and Spain with his previous employer. He has held his present position with the Company since January 2002. Franz H. Killer, Head of Global Production & Process Optimization, reporting directly to the CEO, age 49. He also heads the Steering Committee for Technical Operations. He has held various management jobs with his former employer. He holds his present position with the Company since January 2002. Compensation The aggregate amount of remuneration paid, including bonuses, by the Company during 2001 to the members of the Board and the executive and senior officers of the Company, taken as a group, was approximately CHF 26.6 million, of which approximately CHF 1.8 million was the fair value of compensation paid to the members of the Board. The Company's aggregate accrual during 2001 for pension, retirement or other similar benefits for the members of the Board and the executive and senior officers of the Company was approximately CHF 0.9 million. As of January 31, 2002, the members of the Board and the executive and senior officers of the Company had a total of 309 032 options outstanding under the Company's various stock option and share ownership plans which are described under "Share Ownership". Base salaries are established according to a comparative analysis of base salaries paid within selected peer groups of international companies. Annual bonuses are based on corporate performance, primarily in relation to profitability and personal objectives, which are established at the beginning of the year. Bonuses are expressed as a percentage of base salary and may be adjusted, upward or downward, based on corporate performance and on individual performance. 71 Employees The Company employee's worldwide totaled 19 683 in 2001, 20 306 in 2000 and 23 189 (20 117 from continuing operations) in 1999. The following table shows the number of employees at the end of December 31, 2001.
Europe Americas Asia-Pacific Total --------------------------------------------------------------------------------------------------------- 2001 Plastic Additives ......................... 1 868 1 484 680 4 032 Coating Effects ........................... 3 465 533 523 4 521 Water & Paper Treatment ................... 2 237 862 306 3 405 Textile Effects ........................... 2 833 854 1 141 4 828 Home & Personal Care ...................... 642 498 336 1 476 Unallocated Group Services ................ 566 323 280 1 169 Headquarters .............................. 252 - - 252 --------------------------------------------------------------------------------------------------------- Total Company ............................. 11 863 4 554 3 266 19 683 ---------------------------------------------------------------------------------------------------------
In 2001, the Company implemented a new organizational structure, which created five new Segments focused on specific customer markets. See "Item 4. Information on the Company--Business Overview". Information related to the employees of these five new Segments for prior years by individual Segment is not available in the Company's transaction systems. As a result, the following table presents the number of employees at the end of December 31, 2000 and 1999 for the Segments in total, unallocated and corporate.
Europe Americas Asia-Pacific Total --------------------------------------------------------------------------------------------------------- 2000 Segments in total .......................... 11 399 4 735 2 901 19 035 Unallocated Group Services ................. 491 306 257 1 054 Headquarters ............................... 217 - - 217 --------------------------------------------------------------------------------------------------------- Total Company .............................. 12 107 5 041 3 158 20 306 --------------------------------------------------------------------------------------------------------- 1999 Segments in total .......................... 11 274 4 903 2 559 18 736 Unallocated Group Services ................. 537 358 284 1 179 Headquarters ............................... 202 - - 202 --------------------------------------------------------------------------------------------------------- Continuing operations ...................... 12 013 5 261 2 843 20 117 Discontinued operations (1) ................ 1 719 828 525 3 072 --------------------------------------------------------------------------------------------------------- Total Company .............................. 13 732 6 089 3 368 23 189 ---------------------------------------------------------------------------------------------------------
(1) On May 31, 2000, the Company completed the sale of its Performance Polymers business to Morgan Grenfell Private Equity and to certain Asian joint venture partners. Refer to Note 3 to Consolidated Financial Statements for further information. Labor Relations Membership of the Company's employees in trade unions varies from country to country, and the Company has entered into various collective bargaining agreements. It is the Company's practice to renew or replace its various labor arrangements relating to continuing operations as and when they expire and the Company is not aware of any material arrangements whose expiry is pending and which is not expected to be satisfactorily renewed or replaced in a timely manner. The Company has not experienced any material work stoppages or strikes in the past three fiscal years. The Company's management is of the opinion that relations with the Company's employees are good. The Company requires a number of highly skilled technology, chemical and other specialists. The supply of such employees is highly limited, and competition to hire and retain them is consequently increasingly intense. Competition raises the cost of hiring and retaining these employees and increases employee turnover as competitors seek to lure away employees with particularly rare or sought-after skills. The Company is continually seeking to recruit skilled high-technology, chemical and other specialized workers and management is of the opinion that the Company offers compensation, benefits and opportunities for development and advancement which will attract and retain a sufficient number of such employees. Europe A significant number of the Company's employees in Europe are represented by trade unions. The Company's labor relations in Europe have been good and the Company has not experienced any material work stoppages in recent years. Wages and general working conditions are generally the subject of negotiated collective bargaining 72 agreements. Within the limits established by these agreements, operating companies negotiate directly with unions and other labor organizations representing the Company's employees. Collective bargaining agreements relating to remuneration typically have a term of one year. In addition to trade unions, the Company also consults from time to time with various local, national and European work councils. Employees elect the members of work councils. These work councils primarily serve an advisory role. However, under certain circumstances, the Company may be required to consult with one or more of the work councils before proceeding with a course of action. Furthermore, the Company is obligated to apprise the work councils of activities which affect its workforce in Europe. Other Regions The Company's employees in the Western and Eastern Hemispheres are often represented by trade unions or employed pursuant to collective bargaining agreements. This includes some of the Company's United States sites. In Japan, approximately one half of the employees are represented by labor unions. Labor relations in all of these regions have been good and the Company has not experienced any material work stoppages in recent years. Share Ownership LEAP - In March 1997, the Company established a one-time Leveraged Executive Asset Plan for key executives and non-executive Board members (participants) to promote share ownership. Under the LEAP, approximately 320 participants were given the opportunity to purchase a total of 288 400 restricted shares of common stock of the Company at a price per share of CHF 110, which was the market price per share on the purchase date. For each share purchased, each participant was granted a right to receive four share options (total 1 153 600) with an exercise price of CHF 110 per share, the market value of the shares at the grant date. The participants will receive the market price increase from the grant date to the exercise date in equivalent shares of the Company's common stock. The restricted shares will be released to the participants on March 15, 2002. The share options became fully vested on March 1, 2000, and may be exercised on the 15th day of any month beginning March 15, 2002 through March 15, 2005, the date the share options expire. As a result of terminations from the program, a total of 66 682 options (2000: 60 418 options; 1999: 58 148 options) have been returned to the Company. As of January 31, 2002, a total of 66 682 options have been returned to the Company. The Company paid a fee of CHF 51 million to a major investment bank to assume the Company's obligations to the participants under the LEAP, including supplying all necessary equivalent shares of the Company's stock to the participants of the LEAP when they are due and administering the plan. Even if the cost of supplying the shares exceeds the fee paid by the Company of CHF 51 million, the investment bank will supply all necessary shares and the Company will not be required to issue any additional shares. Therefore, independent of the prevailing future share price, the total cost of the LEAP program to the Company will be the CHF 51 million fee that was paid. Compensation expense has been recognized as this fee was amortized ratably over the three year vesting period through March 1, 2000. CAPS - In 1997, the Company established a Capital Appreciation Performance Share Plan for key executives and non-executive Board members (participants). In accordance with the CAPS, participants were granted rights to receive one share of common stock of the Company for each right granted in the event that the closing share price on any seven days up to August 31, 2001, the date the share option expires, equaled or exceeded CHF 264 per share (which was double the price at the initial grant date in August 1997). Under the program a total of 5 participants were granted 8 192 rights in 1998 and 333 participants were granted 342 572 rights in 1997. As the conditions of the CAPS were not met by August 31, 2001, all share options under this program expired unexercised. No compensation expense was ever recorded under this plan as the target price was never reached. LTIP - In 1998, the Company established a Long-Term Incentive Plan which grants options and, beginning in 2000, may also include grants of restricted shares of common stock of the Company to senior management, other employees and non-executive Board members. For grants of options made to participants other than those in the United States, vesting is at the date of grant and the right to exercise is restricted for three years following the grant date. For grants of options made to participants in the United States, vesting and the right to exercise is over three years. The options expire either five years or ten years after the date of grant. In 2001, 2000 and 1999, no compensation expense was recorded for the options issued under this plan. 73 The following table summarizes option activity under the LTIP for the three year period ended December 31, 2001 and from January 1, 2002 through January 31, 2002: Weighted average Options exercise price outstanding - ------------------------------------------------------------------------------- Balance at December 31, 1998 .......... 165 351 055 Options granted ....................... 113 521 088 Options canceled/forfeited ............ 152 (14 235) - ------------------------------------------------------------------------------- Balance at December 31, 1999 ......... 134 857 908 - ------------------------------------------------------------------------------- Options granted ...................... 108 461 210 Options canceled/forfeited ........... 118 (19 218) - ------------------------------------------------------------------------------- Balance at December 31, 2000 ......... 125 1 299 900 - ------------------------------------------------------------------------------- Options granted ...................... 112 461 444 Options issued on conversion of stock appreciation rights ................. 165 60 799 Options canceled/forfeited ........... 115 (43 694) - ------------------------------------------------------------------------------- Balance at December 31, 2001 ......... 123 1 778 449 - ------------------------------------------------------------------------------- Options granted ...................... - - Options canceled/forfeited ........... 111 (1 113) - ------------------------------------------------------------------------------- Balance at January 31, 2002 .......... 123 1 777 336 - ------------------------------------------------------------------------------- In January 1998, the Company issued 68 500 stock appreciation rights to certain of its senior managers with an exercise price of CHF 165, which equaled the market value of the common stock at grant date. These rights entitle the participants to receive the appreciation in the common stock's market value between grant date and exercise date in cash or under certain circumstances in common stock. These rights vest ratably over a three year period and expire after ten years from date of grant. In March 2001, the remaining 60 799 stock appreciation rights under this plan were, according to the provisions of the plan, converted to stock options with an exercise price of CHF 165. In 2001, 2000 and 1999, no compensation expense was recognized on the stock appreciation rights. The following table summarizes the status of stock options outstanding and exercisable at January 31, 2002:
----------------------------------------------------------------------------------------------------- Stock Options Outstanding Stock Options Exercisable ----------------------------------------------------------------------------------------------------- Weighted Weighted average average Weighted Number of remaining Number of remaining Exercise average outstanding contractual outstanding contractual price range exercise price options life options life (in years) (in years) ------------------------------------------------------------------------------------------------------ 108 - 115 ..... 111.12 1 382 318 4.9 238 528 7.9 165 ........... 165.00 395 018 2.6 395 018 2.6 ------------------------------------------------------------------------------------------------------ 1 777 336 633 546 ------------------------------------------------------------------------------------------------------
In connection with the LTIP 2000, the Company granted 33 288 restricted shares of common stock, which are restricted for three years from the date of grant, to 376 participants. The market value of the common stock at date of grant was CHF 108 per share. Compensation expense of approximately CHF 3.6 million has been recognized in 2000 related to the grant of these shares. In connection with the LTIP 2001, the Company granted 96 729 restricted shares of common stock, which are restricted for three years from the date of grant, to 639 participants. These restricted shares were granted as part of the payment of the 2000 incentive bonus, which was recorded as compensation expense in 2000. The market value of the common stock at date of grant was CHF 112 per share. 74 LEXIP - In April 1998, the Company established a Long-term Executive Incentive Plan in which five participants were given the right to purchase 6 007 shares of common stock at the market value at grant date of CHF 183. For each share purchased, four stock options (total 24 028) were granted to the participants. The strike price of the options is the market value of the shares of common stock at the date of the grant, CHF 183. These options vest after four years and expire after seven years from date of grant. As of December 31, 2001, 12 560 of the stock options have been forfeited. In 2001, 2000 and 1999, no compensation expense was recorded under this plan. As of January 31, 2002, 12 560 stock options have been forfeited. ESOP - In 1998, the Company established a plan which enables substantially all employees to annually purchase up to 20 shares of common stock at a price equal to 85 percent of the average market price, as defined as the average closing price of the shares on the Swiss Exchange for 10 trading days prior to the purchase date of the shares, pursuant to the Company's "Employee Share Ownership Plan". During 2001, 2 279 employees (2000: 2 836 employees; 1999: 3 515 employees) purchased 40 069 shares (2000: 50 099 shares; 1999: 63 929 shares) for which approximately CHF 4 million (2000: CHF 5 million; 1999: CHF 6 million) was paid to the Company. In 2001, 2000 and 1999, no compensation expense was recorded under this plan. In the period from January 1, 2002 through January 31, 2002, no Shares have been purchased under the plan. MAB - In 1998, the Company established a "Mitarbeiterbeteiligungsplan" (Employee Investment Plan) which grants annually to most Swiss employees (as an enhancement to their pension plan arrangements) the right to purchase 20 shares of common stock at CHF 15 per share (so long as the share price is not greater than CHF 200 at which level the Employee Investment Plan price is adjusted). The rights vest at the grant date and become exercisable at the date of the employees' retirement or termination. As of December 31, 2001, 393 300 rights (2000: 307 060 rights; 1999: 223 800 rights) have been granted and 90 560 rights (2000: 74 300 rights; 1999: 35 160 rights) were exercised. Compensation expense is recorded in the year the rights are granted and in 2001 CHF 8 million (CHF 10 million in 2000 and in 1999) of compensation expense was recorded under this plan. In the period from January 1, 2002 through January 31, 2002, 86 040 rights were granted and 1 160 rights were exercised. PSP - In 2001, the Company established a Performance Share Plan for selected key management and non-executive Board members (participants). In accordance with the PSP, participants are granted rights to receive shares of common stock of the Company if the performance of the Company, defined and measured as Total Shareholder Return (TSR), during the measurement period under the PSP meets or exceeds specified conditions and the share price of the Company is equal to or higher than the market value of shares at the beginning of the measurement period. The TSR includes three parameters: (i) the change in the share price from the close of the first trading day at the beginning of the measurement period to the share price at the close of the last trading day at the end of the measurement period, expressed as a percentage; (ii) any dividends paid or payable for the measurement period and (iii) any extraordinary returns paid to the shareholders during the measurement period. In 2001, 86 700 rights were granted to 137 participants with a measurement period from January 1, 2001 through December 31, 2003. The share price as of the beginning of the measurement period was CHF 109.25, the market value of the shares on January 3, 2001. The rights vest ratably over a three year period except when a participant voluntarily terminates employment, in which case all rights are forfeited. Each right is entitled to receive from one share up to a maximum of four shares of Company common stock, depending on the Company's share price and the Company's TSR ranking within the benchmark group at the end of the measurement period. As a result of terminations from the plan, a total of 1 250 rights have been returned to the Company. As the conditions of the PSP were not met, no compensation expense was recorded under this plan in 2001. As of January 31, 2002, a total of 1 250 rights have been returned to the Company resulting in a total of 85 450 rights outstanding as of January 31, 2002. Change in control and reserve of Shares Upon a change in control of the Company (defined as for LEAP 30 percent, for LTIP 2001, 2000 and 1999 33.33 percent, LTIP 1998 50 percent and for PSP 20 percent, such percentage, in each case, as a percentage of total voting power. Additionally, for the PSP in a merger where the Company's shareholders retain less than 50 percent of total voting power or the Company's board of directors does not maintain a majority of the voting rights in the board of the combined company), the vesting and restriction periods for the plans stated above (if still current) will cease to apply and a cash or share payment for the value of the outstanding plans and related taxes and duties will be due to the participants. To cover demands for future option plans that may be established in the next five years, the Company plans to purchase up to 5 percent of its common stock (exclusive of the shares purchased from Novartis AG in the spin-off). At December 31, 2001, the Company had 1.8 million shares (2000: 1.7 million shares; 1999: 1.2 million shares) of treasury stock reserved for issuance under the various stock based compensation plans. For further information see Note 16 to the Consolidated Financial Statements. 75 Item 7. Major Shareholder and Related Party Transactions. Major Shareholders According to the Share Registrar of the Company and other publicly available information as January 31, 2002, the following persons in the table below were known by the Company to be the owner of 2 percent or more of the Company's Shares. These shareholders may use their voting rights up to 2 percent of the common stock. 2001 2000 ------------------------------------------------------------------------- BNP Paribas (Suisse) SA, Geneva* - 2.2% Chase Nominees Ltd, London* 3.1% - Putnam Group, Boston (1) 5.2% - Euroclear Nominees Ltd., Bruxelles* - 2.1% Hanover Nominees Ltd., London* - 2.2% ------------------------------------------------------------------------- * Registered as nominees. (1) Of which 0.7 percent was entered into the Share Register of the Company with the right to vote. As of the January 31, 2002, according to the Share Register, there were 218 registered holders of ordinary shares in the United States. These United States ordinary shareholders collectively held 727 244 ordinary shares, or approximately 1.01 percent of the Company's total issued and outstanding Share as of that date. Also as of January 31, 2002, there were 256 registered holders of American depositary receipts under an ADR program [including Cede & Co., the DTC's nominee). Each ADR issued under the program represents one American Depositary Share, which in turn, represents one-half of one share of the common stock of the Company. All these registered ADR holders have addresses in the United States. They collectively held 302 434 ADRs, or approximately 0.21 percent of the issued and outstanding Shares as of such date. To its knowledge, the Company is not owned or controlled, directly or indirectly, by another corporation, by any government or by any other natural or legal person, severally or jointly. Related Party Transactions The Company and its subsidiaries have not entered into any material transactions in the last three years in which any director, officer or any associate of any director or officer of the Company has or had any interest. No director, officer or associate of any director or officer is or was during the last three years indebted to the Company or any of its subsidiaries. 76 Item 8. Financial Information. Consolidated Financial Statements See "Item 18. Financial Statements" and pages F-1 through F-34. Other Financial Information Export Sales The Company's products and services are primarily sold outside of its home market, Switzerland. In 2001, approximately 98 percent of the Company's sales of products and services produced in Switzerland were exported to other countries. Legal Proceedings The Company operates in countries where political, economic, social, and legal developments could have an impact on the operational activities. The effects of such risks on the Company's results, which arise during the normal course of business, are not foreseeable and are therefore not included in the accompanying Consolidated Financial Statements of this Annual Report. In the ordinary course of business, the Company is involved in lawsuits, claims, investigations and proceedings, including product liability, commercial, environmental, and health and safety matters. In connection with its Toms River, New Jersey site in the United States, the Company has been named as a defendant in several actions (see "(see "Item 4. Information on the Company - Environmental Matters" above). Although the outcome of any legal proceedings cannot be predicted with certainty, management is of the opinion that there are no such matters pending which would be likely to have any material adverse effect in relation to its business, financial position or results of operations. As a result of a dispute over certain agreements with third parties, in the context of the Company's divestment of the Performance Polymers Business in 2000, the third parties have initiated arbitration proceedings against the Company. Although the outcome can not be predicted with certainty, management is of the opinion that this matter will not have any material adverse effects on the financial position or results of operations of the Company. Dividends and Dividend Policy The amount of dividends to be paid by the Company to its shareholders depends on general business conditions, the Company's financial performance and other relevant factors. The Board has adopted a policy on the proposal of dividends which will provide shareholders with dividend growth in line with the underlying growth in the earnings of the Company. Under Swiss law, dividends are paid out only if approved at the shareholders' meeting. The Board may propose that a dividend be paid out, but cannot itself set the dividend. In practice, the shareholders usually approve the dividend proposal of the Board. At the shareholders' meeting that was held on March 23, 2001 a dividend of CHF 2.00 per share was approved in respect of the fiscal year 2000. The Board will proposes a payment to the Company's shareholders in 2002 of an unchanged dividend of CHF 2 per share, based on 2001 results. Additionally, in consideration of the improved financial structures of the Company, an extraordinary payment to the shareholders' is proposed in the form of a capital reduction of CHF 1 per share. If approved, the capital reduction will take the form of a reduction in the nominal value of each common share from CHF 10 per share to CHF 9 per share. Both the dividend and capital reduction are subject to shareholder approval at the Annual General Meeting on March 22, 2002. If approved, the Company expects that the dividend will be distributed on March 27, 2002, and expects, subject to various conditions, that payments from the capital reduction will be made on June 28, 2002. Significant Changes No significant change has occurred since the date of the Consolidated Financial Statements included in this Annual Report. 77 Item 9. The Offer and Listing. Principal Trading Market and Price Range The Shares are listed on the Swiss Exchange and principally traded on London based virt-x, a Recognized Investment Exchange supervised by the Financial Services Authority (FSA) in the U.K. and are also quoted on SEAQ International, the London Stock Exchange's automated quotation system for non-U.K. equity securities. The prices for Shares as quoted in the official list of the Swiss Exchange are expressed in Swiss francs. As of August 2, 2000, the ADRs, each representing one-half of one ordinary share of the Company's common stock, have been listed on the New York Stock Exchange. The information presented in the table below represents, for the periods indicated, (i) the reported high and low closing sales prices quoted in Swiss francs for the Shares on the Swiss Exchange and (ii) the U.S. dollar equivalent of the price per Share based on the Noon Buying Rate on the last trading day of the periods presented. The Shares began trading on the Swiss Exchange on March 13, 1997, at a price of CHF 116.25 per share.
Trading Prices on the Swiss Exchange Price per Share --------------------------------------------------------------------------------------------------------- High Low High Low ------------ ------------ ----------- ------------- in CHF in USD Annual highs and lows 1997 .............................................. 174.50 110.00 119.96 75.62 1998 .............................................. 214.00 102.75 155.20 74.52 1999 .............................................. 128.00 103.00 80.05 64.41 2000 .............................................. 122.50 94.25 75.61 58.17 2001 .............................................. 115.75 75.00 69.74 45.19 Quarterly highs and lows 2001 First Quarter ................................. 115.75 102.75 66.68 59.19 Second Quarter ................................ 110.25 98.75 61.36 54.96 Third Quarter ................................. 108.75 75.00 67.18 46.33 Fourth Quarter ................................ 112.00 91.35 67.48 55.04 2000 First Quarter ................................. 122.50 98.00 73.66 58.93 Second Quarter ................................ 112.75 99.85 69.10 61.19 Third Quarter ................................. 108.50 94.75 62.84 54.88 Fourth Quarter ................................ 110.00 94.25 67.89 58.17 1999 First Quarter ................................. 127.00 103.00 85.35 69.22 Second Quarter ................................ 128.00 112.00 82.46 72.15 Third Quarter ................................. 126.25 108.50 84.12 72.29 Fourth Quarter ................................ 121.25 110.75 75.89 69.31 Monthly highs and lows 2001 January ....................................... 115.00 107.25 70.02 65.30 February ...................................... 112.75 105.75 67.37 63.19 March ......................................... 115.75 102.75 66.68 59.19 April ......................................... 106.50 98.75 61.40 56.93 May ........................................... 109.25 102.25 60.80 56.90 June .......................................... 110.25 102.50 61.36 57.05 July .......................................... 107.00 101.50 61.90 58.72 August ........................................ 108.75 101.25 65.13 60.64 September ..................................... 107.75 75.00 66.56 46.33 October ....................................... 106.25 91.35 65.00 55.88 November ...................................... 112.00 102.00 68.27 62.18 December ...................................... 106.00 100.50 63.86 60.55 2002 January ....................................... 110.50 103.25 64.28 60.06 --------------------------------------------------------------------------------------------------------
78 The information presented in the table below represents, for the periods indicated, the reported high and low closing sales prices quoted in USD on the New York Stock Exchange. The Shares began trading on the New York Stock Exchange on August 2, 2000 at a price of USD 29.50 per ADR.
Trading Prices on the New York Stock Exchange Price per ADR (1) ------------------------------------------------------------------------------------------ High Low ---------- ---------- in USD Annual highs and lows 2000 (from August 2, 2000) ) ...................................... 33.25 26.88 Quarterly highs and lows 2000 Third Quarter (from August 2, 2000) ........................... 31.13 27.50 Fourth Quarter ................................................ 33.25 26.88 2001 First Quarter ................................................. 35.44 29.81 Second Quarter ................................................ 31.50 28.88 Third Quarter ................................................. 32.31 24.00 Fourth Quarter ................................................ 34.00 26.69 Monthly highs and lows 2000 August (from August 2, 2000) .................................. 31.13 29.00 September ..................................................... 29.50 27.50 October ....................................................... 30.19 26.88 November ...................................................... 30.69 29.63 December ...................................................... 33.25 30.44 2001 January ....................................................... 35.44 33.25 February ...................................................... 33.81 31.69 March ......................................................... 34.63 29.81 April ......................................................... 30.75 29.63 May ........................................................... 31.50 29.75 June .......................................................... 31.00 28.88 July .......................................................... 30.63 28.56 August ........................................................ 32.31 30.56 September ..................................................... 31.75 24.00 October ....................................................... 32.25 28.69 November ...................................................... 34.00 31.81 December ...................................................... 31.88 31.00 2002 January ....................................................... 32.63 31.44 ------------------------------------------------------------------------------------------
(1) One ADR represents one half of one share of the Company. On January 31, 2002, the last reported sale price was for Shares on the Swiss Exchange CHF 108.75 and for ADR's on the New York Stock Exchange USD 31.75. According to the Share Registrar of the Company, as of December 31, 2001, there were 222 United States resident shareholders holding 737 814 Shares, representing approximately 1.02 percent of the issued and outstanding Shares as of such date, and there were 257 United States resident holders of American Depositary Receipts holding 302 434 ADRs, representing approximately 0.21 percent of the issued and outstanding Shares as of such date. 79 The information presented in the table below represents, for the periods indicated, the approximate average daily volumes of the Shares traded on the Swiss Exchange:
First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------- 2001 .................................... 280 000 190 000 330 000 280 000 2000 .................................... 250 000 220 000 230 000 230 000 ------------------------------------------------------------------------------------------------- The information presented in the table below represents, for the periods indicated, the average approximate daily volumes of the ADRs traded on the New York Stock Exchange First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------- 2001 .................................... 1 868 1 251 3 619 2 103 2000 .................................... n.a. n.a. 1 873 2 504 ------------------------------------------------------------------------------------------------- n.a. Not applicable as the as the ADRs began trading from August 2, 2000.
The above information was supplied by the Swiss Exchange via the Swiss Market Feed, Citibank N.A., and Reuters, all which supply such data to its customers, subscribers and other information providers. Trading Practices and Procedures on the Swiss Exchange/virt-x The Swiss Exchange is a private organization comprised of 107 members. As of December 31, 2001, 263 Swiss companies and 149 foreign companies were listed on the Swiss Exchange. Securities traded on the Swiss Exchange include Swiss and foreign bonds, equities, investment funds, rights and warrants. The aggregate market value of domestic equity securities (free float) listed on the Swiss Exchange as of December 31, 2001, was CHF 876 billion. As of December 31, 2001, the 10 largest companies in terms of market capitalization (free float) represented CHF 696 billion or approximately 79 percent, of the Swiss Exchange's aggregate market capitalization. Average monthly trading volume during 2001 was CHF 92.9 billion. Virt-x, the new name for Tradepoint, is a collaboration between the TP Group LDC and the SWX Swiss Exchange to provide an efficient and cost effective pan-European blue chip market. The SWX contributed the trading flows in Swiss blue chips and the TP Consortium that is backing virt-x, already accounts for over 50 percent of existing cross border equity flows in Europe. Virt-x provides a single open architecture platform positioned to provide efficient, low cost trading and straight through processing of trades through to settlement in European equities. The SWX Swiss Exchange trading platform, which is used by virt-x, is the only current exchange System in Europe able to exploit this need and builds on the work already done by Tradepoint in developing a framework for European equity trading. 80 Item 10. Additional Information. Memorandum and Articles of Incorporation ("Articles") Set out below is a summary of certain provisions of the Company's Articles and of the Swiss Code of Obligations relating to the Shares. This description does not purport to be complete and is qualified in its entirety by reference to the Articles, which are an exhibit to this registration statement, and Swiss law. Purpose of the Company Section 2 of the Company's Articles establishes that the purpose of the Company is the acquisition, holding and disposition of enterprises which are also active in the area of specialty chemicals. The Company may acquire, mortgage, liquidate or sell real estate and intellectual property rights in Switzerland or abroad and finance other companies. Conflict of interest Swiss law does not have a general provision regarding conflicts of interest. However, the Swiss Code of Obligations requires directors and members of senior management to safeguard the interests of the Company and, in this connection, imposes a duty of care and a duty of loyalty on directors and officers. The breach of these provisions entails personal liability for the directors and officers towards the Company. Swiss law also provides that payments made to a shareholder or a director or any person(s) associated therewith other than at arm's length must be repaid to the Company if the shareholder, director or associated person(s) has or have acted in bad faith. In addition, the by-laws of the Company provide that the Members of the Board of Directors are required to abstain from voting on matters which relate to their own personal interests or to the interests of legal or natural persons with whom they are associated. Directors According to Section 25 of the Articles, the Board of Directors can pass resolutions with respect to all matters which are not reserved to the authority of the General Meeting of Shareholders by law or by Articles of Incorporation. The power to borrow falls within the competencies of the Board of Directors which has delegated part of this power to the Finance Committee. Exercise of this power does not require shareholder approval. Neither Swiss law nor the Articles restrict in any way the Company's power to borrow or otherwise raise funds. Members of the Board retire upon their sixty-eight birthday. The retirement is effective on the date of the next Ordinary Shareholders Meeting. Under special circumstances the Board can make exceptions to this rule. Both Swiss law and the Articles require that the Directors be shareholders of the Company. Ownership of one share is sufficient to satisfy this condition. Dividends Swiss law requires that at least 5 percent of the annual net profits of the Company be retained by the Company as general reserves for so long as these reserves amount to less than 20 percent of the Company's nominal share capital. Under Swiss law, dividends are paid out only if approved by the shareholders. The Board may propose that a dividend be paid out, but cannot itself set the dividend. In practice, the shareholders' meeting usually approves the dividend proposal of the Board. Dividends are usually due and payable three business days after the shareholders' resolution relating to the allocation of profits has been passed. The Company only has one class of shares with a nominal value of CHF 10 each. Therefore, all shareholders are entitled to equal dividends. According to section 30 of the Articles, dividends which have not been claimed for within five years after the due date fall back to the Company and would be allocated to the general reserves. The amount of dividends to be paid by the Company to its shareholders depends on general business conditions, the Company's financial performance and other relevant factors. The Board has adopted a policy on the proposal of dividends which will provide shareholders with dividend growth in line with the underlying growth in the earnings of the Company. At the shareholders' meeting that was held on March 23, 2001, a dividend of CHF 2.00 per share was approved in respect of the fiscal year 2000. The Shares Each Share carries one vote at the shareholders' meetings of the Company. Voting rights may be exercised only after a shareholder has been recorded in the Company's share register (Aktienbuch) as a shareholder with voting rights. The share register is maintained by the Company at its registered office. Registration with voting rights is subject to certain restrictions. The Company's board is staggered and there is cumulative voting for directors. See "-Transfer of Shares" and "-Shareholders' Meeting". 81 Liquidation According to Swiss Law, each shareholder is entitled to receive the part of the assets of a company remaining after its liquidation which is proportional to its paid in shareholding. Redemption provision Swiss law limits the number of shares which the Company may hold or repurchase. The Company and its subsidiaries may repurchase shares only if (i) the Company has sufficient free reserves to pay the purchase price and (ii) the aggregate nominal value of such shares does not exceed 10 percent of the nominal share capital of the Company. Shares held by the Company and its subsidiaries do not have any voting rights. Furthermore, the Company must create a reserve on its balance sheet in the amount of the purchase price of the acquired shares. Long-term share buy-backs by the Company may be subject to certain adverse tax consequences in Switzerland. Sinking fund provision If liabilities exceed assets, the Board of Directors must notify the competent court at the registered office of the Company thereof. Further capital calls by the Company Since all of the Company's issued and outstanding Shares have been fully paid in, the Company has no further capital calls. Transfer of Shares The transfer of Shares (for as long as they are book-entry Shares) is affected by an entry in the books of a bank or depositary institution following an assignment in writing by the selling shareholder and notification of such assignment to the Company. In the event that the Shares are printed, the transfer is effected by delivery of the endorsed Share certificate. The right to exercise voting rights with regard to the Shares further requires that the name of the purchaser be registered in the share register (Aktienbuch) of the Company. Failing such registration, the purchaser may not vote at shareholders' meetings. There are no restrictions on the transfer of Shares. However, no shareholder may be registered as a shareholder with voting rights for more than 2 percent of the Company's share capital. A shareholder purchasing more than 2 percent of the Company's share capital will be recorded in the Company's share register for the Shares in excess of 2 percent of the Company's share capital as a shareholder without voting rights. The Board or a committee designated by the Board may, however, on a case-by-case basis allow some or all of the excess shares to be registered with voting rights. For purposes of the 2 percent rule, natural persons and/or legal entities acting in concert are considered to be one shareholder. A purchaser of Shares will be recorded in the Company's share register if the purchaser discloses its name, citizenship and address and gives a declaration that it has acquired the Shares in its own name and for its own account. The Articles provide that shareholders may register their Shares in the name of a nominee approved by the Company, including Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear"), Citibank, N.A., as operator of Clearstream Banking, societe anonyme ("Clearstream Luxembourg"), and the Depositary, and may exercise their voting rights by giving instructions to such nominee to vote on their behalf. However, the Company has agreed to exempt the Depositary and the custodian and their respective nominees, if any (but no individual Holder or Beneficial Owner of ADSs), from the 2 percent limitation in respect of Deposited Securities held in connection with the ADR facility created by the Deposit Agreement (as defined therein) to the extent that (a) the Depositary requires each Holder who provides voting instructions to the Depositary upon the terms of the Deposit Agreement to certify (the "Voter Certification") that (i) such Holder does not beneficially own, directly or indirectly, more than 2 percent of the share capital of the Company in the form of Shares or ADSs and (ii) neither such Holder nor any of its affiliates has filed, or is under any obligation to file, a Schedule 13D or 13G under the Exchange Act in respect of the Shares or the ADSs (if any such Holder fails to provide such Voter Certification to the Depositary, the Depositary will disregard any voting instructions received from such Holder unless otherwise instructed by the Company), and (b) the Deposited Securities held in the ADR facility do not exceed the 5 percent limitation. See "-Description of the ADSs-Voting of Deposited Securities". Mandatory bid rule Under the Swiss Stock Exchange Act, shareholders and groups of shareholders acting in concert who acquire more than 33 1/3 percent of the voting rights of a company incorporated in Switzerland of which at least one class of equity securities is listed on the Swiss Exchange must submit a takeover bid to all remaining shareholders. A mandatory takeover bid must be made under certain rules (including rules with respect to price and procedures) set forth in the Swiss Stock Exchange Act. 82 Shareholders' meeting Under Swiss law, an annual, ordinary shareholders' meeting must be held within six months after the end of the Company's business year. Shareholders' meetings may be convened by the Board or, if necessary, by the statutory auditors. The Board is further required to convene an extraordinary shareholders' meeting if so resolved by a shareholders' meeting or if so requested by holders of Shares holding in aggregate at least 10 percent of the nominal share capital of the Company. Shareholders holding Shares with a nominal value of a least CHF 1 million have the right to request that a specific proposal be discussed and voted upon at the next shareholders' meeting. A shareholders' meeting is convened by publishing a notice in the Swiss Official Commercial Gazette (Schweizerisches Handelsamtsblatt) at least 20 days prior to such meeting. There is no provision in the Articles or under Swiss law requiring a quorum for the holding of shareholders' meetings. Resolutions generally require the approval of the "majority" of the Shares represented at a shareholders' meeting (i.e. a simple majority of the Shares represented at the shareholders' meeting, with abstentions having the effect of votes against the resolution). A resolution passed at a shareholders' meeting with the affirmative vote of at least two-thirds of the Shares represented at such meeting is required for (i) any change to the Company's business purpose, (ii) the creation of shares with privileged voting rights, (iii) the creation of restrictions on the transferability of registered shares, or elimination of the transfer restrictions described above (see "- Transfer of Shares"), (iv) an authorized or conditional increase in the Company's share capital, (v) an increase in the Company's share capital by way of capitalization of reserves (Kapitalerhohung aus Eigenkapital), against contribution in kind, for the acquisition of assets, or involving the grant of special privileges, (vi) the restriction or elimination of preemptive rights of shareholders, (vii) a relocation of the domicile of the Company or (viii) the dissolution of the Company other than by liquidation (for example, by way of a merger). In addition, any provision in the Articles for a greater voting requirement than is prescribed by law or the existing Articles must be adopted in accordance with such greater voting requirements. The shareholders at a shareholders' meeting also have the power to vote on amendments to the Articles, to elect the members of the Board and the statutory auditors, to approve the annual report and the annual Company accounts, to set the annual dividend, to grant the members of the Board and management discharge from liability for matters disclosed to the shareholders' meeting, and to order an independent investigation into the specific matters proposed to the shareholders' meeting (Sonderprufung). At shareholders' meetings, shareholders can be represented by proxy but only by another shareholder, a proxy appointed by the Company, an independent representative nominated by the Company or a depositary institution. Proxy may also be given to the legal representative of the shareholder. Subject to certain exceptions set forth in the Articles, no shareholder (or group of shareholders acting in concert) may represent more than 5 percent of the Company's share capital at any shareholders' meeting. For purposes of this 5 percent limit, natural persons and/or legal entities acting in concert are considered to be one shareholder. The 5 percent limit does not apply to banks exercising proxies granted by their customers, to shareholders' representatives acting under statutory rules or to nominees, provided such nominees comply with the disclosure requirement discussed above (see "-Transfer of Shares"). Votes are taken on a show of hands unless it is resolved at the shareholders' meeting to have a ballot or such ballot is ordered by the Chairman of the meeting. Preemptive rights Under Swiss law, any share issue, whether for cash or non-cash consideration, is subject to the prior approval at the shareholders' meeting. Shareholders of the Company have certain preemptive rights to subscribe for new issues of Shares in proportion to the nominal amount of Shares held. A resolution adopted at a shareholders' meeting with a two-thirds majority may, however, limit or suspend preemptive rights in certain limited circumstances. At the 1998 shareholders' meeting, the shareholders of the Company authorized the Board to issue from time to time up to two million Shares for the purpose of accommodating options and conversion rights granted to the Company's employees and excluded the subscription rights of the holders of the Shares regarding thereto. At the same meeting, the shareholders of the Company also authorized the Board to issue from time to time up to four million additional Shares at its discretion and to allot preferential subscription rights relating thereto to third parties in the event that the additional Shares are used by shareholders to takeover a business, in whole or in part, or to participate in or finance such takeover. According to article 651 of the Swiss Code of Obligations, this authorization was only valid for two years. At the Annual General Meeting held on April 13, 2000, the shareholders consented to extend this authorization for another two years. At the Company's Annual General Meeting to be held on March 22, 2002, the Board intends to propose to the shareholders another two year extension. 83 In addition to the above, the shareholders also authorized the Board to issue from time to time up to four million additional Shares in connection with the execution of option and conversion rights and to exclude the subscription rights of the holders of Shares regarding thereto. Notices Notices to shareholders are validly made by publication in the Swiss Official Commercial Gazette. The Board may designate further means of communication for publishing notices to shareholders. Duration and Liquidation The Articles do not limit the Company's duration. The Company may be dissolved at any time by a shareholders' resolution which must be passed by (i) a simple majority of the Shares represented at the meeting if the Company is being dissolved by way of liquidation and (ii) two-thirds of the Shares represented at the meeting if the Company is being dissolved for other reasons (for example, in a merger where the Company is not the surviving entity). Under Swiss law, any surplus arising out of a liquidation (after settlement of all claims of creditors) is distributed to shareholders in proportion to the paid-up nominal value of Shares held. Disclosure of Principal Shareholders Under the applicable provisions of the Swiss Stock Exchange Act, shareholders (and groups of shareholders acting in concert) who own shares or other securities representing more than 5 percent, 10 percent, 20 percent, 33 1/3 percent, 50 percent or 66 2/3 percent of the voting rights of a company incorporated in Switzerland of which at least one class of equity securities is listed on the Swiss Exchange are required to notify the company and the Swiss Exchange of such holdings, whether or not the voting rights can be exercised. Following receipt of such notification, the company is required to inform the public. The same disclosure obligation applies to subsequent reductions in the holding of voting rights below the thresholds described above. On October 23, 2001, the Company disclosed that the Putnam Group held together 3 720 789 shares or 5.158% of the Company's share capital. An additional disclosure obligation exists under Swiss corporate law pursuant to which the Company must disclose the identity of all of its shareholders (or related groups of shareholders) who hold more than 2 percent of its voting rights (i.e. shareholders owning shares in excess of the limit set forth in the Articles; see "- Transfer of Shares"). Disclosure of shareholders owning more than 2 percent but less than 5 percent of the voting rights in the Company must only be made once a year in the notes to the financial statements published in the annual report. Material Contracts Pursuant to Second Amended and Restated Deposit Agreement (including all exhibits thereto, the "Deposit Agreement") dated as of August 2, 2000 among the Company, Citibank, N.A., and the registered holders ("Holders") and beneficial owners ("Beneficial Owners") from time to time of the ADRs of the Company, ADRs evidencing ADSs are issuable by Citibank on behalf of the Company. Each ADS represents the right to receive one-half of one Share deposited under the Deposit Agreement. Shares will be deposited to an account maintained by Citibank, N.A., Zurich Branch, as the custodian and agent of the Depositary in Switzerland (the "Custodian"). Only persons in whose names ADRs are registered on the books of the Depositary will be treated by the Depositary and the Company as the absolute owners of such ADRs. Polymers Transaction Agreement On May 31, 2000, the Company sold its Performance Polymers business to Vantico No. 3 S.A., a company established by Morgan Grenfell Private Equity, the private equity arm of Deutsche Bank AG, and certain additional joint venture partners. Total gross proceeds from the sale were CHF 1.6 billion, including the assumption of approximately CHF 160 million in net debt. EMTN Program In 1997, the Company set up a Euro Medium Term Notes program under which certain specified subsidiaries of the Company may issue bonds up to an aggregate amount of USD 2 billion. The program documentation, among Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC, Ciba Spezialitaetenchemie Holding Deutschland GmbH, the Company and the Dealers named thereon, includes an offering circular, a program agreement, a deed of covenant and a guarantee by the Company, and is updated annually, most recently on March 30, 2001. As of December 31, 2001, CHF 1 009 million was outstanding indebtedness of the Company under the program. 84 Exchange Controls There are no legislative or other legal provisions currently in force in Switzerland or arising under the Articles of Association of the Company (the "Articles") restricting the export or import of capital, including, but not limited to, the availability of cash and cash equivalents for use by the Company's group, or that affect the remittance of dividends, interest or other payments to nonresident holders of securities of the Company. Cash dividends payable in Swiss francs on Shares and ADSs may be officially transferred from Switzerland and converted into any other convertible currency. There are no limitations imposed by Swiss laws or the Company's Articles on the right of non-Swiss residents to hold or vote the Shares or ADSs, except that under the Articles, both resident and non-resident holders of Shares and ADSs (acting as individuals or as a group) may not be entered into the Company's share register as a shareholder with voting rights or be permitted to exercise voting rights with respect to more than 2 percent of the share capital of the Company. Taxation Swiss Taxation Swiss Tax Consequences of Holding Shares or ADSs The following is a summary of the material Swiss tax consequences of the ownership of Shares or ADSs, in particular by United States holders (as defined below; see "-United States Taxation"). The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase Shares or ADSs, and prospective investors should consult their professional advisors as to the tax consequences of their purchase, ownership and disposition of Shares and ADSs. In particular, the summary does not address the tax treatment of holders subject to special tax rules, such as banks, insurance companies and dealers in securities, investors liable for alternative minimum tax or investors who hold Shares or ADSs as part of a straddle or hedging or a conversion transaction, some of which may be subject to special rules. This summary should not be read as extending by implication to matters not specifically discussed herein. Additional rules may apply to holders of 10 percent or more in voting power or value of the Shares and ADSs. With respect to United States holders, this discussion generally applies only to such holders who hold Shares or ADSs as a portfolio investment. The description of the Swiss and United States tax laws and practices set forth below is based on the statutes, regulations, rulings, judicial decisions and other authorities as in force and as applied in practice on the date of this Annual Report and is subject to changes to those laws and practices, subsequent to that date, which changes could be made on a retroactive basis. It is assumed for purpose of this summary that a United States holder is entitled to the benefits of the Swiss-American Treaty on Double Taxation (the "Treaty"). A United States holder would generally be eligible for the benefits of the Treaty. However, certain exceptions apply, including (a) United States citizens or residents that do not have a substantial presence, permanent home or habitual abode in the United States, and (b) United States corporations that fail to satisfy the "limitations on benefits" provisions of Article 22 of the Treaty because of the nature of their activities in the United States and the nature of their shareholders. Swiss Withholding Tax On Dividends and Distributions Dividends paid and similar cash or in kind distributions made by the Company to a holder of Shares or ADSs (including dividends on liquidation proceeds and stock dividends) are subject to a Swiss federal withholding tax (the "Withholding Tax") at a rate of 35 percent. The Withholding Tax must be withheld by the Company from the gross distribution and be paid to the Swiss Federal Tax Administration. The Withholding Tax is refundable in full to a Swiss resident who receives a distribution if such resident is the beneficial owner of the payment and duly reports the gross distribution received on his tax return. An individual or corporation that is a resident of a country other than Switzerland and that owns or is deemed to own Shares or ADSs will be subject to the 35 percent Withholding Tax. The Withholding Tax, however, is a final charge for non-residents unless, such an individual or corporation could be eligible for a partial exemption or refund of the Withholding Tax if a tax treaty is in effect between such individual's or corporation's country of residence and Switzerland. Switzerland has concluded such treaties with the United States, Canada, Japan, all European Union member states and certain other countries. The Depositary intends to make use of informal procedures under which it will submit a certificate to the Swiss tax authorities in respect of all United States holders who have provided certifications of their entitlement to Treaty benefits. So long as these procedures remain available it generally should be possible for qualifying United States holders to recover on a timely basis Withholding Tax in excess of the 15 percent rate as provided in the Treaty. There can be no assurance that these informal procedures will remain available. 85 Alternatively, a United States holder that qualifies for Treaty benefits (a "United States resident") may apply on an individual basis for a refund of the Withholding Tax withheld in excess of the 15 percent Treaty rate. The claim for refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse 65, 3003 Berne, Switzerland (http:\\www.estv.admin.ch). The form used for obtaining a refund is Swiss Tax Form 82, I for individuals, Form 82 C for corporations, Form 82 E for other United States citizens, and Form 829 for Swiss citizens resident in the United States, which may be obtained from any Swiss Consulate General in the United States or from the Swiss Federal Tax Administration at the address above. The form must be filled out in triplicate with each copy duly completed and signed before a notary public in the United States. The form may be filed no earlier than July 1 or January 1 following the dividend date but no later than December 31 of the third year following the calendar year that includes the dividend date. The form must be accompanied by evidence of the deduction of Withholding Tax withheld at the source. Stamp Duties upon Transfer of Securities (Umsatzabgabe) The sale of Shares may be subject to a Swiss securities transfer stamp duty of 0.15 percent calculated on the sale proceeds if it occurs through or with a Swiss bank or other Swiss securities dealer as defined in the Swiss Federal Stamp Tax Act. Summary of Swiss Tax Consequences A non-resident holder of Swiss shares will not be liable for any Swiss taxes other than the Withholding Tax described above and the Swiss Securities transfer stamp duty if the transfer occurs through or with a Swiss securities dealer. If, however, the Shares can be attributed to a permanent establishment or fixed place of business maintained by such person within Switzerland, the Shares may be subject to Swiss taxes generally. United States Taxation The following is a general summary of certain United States federal income tax consequences of the purchase, ownership, and disposition of Shares and ADSs. For purposes of this discussion, a "United States holder" means any individual, citizen or resident of the United States for United States federal income tax purposes, corporations created or organized under the laws of the United States or any state thereof or the District of Columbia, or estates or trusts which are residents in the United States for United States federal income tax purposes, in each case who: (i) is not also resident of, or ordinarily resident in Switzerland for Swiss tax purposes; (ii) is not engaged in a trade or business in Switzerland through a permanent establishment; and (iii) does not own, directly, indirectly or by attribution, 10 percent or more of the Shares (by vote or value). This summary is of a general nature only and does not discuss all aspects of United States and Swiss taxation that may be relevant to a particular investor. This summary deals only with Shares and ADSs held as capital assets and does not address special classes of purchasers, such as dealers in securities, United States holders whose functional currency is not the U.S. dollar and certain United States holders (including, but not limited to, insurance companies, tax-exempt organizations, financial institutions and persons subject to the alternative minimum tax) who may be subject to special rules. In particular, the following summary does not address the adverse tax treatment of United States holders who own, directly, or by attribution, one or more of the Company's outstanding classes of voting stock in the event that the Company were to be classified as a "Controlled Foreign Corporation" for United States federal income tax purposes. The Company was not classified as a Controlled Foreign Corporation at December 31, 2000. There can, however, be no assurance that it will not be a Controlled Foreign Corporation in the future. Owners of ADSs are advised to consult their own tax advisors with respect to the United States federal, state and local tax consequences, of the ownership of ADSs and Shares applicable to their particular tax situations. For purposes of tax treaties and United States tax laws, United States holders will be treated as the owners of the Shares represented by ADSs. 86 United States Income Tax on Dividends The gross amount of any dividends received with respect to the ADSs or Shares (including amounts withheld in respect of the Withholding Tax) generally will be subject to United States federal income taxation as foreign source dividend income, and will not be eligible for the dividends received deduction allowed to corporations. For this purpose, a "dividend" will include any distribution paid by the Company with respect to the ADSs or Shares, as the case may be, but only to the extent such distribution is not in excess of the Company's current and accumulated earnings and profits as defined for United States federal income tax purposes. Any distribution that exceeds the Company's earnings and profits will be treated as a nontaxable return of capital to the extent of the United States holder's tax basis in the ADSs or Shares and thereafter as capital gain. Dividends paid in Swiss francs will be includable in the income of United States holders in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt by the holder, or in the case of Shares held in ADS form, by the Depositary. If dividends paid in Swiss francs are converted into U.S. dollars on the date of receipt, holders generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. Subject to generally applicable limitations under United States tax law, the non-recoverable portion of the Withholding Tax (at the 15 percent rate as provided in the Treaty) will be treated as a foreign income tax that is eligible for credit against a holder's United States federal income tax liability or, at the holder's election, may be deducted in computing taxable income. United States residents that receive a Treaty refund may be required to recognize foreign currency gain or loss to the extent the amount of the refund (in U.S. dollars) received by the United States resident differs from the U.S. dollar equivalent of the Treaty refund on the date the dividends were received by the United States resident or (in the case of ADSs) the Depositary. United States Capital Gains Tax upon Disposal of ADSs or Shares Gains realized by a United States holder on the sale or other disposition of ADSs or Shares generally will be subject to United States federal income taxation as capital gain, and generally will be treated as United States source income. A United States holder will recognize capital gain or loss on the disposition of ADSs or Shares equal to the difference between the amount realized upon the disposition and the United States holder's tax basis in the ADSs or Shares. Such capital gain will be long-term capital gain if the ADSs or Shares were held for more than one year. Deposits and withdrawals of Shares in exchange for ADSs will not result in the realization of gain or loss for United States federal income tax purposes. United States Information Reporting and Backup Withholding Obligations Dividends paid on ADSs or Shares to a United States person are generally subject to information reporting and may be subject to backup withholding at the rate of 31 percent (30.5 percent for payments made after August 6, 2001 and 30 percent for payments made after December 31, 2001) unless the holder (i) is a corporation or other exempt recipient or (ii) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Dividends paid on ADSs or Shares to a holder that is not a United States person are generally exempt from information reporting and backup withholding under current law. However, such a holder may be required to provide a certification to ensure such exemption. Documents on Display The following documents referred to herein can be obtained from the Company at its registered office at Klybeckstrasse 141, 4002 Basel, Switzerland. 87 Item 11. Quantitative and Qualitative Disclosures About Market Risk Market risk due to fluctuating foreign currency exchange rates and interest rates As a result of its global operating and financial activities, the Company is exposed to market risk from changes in foreign currency exchange rates and interest rates. The Company actively manages the resulting exposure through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. In accordance with the written policies of the Company, such instruments are used only as risk management tools and not for speculative or trading purposes. The Company's written policy with respect to the use of risk management tools has not changed since 1997. The Company collects global expected cash flows information on a monthly basis and, based on these cash flows, prepares a consolidated exposure forecast by currency and determines to what extent these consolidated currency exposures will be hedged. Foreign currency forwards and swaps as well as options may be used to reduce the Company's exposure that results from the market risk arising from the fluctuation of foreign currency exchange rates. To reduce the cost of such activities, the Company may sell covered options. Potential losses, if any, on these sold options would be substantially offset by gains on the underlying transactions that are hedged. The Company's primary net foreign currency market exposures include the U.S. dollar, the euro, the British pound and the Japanese yen. In 2001, the Company's hedging activities have to a large extent focused on the U.S. dollar. However, hedging activities on the other major currencies as well as on selected minor currencies have been increased when compared to previous years. The fair value of foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates. As of December 31, 2001, a 10 percent appreciation in foreign currency exchange rates against the Swiss franc, with all other variables held constant, would have resulted in a decrease in the fair value of the Company's financial instruments of CHF 103 million. Conversely, a 10 percent depreciation in these currencies would have resulted in an increase in the fair value of the Company's financial instruments of CHF 123 million as of December 31, 2001. As the impact of offsetting changes in the fair value of the underlying positions is not included in the sensitivity model, these results are not indicative of an increase or decrease in the Company's actual exposure to foreign currency exchange risk. Consistent with the nature of the economic hedge of such foreign currency exchange contracts, such unrealized gains or losses would be compensated by the corresponding decreases or increases of the underlying transaction being hedged. The fair value of foreign currency forwards and swaps is calculated by separating the two components and applying the forward rate and the balance sheet rate as well as a discount factor. The discount factor is composed of the respective yield curves as well as the number of days until maturity. The fair value of options is calculated by applying the Black-Scholes model. The Company is exposed to market risks due to fluctuating interest rates primarily through its borrowing activities and less so through its investments. The Company utilizes borrowings denominated in Swiss francs and in foreign currencies to fund its working capital and investment needs. The majority of short-term borrowings are in foreign currencies and floating interest rate instruments whereas the majority of long-term borrowings are in fixed interest rate instruments. The Company manages its ratio of fixed to floating interest rate instruments with the objective of achieving a mix which is appropriate both in terms of risk and cost. To manage this mix effectively, the Company, selectively, enters into interest rate swaps and forward rate agreements, in which it agrees to exchange various combinations of fixed and variable interest rates based on agreed-upon nominal amounts. There is inherent roll-over risk for borrowings as they mature and are renewed at current market rates. Based on the short-term and long-term debt balance outstanding at December 31, 2001, a hypothetical one percentage point increase in interest rates for a one-year period would have reduced net income by CHF 40 million. The assumption is that all debt would be impacted by this hypothetical one percentage point increase, no matter whether actual interest is based on a fixed or a floating rate agreement. Item 12. Description of Securities Other than Equity Securities. Not applicable. 88 PART II Item 13. Defaults, Dividend Arrearages and Delinquencies. None. Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds. None. Item 15. [Reserved]. Item 16. [Reserved]. PART III Item 17. Financial Statements. The Company is furnishing financial statements pursuant to the instructions of Item 18 of Form 20-F. Item 18. Financial Statements. See pages F-1 through F-37 Item 19. Exhibits. (a) The following consolidated financial statements, together with the auditors' report of Arthur Andersen AG, are filed as part of this registration statement: Page Report of Independent Auditors ................................. F-2 Consolidated Statements of Income for the Years ended December 31, 2001, 2000 and 1999 .................... F-3 89 Consolidated Balance Sheets at December 31, 2001 and 2000 ...... F-4 Consolidated Statements of Cash Flows for the Years ended December 31, 2001, 2000 and 1999 ................................ F-5 Consolidated Statements of Shareholders' Equity for the Years ended December 31, 2001, 2000 and 1999 ................... F-6 Business Segment Data ........................................... F-7 Geographic Data ................................................ F-10 Notes to Consolidated Financial Statements ..................... F-12 All schedules are omitted because they are not applicable or because the required information is contained in the Consolidated Financial Statements or Notes thereto. (b) Documents filed as exhibits to this registration statement: **1.1 Articles of Association of Ciba Specialty Chemicals Holding Inc. dated April 13, 2000. **1.2 Specimen share certificate of Ciba Specialty Chemicals Holding Inc. * 2.1 Second Amended and Restated Deposit Agreement dated as of August 2, 2000, between Ciba Specialty Chemicals Holding Inc., Citibank, N.A., and the additional parties named therein. * 2.2 Form of American Depositary Receipt of Ciba Specialty Chemicals Holding Inc. 4.1EMTN Programme Agreement in respect of a USD 2 billion Euro Medium Term Note Programme dated March 30, 2001, among Ciba Specialty Chemicals PLC, Ciba Specialty Chemicals Corporation, Ciba Spezialitaetenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals Holding Inc., UBS AG and the additional parties named therein. 4.2EMTN Deed of Covenant in respect of a USD 2 billion Euro Medium Term Note Programme dated March 30, 2001, by each of Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC, Ciba Spezialitaetenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals Holding Inc., Credit Suisse First Boston (Europe) Limited, Deutsche Bank AG London, Goldman Sachs International, J.P. Morgan Securities Ltd. and UBS AG. 4.3EMTN Deed of Guarantee in respect of a USD 2 billion Euro Medium Term Note Programme dated March 30, 2001, by Ciba Specialty Chemicals Holding Inc. 4.4EMTN Agency Agreement in respect of a USD 2 billion Euro Medium Term Note Programme dated March 30, 2001, among Ciba Specialty Chemicals PLC, Ciba Specialty Chemicals Corporation, Ciba Spezialitaetenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals Holding Inc., The Chase Manhattan Bank and Chase Manhattan Bank Luxembourg S.A. **4.5 Subscription Agreement relating to US $687,000,000 1.25 per cent Guaranteed Convertible Bonds due 2003, dated July 23, 1998, by Ciba Specialty Chemicals Investment Ltd. **4.6 Trust Deed constituting US $687,000,000 1.25 per cent Guaranteed Convertible Bond due 2003, dated July 24, 1998, among Ciba Specialty Chemicals Investment Ltd., Ciba Specialty Chemicals Holding Inc., and The Law Debenture Trust Corporation p.l.c. **4.7 Paying and Conversion Agency Agreement, dated July 24, 1998, among Ciba Specialty Chemicals Investment Ltd., Ciba Specialty Chemicals Holding Inc., The Chase Manhattan Bank and others. 90 The total amount of long-term debt securities of the Company or of its subsidiaries authorized under any other instrument does not exceed 10 percent of the total assets of the Company on a consolidated basis. The Company hereby agrees to furnish to the Commission, upon its request, a copy of any instruments defining the rights of holders of long-term debt of the Company or of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. **4.8 Master Spin-off Agreement dated December 20, 1996, between Novartis AG and Ciba Specialty Chemicals Holding Inc. **4.9 Transaction Agreement re: Sale of the Performance Polymers division to Morgan Grenfell Private Equity dated December 14, 1999, by and between Ciba Specialty Chemicals Holding Inc. and Avanti N03. 8.1 List of Subsidiaries - --------------------------------------- * Incorporated by reference to Post-Effective Amendment No. 1 to the Registration Statement of Ciba Specialty Chemicals Holding Inc. on Form F-6, filed August 2, 2000. (File No. 082-04541 ) ** Incorporated by reference to the Registration Statement of Ciba Specialty Chemicals Holding Inc. on Form 20-F (Amendment No. 2), filed August 1, 2000. (File No. 082-04541 ) 91 Signature Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, Ciba Specialty Chemicals Holding Inc. certifies that it has reasonable grounds to believe that it meets all requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. Ciba Specialty Chemicals Holding Inc., By: /s/ Michael Jacobi ---------------------------------- Name: Michael Jacobi Title: Chief Financial Officer Date: February 6, 2002 92 Ciba Specialty Chemicals Index to Consolidated Financial Statements Page Report of Independent Auditors......................................... F-2 Consolidated Statements of Income for the Years ended December 31, 2001, 2000 and 1999 ............................... F-3 Consolidated Balance Sheets at December 31, 2001 and 2000 ............ F-4 Consolidated Statements of Cash Flows for the Years ended December 31, 2001, 2000 and 1999 ............................... F-5 Consolidated Statements of Shareholders' Equity for the Years ended December 31, 2001, 2000 and 1999 ............................... F-6 Business Segment Data ................................................ F-7 Geographic Data ...................................................... F-10 Notes to Consolidated Financial Statements ........................... F-12 F-1 INDEPENDENT AUDITORS' REPORT To the Shareholders of Ciba Specialty Chemicals Holding Inc. We have audited the accompanying consolidated balance sheets of Ciba Specialty Chemicals Holding Inc. (a Swiss corporation) and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2001, appearing on pages F-3 to F-34 of this Annual Report. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ciba Specialty Chemicals Holding Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN AG Eric G. Ohlund Patrick Fawer Basel, Switzerland, January 18, 2002 F-2 Ciba Specialty Chemicals Consolidated Statements of Income (in millions of Swiss francs except share and per share data) Year ended December 31, Notes 2001 2000 1999 - -------------------------------------------------------------------------------------------------------- Net sales 7 367 7 902 7 244 Cost of goods sold 4 988 5 333 4 956 - -------------------------------------------------------------------------------------------------------- Gross profit 2 379 2 569 2 288 Selling, general and administrative 1 258 1 417 1 338 Research and development 276 293 256 Amortization of goodwill and other intangibles 1,7 92 94 77 Income from earnings of equity affiliates 8 (8) (113) (15) Restructuring and special charges 10 0 2 0 - -------------------------------------------------------------------------------------------------------- Operating income 761 876 632 Interest expense (203) (265) (295) Interest income 69 56 30 Other financial expense, net (59) (14) (5) Minority interest (10) (7) (7) - --------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 558 646 355 Provision for income taxes 13 178 228 117 - --------------------------------------------------------------------------------------------------------- Income from continuing operations 380 418 238 - --------------------------------------------------------------------------------------------------------- Income from discontinued operations, net of tax 3 0 0 87 Gain on sale of discontinued operations, net of tax 3 0 34 0 Cumulative effects of change in accounting principles, net of tax 1 2 0 0 - --------------------------------------------------------------------------------------------------------- Net income 382 452 325 - --------------------------------------------------------------------------------------------------------- Per share data 18 Basic and diluted earnings per share Continuing operations 5.72 6.31 3.58 Discontinued operations - 0.50 1.31 Cumulative effects of change in accounting principles 0.04 - - - --------------------------------------------------------------------------------------------------------- Net income per share 5.76 6.81 4.89 - --------------------------------------------------------------------------------------------------------- Weighted average shares outstanding Basic 66 419 147 66 311 879 66 454 357 Diluted 66 419 147 66 311 879 66 462 898 - ---------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements F-3 Ciba Specialty Chemicals Consolidated Balance Sheets (in millions of Swiss francs except share and per share data) December 31, Notes 2001 2000 - ------------------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------------------ Current assets Cash and cash equivalents 1 602 1 179 Short-term investments 41 68 Accounts receivable, net 4 1 066 1 188 Inventories 5 1 526 1 695 Prepaid and other current assets 592 667 - ------------------------------------------------------------------------------------------ Total current assets 4 827 4 797 - ------------------------------------------------------------------------------------------ Property, plant and equipment, net 6 3 565 3 787 Goodwill and other intangible assets, net 1,7 2 147 2 240 Financial investments 8 193 344 Other assets 986 937 - ------------------------------------------------------------------------------------------ Total assets 11 718 12 105 - ------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------ Current liabilities Accounts payable 490 568 Short-term debt 11 316 371 Income taxes payable 81 32 Accruals and other current liabilities 9 1 090 1 431 - ------------------------------------------------------------------------------------------ Total current liabilities 1 977 2 402 - ------------------------------------------------------------------------------------------ Long-term debt 12 3 678 3 859 Deferred income taxes 13 379 317 Other liabilities 14 1 688 1 723 Minority interest 88 50 - ------------------------------------------------------------------------------------------ Total liabilities 7 810 8 351 - ------------------------------------------------------------------------------------------ Shareholders' equity 15 Common stock(1) 721 721 Additional paid-in capital 3 957 3 955 Retained earnings (74) (324) Accumulated other comprehensive income (240) (116) Treasury stock, at cost(2) (456) (482) - ------------------------------------------------------------------------------------------ Total shareholders' equity 3 908 3 754 - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity 11 718 12 105 - ------------------------------------------------------------------------------------------
(1) Par value CHF 10 per share - 82 130 117 shares authorized and 72 130 117 shares issued in 2001 and 2000. (2) In 2001: 5 987 947 treasury shares; in 2000: 6 061 434 treasury shares. See Notes to Consolidated Financial Statements F-4 Ciba Specialty Chemicals Consolidated Statements of Cash Flow (in millions of Swiss francs except share and per share data) Year ended December 31, 2001 2000 1999 - -------------------------------------------------------------------------------------- Cash flows from operating activities Net income 382 452 325 Deduct net income from discontinued operations, net of tax 0 34 87 - -------------------------------------------------------------------------------------- Income from continuing operations 382 418 238 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 469 470 454 Deferred income taxes 87 179 35 Unremitted earnings of equity affiliates 0 (88) 4 Restructuring and special charges 0 2 0 Restructuring payments (46) (35) (148) Gain on sale/disposal of assets, net (5) (15) (22) Minority interest and other non-cash items, net 71 38 (75) Changes in operating assets and liabilities: Short-term investments 27 (10) (4) Accounts receivable, net 53 37 (1) Inventories 117 (45) 149 Accounts payable (33) (8) 45 Other operating assets and liabilities (68) 87 231 - --------------------------------------------------------------------------------------- Net cash provided by continuing operations 1 054 1 030 906 Net cash provided by discontinued operations 0 1 174 - --------------------------------------------------------------------------------------- Net cash provided by operating activities 1 054 1 031 1 080 - --------------------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures (259) (249) (267) Proceeds from sale of assets 34 39 35 Sale (acquisition) of businesses, net of cash (144) 1 566 70 Loans and other long-term assets 35 (81) 67 Discontinued operations 0 (4) (36) - --------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (334) 1 271 (131) - --------------------------------------------------------------------------------------- Cash flows from financing activities Decrease in short-term debt, net (48) (844) (915) Proceeds from long-term debt 6 4 330 Repayments of long-term debt (110) (499) (49) Dividends paid (132) (133) (133) Treasury stock transactions 9 (40) 0 Other 0 4 2 - --------------------------------------------------------------------------------------- Net cash used in financing activities (275) (1 508) (765) - --------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (22) (28) 23 - --------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 423 766 207 - --------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of year 1 179 413 206 Cash and cash equivalents, end of year 1 602 1 179 413 - --------------------------------------------------------------------------------------- Supplemental cash flow information Cash paid for interest (204) (260) (328) Cash paid for income taxes (49) (72) (95) - ---------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements F-5 Ciba Specialty Chemicals Consolidated Statements of Shareholders' Equity (in millions of Swiss francs except share and per share data) Accumulated Treasury Treasury Additional other stock: stock: Common paid-in Retained comprehensive unreserved reserved Notes stock capital earnings income shares shares Total - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 721 3 930 (835) (122) (164) (278) 3 252 - ----------------------------------------------------------------------------------------------------------------------- Net income 325 325 Currency translation adjustments 180 180 Unrealized gain on available-for-sale securities, net of tax 1 1 - ----------------------------------------------------------------------------------------------------------------------- Comprehensive ime 325 181 506 Cash dividends declared and paid(1) (133) (133) Treasury stock transactions 15 118 (118) 0 Other 11 1 1 13 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 721 3 941 (642) 60 (46) (396) 3 638 - ----------------------------------------------------------------------------------------------------------------------- Net income 452 452 Currency translation adjustments (177) (177) Realization of previously unrealized loss on available-for-sale securities, net of tax 1 1 - ----------------------------------------------------------------------------------------------------------------------- Comprehensive income 452 (176) 276 Cash dividends declared and paid(1) (133) (133) Treasury stock transactions 15 (26) (14) (40) Other 14 (1) 13 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 721 3 955 (324) (116) (72) (410) 3 754 - ----------------------------------------------------------------------------------------------------------------------- Net income 382 382 Currency translation adjustments (83) (83) Unrealized loss on available-for-sale securities, (23) (23) net of tax of CHF 14 Minimum pension liability adjustment, net of tax of CHF 12 17 (19) (19) - ----------------------------------------------------------------------------------------------------------------------- Comprehensive income 382 (125) 257 Cash dividends declared and paid(1) (132) (132) Treasury stock transactions 15 (4) 6 19 21 Other 6 1 1 8 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 721 3 957 (74) (240) (65) (391) 3 908 - -----------------------------------------------------------------------------------------------------------------------
(1) Cash dividends declared and paid were CHF 2.00 per share in 2001, 2000 and 1999. See Notes to Consolidated Financial Statements F-6 Ciba Specialty Chemicals Business Segment Data (in millions of Swiss francs except share and per share data) The segment data includes certain non-United States Generally Accepted Accounting Principles ("U.S. GAAP") financial indicators which form part of the Company's value based management reporting system and that are used by management for purposes of analyzing the results of operations and the financial condition of the Company and its reportable segments. These financial indicators are derived from U.S. GAAP financial items. Such indicators include EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and EBITDA margin. Management believes these financial indicators are an important measure of comparative operating performance for the businesses of the Company and, in the case of EBITDA, when used in comparison to debt levels or the coverage of interest expense, as a measure of financial stability. However, these supplementary financial indicators should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with U.S. GAAP. In the first half of 2001, the Company implemented a new organizational structure which created five segments focused on specific customer markets. The five reporting segments are Plastic Additives, Coating Effects, Water & Paper Treatment, Textile Effects and Home & Personal Care. Amounts reported for the previous periods have been restated to conform to the 2001 presentation. The Company's reportable segments develop, manufacture and market different products, services and solutions. They are managed separately because each segment has different customer markets and requires different technology and marketing strategies. On May 31, 2000, the Company completed the sale of its Performance Polymers business and therefore excluded it from the segment data in 2000 (see Note 3). The accounting policies of the segments are the same as those described in Note 1 to the Consolidated Financial Statements. The Company evaluates the performance of its reportable segments based on operating income before restructuring and special charges, corporate related items, and certain other net expenses not allocated to reportable segments. Intersegment sales between subsidiaries are based on market price. In 2001, as part of the new organizational structure, certain net costs that were previously reported as corporate related items have been attributed to the segments. Beginning in 2000, compensation expense relating to the interest portion of pension costs for unfunded pension plans has been allocated to the segments. Previously, this amount was recorded as a corporate expense. The operating income and EBITDA of the segments have been adjusted accordingly. Amounts reported for the previous periods have been reclassified to conform to the 2001 presentation. The segment Plastic Additives develops, manufactures and markets products and provides services to the plastic and lubricant industries. The Segment's products are additives, which are ingredients added in small quantities to polymers and lubricants that prevent aging and corrosion and help improve appearance, durability and performance of finished goods such as polyolefins and engineering plastics as well as high-performance motor oils and lubricants. The service business adds value to customers by providing solutions in product applications. The segment Coating Effects primarily serves the coatings, printing, imaging, electronic and plastic industries. The end-user industries are, among others, the automotive, industrial and decorative paint industries, the electronic industry, all plastic-processing industries, and the packaging, publication and security printing ink industries. The Segment develops, manufactures and markets products and solutions such as pigments for inks, paints and plastics, optical information storage products for re-writable CDs as well as additives. The additives include, among others, photoinitiators for UV curing of coatings as well as anti-static, anti-corrosion and anti-aging agents for coatings and electronics and imaging applications. The segment Water & Paper Treatment serves the paper and municipal and industrial waste-water treatment industries. The Segment offers products and services for paper production starting at the wet-end with anti-foaming and flocculation agents through the whole paper production process to the dry-end with paper finishings that determine appearance, handling and performance of the paper by making it water repellent, glossy or white. The Segment also offers products and services used to help clean industrial and municipal effluents and to improve the efficiency of mineral and oil processing. The segment Textile Effects serves the textile industry, offering dyes and chemicals, services and integrated solutions to customers along the whole textile value chain. The Segment's products include dyes and chemicals for dyeing and printing of almost all textile fibers, optical brighteners and textile finishing products for protection and easy-care. Services offered by the Segment include color matching via the Internet and technical consultancy regarding textile color and effects management for international brand houses and retailers. The segment Home & Personal Care develops, manufactures and markets products for home and personal care end-user industries. Among the Segment's broad product offerings are whiteners for detergents, antimicrobials for a variety of home and personal care products, UV absorbers for sun screens and innovative hair dyes. See Notes to Consolidated Financial Statements Ciba specialty Chemicals Business Segment Data (in millions of Swiss francs except share and per share data) 2001 2000 1999 - ----------------------------------------------------------------------------------------- Net sales Plastic Additives 1 834 1 959 1 784 Coating Effects 1 944 2 118 1 955 Water & Paper Treatment 1 486 1 558 1 408 Textile Effects 1 673 1 841 1 683 Home & Personal Care 430 426 414 - ----------------------------------------------------------------------------------------- Total net sales 7 367 7 902 7 244 - ----------------------------------------------------------------------------------------- Operating income Plastic Additives 271 314 276 Coating Effects 304 366 305 Water & Paper Treatment 82 111 68 Textile Effects 183 204 117 Home & Personal Care 67 58 62 Corporate and other expe (146) (175) (196) Restructuring and special charges 0 (2) 0 - ----------------------------------------------------------------------------------------- Total operating income 761 876 632 - ----------------------------------------------------------------------------------------- EBITDA(1) Plastic Additives 388 423 377 Coating Effects 411 475 403 Water & Paper Treatment 157 187 151 Textile Effects 248 275 179 Home & Personal Care 95 80 85 Corporate (69) (92) (109) - ----------------------------------------------------------------------------------------- Total EBITDA, before restructuring and special charges 1 230 1 348 1 086 - ----------------------------------------------------------------------------------------- EBITDA margin(2) Plastic Additives 21.1% 21.6% 21.2% Coating Effects 21.1% 22.4% 20.6% Water & Paper Treatment 10.6% 12.0% 10.7% Textile Effects 14.8% 14.9% 10.6% Home & Personal Care 22.2% 18.8% 20.5% Corporate - - - - ----------------------------------------------------------------------------------------- Total EBITDA margin, before restructuring and special charges 16.7% 17.1% 15.0% - ----------------------------------------------------------------------------------------- Depreciation and amortization Plastic Additives 117 109 101 Coating Effects 107 109 98 Water & Paper Treatment 76 76 83 Textile Effects 66 71 62 Home & Personal Care 28 22 23 Corporate 75 83 87 - ----------------------------------------------------------------------------------------- Total depreciation and amortization 469 470 454 - ----------------------------------------------------------------------------------------- Research and development expenditures Plastic Additives 73 82 64 Coating Effects 96 102 97 Water & Paper Treatment 34 36 31 Textile Effects 39 44 41 Home & Personal Care 24 21 19 Corporate 10 8 4 - ----------------------------------------------------------------------------------------- Total research and development expenditures 276 293 256 - -----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements F-8 Ciba Specialty Chemicals Business Segment Data (in millions of Swiss francs except share and per share data) 2001 2000 1999 - ----------------------------------------------------------------------------------------- Capital expenditures Plastic Additives 80 67 54 Coating Effects 66 65 78 Water & Paper Treatment 52 52 90 Textile Effects 32 37 24 Home & Personal Care 25 23 16 Corporate 4 5 5 - ----------------------------------------------------------------------------------------- Total capital expenditures 259 249 267 - ----------------------------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------------------------- Net assets(3) Plastic Additives 1 403 1 458 Coating Effects 1 852 1 904 Water & Paper Treatment 1 092 1 149 Textile Effects 1 270 1 385 Home & Personal Care 286 271 Shared net assets not allocated to segments(4) 1 757 1 844 Non-operating net assets(5) 2 154 1 793 - ----------------------------------------------------------------------------------------- Total net assets 9 814 9 804 - ----------------------------------------------------------------------------------------- Total assets Plastic Additives 1 623 1 758 Coating Effects 2 100 2 195 Water & Paper Treatment 1 286 1 398 Textile Effects 1 456 1 614 Home & Personal Care 347 336 Shared assets not allocated to segments(4) 2 312 2 599 Non-operating assets(5) 2 594 2 205 - ----------------------------------------------------------------------------------------- Total assets 11 718 12 105 - -----------------------------------------------------------------------------------------
(1) EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is calculated as operating income plus depreciation and amortization. (2) EBITDA Margin is EBITDA expressed as a percentage of net sales (EBITDA divided by net sales). (3) Net Assets (invested capital) is the sum of total assets less non-interest bearing current liabilities (i.e., accounts payable, income taxes payable as well as accruals and other current liabilities, except the current portion of deferred tax liabilities) and less deferred tax assets. (4) Shared net assets and assets not allocated to segments include the goodwill and intangibles recognized in connection with the Allied Colloids acquisition. (5) Non-operating net assets and non-operating assets include cash and cash equivalents and short-term investments. See Notes to Consolidated Financial Statements F-9 Ciba Specialty Chemicals Geographic Data (in millions of Swiss francs except share and per share data) Net Sales to Customers 2001 2000 1999 - ----------------------------------------------------------------------------------------- Europe Germany 572 618 606 United Kingdom 373 394 385 Italy 351 366 358 France 311 325 326 Rest of European Union 846 899 865 Switzerland 75 84 79 Rest of Europe 227 227 207 - ----------------------------------------------------------------------------------------- Total Europe 2 755 2 913 2 826 - ----------------------------------------------------------------------------------------- Americas United States of America 1 819 2 025 1 882 Canada 243 276 231 Central America 227 247 206 South America 365 388 301 - ----------------------------------------------------------------------------------------- Total Americas 2 654 2 936 2 620 - ----------------------------------------------------------------------------------------- Asia-Pacific Japan 431 528 483 Region China 424 413 318 Rest of Asia 686 689 570 Australia and New Zealand 154 158 161 Africa and Middle East 263 265 266 - ----------------------------------------------------------------------------------------- Total Asia-Pacific 1 958 2 053 1 798 - ----------------------------------------------------------------------------------------- Total net sales to customers 7 367 7 902 7 244 - -----------------------------------------------------------------------------------------
Net sales to customers are based on the final destination of the sale. See Notes to Consolidated Financial Statements F-10 Ciba Specialty Chemicals Geographic Data (in millions of Swiss francs except share and per share data) Long-lived Assets 2001 2000 - --------------------------------------------------------------------------- Europe Germany 380 409 United Kingdom 627 679 Italy 166 166 France 128 135 Rest of European Union 81 62 Switzerland 629 671 Rest of Europe 1 1 - --------------------------------------------------------------------------- Total Europe 2 012 2 123 - --------------------------------------------------------------------------- Americas United States of America 1 076 1 190 Canada 7 8 Central America 123 108 South America 30 35 - --------------------------------------------------------------------------- Total Americas 1 236 1 341 - --------------------------------------------------------------------------- Asia-Pacific Japan 47 29 Region China 195 204 Rest of Asia 48 58 Australia and New Zealand 18 22 Africa and Middle East 9 10 - --------------------------------------------------------------------------- Total Asia-Pacific 317 323 - --------------------------------------------------------------------------- Total long-lived assets 3 565 3 787 - --------------------------------------------------------------------------- Long-lived assets represent property, plant and equipment, net and are shown by the location of the assets. See Notes to Consolidated Financial Statements F-11 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) 1. Summary of significant accounting policies - -------------------------------------------------------------------------------- Company operations Ciba Specialty Chemicals Holding Inc. and its wholly owned and majority-owned subsidiaries (the "Company") is a global leader in the discovery and manufacture of innovative specialty chemicals that provide color, performance and care for plastics, coatings, fibers, fabrics and other products. The Company's products and services are also used to provide clean water and to treat industrial and municipal effluent. Basis of consolidation and presentation The accompanying consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"). The assets, liabilities and results of operations of entities in which the Company has a controlling interest have been consolidated. Investments in which the Company exercises significant influence, but which it does not control (generally 20-50 percent ownership interest) are accounted for under the equity method of accounting. Investments in which the Company has less than a 20 percent ownership interest are accounted for under the cost method of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from those estimates. Foreign currency translation The Company's financial statements are prepared in Swiss francs (CHF million). For most operations outside Switzerland, where the functional currency is the local currency, income, expense and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at period-end exchange rates. The translation adjustments are included as a component of accumulated other comprehensive income in shareholders' equity. The financial statements of subsidiaries that operate in economic environments that are highly inflationary maintain financial information for reporting purposes in U.S. dollars or Swiss francs and include gains and losses from translation in income. Cash equivalents All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Short-term investments Short-term investments consist of securities that are traded in highly liquid markets. Since they are held for the purpose of investing liquid funds and are readily convertible to cash, they are classified as trading securities and are carried at fair value. Gains and losses are recorded as a component of financial income/expense in the Consolidated Statements of Income. Accounts receivable Accounts receivable are recorded at their net realizable value after deducting an allowance for doubtful accounts. Such deductions reflect either specific cases or estimates based on historical evidence of collectibility. This also includes an allowance for country specific transfer risks. Inventories The Company values its inventories at the lower of cost, determined principally on a first-in, first-out (FIFO) method, or market. Costs include all costs of production, including applicable portions of plant overhead. Allowances are made for obsolete and slow-moving inventory. Property, plant and equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets ranging from approximately 20 to 50 years for buildings, 10 to 20 years for machinery and equipment, and 3 to 10 years for office furniture and fixtures and other equipment. The Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Property, plant and equipment acquired through finance lease arrangements are recorded as assets at their fair value at the date of acquisition and depreciated over the shorter of the useful life of the asset or the lease term. The corresponding obligation is recorded as a liability in the Consolidated Balance Sheets. F-12 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) Goodwill and intangible assets Goodwill and purchased identifiable intangibles are capitalized at acquisition cost. Goodwill acquired on or before June 30, 2001 and identifiable intangibles are amortized on a straight-line basis over the estimated periods to be benefited, which can range from 5 to 40 years. Goodwill acquired after June 30, 2001, is not amortized. The Company assesses its goodwill acquired on or before June 30, 2001 and its identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the goodwill or the identifiable intangible, a loss is recognized for the difference between the fair value and carrying value of the goodwill or the identifiable intangible. See "Change in accounting policy and new accounting standards - Goodwill and intangible assets" section below. Financial investments and other assets Financial investments and other assets comprise primarily investments in and loans to equity affiliates, investments in unconsolidated companies (less than 20 percent ownership) and prepaid pension costs. The investments in unconsolidated companies are accounted for as available-for-sale securities and are recorded at fair value with unrealized gains or losses, net of tax included in "accumulated other comprehensive income" in the Consolidated Balance Sheets. Derivative financial instruments Effective January 1, 2001, with the adoption of the new accounting standard on derivative financial instruments (refer to "Changes in accounting policy and new accounting standards - Derivative financial instruments" section below), all derivative financial instruments, such as interest rate swap contracts, foreign exchange contracts and certain derivative financial instruments embedded in host contracts, are recorded in the balance sheet as either assets or liabilities and are measured at fair value, regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are recognized periodically either in income or stockholders' equity (as a component of other comprehensive income), depending on whether the derivative is designated and qualifies as an accounting hedge of changes in fair value or cash flows. For derivative financial instruments designated and that qualify as fair value hedges, changes in the fair value of the derivative financial instrument and the hedged item are recognized currently in earnings. The changes in fair value of the hedged item are recorded as an adjustment to its carrying amount on the balance sheet. If the derivative financial instrument in a subsequent period is no longer designated or no longer qualifies as a fair value hedge, then the changes in fair value of the hedged item are not recognized in income. The previous changes in fair value that have been recorded as an adjustment to the carrying amount of the hedged item are generally amortized to earnings as the hedged item affects earnings. For derivative financial instruments designated and that qualify as cash flow hedges, changes in the effective portion of the derivative financial instrument's fair value are recorded in accumulated other comprehensive income in the balance sheet until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of the derivative financial instruments is immediately recognized in the income statement as a component of financial income/expense. If the hedged item was a forecasted transaction that is subsequently not expected to or will not occur, then the derivative financial instrument would no longer qualify as a cash flow hedge. As a result, fair value changes that were previously recorded in accumulated other comprehensive income are immediately recognized in earnings as a component of financial income/expense. In all other instances, when a derivative financial instrument ceases to be designated or to qualify as a cash flow hedge, the previously recorded changes in fair value remain in accumulated other comprehensive income until the hedged item affects earnings. For derivative financial instruments that are not designated or that do not qualify as accounting hedges, the changes in the fair value of the derivative financial instruments are recognized currently in income as a component of financial income/expense. Prior to January 1, 2001, gains and losses on derivative financial instruments related to qualifying accounting hedges of existing assets or liabilities, firm commitments or anticipated transactions were deferred and were recognized in income or adjustments of carrying amounts when the hedged transaction occurred. Gains and losses on derivative financial instruments that did not qualify as accounting hedges were recognized currently in other financial income/expense. For interest rate swaps, the differential to be paid or received was accrued as interest rates changed and was recognized over the life of the agreements in interest expense. Revenue recognition Revenue is recognized upon shipment of goods to customers. Provisions for discounts and rebates to customers and returns and other adjustments are provided for in the same period the related sales are recorded. F-13 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) Income taxes Provision for income taxes has been determined using the comprehensive liability method and consists of income taxes paid or payable plus the change in deferred taxes for the current year. Deferred taxes represent the estimated future tax consequences of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on the earnings of foreign operations that are expected to be remitted to the parent company. No accruals are made for unremitted earnings of operations that are intended to be reinvested indefinitely or that can be remitted substantially free of tax. The provision for income taxes also includes income taxes from earnings of equity affiliates. Environmental compliance and expenditures The measurement of environmental liabilities is based on an evaluation of currently available facts with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations and prior experience in remediation of contaminated sites. Environmental operations and maintenance as well as remediation costs are accrued when environmental assessments and the need for remediation are probable and the costs can be reasonably estimated. The estimated liability is not discounted or reduced for any potential insurance recoveries. Actual costs to be incurred at identified sites in future periods may vary from the estimates given the inherent uncertainties in evaluating environmental exposures. Earnings per share Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similar to basic earnings per share except that it reflects the potential dilution that could occur if dilutive securities, such as stock options and convertible debt, were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the Company. Change in accounting policy and new accounting standards Derivative financial instruments Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133", which replaces existing pronouncements and practices for derivatives and hedging activities with a single, integrated accounting framework. These statements expand the previous accounting definition of derivatives to include embedded derivatives and many commodity contracts. Upon adoption of these statements, the Company recorded a net transition adjustment gain after taxes of CHF 2 million in net income. The adoption did not have any effect on accumulated other comprehensive income. Business combinations In July 2001, the FASB issued SFAS No. 141 "Business Combinations". SFAS No. 141 requires that all business combinations completed after June 30, 2001, be accounted for under the purchase method of accounting. Use of the pooling-of-interests method (also known as the "uniting of interest method") is no longer permitted. The new standard requires the recording, as a separate asset apart from goodwill, of all intangible assets that can be identified and named if the intangible asset meets the criteria as defined in SFAS No. 141. In addition, the disclosure requirements related to business combinations have been expanded to include, for material business combinations, the disclosure of the reason for the acquisition and the allocation of the purchase price paid to the assets and liabilities assumed by major balance sheet caption. The adoption of this standard did not have any effect on the Company's 2001 results of operations and financial position. Goodwill and intangible assets In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed annually for impairment. Other identifiable intangibles will continue to be amortized to earnings over their estimated useful lives. The amortization of goodwill ceases upon adoption of SFAS No. 142. The standard is required to be adopted as of July 1, 2001, for any goodwill acquired in an acquisition completed after June 30, 2001. For all other existing goodwill, the new standard is required to be adopted as of January 1, 2002. In addition, the disclosure requirements related to goodwill and intangible assets have been expanded to include information about changes in the carrying value of goodwill, the value of intangible assets by major type and the estimated intangible asset amortization expense for the next five years. The Company is required to adopt and has adopted SFAS No. 142 as of January 1, 2002. Management estimates that the adoption will not have a material effect on the Company's 2002 results of operations and financial position other than the impacts described in the following paragraphs. F-14 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) In connection with past acquisitions, the Company has included, for financial reporting purposes, goodwill and certain identifiable intangibles in the same balance sheet caption. SFAS No. 141 and SFAS No. 142 require the carrying amount of identifiable intangibles to be stated separately from goodwill on the balance sheet. For previously acquired intangible assets that were reported together with goodwill, the Company, starting on January 1, 2002, will report them separately. This is expected to result in goodwill and intangibles of CHF 2 147 million (2000: CHF 2 240 million) being reported separately on the Consolidated Balance Sheets as goodwill of CHF 1 417 million (2000: CHF 1 543 million) and identifiable intangibles of CHF 730 million (2000: CHF 697 million). In 2002, as a result of goodwill not being amortized, the Company estimates a reduction in amortization expense of CHF 61 million. As a consequence, the Company expects a reduction in its effective tax rate of approximately 2 percent. Accounting for asset retirement obligations In June 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 retirement costs. The Company is required to adopt this new standard as of January 1, 2003, and currently does not expect the adoption to have a material effect on its results of operations and financial position. Accounting for the impairment or disposal of long-lived assets In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes a single accounting model to be used for long-lived assets to be disposed of by sale or otherwise, whether previously held and used or newly acquired, and broadens the presentations of discontinued operations to include disposal transactions below the reportable segment level, if certain criteria are met. The Company is required to and has adopted this standard as of January 1, 2002. Management estimates that the adoption will not have a material effect on the Company's 2002 results of operations and financial position. Reclassifications Certain reclassifications to the 2000 and 1999 financial statements and related footnote amounts have been made to conform with the 2001 presentation. 2. Exchange rates of principal currencies - -------------------------------------------------------------------------------------------------------------- Statement of income average rate Balance sheet year-end rates ------------------------------------ ------------------------------ 2001 2000 1999 2001 2000 - ---------------------------------------- ------------------------------------ ------------------------------ 1 U.S. dollar (USD) 1.68 1.69 1.50 1.63 1.67 1 British pound (GBP) 2.43 2.56 2.42 2.37 2.46 1 Euro(1) (2) (EUR) 1.51 1.56 1.60 1.47 1.53 100 German marks(2) (DEM) - 79.62 81.82 - 77.97 100 French francs(2 (FRF) - 23.74 24.40 - 23.25 1000 Italian lira(2 (ITL) - 0.80 0.83 - 0.79 100 Japanese yen (JPY) 1.39 1.57 1.32 1.28 1.48 - ------------------------------------------------------------------------------------------------------------
(1) On January 1, 1999, eleven (on January 1, 2001, twelve) of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and adopted the euro as their new common currency. The euro trades on currency exchanges and the legacy currencies remained legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. At January 1, 1999, the Swiss franc exchange rate to the euro was 1.607. (2) Effective January 1, 2001 the Company's subsidiaries in the twelve countries that adopted the euro, converted their transaction systems and their reporting currency to the euro. F-15 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) 3. Acquisitions and divestitures - -------------------------------------------------------------------------------- Divestment of Performance Polymers business On May 31, 2000, the Company completed the sale of its Performance Polymers business to Morgan Grenfell Private Equity, the then private equity arm of Deutsche Bank AG. The total gross proceeds from the sale of the Performance Polymers division to Morgan Grenfell Private Equity and Asian joint venture partners amounted to approximately CHF 1.6 billion, which includes the net debt assumed of approximately CHF 160 million. The Performance Polymers division produced epoxy resins and other high performance thermosets that provide durability, extraordinary strength and resistance to heat and corrosion. Performance Polymers supplied its products to the coatings, aircraft, electrical and electronic industries, among others. The results of the Performance Polymers business, which represents substantially all of the operations of the Performance Polymers division, have been reported as discontinued operations in the Consolidated Financial Statements and Notes in 2000 and 1999. The results of the Performance Polymers include revenues and expenses that are directly associated with the Performance Polymers business, but do not include an allocation of the Company's interest expense or unallocated corporate general and administrative expenses. Summarized financial information of the discontinued Performance Polymers business is presented in the following table: - -------------------------------------------------------------------------------- Year ended December 31, 2000(1) 1999 - -------------------------------------------------------------------------------- Net sales 774 1 729 - -------------------------------------------------------------------------------- Income before income taxes and minority interest 57 131 Provision for income taxes 21 45 Minority interest 1 1 - -------------------------------------------------------------------------------- Income from operations of the Performance Polymers business, net of tax 37 87 - -------------------------------------------------------------------------------- Loss from sale from net assets of Performance Polymers business, net of tax(2) (3) - -------------------------------------------------------------------------------- Gain on sale of discontinued operations, net of tax 34 - -------------------------------------------------------------------------------- (1) The 2000 income statement data reflects the Performance Polymers operating results through to May 31, 2000. (2) The loss from sale includes transaction related taxes of approximately CHF 160 million and costs associated with selling the business. Minor acquisitions and divestitures In June 2001, the Company completed the acquisition of Efka Additives B.V., a manufacturer of additives for the coatings and inks industries for a total purchase price of approximately CHF 65 million. The acquisition was accounted for under the purchase method of accounting with the resulting goodwill being amortized over 20 years and intangibles being amortized over an average life of 8 years. The business acquired will expand the service element and the high added value products for the Coating Effects Segment. In March 2001, the Company sold its 50 percent interest in TFL Ledertechnik GmbH & Co. KG for net proceeds of CHF 62 million. The net proceeds received approximated the carrying value of the investment at the date of sale. In December 2000, the Company sold 14 525 000 shares of its investment in its equity affiliate Hexcel Corporation, representing approximately 81 percent of its 49.3 percent investment for CHF 277 million (USD 160 million), of which CHF 62 million (USD 36 million) is payable with a 7 percent interest bearing note, due December 31, 2004. The sale resulted in a pre-tax gain of approximately CHF 71 million or CHF 50 million after tax. (See Notes 8 and 10). In November 2000, the Company concluded the acquisition of certain paper-chemical product lines and technology from Cytec Industries for a total purchase price of approximately CHF 40 million (USD 23 million). The resulting intangibles, including goodwill, are being amortized over 12 years. This acquisition complements and expands the Water & Paper Treatment's product offerings to the paper industry, one of its strategic industry segments. In March 2000, the Company completed the purchase of Prochimica s.r.l., the Company's key photoinitiator supplier of its Coating Effects Segment. The Company paid CHF 85 million and accounted for the acquisition under the purchase method of accounting with the resulting goodwill being amortized over 10 years. In March 1999, the Company sold its 30 percent interest in Cerdec AG for net cash proceeds of CHF 70 million (DEM 85 million), resulting in a pre-tax gain of CHF 39 million or CHF 37 million after tax. F-16 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) 4. Accounts receivable 2001 2000 - -------------------------------------------------------------------------------- Accounts receivable 1 186 1 306 Allowance for doubtful accounts (120) (118) - -------------------------------------------------------------------------------- Total 1 066 1 188 - -------------------------------------------------------------------------------- 5. Inventories 2001 2000 - -------------------------------------------------------------------------------- Raw materials 180 214 Work in process and finished goods 1 412 1 554 Allowance for obsolete and slow moving inventory (66) (73) - -------------------------------------------------------------------------------- Total 1 526 1 695 - -------------------------------------------------------------------------------- 6. Property, plant and equipment - -------------------------------------------------------------------------------- Machinery and Construction Land Buildings equipment in progress Total Total 2001 2001 2001 2001 2001 2000 - ------------------------------------------------------------------------------------------------- Cost at January 1, 128 1 934 5 865 171 8 098 7 923 Additions 2 5 63 189 259 249 Retirements/disposals (2) (45) (96) (3) (146) (90) Changes in consolidation scope 2 23 16 3 44 42 Currency adjustments (7) (25) (173) (6) (211) (17) Other 0 31 167 (200) (2) (9) - ------------------------------------------------------------------------------------------------- Cost at December 31, 123 1 923 5 842 154 8 042 8 098 - ------------------------------------------------------------------------------------------------- Accumulated depreciation at January 1, (878) (3 433) (4 311) (4 009) Depreciation (60) (317) (377) (377) Accumulated depreciation on retirements/disposals 28 81 109 53 Changes in consolidation scope 0 0 0 (5) Currency adjustments 17 94 111 30 Other 0 (9) (9) (3) - ------------------------------------------------------------------------------------------------- Accumulated depreciation at December 31, (893) (3 584) (4 477) (4 311) - ------------------------------------------------------------------------------------------------- Net book value at December 31, 123 1 030 2 258 154 3 565 3 787 - -------------------------------------------------------------------------------------------------
The insurance value of the property, plant and equipment was approximately CHF 10 804 million at December 31, 2001 and CHF 10 622 million at December 31, 2000. 7. Goodwill and other intangible assets 2001 2000 - -------------------------------------------------------------------------------- Goodwill and other intangibles 2 467 2 501 Less accumulated amortization (320) (261) - -------------------------------------------------------------------------------- Total 2 147 2 240 - -------------------------------------------------------------------------------- The line goodwill and other intangibles includes goodwill of approximately CHF 1 486 million (2000: CHF 1 542 million) that was acquired in the Allied Colloids acquisition in 1998 and goodwill of approximately CHF 145 million (2000: CHF 162 million) that was acquired in other acquisitions. The Allied Colloids goodwill is being amortized over its estimated useful life of 33 years. The line goodwill and other intangibles includes the intangible assets, developed technology and know-how of approximately CHF 686 million (2000: CHF 712 million) that were acquired in the Allied Colloids acquisition in 1998 and intangible assets of approximately CHF 150 million (2000: CHF 85 million) that were acquired in other acquisitions. The Allied Colloids intangible assets are being amortized over their estimated useful lives of 33 years. F-17 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) Amortization expense on goodwill and other intangible assets amounted to CHF 92 million (2000: CHF 94 million; 1999: CHF 77 million). For further information refer to the sections in Note 1 "Change in accounting policies and new accounting standards - Business combinations" and "- Goodwill and intangible assets". 8. Financial investments and instruments - -------------------------------------------------------------------------------- Fair value of financial investments and instruments The fair value of financial investments and instruments is the price at which one party would assume the rights and duties of another party. Fair values of financial investments and instruments have been determined with reference to available market information at the balance sheet date and when such information is not readily available using valuation methodologies as described below. Considering the variability of their value-determining factors, the fair values used for financial reporting purposes may not be indicative of the amounts that the Company could realize under current market conditions. Financial assets and liabilities with book values approximating fair market value due to their short-term nature include cash and cash equivalents, accounts receivable, accounts payable and short-term debt. The fair value of short-term investments is estimated using quoted market prices. The fair value of publicly traded long-term debt is estimated using quoted market prices. The fair value of other long-term debt is estimated by discounting future cash flows using interest rates currently available for similar debt with identical terms, similar credit ratings and remaining maturities. The book value and fair value of the Company's long-term debt is as follows: - ---------------------------------------------------------------------------------------------- 2001 2000 ------------------------ ------------------------ ------------------------- ------------------------ Book value Fair value Book value Fair value - ---------------------------------------------------------------------------------------------- Long-term debt, including current portion 3 680 3 675 3 861 3 726 - ----------------------------------------------------------------------------------------------
The fair value of financial investments for which quoted market prices are available are based on such market prices. Financial investments for which quoted market prices do not exist and where it is not practical to estimate fair value are reflected at their book value. Investments in unconsolidated companies are reported at fair value with the unrealized gains and losses reported in accumulated other comprehensive income. For investments in equity affiliates, it is not practical to estimate fair value. Financial investments - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- Investments in equity affiliates 157 278 Investments in unconsolidated companies 36 66 - ------------------------------------------------------------------------------- Total financial investments 193 344 - ------------------------------------------------------------------------------- At December 31, 2001, the cumulative unrealized gain/(loss), before tax on investments in unconsolidated companies, which is included in "Accumulated other comprehensive income", was a loss of CHF 37 million (2000: CHF 0 million; 1999: CHF 1 million). These unrealized losses are a result of market weakness in the industry segments in which these companies participate. In management's opinion, this situation is temporary. The most significant of the Company's investments in equity affiliates are CIMO Compagnie Industrielle de Monthey SA (50 percent) and Daihan Swiss Chemical Corp. (50 percent), both of which have maintained the same level of investment in 2001, 2000 and 1999. In December 2000, the Company sold the majority of its investment in Hexcel Corporation reducing its ownership interest from 49.3 percent to approximately 9.5 percent (see Note 3 and 10). As a result, as of December 31, 2000 the investment is accounted for as an available-for-sale security reported in investments in unconsolidated companies. In March 2001, the Company sold its 50 percent investment in TFL Ledertechnik GmbH & Co. KG (see Note 3). Effective January 1, 2001, the Company acquired a controlling interest in Musashino-Geigy Co. Ltd increasing its holdings from 50 percent to 60 percent. F-18 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) The following table presents summarized financial information on a 100 percent basis for the companies accounted for as investments in equity affiliates as of December 31, 2001, 2000 and 1999.
- ----------------------------------------------------------------------------------- 2000 -------------------------------------- 2001 Total Hexcel (1) Other - ----------------------------------------------------------------------------------- Sales 213 2 469 1 791 678 Income before taxes 16 207 141 66 Net income 11 141 97 44 Total assets 161 937 0 937 Shareholders' equity 293 538 0 538 - -------------------------------------------------------------------------------------
(1) The figures for the year 2000 for Hexcel have been shown separately due to its size. Total assets and shareholders' equity are excluded as a result of the sale of the Company's majority interest in December 2000.
1999 Total Hexcel(1) Other - ----------------------------------------------------------------------------------- Sales 2 457 1 770 687 Income before taxes 20 (25) 45 Net income 6 (25) 31 Total assets 3 111 2 074 1 037 Shareholders' equity 1 006 434 572 - -----------------------------------------------------------------------------------
(1) The figures for Hexcel have been shown separately due to its size. The Company's ownership percentage was 49.73%. The income from earnings of equity affiliates of CHF 8 million (CHF 113 million in 2000 and CHF 15 million in 1999) are shown before taxes as a separate line item in the operating income section of the Consolidated Statements of Income. The related income tax provision of CHF 3 million (CHF 32 million in 2000 and CHF 6 million in 1999) is included in the Company's provision for income taxes. The investment in Hexcel was recorded using a one quarter time lag. In 2000, the Company recognized CHF 66 million as its share of Hexcel's income (1999: CHF 17 million loss), included in the line Income from earnings of equity affiliates, and a provision for income taxes of CHF 22 million (credit of CHF 1 million in 1999) as its share of the related Hexcel income taxes in the line provision for income taxes in the accompanying Consolidated Statements of Income. Included in Hexcel's 2000 income from earnings of equity affiliates is CHF 57 million, representing the Company's share of the gain recognized by Hexcel on the sale of its Bellingham Aircraft business. The associated taxes recognized by Hexcel on this gain, of CHF 18 million, are included in the line provision for income taxes in the accompanying Consolidated Statements of Income. Derivative financial instruments The Company enters into derivative financial instruments in the ordinary course of business to mitigate its exposure to adverse changes in foreign exchange rates and to manage its interest rate exposures. Various risk exposures, arising from existing assets and liabilities, from future transactions in which the Company is firmly committed and from future anticipated transactions, are assessed and managed centrally by the Company's treasury function based on the Company's aggregate exposure. Under the Company's written hedging policy, treasury management continuously monitors and reports the results of its risk management programs to senior management and may choose to partially or fully hedge exposures. The Company's risk management policies do not permit the utilization of financial instruments for speculative or trading purposes. The Company has procedures to monitor the credit exposure amounts and manages exposure to counter-party credit risk through specific minimum credit standards and diversification of counter-parties. The counter-parties to financial instruments are financial institutions with a minimum `A' credit rating or its equivalent and with significant experience with such instruments. Foreign currency risk management A substantial portion of the Company's cash flows is denominated in foreign currencies. The Company collects global expected cash flows information on a monthly basis and, based on these cash flows, prepares a consolidated exposure forecast by currency and determines to what extent these consolidated currency exposures will be hedged. To hedge the balance sheet and income exposure associated with diminution in value of foreign currency cash flows (principally U.S. dollars, euro, British pounds, Australian dollars and Japanese yen), the Company primarily utilizes foreign currency forwards and swaps as well as options, which generally expire within twelve months. In order to lower the overall hedging costs, the Company may issue derivatives on existing or future positions. F-19 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) Generally, the Company does not designate foreign exchange contracts as accounting hedges. For specific anticipated transactions, the Company may designate the foreign exchange contract as a cash flow hedge. For specific firm purchase or sale commitments or for recognized foreign currency denominated assets and liabilities, the Company may designate the foreign exchange contract as a fair value hedge. Interest rate risk management The Company is exposed to market risks due to fluctuating interest rates primarily through its borrowing activities and to a lesser extent through its investments. The Company issues debt, using the most efficient capital markets and products to fund its working capital and investment needs, which can result in a currency or interest rate mismatch with the underlying assets. Most short-term borrowings are in foreign currencies and floating interest rate instruments, whereas the majority of long-term borrowings are in fixed interest rate instruments. The Company manages its ratio of fixed to floating interest rate financial instruments with the objective of achieving a mix which is appropriate both in terms of risk and cost. To manage this mix effectively, the Company selectively enters into interest rate swaps and forward rate agreements, in which it agrees to exchange various combinations of fixed and variable interest rates based on agreed-upon nominal amounts. Interest rate swaps and forward rate agreements that qualify and are designated as a hedge against the change in the fair value of the Company's fixed-rate debt obligations are recorded as fair value hedges. Interest rate swaps and forward rate agreements that qualify and are designated as a hedge against the variability of cash flows associated with Company's variable-rate long-term debt are recorded as cash flow hedges. Information with respect to fair value hedges In 2001, the Company recorded a net gain of CHF 6 million for hedging ineffectiveness in "other financial expense, net" in the Consolidated Statements of Income. Derivative financial instruments previous year Foreign exchange currency forwards, swaps and options were mainly used to hedge existing assets and liabilities, firm commitments and anticipated transactions denominated in foreign currencies (principally U.S. dollars, euro, British pounds, Australian dollars and Japanese yen). The Company had entered into currency contracts to cover foreign exchange risks on certain anticipated foreign currency transactions relating to sales and purchase transactions expected to occur within a period of one year. The premiums associated with purchased and written option contracts were generally amortized over the lives of the options and were not material to the Company's results. For purchased options that hedge anticipated transactions which did not qualify for hedge accounting, gains and losses were recorded in net income as they occurred on a mark-to-market basis. All written options were marked to market monthly and were not material to the Company's results. The Company used interest rate swaps and forward rate agreements as part of its program to manage the fixed and floating interest rate mix of the total debt portfolio and related overall cost of borrowing. Interest and currency rate differentials accruing under these contracts were recognized over the life of the contracts. In the event of an early termination of an interest rate related derivative financial instrument designated as an accounting hedge, the gain or loss was deferred and recorded as an adjustment to financial income/expense over the remaining term of the underlying financial instrument. All derivative financial instruments were valued based upon quoted market prices or market prices for instruments with similar terms and maturities. The following table presents the book value, the fair values and notional principal amount of derivative financial instruments at December 31, 2000: - ------------------------------------------------------------------------------- Notional Book Fair principal 2000 value value amount(1) - ------------------------------------------------------------------------------- Foreign currency forward contracts 33 33 1 033 Foreign currency options contracts 3 3 704 Foreign currency swaps 6 6 1 511 Interest rate contracts 7 (7) 1 400 - ------------------------------------------------------------------------------- Bracketed amounts are liabilities. (1) The notional values of derivative instruments at year end provide an indication of the extent of the Company's involvement in such instruments, but do not represent exposure to market risks. The amounts indicated are gross values and include closed transactions that had not matured at the balance sheet date. F-20 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) 9. Accruals and other current liabilities 2001 2000 - ------------------------------------------------------------------------------ Payroll and employee benefits 166 274 Environmental remediation and compliance 31 61 Restructuring 180 368 Retirement and postemployment benefits 33 27 Deferred income taxes 115 109 Other 565 592 - ------------------------------------------------------------------------------ Total 1 090 1 431 - ------------------------------------------------------------------------------ In 2001, restructuring includes CHF 12 million (2000: 52 million) for restructuring programs (see Note 10) and CHF 168 million (2000: CHF 316 million) for accrued separation costs and transaction taxes related to the divestment of the Performance Polymers business (see Note 3). The change in the accrued separation costs and transaction taxes for the Performance Polymers business reflects amounts utilized and currency adjustments. 10. Restructuring and special charges - ------------------------------------------------------------------------------ Current year program In 2001, the Company implemented a program ("Fit For Growth!") that aligned the Company's operational activities with its customers' industries. This new structure was designed to bring the Company's businesses closer to its customers and allow for a greater focus on providing not just products, but total integrated solutions. This program resulted in the establishment of five new business segments, a Chief Technology Officer at the Executive Committee level and a new, cross-segment Research and Technology Board, which was formed to leverage the Company's existing technological core competencies and to identify new technology platforms for future growth. The "Fit for Growth!" program was also designed to speed up decision-making by eliminating the former divisional layer, as well as to improve efficiency by harmonizing several support areas. The major initiatives in these efficiency projects are the merging of the existing three supply chains into one coordinated global supply chain system, the rationalization of Information Technology support structures and infrastructure and the reduction of personnel in the Water & Paper Treatment Segment as part of the strategy to streamline operations, improve profitability and grow the business. During 2001, under the "Fit For Growth!" program, the Company has eliminated 262 full-time equivalents ("FTEs") under severance programs. The total cost of these severances was approximately CHF 33 million. The Company also released to income excess restructuring provisions of CHF 8 million and special charges provisions of CHF 25 million that were established in prior years. Prior year programs In 2000, the Company incurred net restructuring and special charges of CHF 2 million. This charge includes a CHF 71 million gain on the sale of 14 525 000 shares of the Company's investment in Hexcel Corporation at USD 11.00 per share, which represented approximately 81 percent of the Company's holdings (see Notes 3 and 8). Also included is a charge of CHF 21 million which relates to an impairment loss on certain equity investments. The restructuring projects, totaling CHF 52 million, comprised primarily the restructuring of certain operations of the Water & Paper Treatment Segment in the United States (mainly relating to the closure of a manufacturing facility), the reorganization of the Company's administration functions in Southern Europe and the reduction of personnel, principally at a Plastic Additives and Home & Personal Care manufacturing facility in the United States. Severance costs incurred in 2000 relate to the elimination of approximately 238 FTEs in the United States and southern Europe, principally in the administration, sales and marketing functions and, in addition, the production function in the United States. As of December 31, 2001, 58 FTEs are still to be terminated. The remaining terminations relating to these restructuring programs are expected to be substantially completed during 2002. In 1999, the Company implemented a program in the Water & Paper Treatment Segment to eliminate approximately 250 FTEs, principally in the production, sales and administration areas. This program was completed in 1999 for a total cost of CHF 10 million. The Company also released to income excess restructuring provisions of CHF 10 million that were established in prior years. The costs and activity associated with the prior years' restructuring programs are summarized below: - ----------------------------------------------------------------------------- Severance Other 2001 costs costs Total - ----------------------------------------------------------------------------- January 1, 30 22 52 Amounts utilized(1) (25) (15) (40) - ----------------------------------------------------------------------------- December 31, 5 7 12 - ----------------------------------------------------------------------------- (1) Includes currency adjustments and a release of excess reserves of CHF 8 million. F-21 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) - ----------------------------------------------------------------------------- Severance Other 2000 costs costs Total - ----------------------------------------------------------------------------- January 1, 35 9 44 Restructuring expense 30 22 52 Amounts utilized(1) (35) (9) (44) - ----------------------------------------------------------------------------- December 31, 30 22 52 - ----------------------------------------------------------------------------- (1) Includes currency adjustments. - ----------------------------------------------------------------------------- Severance Other 1999 costs costs Total - ----------------------------------------------------------------------------- January 1, 120 68 188 Restructuring expense(1) 0 0 0 Amounts utilized(2) (85) (59) (144) - ----------------------------------------------------------------------------- December 31, 35 9 44 - ----------------------------------------------------------------------------- (1) Includes an addition related to severance cost of CHF 10 million and a release of excess reserves from prior year programs of CHF 10 million. (2) Includes currency adjustments. Management believes that the remaining restructuring provision is adequate to complete all of its programs. 11. Short-term debt 2001 2000 - ---------------------------------------------------------------------------- Bank overdrafts 31 71 Loans 122 119 Commercial paper 4 12 Other 157 167 Current portion of long-term debt 2 2 - ---------------------------------------------------------------------------- Total 316 371 - ---------------------------------------------------------------------------- The Company's principle commercial paper programs are in the United States and provide for short-term borrowings up to USD 1 000 million. At December 31, 2001, no amounts were outstanding and at December 31, 2000 CHF 1 million (USD 0.6 million) were outstanding under these programs. The programs are secured by a USD 50 million standby credit facility. The CHF 300 million multicurrency standby facility with a major Swiss bank, entered into in 1998, expired on June 30, 2000 and was not renewed. This facility bore interest at the London Interbank Offered Rate (LIBOR) plus 20.0 basis points and a facility fee of 0.08 percent per annum was paid on the total amount. The Company maintains a multicurrency revolving loan facility. At December 31, 2001 and 2000, the available commitments under this facility were CHF 400 million. A commitment fee of 0.10% per annum is paid on the average unused facility. The outstanding loans bear interest at LIBOR plus 21.5 basis points. The facility expires on July 11, 2002. At December 31, 2001 and 2000, the facility was unused. The weighted average interest rate for short-term debt (excluding current portion of long-term debt) calculated at December 31, 2001 was 6.3 percent and at December 31, 2000 was 6.6 percent. Unused short-term credit lines totaled approximately CHF 1 040 million at December 31, 2001 and CHF 1 229 million at December 31, 2000. F-22 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data)
12. Long-term debt 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Bonds and Euro Medium-Term Notes 2 585 2 648 Convertible bonds 1 005 1 107 Amounts owed to credit institutions 11 8 Other long-term debt 79 98 - ---------------------------------------------------------------------------------------------------------------- Total 3 680 3 861 Less: current portion of long-term debt 2 2 - ---------------------------------------------------------------------------------------------------------------- Total long-term debt 3 678 3 859 - ---------------------------------------------------------------------------------------------------------------- Bonds and Euro Medium-Term Notes 2001 2000 - ---------------------------------------------------------------------------------------------------------------- CHF 1 000 3.25% Straight Bonds, principal due 2008 982 1 011 CHF 300 3.25% Straight Bonds, principal due 2009 303 304 USD 178 U.S. pollution control and industrial development bonds, principal due between 2008 and 2028 (weighted average interest rate of 3.22 %) 291 298 - ---------------------------------------------------------------------------------------------------------------- Total Bonds 1 576 1 613 - ---------------------------------------------------------------------------------------------------------------- GBP 243 6.50% Euro Medium-Term Note, principal due 2013 563 584 USD 175 6.125% Euro Medium-Term Note, principal due 2003 277 275 EUR 114(1) 4.875% Euro Medium-Term Note, principal due 2005 169 176 - ---------------------------------------------------------------------------------------------------------------- Total Euro Medium-Term Notes 1 009 1 035 - ---------------------------------------------------------------------------------------------------------------- Total Bonds and Euro Medium-Term Notes 2 585 2 648 - ----------------------------------------------------------------------------------------------------------------
(1) The underlying note is denominated in German marks (DEM 223). The Company maintains a Euro Medium-Term Note program, under which the Company may issue up to USD 2 000 million multicurrency unsecured, unsubordinated notes with a minimum maturity of one month and at fixed, floating or indexed interest rates. In June 1998, the Company issued a USD 300 million Euro Medium-Term Note (reduced to USD 175 million in 2000) with a 6.125% U.S. dollar fixed interest rate. In connection with this Note, the Company entered into certain interest and principal currency swaps in 1998, all of which were canceled in 2000. In July 1998, the Company issued USD 687 million unsecured, unsubordinated convertible bonds, due 2003, with a 1.25% fixed interest rate. The bonds are convertible into the Company's common stock from September 2, 1998 to July 10, 2003 at a conversion price of CHF 254.14 per share, the conversion price being subject to the usual adjustments. In 2001, the Company repurchased approximately CHF 91 million (USD 59 million) of these bonds. The Company had 3 461 399 shares (2000: 3 783 582 shares) of treasury stock reserved for the potential conversion. The annual maturities of long-term debt outstanding at December 31, 2001 are as follows: 2002 CHF 2 million; 2003 CHF 1 374 million; 2004 CHF 2 million; 2005 CHF 167 million; 2006 CHF 2 million; 2007 and thereafter CHF 2 167 million. F-23 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) 13. Income taxes - ------------------------------------------------------------------------------ The provision for income taxes in 2001, 2000 and 1999 from continuing operations consists of the following: - ------------------------------------------------------------------------------ 2001 2000 1999 - ------------------------------------------------------------------------------ Current provision 91 49 82 Deferred provision 87 179 35 - ------------------------------------------------------------------------------ Total provision for income taxes 178 228 117 - ------------------------------------------------------------------------------ The Company is incorporated in Switzerland but operates in numerous countries with differing tax laws and rates. The income before income taxes and provision for income taxes are generated primarily outside of Switzerland. Therefore, the weighted average expected tax rate (computed by multiplying the statutory rate applicable to each local subsidiary's income or loss) may vary between periods reflecting the income or losses generated in each country. The main factors causing the effective tax rate to differ from the expected tax rate are: - ------------------------------------------------------------------------------ 2001 2000 1999 % % % - ------------------------------------------------------------------------------ Expected tax rate 30 30 30 Non-deductible items 7 14 7 Tax free income (2) (1) (3) Income taxed at reduced rates (3) 0 (2) Changes in valuation allowance 1 (11) (1) Other (1) 3 2 - ---------------------------------------------------------------------------- Effective tax rate 32 35 33 - ------------------------------------------------------------------------------ "Non-deductible items" includes the tax effect of amortization of goodwill and other intangibles. In 2000, also included is the tax effect of the impairment loss on certain of the Company's equity investments (see Note 10) and the effect of certain taxable income in one of the Company's subsidiaries that was not recognized for financial accounting purposes. In 2001, the change in valuation allowance is primarily the result of not recognizing the full benefit from loss carryforwards in certain tax jurisdictions as their realization was not certain. In 2000 and 1999 the change in valuation allowance is primarily the result of the realization of tax loss carryforwards for which the Company had previously recorded a valuation allowance, as realization was uncertain at the time of their origination. In 2001, "Other" includes approximately 3 percent for the effect of a tax payment in Italy (the "Imposta Sostitutiva") that permitted the future tax deductibility of Prochimica s.r.l.'s goodwill amortization, 3 percent for tax adjustments, offset by (4) percent reflecting the effect of certain taxable expenses in one of the Company's subsidiaries that was not recognized for financial reporting purposes. In prior years, "Other " includes approximately 2 percent in 2000 and 1 percent in 1999, reflecting the effect of the reduction in the German statutory tax rates on the year-end 2000 and 1999 net deferred tax asset balances of the Company's German subsidiaries. F-24 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) The significant components of activities that gave rise to deferred tax assets and liabilities on the balance sheet at December 31, 2001 and 2000, were as follows: - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ Deferred tax assets Pensions and other employee compensation 104 91 Inventory 44 48 Restructuring and special charges 22 84 Environmental reserves 241 259 Tax loss carryforwards 170 135 Other 45 33 - ------------------------------------------------------------------------------ Gross deferred tax assets 626 650 Valuation allowance (146) (143) - ------------------------------------------------------------------------------ Net deferred tax assets 480 507 - ------------------------------------------------------------------------------ Deferred tax liabilities Property, plant and equipment (429) (394) Other (186) (160) - ------------------------------------------------------------------------------ Gross deferred tax liabilities (615) (554) - ------------------------------------------------------------------------------ Net deferred tax liabilities (135) (47) - ------------------------------------------------------------------------------ Included in Prepaid and other current assets 191 222 Other assets 168 157 Accruals and other current liabilities (115) (109) Deferred income taxes (379) (317) - ------------------------------------------------------------------------------ Net deferred tax liabilities (135) (47) - ------------------------------------------------------------------------------ In management's opinion the majority of deferred tax assets will be realized because of the depletion of certain significant tax deductions and anticipated future taxable income resulting from the Company's operations. Valuation allowances have been established for certain tax loss carryforwards and certain long-term deferred tax assets of the Company. For tax return purposes, the Company has available tax loss carryforwards of approximately CHF 478 million, of which CHF 88 million will expire in the next five years and CHF 240 million will expire between five and twenty years. The remaining carryforwards do not expire. At December 31, 2001, unremitted earnings of subsidiaries outside of Switzerland of approximately CHF 300 million were deemed to be permanently invested. No deferred tax liability has been recognized with regard to the remittance of such earnings as it is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to Switzerland. 14. Other liabilities 2001 2000 - ------------------------------------------------------------------------------ Environmental remediation and compliance 717 737 Retirement and postemployment benefits 625 577 Other 346 409 - ------------------------------------------------------------------------------ Total 1 688 1 723 - ------------------------------------------------------------------------------ F-25 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) 15. Shareholders' equity - ------------------------------------------------------------------------------ On April 20, 1998 the Company's shareholders approved the creation of authorized and conditional capital of the Company. The approval allows for the issuance of a maximum of 10 million registered shares with a par value of CHF 10 per share. While 2 million shares are reserved for employee stock option plans, 4 million are primarily reserved for an issuance under future convertible bonds and similar debt instruments. After a re-approval by the shareholders due to requirements of Swiss law, another 4 million shares may also be issued until April 13, 2002 without any restriction. The Company sold 1 929 453 shares in 2001 (4 862 shares in 2000 and 1 679 shares in 1999) of treasury stock at market prices. In addition, in 2001, the Company purchased 1 855 966 shares of treasury stock (2000: 391 177 shares of treasury stock and none in 1999) at market prices. The Company designated a total of 5 278 224 shares in 2001 (5 485 963 shares in 2000 and 5 304 753 shares in 1999) of its treasury stock as reserved shares primarily for satisfaction of future share requirements under its various outstanding employee stock option plans and for the potential share issuance under its outstanding convertible bonds (see Notes 12 and 16). The remaining 709 723 shares in 2001 (575 471 shares in 2000 and 370 366 shares in 1999) of treasury stock have been designated as unreserved shares. The after-tax components of accumulated other comprehensive income are as follows: - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ Currency translation adjustment (199) (117) Unrealized gains/(losses) on available-for-sale securities (23) 0 Minimum pension liability (19) 0 Other 1 1 - ------------------------------------------------------------------------------ Accumulated other comprehensive income (240) (116) - ------------------------------------------------------------------------------ The deferred tax effect on the unrealized gains/(losses) on available-for-sale securities is a benefit of CHF 14 million in 2001 and CHF 0 million in 2000. The deferred tax effect on the minimum pension liability adjustment is a deferred tax benefit of CHF 12 million in 2001. The currency translation adjustment is not adjusted for income taxes as it relates primarily to indefinite investments in non-Swiss subsidiaries. 16. Stock based compensation plans - ------------------------------------------------------------------------------ The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its plans. A description of the terms of the Company's plans are presented in the following paragraphs. LEAP - In March 1997, the Company established a one-time Leveraged Executive Asset Plan for key executives and non-executive Board members (participants) to promote share ownership. Under the LEAP, approximately 320 participants were given the opportunity to purchase a total of 288 400 restricted shares of common stock of the Company at a price per share of CHF 110, which was the market price per share on the purchase date. For each share purchased, each participant was granted a right to receive four share options (total 1 153 600) with an exercise price of CHF 110 per share, the market value of the shares at the grant date. The participants will receive the market price increase from the grant date to the exercise date in equivalent shares of the Company's common stock. The restricted shares will be released to the participants on March 15, 2002. The share options became fully vested on March 1, 2000, and may be exercised on the 15th day of any month beginning March 15, 2002 through March 15, 2005, the date the share options expire. As a result of terminations from the program, a total of 66 682 options (2000: 60 418 options; 1999: 58 148 options) have been returned to the Company. The Company paid a fee of CHF 51 million to a major investment bank to assume the Company's obligations to the participants under the LEAP, including supplying all necessary equivalent shares of the Company's stock to the participants of the LEAP when they are due and administering the plan. Even if the cost of supplying the shares exceeds the fee paid by the Company of CHF 51 million, the investment bank will supply all necessary shares and the Company will not be required to issue any additional shares. Therefore, independent of the prevailing future share price, the total cost of the LEAP program to the Company will be the CHF 51 million fee that was paid. Compensation expense has been recognized as this fee was amortized ratably over the three year vesting period through March 1, 2000. CAPS - In 1997, the Company established a Capital Appreciation Performance Share Plan for key executives and non-executive Board members (participants). In accordance with the CAPS, participants were granted rights to receive one share of common stock of the Company for each right granted in the event that the closing share price on any seven days up to August 31, 2001, the date the share option expires, equaled or exceeded CHF 264 per share (which was double the price at the initial grant date in August 1997). Under the program a total of 5 participants were granted 8 192 rights in 1998 and 333 participants were granted 342 572 rights in 1997. As the conditions of the CAPS were not met by August 31, 2001, all share options under this program expired unexercised. No compensation expense was ever recorded under this plan as the target price was never reached. F-26 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) LTIP - In 1998, the Company established a Long-Term Incentive Plan which grants options and, beginning in 2000, may also include grants of restricted shares of common stock of the Company to senior management, other employees and non-executive Board members. For grants of options made to participants other than those in the United States, vesting is at the date of grant and the right to exercise is restricted for three years following the grant date. For grants of options made to participants in the United States, vesting and the right to exercise is over three years. The options expire either five years or ten years after the date of grant. In 2001, 2000 and 1999, no compensation expense was recorded for the options issued under this plan. The following table summarizes option activity under the LTIP during 2001, 2000 and 1999: - ------------------------------------------------------------------------------
Weighted average Options exercise price outstanding - ------------------------------------------------------------------------------------------ Balance at December 31, 1998 165 351 055 Options granted 113 521 088 Options canceled/forfeited 152 (14 235) - ------------------------------------------------------------------------------------------ Balance at December 31, 1999 134 857 908 - ------------------------------------------------------------------------------------------ Options granted 108 461 210 Options canceled/forfeited 118 (19 218) - ------------------------------------------------------------------------------------------ Balance at December 31, 2000 125 1 299 900 - ------------------------------------------------------------------------------------------ Options granted 112 461 444 Options issued on conversion of stock appreciation rights 165 60 799 Options canceled/forfeited 115 (43 694) - ------------------------------------------------------------------------------------------ Balance at December 31, 2001 123 1 778 449 - ------------------------------------------------------------------------------------------
In January 1998, the Company issued 68 500 stock appreciation rights to certain of its senior managers with an exercise price of CHF 165, which equaled the market value of the common stock at grant date. These rights entitle the participants to receive the appreciation in the common stock's market value between grant date and exercise date in cash or under certain circumstances in common stock. These rights vest ratably over a three year period and expire after ten years from date of grant. In March 2001, the remaining 60 799 stock appreciation rights under this plan were, according to the provisions of the plan, converted to stock options with an exercise price of CHF 165. In 2001, 2000 and 1999, no compensation expense was recognized on the stock appreciation rights. The following table summarizes the status of stock options outstanding and exercisable at December 31, 2001: - ------------------------------------------------------------------------------
Stock Options Outstanding Stock Options Exercisable ----------------------------------- ----------------------------------- Weighted average Weighted average Number of remaining Number of remaining Exercise price Weighted average outstanding contractual life outstanding contractual life range exercise price options (in years) options (in years) - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- 108 - 115 111.13 1 383 431 5.1 178 034 7.6 165 165.00 395 018 2.7 395 018 2.7 - ---------------------------------------------------------------------------------------------------------------- 1 778 449 573 052 - ------------------------------------------------------------------------------------------------------------------
In connection with the LTIP 2000, the Company granted 33 288 restricted shares of common stock, which are restricted for three years from the date of grant, to 376 participants. The market value of the common stock at date of grant was CHF 108 per share. Compensation expense of approximately CHF 3.6 million has been recognized in 2000 related to the grant of these shares. In connection with the LTIP 2001, the Company granted 96 729 restricted shares of common stock, which are restricted for three years from the date of grant, to 639 participants. These restricted shares were granted as part of the payment of the 2000 incentive bonus, which was recorded as compensation expense in 2000. The market value of the common stock at date of grant was CHF 112 per share. F-27 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) LEXIP - In April 1998, the Company established a Long-term Executive Incentive Plan in which five participants were given the right to purchase 6 007 shares of common stock at the market value at grant date of CHF 183. For each share purchased, four stock options (total 24 028) were granted to the participants. The strike price of the options is the market value of the shares of common stock at the date of the grant, CHF 183. These options vest after four years and expire after seven years from date of grant. As of December 31, 2001, 12 560 of the stock options have been forfeited. In 2001, 2000 and 1999, no compensation expense was recorded under this plan. ESOP - In 1998, the Company established a plan which enables substantially all employees to annually purchase up to 20 shares of common stock at a price equal to 85 percent of the average market price, as defined as the average closing price of the shares on the Swiss Exchange for 10 trading days prior to the purchase date of the shares, pursuant to the Company's "Employee Share Ownership Plan". During 2001, 2 279 employees (2000: 2 836 employees; 1999: 3 515 employees) purchased 40 069 shares (2000: 50 099 shares; 1999: 63 929 shares) for which approximately CHF 4 million (2000: CHF 5 million; 1999: CHF 6 million) was paid to the Company. In 2001, 2000 and 1999, no compensation expense was recorded under this plan. MAB - In 1998, the Company established a "Mitarbeiterbeteiligungsplan" (Employee Investment Plan) which grants annually to most Swiss employees (as an enhancement to their pension plan arrangements) the right to purchase 20 shares of common stock at CHF 15 per share (so long as the share price is not greater than CHF 200 at which level the Employee Investment Plan price is adjusted). The rights vest at the grant date and become exerciseable at the date of the employees' retirement or termination. As of December 31, 2001, 393 300 rights (2000: 307 060 rights; 1999: 223 800 rights) have been granted and 90 560 rights (2000: 74 300 rights; 1999: 35 160 rights) were exercised. Compensation expense is recorded in the year the rights are granted and in 2001 CHF 8 million (CHF 10 million in 2000 and in 1999) of compensation expense was recorded under this plan. PSP - In 2001, the Company established a Performance Share Plan for selected key management and non-executive Board members (participants). In accordance with the PSP, participants are granted rights to receive shares of common stock of the Company if the performance of the Company, defined and measured as Total Shareholder Return (TSR), during the measurement period under the PSP meets or exceeds specified conditions and the share price of the Company is equal to or higher than the market value of shares at the beginning of the measurement period. The TSR includes three parameters: (i) the change in the share price from the close of the first trading day at the beginning of the measurement period to the share price at the close of the last trading day at the end of the measurement period, expressed as a percentage; (ii) any dividends paid or payable for the measurement period and (iii) any extraordinary returns paid to the shareholders during the measurement period. In 2001, 86 700 rights were granted to 137 participants with a measurement period from January 1, 2001 through December 31, 2003. The share price as of the beginning of the measurement period was CHF 109.25, the market value of the shares on January 3, 2001. The rights vest ratably over a three year period except when a participant voluntarily terminates employment, in which case all rights are forfeited. Each right is entitled to receive from one share up to a maximum of four shares of Company common stock, depending on the Company's share price and the Company's TSR ranking within the benchmark group at the end of the measurement period. As a result of terminations from the plan, a total of 1 250 rights have been returned to the Company. As the conditions of the PSP were not met, no compensation expense was recorded under this plan in 2001. Change in control and reserve of shares Upon a change in control of the Company (defined as for LEAP 30 percent, for LTIP 2001, 2000 and 1999 33.33 percent, LTIP 1998 50 percent and for PSP 20 percent, such percentage, in each case, as a percentage of total voting power. Additionally, for the PSP in a merger where the Company's shareholders retain less than 50 percent of total voting power or the Company's board of directors does not maintain a majority of the voting rights in the board of the combined company), the vesting and restriction periods for the plans stated above (if still current) will cease to apply and a cash or share payment for the value of the outstanding plans and related taxes and duties will be due to the participants. To cover demands for future option plans that may be established in the next five years, the Company plans to purchase up to 5 percent of its common stock (exclusive of the shares purchased from Novartis AG in the spin-off). At December 31, 2001, the Company had 1.8 million shares (2000: 1.7 million shares; 1999: 1.2 million shares) of treasury stock reserved for issuance under the various stock based compensation plans. Pro forma disclosure The pro forma net income and earnings per share for 2001, 2000 and 1999 have been determined as if the Company had used the fair value method of accounting for its stock option grants and employee share ownership plan in accordance with the provisions of SFAS No. 123. F-28 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) The pro forma amounts presented below reflect the portion of the estimated fair value of awards granted in 2001, 2000 and 1999, based on the vesting or service period over which the awards are earned.
- ---------------------------------------------------------------------------------------------------------------- Year-ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Pro forma income from continuing operations 368 410 224 Pro forma income from discontinued operations 0 34 87 Cumulative effects of change in accounting principles, net of tax 2 0 0 - ---------------------------------------------------------------------------------------------------------------- Pro forma net income 370 444 311 - ---------------------------------------------------------------------------------------------------------------- Pro forma earnings per share - basic and diluted: Continuing operations 5.53 6.19 3.37 Discontinued operations - 0.50 1.31 Cumulative effects of a change in accounting principle 0.04 - - - ---------------------------------------------------------------------------------------------------------------- Pro forma net income per share 5.57 6.69 4.68 - ---------------------------------------------------------------------------------------------------------------- The Company used the Black-Scholes model to value the stock options granted. The weighted-average assumptions used to estimate the fair value of the options included in the pro forma amounts are as follows: - ---------------------------------------------------------------------------------------------------------------- Year-ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Expected option lives in years 7.04 7.36 6.82 Expected volatility in percentage 29.93 32.36 40.29 Risk-free interest rate in percentage 3.60 3.94 2.06 Expected dividend yield in percentage 1.80 1.85 1.71 Weighted average fair value in CHF 33.13 36.14 42.91 - ----------------------------------------------------------------------------------------------------------------
17. Retirement benefits - ------------------------------------------------------------------------------ Pension plans Employees receive and the Company funds pensions and retirement benefits in accordance with the applicable laws and customs in the countries in which the Company operates. The Company has both contributory and non-contributory defined benefit and defined contribution plans. Defined contribution plans: In countries in which employees are covered by defined contribution plans, employer contributions charged to income from continuing operations were CHF 19 million in 2001, CHF 19 million in 2000 and CHF 13 million in 1999. Defined benefit plans Benefits are generally based on years of service, levels of compensation or stated amounts for each year of service. The components of net pension and postretirement expense for the Company-sponsored defined benefit plans were:
- ---------------------------------------------------------------------------------------------------------------- Pension benefits Postretirement benefits -------------------------------- -------------------------------- 2001 2000 1999 2001 2000 1999 -------------------------------- -------------------------------- Major plans: Service cost 92 114 120 1 1 2 Interest cost 185 162 161 5 5 4 Expected return on plan assets (252) (239) (216) 0 0 0 Amortization of prior service cost 0 (3) 0 (1) (1) (1) Other (gains), losses and amortization, (38) (36) (35) 0 (3) (4) net - ---------------------------------------------- -------------------------------- -------------------------------- Benefit expense (income) major plans (13) (2) 30 5 2 1 Other plans 2 3 1 0 0 0 - ---------------------------------------------- -------------------------------- -------------------------------- Total benefit expense (income)(1) (11) 1 31 5 2 1 - ---------------------------------------------- -------------------------------- -------------------------------- Continuing operations (11) 1 26 5 2 0 Discontinuing operations 0 0 5 0 0 1 - ---------------------------------------------- -------------------------------- -------------------------------- Total benefit expense (income)(1) (11) 1 31 5 2 1 - ----------------------------------------------------------------------------------------------------------------
(1) In connection with the sale of the Performance Polymers business on May 31, 2000 (see Note 3), the pension benefits and post-retirement benefits, liabilities and related assets for the active employees and certain retirees of the Performance Polymers business were assumed by the purchaser. For 1999, the components of pension expense and the components reconciling the changes in the projected benefit obligation, the changes in the fair value of assets, and the funded status have not been restated for amounts related to continuing and discontinued operations as no detailed information was available. An estimate of the prepaid (accrued) pension cost and pension expense allocable to the Performance Polymers business has been included in discontinued operations. F-29 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) For the Company's major plans, the following table provides a reconciliation of the changes in the benefit obligation, the changes in the fair value of assets, and the funded status of the plans as of December 31, 2001 and 2000:
- ---------------------------------------------------------------------------------------------------------------- Pension benefits Postretirement benefits ---------------------------------------------------- 2001 2000 2001 2000 ---------------------------------------------------- Benefit obligation, beginning of year 3 340 3 588 66 73 Service cost 92 114 1 1 Interest cost 185 162 5 5 Participant contributions 20 23 2 0 Actuarial (gain) loss 74 (33) 1 (2) Plan amendments 7 (4) 0 (2) Change in consolidation scope 0 (339) 0 (8) Benefits paid (157) (141) (7) (5) Foreign currency translation (65) (30) (1) 4 Other 36 0 0 0 - ----------------------------------------------------- ---------------------------------------------------------- Benefit obligation, end of year 3 532 3 340 67 66 - ----------------------------------------------------- ---------------------------------------------------------- Plan assets, beginning of year 3 939 3 862 0 0 Actual return on plan assets (505) 463 0 0 Employer contributions 60 59 5 5 Participant contributions 20 23 2 0 Change in consolidation scope 0 (302) 0 0 Benefits paid (157) (141) (7) (5) Foreign currency translation (53) (25) 0 0 Other (12) 0 0 0 - ----------------------------------------------------- ---------------------------------------------------------- Plan assets, end of year 3 292 3 939 0 0 - ----------------------------------------------------- ---------------------------------------------------------- Funded status (240) 599 (67) (66) Unrecognized net (gain) loss 415 (510) (17) (19) Unrecognized prior service cost (9) (4) (8) (9) - ----------------------------------------------------- ---------------------------------------------------------- Net amount recognized, major plans(1) 166 85 (92) (94) Other plans (9) (9) 0 0 - ----------------------------------------------------- ---------------------------------------------------------- Total net amount recognized 157 76 (92) (94) - ----------------------------------------------------- ----------------------------------------------------------
(1) Refer to footnote (1) to the previous table. Certain of the Company's pension plans have accumulated benefit obligations that exceed plan assets by CHF 501 million in 2001 and CHF 425 million in 2000. Those plans have aggregate accumulated benefit obligations of CHF 882 million in 2001 and CHF 464 million in 2000 and plan assets of CHF 381 million in 2001 and CHF 39 million in 2000. These unfunded plans are mainly in Germany, where in line with local practices, the Company has not funded the pension plans of its German subsidiaries. This results in accrued pension costs, which exceed the unfunded accumulated benefit obligation of approximately CHF 435 million in 2001 and CHF 438 million in 2000. The Company recognizes a minimum pension liability for pension plans when the accrued pension cost for the plan is less than the unfunded accumulated benefit obligation. This minimum pension liability has no impact on income. In 2001, the Company recorded a minimum pension liability of CHF 53 million, which was offset by recording an intangible asset of CHF 22 million and by reducing equity through accumulated other comprehensive income of CHF 31 million, before tax of CHF 12 million. The amounts recognized in the Consolidated Balance Sheets as of December 31, 2001 and 2000, related to retirement benefits consists of the following:
- ---------------------------------------------------------------------------------------------------------------- Pension benefits Postretirement benefits ---------------------------------------------------- 2001 2000 2001 2000 ---------------------------------------------------- Prepaid benefit cost 650 565 0 0 Accrued benefit liability (546) (489) (92) (94) Intangible asset 22 0 0 0 Accumulated other comprehensive income 31 0 0 0 - ---------------------------------------------------------------------------------------------------------------- Total net amount recognized 157 76 (92) (94) - ----------------------------------------------------------------------------------------------------------------
F-30 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) The weighted average key actuarial assumptions used to compute the benefit obligations were as follows:
- ---------------------------------------------------------------------------------------------------------------- Pension benefits Postretirement benefits ------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 ------------------------------------------------------------- Discount (interest rate) 5.3% 5.5% 4.9% 7.2% 7.7% 7.4% Rate of increase in compensation levels 2.9% 3.2% 2.8% n.a. n.a. n.a. Expected long-term rate of return on plan assets 6.5% 6.3% 6.4% n.a. n.a. n.a. - ----------------------------------------------------------------------------------------------------------------
The weighted average healthcare cost trend rate is 9.5 percent for 2002 and is assumed to decrease to an ultimate trend rate of 5.0 percent in 2008. A one percent annual increase in the assumed healthcare cost trend rate would increase the 2001 accumulated postretirement benefit obligation by approximately CHF 3 million and the annual postretirement benefit cost by approximately CHF 0.3 million. A one percent annual decrease in the assumed healthcare cost trend rate would decrease the 2001 accumulated postretirement benefit obligation by approximately CHF 2 million and the annual postretirement benefit cost by approximately CHF 0.3 million. The market value of the Company's shares held by its various pension plans was approximately CHF 52 million as of December 31, 2001, CHF 55 million as of December 31, 2000, and CHF 47 million as of December 31, 1999. Number of personnel and personnel expenses The Company employed in its continuing operations 19 683 employees at December 31, 2001, 20 306 at December 31, 2000, and 20 117 at December 31, 1999. The Company's salaries and wages, including social charges in its continuing operations were CHF 1 796 million in 2001, CHF 2 047 million in 2000 and CHF 1 836 million in 1999. The Company employed in its discontinued operations 3 072 employees at December 31, 1999. The Company's salaries and wages, including social charges in its discontinued operations were CHF 130 million for the five month period ended May 31, 2000, the date of Polymers divestment, and were CHF 284 million in 1999. 18. Earnings per share - ------------------------------------------------------------------------------ In 2001, 2000 and 1999 there was no difference in basic and diluted earnings per share. In 2001 and 2000, basic and diluted weighted average numbers of shares outstanding were the same and amounted to 66 419 147 in 2001 and 66 311 879 in 2000. In 1999, basic weighted average number of share outstanding were 66 454 357 and diluted weighted average shares outstanding were 66 462 898, reflecting the 8 541 incremental shares for stock option plans. This difference in diluted weighted average number of shares outstanding was not material for the calculation of diluted earnings per share. For purposes of calculating basic and diluted earnings per share in 2001, 2000 and 1999, there was no required adjustment to the reported income from continuing operations, discontinued operations or in net income. The calculation of diluted earnings per share considers the effect of the Company's outstanding convertible bonds and stock options as further described in the following paragraphs. Diluted earnings per share assumes (i) that the 1.25 percent convertible bonds, issued in 1998, were converted at the beginning of the year in 2001, 2000 and in 1999, with related interest and common shares adjusted accordingly, and (ii) that the weighted average shares outstanding were increased by shares issuable upon exercise of those stock options for which the average stock market price exceeded the exercise price, less shares which could have been purchased by the Company with the related proceeds receivable from the exercise of the stock options. These two calculations are not considered in calculating diluted earnings per share if the effect would be antidilutive, that is the diluted earnings per share would be higher than the basic earnings per share. For the years ended December 31, 2001, 2000 and 1999, the calculation of diluted earnings per share excluded the assumed conversion of the 1.25 percent convertible bonds, issued July 1998, due 2003, as their inclusion would have been antidilutive. In 2001, the calculation of diluted earnings per share excluded 1 768 952 stock options (2000: 1 297 543 stock options; 1999: 417 153 stock options) with exercise prices between CHF 108 and CHF 183 as their exercise prices were greater than the average market price of the common shares for the year. F-31 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) 19. Related party transactions - ------------------------------------------------------------------------------ Transactions with associated companies The Company had receivables with associated companies of CHF 0 million in 2001 and CHF 12 million in 2000. Investments in affiliates of CHF 157 million in 2001 and CHF 278 million in 2000 are included in financial investments and are described in Note 8. Loans receivable from equity affiliates of CHF 10 million in 2001 and CHF 52 million in 2000 are included in other assets. Included is a loan to CIMO Compagnie Industrielle de Monthey SA, of CHF 10 million in 2001 and 2000, which bears interest at 3 percent in 2001 (2000: 2 percent). In 2000, a variable interest rate loan from Hexcel Corporation was outstanding and amounted to CHF 42 million (USD 25 million). This loan was repaid in 2001. The Company had payables and accrued expenses to equity affiliates of CHF 11 million in 2001 and CHF 46 million in 2000. Other The fair value of the compensation paid to members of the Board of Directors was CHF 1.8 million in 2001, CHF 1.6 million in 2000 and CHF 1.5 million in 1999. There were no loans between the Company and members of the Board of Directors. 20. Commitments and contingencies - ------------------------------------------------------------------------------ Lease Commitments The Company leases certain facilities under operating leases. The future minimum lease commitments required under fixed term leases are: 2002 CHF 44 million; 2003 CHF 32 million; 2004 CHF 56 million; 2005 CHF 18 million; 2006 CHF 6 million; 2007 and thereafter CHF 7 million. Rental expense amounted to CHF 74 million in 2001, CHF 85 million in 2000 and CHF 75 million in 1999. Purchase Commitments The Company has various purchase commitments for materials, supplies and items of permanent investment incident to the ordinary course of business. In the aggregate, these commitments are not in excess of current market prices and reflect normal business operations. Guarantees In the normal course of business, the Company has provided guarantees of approximately CHF 36 million. Although it is not practical to estimate their fair value, the Company does not expect to incur losses as a result of these guarantees. Contingencies The Company operates in countries where political, economic, social, and legal developments could have an impact on the operational activities. The effects of such risks on the Company's results, which arise during the normal course of business, are not foreseeable and are therefore not included in the accompanying financial statements. In the ordinary course of business, the Company is involved in lawsuits, claims, investigations and proceedings, including product liability, commercial, environmental, and health and safety matters. In connection with its Toms River, New Jersey site in the United States, the Company has been named as a defendant in several actions (see "Environmental matters" below). Although the outcome of any legal proceedings cannot be predicted with certainty, management is of the opinion that there are no such matters pending which would be likely to have any material adverse effect in relation to its business, financial position or results of operations. As a result of a dispute over certain agreements with third parties, in the context of the Company's divestment of the Performance Polymers Business in 2000, the third parties have initiated arbitration proceedings against the Company. Although the outcome cannot be predicted with certainty, management is of the opinion that this matter will not have any material adverse effects on the financial position or results of operations of the Company. Taxes In their tax audit of the Company's operations in Grenzach, Germany, the German tax authorities have made a substantial tax adjustment. In accordance with the Master Spin-off Agreement with Novartis and with Swiss commercial law, management is of the opinion that the total liability owed is the responsibility of Novartis. In 2001, arbitration proceedings have been initiated in relation to this matter. In management's opinion, the ultimate outcome of this matter will not have a material adverse effect on the financial position or results of operations of the Company. F-32 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) Environmental Matters Operating in the chemical industry, the Company is subject to stringent environmental, health and safety laws and regulations. It is the Company's policy to continuously develop and improve the environmental performance of key manufacturing processes through an active program to address environmental matters. In addition to process improvements, the Company uses advanced waste treatment and disposal facilities at all major manufacturing sites that allow the sites to comply with recent laws and regulations applicable to waste streams. Management believes that the Company substantially complies with all such laws. For outstanding environmental matters that are currently known and estimable by the Company, provisions of approximately CHF 748 million at December 31, 2001 and CHF 798 million at December 31, 2000 have been recorded in the accompanying Consolidated Balance Sheets. The main difference between 2001 and 2000 relates to changing foreign currency exchange rates, usage of the provisions, and updates to the estimated costs to complete outstanding claims and issues. The Company's environmental protection and improvement cash expenditures were approximately CHF 43 million in 2001 (CHF 47 million in 2000), including investments in construction, operations and development. In the agreement on the Company's spin-off from Novartis, Novartis agreed to reimburse the Company 50 percent of United States environmental liabilities arising from past operations of the Company in excess of the agreed reserves. Outside the United States, environmental liabilities are allocated between Novartis and the Company based on ownership of the site or, if environmental liabilities do not relate to production sites or these are not owned by either entity, according to the polluter pays principle. If causation between the parties cannot be determined, costs are shared equally. The agreement with Novartis is not subject to any time or amount limits but could terminate for certain liabilities in the United States (i) upon a sale of substantially all of the Company's assets, (ii) upon a change in control of the Company, or (iii) for individual facilities, upon the sale of the facility (unless the Company retains responsibility for any clean-up at such site). In 1998, certain litigation matters related to sites located in the United States were settled with the insurance companies. The Company received the cash of approximately CHF 43 million, net of related legal costs incurred, in 1999 and such amount was included as a reduction in selling, general and administrative expenses in 1998. The Company has not reflected any potential insurance recoveries that may be available in the future. The Company continues to participate in environmental assessments and clean-ups at a number of locations, including operating facilities, previously owned facilities and United States Superfund sites. The Company accrues reserves for all known environmental liabilities for remediation costs when a clean-up program becomes probable and costs can be reasonably estimated. Clean-up of the most significant sites has been or is nearly completed, except for two major sites where remediation measures are still in discussion, as described in the following paragraphs. At its Toms River, New Jersey remediation site the Company agreed with the United States Environmental Protection Agency to implement the selected remedy, which involves design and construction of a large bio-remediation project over the next eight to ten years. Based on management's current estimates, the Company's environmental provisions are adequate to cover the expected costs to complete this remediation plan. In connection with the former operation of the Ciba-Geigy plant in Toms River, the Company and two other companies were contacted by attorneys representing the interests of approximately 70 families, each of which has or had a child with cancer. These families claimed that the cancer was caused by exposure to contaminated drinking water and that the contamination was partly caused by the former operations at the plant. All parties engaged themselves in informal dispute resolution proceedings over the past 4 years, which led to a settlement in 2001. The total amount owed by the Company has been sufficiently provided for in its environmental provisions and will not have a material adverse effect on the Company's financial position or results of operations. In 2000, several actions were filed against the Company's subsidiary in the United States in New Jersey state court seeking medical monitoring as well as payment of damages for alleged personal injuries and property damage. The individual plaintiffs in these suits claim that the manufacturing operations at the Toms River plant from 1952 through its closure in 1996 are linked to and caused their damages. None of these plaintiffs were involved in the settlement described in the preceding paragraph. These cases are in the discovery stage of litigation. The Company does not believe these claims have merit and it is vigorously defending itself. The planning for the total clean-up of the waste disposal site in Bonfol, Switzerland, which was closed in 1976, is ongoing. The responsibility for the clean-up lies with eight chemical companies, including among others the Company. The responsible companies cooperate with the governmental authorities to define the necessary measures in view of a final remediation of the site. The remediation effort could require up to fifteen years to complete. In management's opinion, based on the current remediation plans, the Company's environmental provisions are adequate to cover the Company's share of the expected costs to complete the remediation at this site. The contractual terms of the sale of the Performance Polymers business stipulate that, in general, the Company will retain responsibility for environmental claims relating to the operations of the Performance Polymers business prior to May 31, 2000, whereby damages for remediation in connection with sites outside the United States shall cover only 80 percent of the respective costs. The responsibility with respect to any non-United States sites covers environmental liabilities incurred within fifteen years from May 31, 2000 and is limited to CHF 75 million. With respect to any such environmental liabilities in the United States, the Company's obligation to indemnify is unlimited in time or amount. Novartis' environmental indemnification obligations to the Company described above are not affected by the sale of the Performance Polymers business. F-33 Ciba Specialty Chemicals Notes to Consolidated Financial Statements (in millions of Swiss francs except share and per share data) In management's opinion, the environmental reserves accrued are sufficient to meet all currently known and estimable environmental claims and contingencies. Because of the nature of the Company's operations, however, there can be no assurance that significant costs and liabilities from ongoing or past operations will not be incurred in the future. In addition, environmental clean-up periods are protracted in length and environmental costs in future periods are subject to changes in environmental remediation regulations. 21. Valuation and qualifying accounts and reserves - ------------------------------------------------------------------------------
Allowance for doubtful accounts For the year ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Balance at beginning of year 118 125 111 Additions (deductions) charged (credited) to cost and expenses, net 22 24 19 Other, net(1) (20) (30) (8) Currency adjustments 0 (1) 3 - ---------------------------------------------------------------------------------------------------------------- Balance at end of year 120 118 125 - ---------------------------------------------------------------------------------------------------------------- Allowance for obsolete and slow moving inventory For the year ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Balance at beginning of year 73 78 67 Additions (deductions) charged (credited) to cost and expenses, net 5 17 4 Other, net(1) (13) (22) 0 Currency adjustments 1 0 7 - ---------------------------------------------------------------------------------------------------------------- Balance at end of year 66 73 78 - ---------------------------------------------------------------------------------------------------------------- Deferred income tax valuation allowance For the year ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Balance at beginning of year 143 217 182 Additions (deductions) charged (credited) to cost and expenses, net 3 (70) (5) Other, net(1) 0 (8) 27 Currency adjustments 0 4 13 - ---------------------------------------------------------------------------------------------------------------- Balance at end of year 146 143 217 - ----------------------------------------------------------------------------------------------------------------
(1) Other, net is primarily additions and deductions applicable to acquisitions and divestitures, amounts written-off and miscellaneous other adjustments. F-34 EX-4.1 3 ex4-1.txt PROGRAM AGREEMENT Exhibit 4.1 30TH MARCH, 2001 CIBA SPECIALTY CHEMICALS PLC CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH AS ISSUERS - AND - CIBA SPECIALTY CHEMICALS HOLDING INC. AS GUARANTOR - AND - CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED DEUTSCHE BANK AG LONDON GOLDMAN SACHS INTERNATIONAL J.P. MORGAN SECURITIES LTD. UBS AG, ACTING THROUGH ITS BUSINESS GROUP UBS WARBURG AS DEALERS --------------------------------------------- PROGRAM AGREEMENT IN RESPECT OF A U.S.$2,000,000,000 EURO MEDIUM TERM NOTE PROGRAM (AMENDED AND RESTATED) -------------------------------------------- [GRAPHIC OMITTED] London CONTENTS Clause Page 1. Definitions and Interpretation..........................................2 2. Agreements to Issue and Purchase Notes..................................5 3. Conditions of Issue; Updating...........................................6 4. Representations and Warranties..........................................8 5. Undertakings of the Issuers and the Guarantor..........................10 6. Indemnity..............................................................14 7. Authority to Distribute Documents......................................15 8. Dealers' Undertakings..................................................16 9. Fees, Expenses and Stamp Duties........................................16 10. Termination of Appointment of Dealers..................................17 11. Appointment of New Dealers.............................................18 12. Increase in the Aggregate Nominal Amount of the Program................18 13. Status of the Arrangers................................................19 14. Counterparts...........................................................19 15. Communications.........................................................19 16. Benefit of Agreement...................................................19 17. Currency Indemnity.....................................................20 18. Calculation Agent......................................................20 19. Stabilisation..........................................................21 20. Contracts (Rights of Third Parties) Act 1999...........................21 21. Governing Law and Jurisdiction.........................................21 Appendices A. Initial Documentation List.............................................22 B. Selling Restrictions...................................................24 C. Part I - Form of Dealer Accession Letter - Program....................28 Part II - Form of Confirmation Letter - Program........................30 Part III - Form of Dealer Accession Letter - Note Issue................32 Part IV - Form of Confirmation Letter - Note Issue....................34 D. Letter Regarding Increase in the Nominal Amount of the Program.........36 E. Form of Subscription Agreement.........................................38 F. Form of Deed of Covenant...............................................44 Signatories.................................................................52 PROGRAM AGREEMENT in respect of a EURO MEDIUM TERM NOTE PROGRAM THIS AGREEMENT is made on 30th March, 2001 BETWEEN: (1) CIBA SPECIALTY CHEMICALS CORPORATION of 560 White Plains Road, Tarrytown, New York 10591-9005, United States ("CSC US"); (2) CIBA SPECIALTY CHEMICALS PLC of Hulley Road, Macclesfield, Cheshire SK10 2NX, England ("CSC UK"); (3) CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH of Chemiestrasse, D- 68623 Lampertheim, Germany ("CSC GERMANY"); (4) CIBA SPECIALTY CHEMICALS HOLDING INC. of Klybeckstrasse 141, CH-4002 Basle, Switzerland (the "GUARANTOR"); (5) CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED of One Cabot Square, London E14 4QJ; (6) DEUTSCHE BANK AG LONDON of Winchester House, 1 Great Winchester Street, EC2N 2DB; (7) GOLDMAN SACHS INTERNATIONAL of Peterborough Court, 133 Fleet Street, London EC4A 2BB; (8) J.P. MORGAN SECURITIES LTD. of 60 Victoria Embankment, London EC4Y 0JP; and (9) UBS AG, acting through its business group UBS Warburg ("UBS WARBURG") of 1 Finsbury Avenue, London EC2M 2PP. IT IS HEREBY AGREED as follows: WHEREAS: (A) CSC US, CSC UK, CSC Germany, the Guarantor and the Dealers (as defined below) entered into an amended and restated program agreement dated 16th June, 2000 (the "PRINCIPAL PROGRAM AGREEMENT") in respect of a U.S.$2,000,000,000 Euro Medium Term Note Program of CSC US, CSC UK and CSC Germany unconditionally and irrevocably guaranteed by the Guarantor. (B) This Agreement amends and restates the Principal Program Agreement. Any Notes issued under the Program on or after the date hereof shall be issued pursuant to this Agreement. This does not affect any Notes issued under the Program prior to the date of this Agreement. 2 1. DEFINITIONS AND INTERPRETATION (1) For the purposes of this Agreement, except where the context requires otherwise: "Agenty Agreement" means the amended and restated agreement of even date herewith between the Issuers, the Guarantor, the Agent (as defined below) and the other Paying Agents (as defined therein) under which the Agent is appointed as issuing agent, principal paying agent and agent bank for the purposes of the Program; "Agent" means The Chase Manhattan Bank as Agent under the Agency Agreement and any successor agent appointed by the Issuers and the Guarantor in accordance with the Agency Agreement; "Agreement Date" means, in respect of any Note, the date on which agreement is reached for the issue of such Note as contemplated in Clause 2 which, in the case of Notes issued on a syndicated basis or otherwise in relation to which a Subscription Agreement is entered into, shall be the date upon which the relevant Subscription Agreement is signed by or on behalf of all the parties; "Arranger" means each of UBS Warburg and any company appointed to the position of arranger for the Program or in respect of a particular issue of Notes under the Program and references in this Agreement to the "Arrangers" shall be references to the relevant Arranger; "Clearstream, Luxembourg" means Clearstream Banking, societe anonyme; "Confirmation Letter" means: (a) in respect of the appointment of a third party as a Dealer for the duration of the Program, the Confirmation Letter substantially in the form set out in Part II of Appendix C hereto; and (b) in respect of the appointment of a third party as a Dealer for a particular issue of Notes under the Program, the Confirmation Letter substantially in the form set out in Part IV of Appendix C hereto; "Dealer" means each of Credit Suisse First Boston (Europe) Limited, Deutsche Bank AG London, Goldman Sachs International, J.P. Morgan Securities Ltd., UBS Warburg, and any New Dealer and excludes any entity whose appointment has been terminated pursuant to Clause 10 and notice of termination of whose appointment has been given to the Agent by the Issuers and the Guarantor, and references in this Agreement to the "relevant Dealer" shall, in relation to any Note, be references to the Dealer or Dealers with whom the relevant Issuer has agreed the issue and purchase of such Note; "Dealer Accession Letter" means: (a) in respect of the appointment of a third party as a Dealer for the duration of the Program, the Dealer Accession Letter substantially in the form of Part I of Appendix C hereto; and 3 (b) in respect of the appointment of a third party as a Dealer for one or more particular issue(s) of Notes under the Program, the Dealer Accession Letter substantially in the form set out in Part III of Appendix C hereto; "Deed of Covenant" means the deed poll of even date herewith, substantially in the form set out in Appendix F hereto, executed as a deed by each Issuer in favour of certain accountholders with relevant clearing systems; "Deed of Guarantee" means the deed of guarantee of even date herewith executed by the Guarantor under which the Guarantor irrevocably guarantees the obligations of the Issuers in relation to the Program; "Euroclear" means Euroclear Bank S.A./N.V. as operator of the Euroclear System, or any successor to the business thereof; "FSA" means the Financial Services Act 1986; "Initial Documentation List" means the list of documents set out in Appendix A to this Agreement; "Issuer" means any of CSC US, CSC UK or CSC Germany in its capacity as an issuer of Notes, and references in this Agreement to the "relevant Issuer" shall, in relation to any issue of Notes, be references to the Issuer which is, or is intended to be, the issuer of such Notes; "Lead Manager" means, in relation to any Tranche of Notes, the person defined as the Lead Manager in the applicable Subscription Agreement or, when only one Dealer signs such Subscription Agreement, such Dealer; "Listing Agent" means, in relation to Notes which are, or are to be: (a) listed on the Luxembourg Stock Exchange, Banque Internationale a Luxembourg S.A. or such other listing agent as the Issuers and the Guarantor may from time to time appoint for the purposes of liaising with the Luxembourg Stock Exchange; and (b) listed on a Stock Exchange other than the Luxembourg Stock Exchange, such listing agent as the Issuers and the Guarantor may from time to time appoint for the purposes of liaising with such Stock Exchange; "Listing Rules" means, in the case of Notes which are, or are to be, listed on a Stock Exchange (including the Luxembourg Stock Exchange), the listing rules and regulations for the time being in force for such Stock Exchange; "Moody's" means Moody's Investors Service, Inc., or any successor to the rating agency business thereof; "New Dealer" means any entity appointed as an additional Dealer for the duration of the Program or for a particular issue of Notes in accordance with Clause 11; 4 "Note" means a note issued or to be issued by an Issuer pursuant to this Agreement, which Note may be represented by a Global Note or be in definitive form; "Offering Circular" means, subject to Clause 5(2), the Offering Circular relating to the Program as revised, supplemented, amended or updated from time to time, including in relation to each Tranche of Notes, the Pricing Supplement relating to such Tranche and such other documents as are from time to time incorporated therein by reference except that for the purpose of Clause 4(2) in respect of the Agreement Date and the Issue Date, the Offering Circular means the Offering Circular as at the Agreement Date but not including any subsequent revision, supplement or amendment thereto; "Pricing Supplement" means the pricing supplement issued in relation to each Tranche of Notes (substantially in the form of Annexe C to the Procedures Memorandum) as a supplement to the Offering Circular and giving details of that Tranche; "Procedures Memorandum" means the Operating and Administrative Procedures Memorandum dated 30th as amended or varied from time to time (in respect of any Tranche) by agreement between the relevant Issuer, the Guarantor and the relevant Dealer with the approval in writing of the Agent; "Program" means the Euro Medium Term Note Program established by this Agreement; "Relevant Party" means the Arranger, each Dealer (and for the purposes of Clause 8(3) each Issuer and the Guarantor), each of their respective affiliates and each person who controls them (within the meaning of section 15 of the Securities Act or section 20 of the Exchange Act) and each of their respective directors, officers, employees and agents; "Securities Act" means the Securities Act of 1933, as amended, of the United States of America; "Standard & Poor's" means Standard & Poor's Ratings Service, a division of the McGraw-Hill Companies Inc., or any successor to the rating agency business thereof; "Stock Exchange" means the Luxembourg Stock Exchange or any other or further stock exchange(s) on which any Notes may from time to time be listed or admitted to trading, and references in this Agreement to the "relevant Stock Exchange" shall, in relation to any Notes, be references to the Stock Exchange on which such Notes are from time to time, or are intended to be, listed or admitted to trading; and "Subscription Agreement" means an agreement (by whatever name called) in or subsequently in the form set out in Appendix E hereto or in such other form as may be agreed in writing between the relevant Issuer, the Guarantor and the Lead Manager which agreement shall be supplemental to this Agreement. (2) Terms and expressions defined in the Agency Agreement, the Conditions and the Pricing Supplement applicable to any Notes and not otherwise defined in this Agreement shall have the same meanings in this Agreement, except where the context otherwise requires. (3) In this Agreement, clause headings are inserted for convenience and ease of reference only and shall not affect the interpretation of this Agreement. 5 (4) All references in this Agreement to the provisions of any statute shall be deemed to be references to that statute as from time to time modified, extended, amended or re-enacted. (5) All references in this Agreement to an agreement, instrument or other document (including this Agreement, the Agency Agreement, the Deed of Covenant, the Deed of Guarantee, any Series of Notes and any Conditions appertaining thereto) shall be construed as a reference to that agreement, instrument or document as the same may be amended, modified, varied, supplemented or novated from time to time including, but without prejudice to the generality of the foregoing, this Agreement as supplemented by any Subscription Agreement. (6) Words denoting the singular number only shall include the plural number also and vice versa; words denoting the masculine gender only shall include the feminine gender also; and words denoting persons only shall include firms and corporations and vice versa. (7) Any reference herein to Euroclear and/or Clearstream, Luxembourg shall, wherever the context so permits, be deemed to include reference to any additional or alternative clearance system approved by the relevant Issuer, the Guarantor and the Agent. 2. AGREEMENTS TO ISSUE AND PURCHASE NOTES (1) Subject to the terms and conditions of this Agreement, any Issuer and the Guarantor may from time to time agree with any Dealer to issue, and any Dealer may agree to purchase, Notes. (2) On each occasion upon which an Issuer, the Guarantor and any Dealer agree on the terms of the issue and purchase of one or more Notes by such Dealer: (a) the relevant Issuer shall cause such Notes (which shall be initially represented by a Temporary Global Note) to be issued and delivered to a common depositary for Euroclear and Clearstream, Luxembourg so that the securities account(s) of such Dealer with Euroclear and/or with Clearstream, Luxembourg (as specified by such Dealer) is/are credited with such Notes on the agreed Issue Date, as described in the Procedures Memorandum; and (b) the relevant Dealer shall, subject to such Notes being so credited, cause the net purchase moneys for such Notes to be paid in the relevant currency by transfer of funds to the relevant cash account(s) of the Agent with Euroclear and/or Clearstream, Luxembourg or (in the case of syndicated issues) the relevant account of the relevant Issuer so that such payment is credited to such account(s) for value on the agreed Issue Date, as described in the Procedures Memorandum. (3) Unless otherwise agreed, the procedures which the parties must apply for the purposes of subclause (2) are set out in the Procedures Memorandum. Unless otherwise agreed between the relevant Issuer and the relevant Dealers, where more than one Dealer has agreed with the relevant Issuer to purchase a particular issue of Notes pursuant to this Clause, the obligations of such Dealers so to purchase the Notes shall be joint and several. (4) Where the relevant Issuer and the Guarantor agree with two or more Dealers to issue, and such Dealers agree to purchase, Notes on a 6 syndicated basis, the relevant Issuer and the Guarantor shall enter into a Subscription Agreement with such Dealers. The Issuer and the Guarantor may also enter into a Subscription Agreement with one Dealer only. For the avoidance of doubt, the Agreement Date in respect of any such issue shall be the date on which the Subscription Agreement is signed by or on behalf of all the parties to it. (5) Each issue of Notes denominated in a currency in respect of which particular laws, guidelines, regulations, restrictions or reporting requirements apply will only be issued in circumstances which comply with such laws, guidelines, regulations, restrictions or reporting requirements. 3. CONDITIONS OF ISSUE; UPDATING (1) First issue The Arrangers shall circulate to each Dealer all of the documents and confirmations described in the Initial Documentation List immediately after those documents and confirmations have been given to the Arrangers by each Issuer and the Guarantor. Before any Issuer and the Guarantor reach their first agreement with any Dealer for the issue and purchase of Notes, that Dealer shall have received, and found satisfactory, in its reasonable opinion, all of the documents and confirmations described in the Initial Documentation List. (2) Each issue The obligations of a Dealer under any agreement for the issue and purchase of Notes made pursuant to Clause 2 are conditional upon: (a) there having been, as at the proposed Issue Date, no adverse change in the condition (financial or otherwise) of the relevant Issuer and the Guarantor (as the case may be) which is material in the context of the issue and offering of the Notes from that set forth in the Offering Circular on the relevant Agreement Date, nor the occurrence of any event making untrue or incorrect to an extent which is material as aforesaid any of the warranties contained in Clause 4; (b) there being no outstanding breach of any of the obligations of either the relevant Issuer or (as the case may be) the Guarantor under this Agreement, the Notes, the Agency Agreement, the Deed of Covenant or the Deed of Guarantee which has not been waived by the relevant Dealer on or prior to the proposed Issue Date; (c) subject to Clause 12, the aggregate nominal amount of the Notes to be issued, when added to the aggregate nominal amount of all Notes outstanding (as defined in the Agency Agreement) on the proposed Issue Date, not exceeding U.S.$2,000,000,000 or its equivalent in other currencies as determined pursuant to subclause (5); (d) in the case of Notes which are intended to be listed, the relevant Stock Exchange having agreed to list such Notes; (e) no meeting of the holders of Notes (or any of them) issued by the relevant Issuer (to consider matters which might in the reasonable opinion of the relevant Dealer be considered to have a material adverse effect on the issue of the Notes) having been duly convened but not yet held or, if held but adjourned, the adjourned meeting 7 having not been held and neither the relevant Issuer nor the Guarantor being aware of any circumstances which are likely to lead to the convening of such a meeting; (f) there having been, between the Agreement Date and the Issue Date for such Notes, no such change in national or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the opinion of the relevant Dealer (after consultation with the relevant Issuer and the Guarantor if practicable), be likely to prejudice materially the success of the offer, sale or distribution by such Dealer of the Notes proposed to be issued; (g) the forms of the Pricing Supplement, the Temporary Global Note, the Permanent Global Note and/or the Definitive Notes in relation to the relevant Tranche and the relevant settlement procedures, having been agreed by the relevant Issuer, the Guarantor, the relevant Dealer and the Agent; (h) the relevant currency being generally accepted for settlement by Euroclear and Clearstream, Luxembourg; and (i) any calculations or determinations which are required by the relevant Conditions prior to the Issue Date having been duly made. (3) Waiver Any Dealer, on behalf of itself only (or, in relation to a syndicated issue, the Lead Manager on behalf of itself and the other Managers) may by notice in writing to the relevant Issuer and the Guarantor waive any of the conditions precedent contained in subclauses (1) and (2) (save for the condition precedent contained in subclause (2)(c)) in so far as they relate to an issue of Notes to that Dealer. (4) Updating of legal opinions Before the first issue of Notes occurring after the end of each annual period commencing on the date hereof and on such other occasions as a Dealer so requests in relation either to any Issuer or the Guarantor or both (on the basis of reasonable grounds), the Issuers and/or the Guarantor will procure that a further legal opinion in such form and with such content as the Dealers may reasonably require is delivered, at the expense of the Issuers (as to which each of the Issuers shall have joint and several responsibility as between itself and the Guarantor to the Dealers). If at, or prior to, the time of any agreement to issue and purchase Notes under Clause 2 such request is given in writing with respect to the Notes to be issued, the receipt of such opinion in a form satisfactory to the relevant Dealer shall be a further condition precedent to the issue of those Notes to the relevant Dealer. (5) Determination of amounts outstanding For the purposes of subclause (2)(c): (a) the U.S. dollar equivalent of Notes denominated in a currency other than U.S. dollars shall be determined, at the discretion of the Issuer, either as of the Agreement Date for such Notes or on the preceding day on which commercial banks and foreign exchange markets are open for general business in London, in each case on the basis 8 of the spot rate for the sale of U.S. dollars against the purchase of the relevant currency in the London foreign exchange market quoted by any leading bank selected by the relevant Issuer or the Guarantor on the relevant day of calculation; (b) the U.S. dollar equivalent of Dual Currency Notes and Indexed Notes shall be calculated in the manner specified above by reference to the original nominal amount of such Notes; (c) the U.S. dollar equivalent of Zero Coupon Notes and other Notes issued at a discount or premium shall be calculated in the manner specified above by reference to the net proceeds received by the relevant Issuer for the particular issue; and (d) the U.S. dollar equivalent of Partly Paid Notes shall be the nominal amount regardless of the amount of purchase moneys paid. 4. REPRESENTATIONS AND WARRANTIES (1) As at the date of this Agreement each of the Issuers and the Guarantor (each Issuer severally as to itself and the Guarantor jointly and severally with the relevant Issuer as to the relevant Issuer and severally as to itself) warrant to and agree with the Dealers and each of them as follows: (a) that the Offering Circular contains all information with regard to the Issuers, the Guarantor and the Notes which is material in the context of the Program and the issue and offering of Notes thereunder, that the information contained in the Offering Circular with respect to the Issuers, the Guarantor and the Notes is true and accurate in all material respects and is not misleading in any material respect, that the opinions and intentions expressed therein with respect to the Issuers, the Guarantor and the Notes are honestly held, that there are no other facts with respect to the Issuers, the Guarantor and the Notes the omission of which would make the Offering Circular as a whole or any of such information or the expression of any such opinions or intentions misleading in any material respect and that each of the Issuers and the Guarantor have made all reasonable enquiries to ascertain all facts material for the purposes aforesaid, provided that the warranty and agreement in this paragraph (a) shall not extend to information in the Offering Circular under the heading "Subscription and Sale"; (b) that, except as otherwise indicated in the Offering Circular, there has been no adverse change in the financial position or results of operations of the Guarantor and its consolidated subsidiaries taken as a whole which is material in the context of the issue and offering of any Notes to be issued under the Program since the date as at which the last published audited consolidated accounts of the Guarantor were prepared; (c) that each of the Issuers and the Guarantor is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and that the creation of Notes under the Program, their offering on the terms and subject to the conditions contained herein, the execution and issue by the relevant Issuer of, and compliance by the relevant Issuer with the terms of, the Notes, the Receipts and the Coupons and the execution and delivery by or on behalf of each 9 Issuer of, and compliance by each Issuer with the terms of, this Agreement, the Deed of Covenant and the Agency Agreement and the execution and delivery by or on behalf of the Guarantor, and compliance by the Guarantor with the terms of, the Deed of Guarantee: (i) are in accordance with the provisions of the laws of the jurisdiction of the relevant company and with the constitutional documents of the relevant company; (ii) do not infringe the terms of, or constitute a default under, any trust deed, agreement or other instrument or obligation to which any of the Issuers or the Guarantor is a party or by which it is bound; and (iii) have been duly authorised by each of the Issuers and/or the Guarantor (as the case may be), so that Notes issued under the Program, the Receipts, the Coupons and the aforesaid agreements constitute, or upon due authentication and issue or delivery will constitute, valid and legally binding obligations of the relevant Issuer and/or the Guarantor (as the case may be) in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, fraudulent transfer, moratorium and other similar laws affecting creditors' rights generally from time to time in effect, and to general principles of equity, regardless of whether considered in a proceeding in law or at equity); (d) that no condition, omission, event or act has occurred which would (or, with the giving of notice and/or the lapse of time would) constitute an Event of Default; (e) that, except as disclosed in the Offering Circular, none of the Issuers or the Guarantor is engaged (whether as defendant or otherwise) in, nor has any of the Issuers or the Guarantor knowledge of the existence of, or any threat of, any legal, arbitration, administrative or other proceedings the result of which might have a material adverse effect on the financial position or operations of any of the Issuers or the Guarantor in the context of the issue of Notes under the Program; (f) that all consents, approvals, authorisations, orders and clearances of all regulatory authorities required by the Issuers or the Guarantor under the laws of Germany, the United States of America, Switzerland, the Grand Duchy of Luxembourg and the United Kingdom (as the case may be) for or in connection with the creation and offering of Notes under the Program, the execution and issue of, and compliance by each Issuer and the Guarantor with the terms of, Notes issued under the Program (including any Global Note), the Receipts and the Coupons and the execution and delivery of, and compliance with the terms of, this Agreement, the Agency Agreement, the Deed of Covenant and the Deed of Guarantee have been obtained and are in full force and effect and that the Issuers and the Guarantor have complied with all legal and other requirements necessary to ensure that, upon due authentication and issue in the manner aforesaid, Notes issued under the Program, the Receipts and the Coupons will represent valid and legally binding obligations of the relevant Issuer and the Guarantor, payable (as regards the Notes, any Global Note, the Receipts and the Coupons) in accordance with their terms, that this Agreement, the Agency Agreement, the Deed of Covenant and 10 the Deed of Guarantee constitute valid and legally binding obligations of the Issuers and/or the Guarantor (as the case may be) in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, fraudulent transfer, moratorium and other similar laws affecting creditors' rights generally from time to time in effect, and to general principles of equity, regardless of whether considered in a proceeding in law or at equity) and that on issuance, due payment of the principal and interest (including any additional amounts payable under the Conditions of the Notes) in respect of Notes issued under the Program and compliance by the Issuers and/or the Guarantor with their terms and with the terms of this Agreement, the Agency Agreement, the Deed of Covenant and the Deed of Guarantee will not infringe any existing such laws or the terms of any such consent, approval, authorisation, order or clearance; (g) that the net proceeds from the issue of the Notes will be used outside Switzerland; and (h) that none of the Issuers, the Guarantor nor any affiliate (as defined in Rule 405 under the Securities Act) nor any persons (other than the Dealers, any of their respective affiliates or any person acting on behalf of any of the foregoing) acting on behalf of any of them has engaged or will engage in any directed selling efforts (as defined in Regulation S under the Securities Act) with respect to the Notes, and the Issuers, the Guarantor and any affiliate and all persons (other than the Dealers, any of their respective affiliates or any person acting on behalf of any of the foregoing) acting on behalf of any of them with respect to the Notes have complied and will comply with the offering restrictions requirements of Regulation S under the Securities Act with respect thereto. (2) With regard to each issue of Notes under the Program, the relevant Issuer and the Guarantor shall be deemed to repeat the warranties and agreements contained in subclause (1) as at the Agreement Date for such Notes (any agreement on such Agreement Date being deemed to have been made on the basis of, and in reliance on, such warranties and agreements) and as at the Issue Date of such Notes. (3) The Issuers and the Guarantor shall be deemed to repeat the representations and warranties contained in subclause (1)(a) on each date on which the Offering Circular is revised, supplemented or amended. The Issuers and the Guarantor shall be deemed to repeat the representations and warranties contained in subclause (1) on each date on which the aggregate nominal amount of the Program is increased in accordance with Clause 12. (4) The warranties and agreements contained in this Clause 4 shall continue in full force and effect notwithstanding any investigation by or on behalf of the Dealers or completion of the subscription and issue of any Notes. 5. UNDERTAKINGS OF THE ISSUERS AND THE GUARANTOR (1) Notification of material developments Each Issuer and the Guarantor shall, prior to the time of an agreement under Clause 2 (or, if such party becomes aware of the occurrence thereof after such time but prior to the completion of the distribution by the 11 Dealers of the relevant Notes, promptly upon becoming aware of the occurrence thereof), notify each Dealer of: (a) any Event of Default or any condition, event or act in relation to itself of which it is aware which, with the giving of notice and/or the lapse of time (after the issue of any Notes) would constitute an Event of Default or any breach of the representations and warranties or undertakings contained in this Agreement, the Agency Agreement, the Deed of Covenant, the Deed of Guarantee or any of them; and (b) any development affecting such Issuer or the Guarantor or their respective businesses of which it is aware which, in the reasonable opinion of such Issuer or the Guarantor (as the case may be), is material in the context of the Program or any issue of Notes thereunder. If, following the time of an agreement under Clause 2 and before the issue of the relevant Notes, the relevant Issuer or the Guarantor becomes aware that the conditions specified in Clause 3(2) will not be satisfied in relation to that issue, the relevant Issuer or the Guarantor (if applicable), as the case may be, shall forthwith notify the relevant Dealer to that effect giving full details thereof. In such circumstances, the relevant Dealer shall be entitled (but not bound) by written notice to the relevant Issuer and the Guarantor to be released and discharged from its obligations under the agreement reached under Clause 2. Without prejudice to the generality of the foregoing, each Issuer and the Guarantor shall from time to time promptly furnish to each Dealer such information relating to such Issuer and/or the Guarantor (as the case may be) as such Dealer may reasonably request, provided that such information is relevant in the context of the Program or an issue of Notes thereunder. (2) UPDATING OF OFFERING CIRCULAR Following the publication of the Guarantor's audited financial information for the year ended 31st December, 2001, and at the end of each annual period thereafter and in the event of a change in the condition of any or all of the Issuers or the Guarantor which is material in the context of the Program or the issue of the Notes thereunder, the Issuers and the Guarantor shall update or amend the Offering Circular (following consultation with the Arrangers on behalf of the Dealers) by the publication of a supplement thereto, in a form approved by the Dealers, in the light of such change in condition. The Offering Circular shall, as specified therein, be deemed to incorporate by reference therein the most recently published annual accounts (if any) of each Issuer and the Guarantor and the most recently published annual report of the Guarantor from time to time. Upon any new financial statements being incorporated in the Offering Circular as aforesaid or upon the publication of a revised Offering Circular or a supplement to the Offering Circular, the Issuers or the Guarantor (as the case may be) shall promptly supply to each Dealer and the Agent such number of copies of such financial statements, revised Offering Circular or supplement as each Dealer or the Agent (as the case may be) may reasonably request. Until a Dealer receives such financial statements, revised Offering Circular or supplement, the definition of "Offering Circular" in Clause 1(1) shall, in relation to such Dealer, mean the Offering Circular prior to the publication of such financial statements, revised Offering Circular or supplement. 12 (3) LISTING The Issuers and the Guarantor shall cause an initial application to be made for Notes issued under the Program to be listed on the Luxembourg Stock Exchange or on such other Stock Exchange as the Issuers, the Guarantor and the Arrangers may agree. In connection with such application in respect of any Series of Notes which is intended to be so listed, the relevant Issuer and the Guarantor (if applicable) shall endeavour to obtain the listing as promptly as reasonably practicable and the relevant Issuer and the Guarantor (if applicable) shall make reasonable endeavours to furnish any and all documents, instruments, information and undertakings that may be necessary or advisable in order to obtain and maintain the listing. If, after the preparation of the Offering Circular for submission to the relevant Stock Exchange and before whichever is the later of the Issue Date of any Notes and the date on which listing becomes effective: (a) there is a significant change which is material in the context of the Notes affecting any matter contained in the Offering Circular whose inclusion was required by the relevant Stock Exchange; or (b) a significant new matter arises which is material in the context of the Notes and the inclusion of information in respect of which would have been so required if it had arisen when the Offering Circular was prepared, the relevant Issuer and the Guarantor shall give to the Listing Agent and to each Dealer full information about the change or matter and shall publish such supplementary listing particulars (in a form approved by the Listing Agent) as may be required by the relevant Stock Exchange, and shall otherwise comply with the Listing Rules in that regard. Each Issuer and the Guarantor shall comply with any undertakings given by it from time to time to the relevant Stock Exchange(s) in connection with any Notes listed on such Stock Exchange(s) or the listing thereof and, without prejudice to the generality of the foregoing, shall furnish or procure to be furnished to the relevant Stock Exchange(s) all such information as the relevant Stock Exchange(s) may require in connection with the listing on such Stock Exchange(s) of any Notes. If any Notes cease to be listed on the relevant Stock Exchange, the relevant Issuer and the Guarantor shall endeavour promptly to list such Notes on a stock exchange to be agreed between the Issuers, the Guarantor and the relevant Dealers. (4) AGENCY AGREEMENT, DEED OF COVENANT AND DEED OF GUARANTEE Each Issuer and the Guarantor undertakes that it will not: (a) without prior consultation with the Dealers terminate the Agency Agreement, the Deed of Covenant or the Deed of Guarantee or effect or permit to become effective any amendment to the Agency Agreement, the Deed of Covenant or the Deed of Guarantee which, in the case of an amendment, would or might adversely affect the interests of any Dealer or of any holder of Notes issued before the date of such amendment; or (b) without prior consultation with the Dealers appoint a different Agent or paying agent(s) under the Agency Agreement, 13 and each Issuer and the Guarantor will promptly notify each of the Dealers of any termination of, or amendment to, the Agency Agreement, the Deed of Covenant or the Deed of Guarantee and of any change in the Agent or paying agent(s) under the Agency Agreement. (5) LAWFUL COMPLIANCE Each Issuer and the Guarantor will at all times ensure that all necessary action is taken and all necessary conditions are fulfilled (including, without limitation, the obtaining of all necessary consents) so that it may lawfully comply with its obligations under the Notes, this Agreement, the Agency Agreement, the Deed of Covenant and the Deed of Guarantee and, further, so that it may comply with any applicable laws, regulations and guidance from time to time promulgated by any governmental and regulatory authorities relevant in the context of the issue of Notes under the Program. (6) AUTHORISED REPRESENTATIVE Each Issuer and the Guarantor will notify the Dealers immediately in writing if any of the persons named in the list referred to in paragraph 3 of the Initial Documentation List ceases to be authorised to take action on behalf of such Issuer and the Guarantor or if any additional person becomes so authorised together, in the case of an additional authorised person, with evidence satisfactory to the Dealers that such person has been so authorised. (7) AUDITORS' COMFORT LETTERS Each Issuer and the Guarantor will at the time of the preparation of the initial Offering Circular and thereafter upon each occasion when the same may be amended or updated, whether by means of information incorporated by reference or otherwise (insofar as such amendment or up-dating concerns or contains financial information about any of the Issuers or the Guarantor), at the expense of the Issuers and the Guarantor (as to which each of the Issuers will have joint and several responsibility as between itself and the Guarantor) and at other times whenever so requested by the Dealers or any of them (on the basis of reasonable grounds) deliver to the relevant Dealer a comfort letter or comfort letters from independent auditors of the Issuers (or any of them) and the Guarantor in such form and with such content as the relevant Dealer may reasonably request. (8) NO OTHER ISSUES During the period commencing on an Agreement Date in respect of any Notes and ending on the Issue Date with respect to those Notes, none of the Issuers or the Guarantor will, without prior consultation with the relevant Dealer, issue or agree to issue any other listed notes, bonds or other securities of whatsoever nature (other than Notes to be issued under the Program) where such notes, bonds or other securities would have the same maturity and currency as the Notes to be issued on the relevant Issue Date. (9) INFORMATION ON NOTEHOLDERS' MEETINGS Each Issuer or the Guarantor will, at the same time as it is despatched, furnish the Dealers with a copy of every notice of a meeting of the holders of the Notes (or any of them) which is despatched at the 14 instigation of the relevant Issuer or the Guarantor (as the case may be) and will notify the Dealers immediately after it becomes aware that a meeting of the holders of the Notes (or any of them) has been convened by holders of the Notes. (10) RATING Each Issuer (failing whom the Guarantor) undertakes promptly to notify the Dealers of any change in the rating given by Standard & Poor's, Moody's or such other rating agency as notified to the Dealers for any of the Notes to be issued under the Program by it, or upon it becoming aware that such rating is listed on 'Creditwatch' or other similar publication of formal review by the relevant rating agency. 6. INDEMNITY (1) Without prejudice to the other rights or remedies of the Dealers, each Issuer (severally as to itself) and the Guarantor (jointly and severally with the relevant Issuer and severally as to itself) undertakes to the Arranger and each Dealer that if that Arranger or Dealer or any Relevant Party relating to that Arranger or Dealer incurs any liability, damages, cost, loss or expense (including, without limitation, legal fees, costs and expenses) (a "Loss") arising out of, in connection with, or based on: (a) any failure by the relevant Issuer to issue on the agreed Issue Date any Notes which a Dealer has agreed to purchase (unless such failure is as a result of the failure by the relevant Dealer to pay the aggregate purchase price for such Notes); or (b) any actual or alleged breach of the representations, warranties and undertakings contained in, or made or deemed to be made by the relevant Issuer and/or the Guarantor under, this Agreement (any such allegation being made by a person other than a Relevant Party); or (c) any untrue or misleading (or allegedly untrue or misleading) statement, which is material (or allegedly material) in the context of the Program and the issue and offering of Notes by such Issuer thereunder, in, or any material omission (or alleged omission) from, the Offering Circular or any part thereof (any such allegation being made by a person other than a Relevant Party). the relevant Issuer or, as the case may be, the Guarantor shall (subject as provided in subclause (2)) pay to that Arranger or Dealer on demand an amount equal to such Loss. No Arranger or Dealer shall have any duty or obligation, whether as fiduciary or trustee for any Relevant Party or otherwise, to recover any such payment or to account to any other person for any amounts paid to it under this Clause 6(1). (2) If any action, proceeding, claim or demand shall be brought or asserted against any Relevant Party in respect of which an indemnity is to be sought against another party under Clause 6(1) (the "Indemnifying Person"), the Relevant Party shall promptly notify the Indemnifying Person in writing, and the Indemnifying Person shall have the option in the name of the Relevant Party to assume the defence thereof, including the employment of legal advisers approved by the Relevant Party (which approval shall not be unreasonably withheld or delayed) subject to the payment by the Indemnifying Person of all fees and expenses relating thereto provided that such legal advisers shall not, save with the consent of the Relevant Party (which consent shall not be unreasonably withheld or delayed), also be legal advisers to the Indemnifying Person 15 and provided further that if the defendants in any such action, proceeding, claim or demand include the Relevant Party and the Relevant Party shall have reasonably concluded that there may be legal defences available to the Relevant Party which are different from or additional to those available to the Indemnifying Person and in the event that the Indemnifying Person does not wish to assume, or is prevented from assuming, such different or additional legal defences on behalf of the Relevant Party, the Relevant Party shall have the right, at the expense of the Indemnifying Person, to select separate legal advisers to assume such legal defences and otherwise to participate in the defence of such action, proceeding, claim or demand on behalf of the Relevant Party. Upon receipt of notice from the Indemnifying Person of its election so to assume the defence of any such action, proceeding, claim or demand and approval by the Relevant Party as aforesaid of legal advisers, the Indemnifying Person will not be liable to any Relevant Party for any fees or expenses subsequently incurred by such Relevant Party in connection with the defence thereof unless: (i) the Relevant Party shall have employed legal advisers in connection with the assumption of legal defences in accordance with the proviso to the preceding paragraph; or (ii) the Indemnifying Person shall not have employed legal advisers, or taken other measures, approved by or on behalf of the Relevant Party to represent such Relevant Party within a reasonable time after notice has been received by the Indemnifying Person of commencement of the action or proceedings or the making of any claim or demand; or (iii) the Indemnifying Person has authorised the employment of separate legal advisers by the Indemnifying Person, in which case the Indemnifying Person will reimburse the Relevant Party all such reasonable fees and expenses. Each Relevant Party undertakes not to compromise or settle any such action, proceedings, claim or demand effected without the written consent of the Indemnifying Person. Each Indemnifying Person undertakes not to compromise or settle any such action, proceedings, claims or demands effected without the written consent of the Relevant Party (consent is not to be unreasonably withheld or delayed). If any such action, proceeding, claim or demand shall be settled with the authority and written consent of the Indemnifying Person or if there be a final judgment for the plaintiff in relation thereto in respect of which the Relevant Party is entitled to indemnification hereunder, the Indemnifying Person agrees to indemnify and hold harmless the Relevant Party from and against any loss or liability by reason of such settlement or judgment (other than any fees and expenses incurred in circumstances where the Indemnifying Person is not to be liable therefor under the preceding paragraph). 7. AUTHORITY TO DISTRIBUTE DOCUMENTS Subject to Clause 8 below, each Issuer and the Guarantor hereby authorises each of the Dealers on behalf of each Issuer and the Guarantor to provide copies of the Offering Circular and such additional written information as the relevant Issuer or the Guarantor shall, in writing, 16 provide to and authorise the Dealers so to use to actual and potential purchasers of Notes. 8. DEALERS' UNDERTAKINGS (1) Each Dealer agrees to comply with the restrictions and agreements set out in Appendix B hereto. (2) Each Dealer acknowledges that: (i) none of the Issuers nor the Guarantor has authorised it to give any information or make any representation in connection with any offering, issue, subscription or sale of any Notes other than those contained in the Offering Circular or the information approved in writing and provided by such Issuer or the Guarantor pursuant to Clause 7; (ii) it will not circulate any version of the Offering Circular other than the latest version of the Offering Circular published by such Issuer and made available to such Dealer from time to time; and (iii) it shall promptly cease use or distribution of the Offering Circular or any additional written information provided for in Clause 7 upon receipt of notice from any Issuer or the Guarantor that the Offering Circular or such information requires updating or correction. (3) Each Dealer undertakes with each of the Issuers, the Guarantor and the other Dealers to indemnify, defend and hold harmless the Relevant Party against any losses, liabilities, claims, charges, actions and demands, and any reasonable out-of-pocket costs and expenses which the Relevant Party may incur or which may be made against the Relevant Party arising out of, or in connection with: (a) the making by such Dealer of any unauthorised representation or the giving by it of any information which is not contained in the Offering Circular or otherwise authorised in accordance with Clause 7; or (b) any failure by such Dealer to observe any of the restrictions or agreements contained in Appendix B hereto. (4) If any claim, demand or action is brought against any such Relevant Party in respect of which indemnity may be sought from a Dealer pursuant to Clause 8(3), the provisions of Clause 6(2) shall apply, mutatis mutandis, in relation thereto. 9. FEES, EXPENSES AND STAMP DUTIES (1) The Issuers and the Guarantor jointly and severally undertake that they shall: (a) pay to each Dealer all commissions from time to time agreed in connection with the sale of any Notes to that Dealer (and any value added or other similar tax thereon); and 17 (b) pay (together with any value added tax or other similar tax thereon): (i) the fees and expenses of their legal advisers and auditors; and (ii) the cost of listing and maintaining the listing of any Notes to be issued under the Program which are to be listed on a Stock Exchange; (2) The Issuers and the Guarantor jointly and severally undertake that they shall: (a) pay (together with any value added tax or other similar tax thereon): (i) the fees and expenses payable to the Agent and any paying agents; (ii) all expenses (other than those of the Agent, any paying agent or the Dealers) in connection with the issue, authentication, packaging and initial delivery of Notes and the preparation of Global Notes, this Agreement, the Agency Agreement, the Deed of Guarantee and the preparation and printing of Notes, the Offering Circular and any amendments or supplements thereto (including the updating of any legal opinions issued pursuant to Clause 3(4) and of any auditors' comfort letters issued pursuant to Clause 5(7)); and (iii) the cost of any publicity agreed in writing by any Issuer or the Guarantor in connection with the Program or any issue of any Notes; (b) pay to UBS Warburg such amount as is separately agreed in relation to the fees and disbursements of the legal advisers appointed to represent the Dealers (including any value added tax or other similar tax thereon) in connection with the negotiation, preparation, execution and delivery of this Agreement, the Agency Agreement, the Deed of Covenant, the Deed of Guarantee and any documents referred to in any of them and any other documents required in connection with the creation of the Program; and (c) pay promptly, and in any event before any penalty becomes payable, any stamp, documentary, registration or similar duty or tax (including any stamp duty reserve tax) payable in Germany, the United States of America, the United Kingdom, Switzerland or the Grand Duchy of Luxembourg in connection with the entry into, performance, enforcement or admissibility in evidence of this Agreement, any communication pursuant hereto, the Agency Agreement, the Deed of Covenant, the Deed of Guarantee or any Note and shall indemnify each Dealer against any liability with respect to or resulting from any delay in paying or omission to pay any such duty or tax. 10. TERMINATION OF APPOINTMENT OF DEALERS The Issuers, the Guarantor or (as to itself) a Dealer may terminate the arrangements described in this Agreement by giving not less than 30 days' written notice to the other parties hereto. The Issuers or the Guarantor may terminate the appointment of a Dealer or Dealers by giving not less than 30 days' written notice to such Dealer or Dealers (with a copy promptly thereafter to all the other Dealers and the Agent). Termination shall not affect any rights or obligations (including but not limited to 18 those arising under Clause 6, 8 or 9) which have accrued at the time of termination or which accrue thereafter in relation to any act or omission or alleged act or omission which occurred prior to such time. 11. APPOINTMENT OF NEW DEALERS (1) Nothing in this Agreement shall prevent the Issuers or the Guarantor from appointing one or more New Dealers for the duration of the Program or, with regard to a particular issue of Notes, the relevant Issuer and the Guarantor (if applicable) from appointing one or more New Dealers for the purposes of that issue, in either case upon the terms of this Agreement and provided that, unless such appointment is effected pursuant to a Subscription Agreement: (a) any New Dealer shall have first delivered to the Issuers and the Guarantor a Dealer Accession Letter; and (b) the Issuers and the Guarantor shall have delivered to such New Dealer a Confirmation Letter. Upon receipt of the relevant Confirmation Letter or execution of the relevant Subscription Agreement, as the case may be, each such New Dealer shall, subject to the terms of the relevant Dealer Accession Letter and the relevant Confirmation Letter or the relevant Subscription Agreement, as the case may be, become a party to this Agreement, vested with all authority, rights, powers, duties and obligations of a Dealer as if originally named as a Dealer hereunder provided that, except in the case of the appointment of a New Dealer for the duration of the Program, following the issue of the Notes of the relevant Tranche, the relevant New Dealer shall have no further such authority, rights, powers, duties or obligations except such as may have accrued or been incurred prior to or in connection with the issue of such Notes. (2) The Issuers and/or the Guarantor shall promptly notify the Agent and the other Dealers of any appointment of a New Dealer for the duration of the Program by supplying to such parties a copy of any Dealer Accession Letter and Confirmation Letter. No such notice shall be required to be given in the case of an appointment of a New Dealer for a particular issue of Notes. 12. INCREASE IN THE AGGREGATE NOMINAL AMOUNT OF THE PROGRAM (1) From time to time the Issuers and the Guarantor may wish to increase the aggregate nominal amount of the Notes that may be issued under the Program. In such circumstances, the Issuers and the Guarantor may request such an increase (subject as set out in subclause (2)) by delivering to the Listing Agent and the Dealers the letter substantially in the form set out in Appendix D hereto. Unless notice to the contrary is received by the Issuers or the Guarantor no later than 10 days after notice was given to the Dealers and the Listing Agent, each such Dealer and the Listing Agent will be deemed to have given its consent to the increase in the nominal amount of the Program, whereupon all references in this Agreement and the Procedures Memorandum to a Euro Medium Term Note Program of a certain nominal amount, shall be and shall be deemed to be references to a Euro Medium Term Note Program of the increased nominal amount. (2) Notwithstanding subclause (1), the right of the Issuers and the Guarantor to increase the aggregate nominal amount of the Program shall be subject to each Dealer having received and found satisfactory all the documents 19 and confirmations described in the Initial Documentation List (with such changes as may be relevant, with reference to the circumstances at the time of the proposed increase as are agreed between the Issuers, the Guarantor and the Dealers), and the delivery of any further conditions precedent that any of the Dealers may reasonably require, including, without limitation, the production of a supplementary Offering Circular by the Issuers and the Guarantor and any further or other documents required by the relevant Stock Exchange(s) for the purpose of listing the Notes to be issued under the Program on the relevant Stock Exchange(s). The Arrangers shall circulate to the Dealers all the documents and confirmations described in the Initial Documentation List and any further conditions precedent so required. Any Dealer must notify the Arrangers, the Issuers and the Guarantor within 10 business days of receipt if it considers, in its reasonable opinion, such documents, confirmations and, if applicable, such further conditions precedent to be unsatisfactory. 13. STATUS OF THE ARRANGERS (1) Each of the Dealers agrees that each Arranger has only acted in an administrative capacity to facilitate the establishment and/or maintenance of the Program and has no responsibility to it for (a) the adequacy, accuracy, completeness or reasonableness of any representation, warranty, undertaking, agreement, statement or information in the Offering Circular, any Pricing Supplement, this Agreement or any information provided in connection with the Program or (b) the nature and suitability of it of all legal, tax and accounting matters and all documentation in connection with the Program or any Tranche. (2) The Arrangers shall have only those duties, obligations and responsibilities expressly specified in this Agreement. 14. COUNTERPARTS This Agreement may be signed in any number of counterparts, all of which taken together shall constitute one and the same instrument. 15. COMMUNICATIONS (1) All communications shall be by fax or letter delivered by hand or (but only where specifically provided in the Procedures Memorandum) by telephone. Each communication shall be made to the relevant party at the fax number or address or telephone number and, in the case of a communication by fax or letter, marked for the attention of, or (in the case of a communication by telephone) made to, the person(s) from time to time specified in writing by that party to the other for the purpose. The initial telephone number, fax number and address of, and person(s) so specified by, each party are set out on the signature pages hereof. (2) A communication shall be deemed received (if by fax) when an acknowledgement of receipt is received, (if by telephone) when made or (if by letter) when delivered, in each case in the manner required by this clause. Every communication shall be irrevocable save in respect of any manifest error therein. 16. BENEFIT OF AGREEMENT (1) This Agreement shall be binding upon and shall inure for the benefit of each Issuer, the Guarantor and each Dealer and their respective successors and permitted assigns. 20 (2) The Dealers may assign or transfer their rights or obligations under this Agreement with the prior written consent of the Issuers and the Guarantor (except for an assignment and/or transfer of all of a Dealer's rights and obligations under this Agreement by operation of law resulting directly from a merger by, or sale of all or substantially of all the assets of, such Dealer). If the Dealers assign their rights or transfer their obligations as provided in this clause, the relevant assignee or transferee shall be treated as if it were a party to this Agreement with effect from the date on which such assignment or transfer takes effect; provided that any transfer shall only become effective when the Issuers and the Guarantor have received an undertaking from the transferee to be bound by this Agreement and to perform the obligations transferred to it (in form and substance reasonably satisfactory to the Issuers and the Guarantor). 17. CURRENCY INDEMNITY If, under any applicable law and whether pursuant to a judgment being made or registered against any Issuer and/or (as the case may be) the Guarantor or in the liquidation, insolvency or analogous process of the relevant Issuer and/or (as the case may be) the Guarantor or for any other reason, any payment under or in connection with this Agreement is made or falls to be satisfied in a currency (the "other currency") other than that in which the relevant payment is expressed to be due (the "required currency") under this Agreement, then, to the extent that the payment (when converted into the required currency at the rate of exchange on the date of payment or, if it is not practicable for the relevant Dealer to purchase the required currency with the other currency on the date of payment, at the rate of exchange as soon thereafter as it is practicable for it to do so) actually received by the relevant Dealer falls short of the amount each due under the terms of this Agreement, the relevant Issuer and the Guarantor each undertakes that it shall, as a separate and independent obligation, indemnify and hold harmless each Dealer against the amount of such shortfall. For the purpose of this clause "rate of exchange" means the rate at which the relevant Dealer is able on the London foreign exchange market on the relevant date to purchase the required currency with the other currency and shall take into account any premium and other reasonable costs of exchange. The Dealers understand and agree that in the event that the required currency is replaced by the Euro after the date hereof, the Euro will not be considered an "other currency" for the purposes of this Clause 17. 18. CALCULATION AGENT (1) In the case of any Series of Notes which require the appointment of a Calculation Agent the Agent shall act as Calculation Agent, unless (a) the relevant Issuer or the Guarantor appoints another person as Calculation Agent with the approval of the relevant Dealer or (in the case of a syndicated issue) the Lead Manager or (b) the relevant Dealer or (in the case of a syndicated issue) the Lead Manager requests the relevant Issuer to appoint such Dealer or Lead Manager, or a person nominated by such Dealer or Lead Manager (a "Nominee"), as Calculation Agent. (2) Should such an appointment be made by the relevant Issuer or Guarantor (with such approval) or such a request be made to the relevant Issuer and agreed to by the relevant Issuer and the Guarantor, the appointment of that other person, Dealer, Lead Manager or Nominee shall be automatic upon the issue of the relevant Series of Notes, and shall, except as agreed, be on the terms set out in the Calculation Agency Agreement 21 attached as Appendix A to the Agency Agreement, and no further action shall be required to effect the appointment of such Dealer, other person, Lead Manager or Nominee as Calculation Agent in relation to that Series of Notes. The name of the other person, Dealer, Lead Manager or Nominee so appointed will be entered in the relevant Pricing Supplement. 19. STABILISATION In connection with the distribution of any Tranche of Notes, the Dealer (if any) designated as stabilising manager in the applicable Pricing Supplement may over-allot or effect transactions which stabilise or maintain the market price of Notes of the Series of which such Tranche forms a part at a level which might not otherwise prevail, but in doing so such Dealer shall act as principal and not as agent of the relevant Issuer. Such stabilising, if commenced, may be discontinued at any time. Any loss resulting from over-allotment and stabilisation shall be borne, and any net profit arising therefrom shall be retained, by the stabilising manager for its own account. Such stabilising shall be done in accordance with the applicable laws. 20. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement, but this does not affect any right or remedy of a third party which exists or is available apart from that Act. 21. GOVERNING LAW AND JURISDICTION (1) This Agreement and every agreement for the issue and purchase of Notes as referred to in Clause 2 shall be governed by, and construed in accordance with, the laws of England. (2) Each party to this Agreement hereby irrevocably agrees for the exclusive benefit of the other parties to this Agreement that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together referred to as "Proceedings") arising out of or in connection with this Agreement may be brought in such courts. Each party to this Agreement hereby irrevocably waives any objection which it may have to the laying of the venue of any Proceedings in any such courts and any claim that any such Proceedings have been brought in an inconvenient forum and hereby further irrevocably agrees that a judgment in any Proceedings brought in the English courts shall be conclusive and binding upon such party and may be enforced in the courts of any other jurisdiction (subject to the laws of the jurisdiction in which enforcement is sought). Nothing contained herein shall limit any right to take Proceedings against any party to this Agreement in any other court of competent jurisdiction (outside the Contracting States as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982), nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not (subject to the laws of the relevant jurisdictions). Each of CSC US, CSC Germany and the Guarantor hereby appoints CSC UK as its agent for service of process and agrees that, in the event of ceasing so to act or ceasing to be registered in England, it will appoint another person as its agent for service of process in England in respect of any Proceedings. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date first above written. 22 APPENDIX A INITIAL DOCUMENTATION LIST 1. A certified copy of: (a) the Certificate of Incorporation of CSC US; (b) the Memorandum and Articles of Association of CSC UK; (c) the Articles of Association of CSC Germany; and (d) the Articles of Incorporation of the Guarantor, unless these have not changed since the date they were last provided to the Dealers. 2. A certified copy of all resolutions and other authorisations required to be passed or given, and evidence of any other action required to be taken, on behalf of each Issuer and the Guarantor, as applicable: (a) to approve this Agreement, the Agency Agreement, the Deed of Covenant, the creation of the Program, the issue of Notes under the Program and the execution of the Deed of Guarantee by the Guarantor; (b) to authorise appropriate persons to execute each of this Agreement, the Agency Agreement, the Deed of Covenant, the Deed of Guarantee and Notes issued under the Program and to take any other action in connection therewith; and (c) to authorise appropriate persons to enter into agreements with any Dealer on behalf of each Issuer and the Guarantor to issue Notes in accordance with Clause 2 of this Agreement. 3. A certified list of the names, titles and specimen signatures of the persons authorised on behalf of each Issuer and the Guarantor in accordance with paragraph 2(c) above unless these have not changed since the date they were last provided to the Dealers. 4. Certified copies of any other governmental or other consents (including, but not limited to, confirmation that the Bank of England has been notified of the establishment of the Program) required for each Issuer and the Guarantor to issue Notes under the Program, for the Guarantor to guarantee Notes issued under the Program, for each Issuer and the Guarantor (as the case may be) to execute and deliver this Agreement, the Deed of Covenant and the Agency Agreement and for each Issuer and the Guarantor to fulfil its respective obligations under this Agreement, the Agency Agreement, the Deed of Covenant and the Notes. 5. Confirmation that master Global Notes (from which copies may be made for each Tranche), duly executed by a person or persons authorised to take action on behalf of the relevant Issuer as specified in paragraph (2)(b) above, have been delivered to the Agent. 6. Legal opinions addressed to each of the Dealers dated on or after the date of this Agreement, in such form and with such content as the Dealers may reasonably require, from: 23 (a) Freshfields Bruckhaus Deringer, legal advisers to CSC Germany as to German law; (b) Cravath, Swaine & Moore, legal advisers to CSC US as to U.S. law; (c) Homburger Rechtsanwalte, legal advisers to the Guarantor as to Swiss law; and (d) Allen & Overy, legal advisers to the Dealers as to English law. 7. A conformed copy of the Agency Agreement and the Deed of Guarantee and confirmation that an executed copy of each such document has been delivered to the Paying Agents and the Common Depositary for Euroclear and Clearstream, Luxembourg. 8. A conformed copy of the Deed of Covenant and confirmation that an executed copy of such deed has been delivered to the Agent and the Common Depositary for Euroclear and Clearstream, Luxembourg. 9. A printed final version of the Offering Circular. 10. Confirmation from the Listing Agent that the Luxembourg Stock Exchange will list Notes to be issued under the Program. 11. A comfort letter from the independent auditors of each Issuer and the Guarantor, in such form and with such content as the Dealers may reasonably request. 12. Confirmation that the Program has been rated A by Standard & Poor's and A2 by Moody's. 24 APPENDIX B SELLING RESTRICTIONS 1. UNITED STATES (1) The Notes have not been and will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. Each Dealer represents and agrees that it and any of its affiliates and any person acting on its or their behalf have offered and sold any Notes, and will offer and sell any Notes (i) as part of their distribution at any time and (ii) otherwise until 40 days after the completion of the distribution of all Notes of the Tranche of which such Notes are a part, as determined and notified by the Agent to such Dealer, as provided below, only in accordance with Rule 903 of Regulation S under the Securities Act. Accordingly, each Dealer, its affiliates and any persons acting on its or their behalf have not engaged and will not engage in any directed selling efforts with respect to the Notes, and have complied and will comply with the offering restrictions requirement of Regulation S. Each Dealer who has purchased Notes of a Tranche hereunder (or in the case of a sale of a Tranche of Notes issued to or through more than one Dealer, each of such Dealers as to the Notes of such Tranche purchased by or through it) shall determine and certify to the Agent the completion of the distribution of the Notes of such Tranche. On the basis of such certification or certifications, the Agent agrees to notify such Dealer or Dealers of the end of the distribution compliance period with respect to such Tranche. Each Dealer also agrees that, at or prior to confirmation of sale of Notes, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it or any of its affiliates or any person acting on its or their behalf during the distribution compliance period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the "Securities Act") and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the completion of the distribution of the Securities as determined and notified by the Agent for the Securities to [name of Dealer(s)], except in either case in accordance with Regulation S under the Securities Act. Terms used above have the meanings given to them by Regulation S." Terms used in this sub-clause 1(1) have the meanings given to them by Regulation S. (2) In addition: (1) except to the extent permitted under U.S. Treas. Reg. Section 1.163-5(c)(2)(i)(D) (the "D Rules"), each Dealer (a) represents that it has not offered or sold, and agrees that during the restricted period it will not offer or sell, Notes in bearer form to a person who is within the United States or its possessions or to a United States person, and (b) represents that it has not delivered and 25 agrees that it will not deliver within the United States or its possessions definitive Notes in bearer form that are sold during the restricted period; (2) each Dealer represents that it has and agrees that throughout the restricted period it will have in effect procedures reasonably designed to ensure that its employees or agents who are directly engaged in selling Notes in bearer form are aware that such Notes may not be offered or sold during the restricted period to a person who is within the United States or its possessions or to a United States person, except as permitted by the D Rules; (3) if it is a United States person, each Dealer represents that it is acquiring the Notes for purposes of resale in connection with their original issuance and if it retains Notes in bearer form for its own account, it will only do so in accordance with the requirements of U.S. Treas. Reg. Section 1.163-5(c)(2)(i)(D)(6); and (4) with respect to each affiliate that acquires Notes from a Dealer for the purpose of offering or selling such Notes during the restricted period, such Dealer repeats and confirms the representations and agreements contained in sub-clauses (1), (2) and (3) on such affiliate's behalf. Terms used in this sub-clause 1(2) have the meanings given to them by the U.S. Internal Revenue Code and regulations thereunder, including the D Rules. (3) Each Dealer represents that it has not entered and agrees that it will not enter into any contractual arrangement with respect to the distribution or delivery of Notes, so as to cause any person to become a "distributor" within the meaning of Regulation S or the D Rules except with their affiliates or with the prior written consent of the relevant Issuer and the Guarantor (in which case such Dealer will obtain for the benefit of the Issuer and the Guarantor the agreement of such person to the representations and agreements contained in Clauses 1(1) and 1(2) above). (4) Each issue of Indexed Notes and Dual Currency Notes shall be subject to such additional U.S. selling restrictions as the relevant Issuer and the relevant Dealer or Dealers shall agree as a term of the issue and purchase of such Notes, which additional selling restrictions shall be set out in the Pricing Supplement. Each Dealer agrees that it shall offer, sell and deliver such Notes only in compliance with such additional U.S. selling restrictions. 2. UNITED KINGDOM Each Dealer represents and agrees that: (i) in relation to Notes which have a maturity of one year or more, it has not offered or sold and, prior to the expiry of the period of six months from the Issue Date of such Notes, will not offer or sell any such Notes to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 (as amended); 26 (ii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of any Notes to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom such document may otherwise lawfully be issued or passed on; and (iii) it has complied and will comply with all applicable provisions of the FSA with respect to anything done by it in relation to any Notes in, from or otherwise involving the United Kingdom. 3. JAPAN The Notes have not been and will not be registered under the Securities and Exchange Law of Japan (the "Securities and Exchange Law") and each Dealer agrees that it will not offer or sell any Notes, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organised under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan except in compliance with the Securities and Exchange Law and any other applicable laws or regulations of Japan. 4. FRANCE Each of the Dealers, the Issuer and the Guarantor represents and agrees that, in connection with their initial distribution, it has not offered or sold and will not offer or sell, directly or indirectly, Notes to the public in the Republic of France, and has not distributed or caused to be distributed and will not distribute or cause to be distributed to the public in the Republic of France, the Offering Circular or any other offering material relating to the Notes, and that such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifies) and/or (ii) a restricted circle of investors (cercle restreint d'investisseurs), all as defined in and in accordance with Article 6 of ordonnance no. 67-833 dated 28th September, 1967 (as amended) and decret no. 98-880 dated 1st October, 1998. Where an issue of Notes is effected as an exception to the rules relating to an appel public a l'epargne in the Republic of France (public offer rules) by way of an offer to a restricted circle of investors (as referred to in (ii) above), such investors must, to the extent that the Notes are offered to 100 or more of such investors, provide certification as to their personal relationship of a professional or family nature with a member of the management of the Issuer. In the context of such exception, investors in the Republic of France may only participate in the issue of Notes for their own account in accordance with the conditions set out in decret no. 98-880 dated 1st October, 1998. Notes may only be issued, directly or indirectly, to the public in the Republic of France in accordance with articles 6 and 7 of ordonnance no. 67-833 dated 28th September, 1967 (as amended). 5. GERMANY In connection with the initial placement of any Notes in Germany, each Dealer agrees that (i) unless otherwise provided in the relevant Subscription Agreement or Pricing Supplement, Notes will be offered and sold only in compliance with an exemption from the prospectus requirement of the German Securities Selling Prospectus Act Wertpapier- 27 Verkaufsprospektgesetz) of 13th December, 1990, as amended, and (ii) in any event Notes will be offered and sold in Germany only in accordance with the requirements of such Act. 6. THE NETHERLANDS Each Dealer represents and agrees that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer to sell in The Netherlands any Notes other than to persons who trade or invest in securities in the conduct of a profession or business (which include banks, stockbrokers, insurance companies, pension funds, other institutional investors and finance companies and treasury departments of large enterprises). 7. GENERAL Each Dealer will (to the best of its knowledge and belief) comply with all applicable laws and regulations in force in any jurisdiction in which it purchases, offers, sells or delivers Notes or possesses or distributes the Offering Circular and will obtain any consent, approval or permission required by it for the purchase, offer, sale or delivery by it of Notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers, sales or deliveries and none of the Issuers, the Guarantor nor any other Dealer shall have responsibility therefor. None of the Issuers, the Guarantor nor any of the Dealers represents that Notes may at any time lawfully be sold in compliance with any applicable registration or other requirements in any jurisdiction, or pursuant to any exemption available thereunder, or assumes any responsibility for facilitating such sale. With regard to each Tranche, the relevant Dealer will be required to comply with such other additional restrictions as the relevant Issuer, the Guarantor and the relevant Dealer shall agree and as shall be set out in the applicable Pricing Supplement. 28 APPENDIX C PART I FORM OF DEALER ACCESSION LETTER - PROGRAM [Date] To: CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH (the "Issuers") and: CIBA SPECIALTY CHEMICALS HOLDING INC. (the "Guarantor") Attention: Dear Sirs, CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH U.S.$2,000,000,000 Euro Medium Term Note Program We refer to the amended and restated Program agreement dated 30th March, 2001 entered into in respect of the above Euro Medium Term Note Program (the "Program") and made between the Issuers, the Guarantor and the Dealers party thereto (which agreement, as amended from time to time, is herein referred to as the "Program Agreement"). CONDITIONS PRECEDENT We confirm that we are in receipt of the documents referenced below: (i) a copy of the Program Agreement; (ii) a copy of the current version all documents referred to in Appendix A of the Program Agreement; and have found them to our satisfaction or (in the case of documents referred to in (ii) above) have waived production of such documents. For the purposes of the Program Agreement our Notice Details are as follows: (insert name, address, telephone, telex (+ answerback) and attention). 29 In consideration of appointment by the Issuers and the Guarantor of us as a Dealer under the Program Agreement we hereby undertake, for the benefit of each of the Issuers, the Guarantor and the other Dealers, that we will perform and comply with all the duties and obligations expressed to be assumed by a Dealer under the Program Agreement. This letter is governed by, and shall be construed in accordance with, English law. Yours faithfully, [Name of New Dealer] cc: The Chase Manhattan Bank (Agent) [names of Dealers at the date of accession] 30 PART II FORM OF CONFIRMATION LETTER - PROGRAM [Date] To: [Name and address of new Dealer] Dear Sirs, CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH U.S.$2,000,000,000 Euro Medium Term Note Program We refer to the amended and restated Program Agreement dated 30th March, 2001 (such agreement, as amended from time to time, the "Program Agreement") entered into in respect to the above Euro Medium Term Note Program and hereby acknowledge receipt of your Dealer Accession Letter to us dated [ ]. We hereby confirm that, with effect from the date hereof, you shall become a party to the Program Agreement in accordance with Clause 11 of the Program Agreement. Yours faithfully, For and on behalf of CIBA SPECIALTY CHEMICALS CORPORATION By: For and on behalf of CIBA SPECIALTY CHEMICALS PLC By: For and on behalf of CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH By: 31 For and on behalf of CIBA SPECIALTY CHEMICALS HOLDING INC. By: By: cc: The Chase Manhattan Bank (Agent) [names of other Dealers at the date of accession] 32 PART III FORM OF DEALER ACCESSION LETTER - NOTE ISSUE [DATE] To: CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH (the "Issuers") and: CIBA SPECIALTY CHEMICALS HOLDING INC. (the "Guarantor") Attention: Dear Sirs, CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH U.S.$2,000,000,000 Euro Medium Term Note Program We refer to the amended and restated Program Agreement dated 30th March, 2001 entered into in respect of the above Euro Medium Term Note Program (the "Program") and made between the Issuers, the Guarantor and the Dealers party thereto (which agreement, as amended from time to time, is herein referred to as the "Program Agreement"). Conditions Precedent We confirm that we are in receipt of the documents referenced below: (i) a copy of the Program Agreement; (ii) a copy of current versions of all documents referred to in Appendix A of the Program Agreement; and have found them to our satisfaction or (in the case of documents referred to in (ii) above) have waived production of such documents. For the purposes of the Program Agreement our Notice Details are as follows: (insert name, address, telephone, telex (+ answerback) and attention). 33 In consideration of appointment by the Issuers and the Guarantor of us as a Dealer in respect of the issue of [ ] Notes due [ ] (the "Issue") under the Program Agreement we hereby undertake, for the benefit of each of the Issuers, the Guarantor and each of the other Dealers that in relation to the Issue we will perform and comply with all the duties and obligations expressed to be assumed by a Dealer under the Program Agreement. This letter is governed by, and shall be construed in accordance with, English law. Yours faithfully, [Name of New Dealer] By: cc: The Chase Manhattan Bank (Agent) [names of Dealers at the date of accession] 34 PART IV FORM OF CONFIRMATION LETTER - NOTE ISSUE [Date] To: [Name and address of new Dealer] Dear Sirs, CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH U.S.$2,000,000,000 Euro Medium Term Note Program We refer to the amended and restated Program Agreement dated 30th March, 2001 (such Agreement, as amended from time to time, the "Program Agreement") entered into in respect to the above Euro Medium Term Note Program and hereby acknowledge receipt of your Dealer Accession Letter to us dated [ ]. We hereby confirm that, with effect from the date hereof in respect of the issue of [ ] Notes due [ ] (the "Issue"), you shall become a party to the Program Agreement in accordance with Clause 11 of the Program Agreement. Yours faithfully, CIBA SPECIALTY CHEMICALS CORPORATION By: CIBA SPECIALTY CHEMICALS PLC By: CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH By: 35 CIBA SPECIALTY CHEMICALS HOLDING INC. By: By: cc: The Chase Manhattan Bank (Agent) [names of Dealers at the date of accession] 36 APPENDIX D LETTER REGARDING INCREASE IN THE NOMINAL AMOUNT OF THE PROGRAM [Date] To: The Dealers and the Listing Agent (as those expressions are defined in the amended and restated Program Agreement dated 30th March, 2001 as amended from time to time, (the "Program Agreement")) Dear Sirs, CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH U.S.$2,000,000,000 Euro Medium Term Note Program We hereby request, pursuant to Clause 12 of the Program Agreement, that the aggregate nominal amount of the above Program be increased to U.S.$[ ] on and from [insert date]. We would like to draw your attention to such Clause 12, under which, should you fail to object in accordance with the provisions set out in that clause, this increase shall (subject as set out below) take effect on and from [insert date], whereupon all references in the Program Agreement, the Agency Agreement, the Deed of Covenant and the Deed of Guarantee will be deemed amended accordingly. We understand that this increase is subject to the satisfaction of the conditions set out in Clause 12 of the Program Agreement. Terms used in this letter have the meanings given to them in the Program Agreement. Yours faithfully, For and on behalf of CIBA SPECIALTY CHEMICALS CORPORATION By: CIBA SPECIALTY CHEMICALS PLC By: 37 For and on behalf of CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH By: For and on behalf of CIBA SPECIALTY CHEMICALS HOLDING INC. By: By: cc: UBS Warburg (for distribution to the existing Dealers). The Chase Manhattan Bank (Agent) 38 APPENDIX E FORM OF SUBSCRIPTION AGREEMENT [CURRENCY AND AMOUNT] [CIBA SPECIALTY CHEMICALS CORPORATION] [CIBA SPECIALTY CHEMICALS PLC] [CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [DESCRIPTION OF NOTES] unconditionally and irrevocably guaranteed by CIBA SPECIALTY CHEMICALS HOLDING INC. [DATE] To: [ ] (the "Managers") c/o [ ] (the "Lead Manager") Dear Sirs, [CIBA SPECIALTY CHEMICALS CORPORATION] [CIBA SPECIALTY CHEMICALS PLC] [CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] (the "Issuer") proposes to issue [CURRENCY AND AMOUNT] [DESCRIPTION OF NOTES] (the "Notes") unconditionally and irrevocably guaranteed by CIBA SPECIALTY CHEMICALS HOLDING INC. (the "Guarantor") pursuant to its U.S.$2,000,000,000 Euro Medium Term Note Program. The terms of the issue shall be as set out in the form of Pricing Supplement attached to this Agreement as Annexe A. This Agreement is supplemental to the amended and restated Program Agreement (the "Program Agreement") dated 30th March, 2001 made between CIBA SPECIALTY CHEMICALS CORPORATION, CIBA SPECIALTY CHEMICALS PLC and CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH (together the "Issuers"), the Guarantor and the Dealers party thereto. All terms with initial capitals used herein without definition have the meanings given to them in the Program Agreement. We wish to record the arrangements agreed between us in relation to the issue: 39 *[1. Conditions Precedent This Agreement appoints each Manager which is not a party to the Program Agreement (each a "New Dealer") as a Dealer under the Program Agreement for the purposes of the issue of the Notes. The Lead Manager confirms that it is in receipt of the documents referenced below: (i) a copy of the Program Agreement; (ii) a copy of all documents referred to in Appendix A of the Program Agreement; and (iii) a copy of the Agency Agreement; and has confirmed with (each of) the New Dealer(s) that it/they has/have found them to be satisfactory or (in the case of the documents referred to in (ii)) has/have waived such production. For the purposes of the Program Agreement the details of the Lead Manager for service of notices are as follows: (insert name, address, telephone, telex (# answerback) and attention). In consideration of the Issuer and the Guarantor appointing the New Dealer(s) as (a) Dealer(s) in respect of the Notes under the Program Agreement, each/the New Dealer hereby undertakes, for the benefit of each of the Issuers, the Guarantor and the other Dealers, that, in relation to the issue of the Notes, it will perform and comply with all the duties and obligations expressed to be assumed by a Dealer under the Program Agreement, a copy of which it acknowledges it has received from the Lead Manager.] The Issuer hereby confirms that [each] [the] New Dealer shall be vested with all authority, rights, powers, duties and obligations of a Dealer in relation to the issue of Notes as if originally named as a Dealer under the Program Agreement provided that following the issue of the Temporary Global Note in respect of the Notes [each] [the] New Dealer shall have no further such authority, rights, powers, duties and obligations except such as may have accrued or been incurred prior to, or in connection with, the issue of such Temporary Global Note and the Notes represented thereby. 2. Subject to the terms and conditions of the Program Agreement and this Agreement the Issuer hereby agrees to issue the Notes, the Guarantor hereby agrees to guarantee the Notes and the Managers jointly and severally agree to purchase the Notes at a subscription price of [ ] per cent. of the principal amount of the Notes (the "Subscription Price"), being the issue price of [ ] per cent. less a selling commission of [ ] per cent. of such principal amount and a management and underwriting fee of [ ] per cent. of such principal amount. 3. The net purchase money in respect of the Notes, namely the sum of [ ] (representing the Subscription Price, less the amount payable in respect of the Managers' expenses specified in Clause 4 hereof) will be paid by the Lead Manager on behalf of the Managers to the Issuer at [ ] hours (London time) on [ ], or at such other time and/or date as the Issuer and the Lead Manager on behalf of the Managers may agree (the "Closing Date") against delivery to a common depositary for Clearstream, Luxembourg and Euroclear Bank S.A./N.V. as operator of the Euroclear System, or any successor to the business thereof of a temporary global note representing the Notes, in the manner contemplated in the Program Agreement. ----------------------------------- * Delete this paragraph for a Dealer-only syndicate. 40 4. The Issuer or, failing the Issuer, the Guarantor shall bear and pay all costs and expenses incurred in or in connection with the printing of the Notes, this Agreement and the Pricing Supplement prepared in connection with the issue of the Notes, the listing of the Notes on the [ ] Stock Exchange and making initial delivery of the Notes. In addition, the Issuer or, failing the Issuer, the Guarantor agrees to pay to the Lead Manager [ ] in respect of reasonable legal, travelling, telex, facsimile, telephone, postage and costs of any publicity agreed in writing by the Issuer or the Guarantor incurred and to be incurred by the Managers in connection with the preparation and management of the issue and distribution of the Notes which sum may be deducted from the Subscription Price as provided in Clause 3 hereof. 5. The obligation of the Managers to purchase the Notes is conditional upon: (i) the conditions set out in Clause 3(2) (other than that set out in Clause 3(2)(f)) of the Program Agreement being satisfied as of the Closing Date and without prejudice to the aforesaid, the Offering Circular dated [ ] [, as supplemented by [ ],] containing all material information relating to the assets and liabilities, financial position and profits and losses of the Issuer [and the Guarantor/Parent] and nothing having happened or being expected to happen which would require the Offering Circular [, as so supplemented,] to be [further] supplemented or updated; and (ii) the delivery to the Lead Manager on the Closing Date of: (A) legal opinions addressed to the Managers dated the Closing Date in such form and with such contents as the Lead Manager, on behalf of the Managers, may reasonably require [from Freshfields Bruckhaus Deringer/Cravath, Swaine & Moore], the legal advisers to the Issuer as to [German/United States law,] from Homburger Rechtsanwalte, the legal advisers to the Guarantor as to Swiss law, and from Allen & Overy, the legal advisers to the Managers as to English law; (B) a certificate dated the Closing Date signed by a duly authorised officer of each of the Issuer and the Guarantor to the effect stated in paragraph (i) of this Clause; (C) a comfort letter dated the Closing Date from the independent auditors of each of the Issuer and the Guarantor, in such form and with such content as the Managers may reasonably request; and (D) [list such other conditions precedent as may be agreed]. If any of the foregoing conditions is not satisfied on or before the Closing Date, this Agreement shall terminate on such date and the parties hereto shall be under no further liability arising out of this Agreement (except for the liability of the Issuer and the Guarantor in relation to 41 expenses as provided in Clause 4 and except for any liability arising before or in relation to such termination), provided that the Lead Manager, on behalf of the Managers, may in its discretion waive any of the aforesaid conditions (other than the conditions precedent contained in Clause 3(2)(c) of the Program Agreement) or any part of them. 6. In connection with the distribution of the Notes, the Lead Manager may over-allot or effect transactions in the open market or otherwise with a view to stabilising or maintaining the market price of the Notes at levels other than those which might otherwise prevail in the open market, but in doing so the Lead Manager shall act as principal and not as agent of the Issuer. Such stabilising if commenced, may be discontinued at any time. Any loss resulting from over-allotment and stabilisation shall be borne, and any net profit arising therefrom shall be retained, by the Lead Manager for its own account. Such stabilisation shall be done in compliance with all applicable laws. 7. (a) The Lead Manager, on behalf of the Managers, may, after consultation with the Issuer and the Guarantor if practicable and by notice to the Issuer and the Guarantor, terminate this Agreement at any time prior to payment of the net purchase money to the Issuer if in the opinion of the Lead Manager there shall have been such a change in national or international financial, political or economic conditions or currency exchange rates or exchange controls as would in the view of the Lead Manager be likely to prejudice materially the success of the offering and distribution of the Notes (whether in the primary market or in respect of dealings in the Notes in the secondary market). (b) Upon such notice being given, this Agreement shall terminate and no party shall be under any liability to any other in respect thereof except for the liability of the Issuer and the Guarantor for the payment of costs and expenses as provided in Clause 4 of this Agreement, the obligations of the Managers under Clause 8 of the Program Agreement and the respective obligations of the parties under Clause 6 of the Program Agreement. 8. (1) This Agreement shall be governed by, and construed in accordance with, the laws of England. (2) A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement, but this does not affect any right or remedy of a third party which exists or is available apart from that Act. (3) Each party to this Agreement hereby irrevocably agrees for the exclusive benefit of the other parties to this Agreement that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together referred to as "Proceedings") arising out of or in connection with this Agreement may be brought in such courts. Each party to this Agreement hereby irrevocably waives any objection which it may have to the laying of the venue of any Proceedings in any such courts and any claim that any such Proceedings have been brought in an inconvenient forum and hereby further irrevocably agrees that a judgment in any Proceedings brought in the English courts shall be conclusive and binding upon such party and may be enforced in the courts of any other jurisdiction (subject to the laws of the jurisdiction in which enforcement is sought). Nothing contained herein shall limit any 42 right to take Proceedings against the Issuer and/or the Guarantor in any other court of competent jurisdiction (outside the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982), nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not (subject to the laws of the relevant jurisdiction). The [Issuer and the] Guarantor hereby appoints [the Issuer/Ciba Specialty Chemicals PLC] as its agent for service of process and agrees that, in the event of ceasing so to act or ceasing to be registered in England, it will appoint another person as its agent for service of process in England in respect of any Proceedings. 9. This Agreement may be signed in any number of counterparts, all of which, taken together, shall constitute one and the same agreement and any party may enter into this Agreement by executing a counterpart. Please confirm that this letter correctly sets out the arrangements agreed between us. Yours faithfully, For: [Issuer] By: For: CIBA SPECIALTY CHEMICALS HOLDING INC. By: By: We agree to the foregoing. For: [ ] By: 43 ANNEXE A [FORM OF PRICING SUPPLEMENT] 44 APPENDIX F FORM OF DEED OF COVENANT THIS DEED OF COVENANT is made on 30th March, 2001 by each of Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC and Ciba Spezialitatenchemie Holding Deutschland GmbH (each an "Issuer") in favour of the account holders of Clearstream Banking, societe anonyme ("Clearstream, Luxembourg") and Euroclear Bank S.A./N.V. as operator of the Euroclear System ("Euroclear"), or any successor to the business thereof or any other additional clearing system or systems as are specified in the Pricing Supplement relating to any Note (as defined below) (each a "Clearing System"). WHEREAS: (A) Each Issuer has entered into an amended and restated Program Agreement (the "Program Agreement", which expression includes the same as it may be amended, supplemented, novated or restated from time to time) dated 30th March, 2001 with Ciba Specialty Chemicals Holding Inc. (the "Guarantor") and the Dealers named therein under which the relevant Issuer proposes from time to time to issue Euro Medium Term Notes (the "Notes"), which amends and restates the amended and restated program agreement dated 16th June, 2000 with Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC, Ciba Spezialitatenchemie Holdings Deutschland GmbH, the Guarantor and the Dealers named therein (the "Principal Program Agreement"). (B) Each Issuer has also entered into an amended and restated Agency Agreement (the "Agency Agreement", which expression includes the same as it may be amended, supplemented, novated or restated from time to time) dated 30th March, 2001 between, inter alios, the Issuer and The Chase Manhattan Bank (the "Agent"). (C) The Notes will initially be represented by, and comprised in, Temporary Global Notes (the "Temporary Global Notes") and thereafter may be represented by, and comprised in, Permanent Global Notes (the "Permanent Global Notes" and together with the Temporary Global Notes, the "Global Notes"), such Global Notes representing a certain number of underlying Notes (the "Underlying Notes"). (D) Each Global Note will, after issue, be deposited with a common depository for one or more Clearing Systems (each such Clearing System or all such Clearing Systems together, the "Relevant Clearing System"). Upon such deposit of a Global Note the Underlying Notes represented by such Global Note will be credited to a securities account or securities accounts with the Relevant Clearing System. Any account holder with the Relevant Clearing System which has Underlying Notes credited to its securities account from time to time (each a "Relevant Account Holder") will, subject to and in accordance with the terms and conditions and operating procedures or management regulations of the Relevant Clearing System, be entitled to transfer such Underlying Notes and (subject to and upon payment being made by the relevant Issuer to the bearer in accordance with the terms of the relevant Global Note) will be entitled to receive payments from the Relevant Clearing System calculated by reference to the Underlying Notes credited to its securities account. (E) In certain circumstances specified in each Global Note, a Global Note will become void. The time at which a Global Note becomes void is hereinafter referred to as the "Relevant Time". In such circumstances 45 each Relevant Account Holder will, subject to and in accordance with the terms of this Deed, acquire against the relevant Issuer all those rights which such Relevant Account Holder would have had if, prior to the Global Note becoming void, duly executed and authenticated Definitive Note(s) (as defined in the Agency Agreement) and, if the Notes are repayable in instalments, receipts in respect thereof (the "Receipts") and interest coupons (the "Coupons") appertaining to the Definitive Note(s) (if appropriate) had been issued in respect of its Underlying Note(s) and such Definitive Notes(s), Receipts (if appropriate) and Coupons (if appropriate) were held and beneficially owned by such Relevant Account Holder. (F) The obligations of each Issuer under this Deed have been guaranteed by the Guarantor pursuant to the amended and restated Deed of Guarantee (the "Guarantee") executed by the Guarantor on 30th March, 2001 and an executed copy of the Guarantee has been deposited with and shall be held by the Agent for the time being for the Notes. A copy of the Guarantee shall be available for inspection at the office of the Agent for the time being (being at the date hereof at Trinity Tower, 9 Thomas More Street, London E1 9YT). (G) This Deed of Covenant amends and restates the amended and restated Deed of Covenant entered into by Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC, Ciba Spezialitatenchemie Holding Deutschland GmbH dated 16th June, 2000. This Deed of Covenant does not affect any Notes issued pursuant to the Principal Program Agreement prior to the date hereof. NOW THIS DEED WITNESSES AS FOLLOWS: 1. If any Global Note becomes void in accordance with the terms thereof the relevant Issuer hereby undertakes and covenants with each Relevant Account Holder (other than when any Relevant Clearing System is an account holder of any other Relevant Clearing System) that each Relevant Account Holder shall automatically acquire at the Relevant Time, without the need for any further action on behalf of any person, against the relevant Issuer all those rights which such Relevant Account Holder would have had if at the Relevant Time it held and beneficially owned duly executed and authenticated Definitive Note(s), Receipts (if appropriate) and Coupons (if appropriate) in respect of each Underlying Note represented by such Global Note which such Relevant Account Holder has credited to its securities account with the Relevant Clearing System at the Relevant Time. The relevant Issuer's obligation pursuant to this clause shall be a separate and independent obligation by reference to each Underlying Note which a Relevant Account Holder has credited to its securities account with the Relevant Clearing System and the relevant Issuer agrees that a Relevant Account Holder may assign its rights hereunder in whole or in part. 2. The records of the Relevant Clearing System shall be conclusive evidence of the identity of the Relevant Account Holders and the number of Underlying Notes credited to the securities account of each Relevant Account Holder. For the purposes hereof a statement issued by the Relevant Clearing System stating: (i) the name of the Relevant Account Holder to which such statement is issued; and (ii) the aggregate nominal amount of Underlying Notes credited to the securities account of such Relevant Account Holder as at the opening 46 of business on the first day following the Relevant Time on which the Relevant Clearing System is open for business, shall be conclusive evidence of the records of the Relevant Clearing System at the Relevant Time. 3. In the event of a dispute, the determination of the Relevant Time by the Relevant Clearing System shall be final and conclusive for all purposes in connection with the Relevant Account Holders with securities accounts with the Relevant Clearing System. 4.(a) Where the Issuer is Ciba Specialty Chemicals Corporation: The Issuer will, subject to the exceptions and limitations set forth below, pay as additional interest on an Underlying Note such additional amounts as are necessary in order that the net amounts receivable pursuant to the terms of the Underlying Note by each Relevant Account Holder who is a United States Alien (as such term is defined below), after deduction for any present or future tax, assessment or governmental charge of the United States (as such term is defined below), or a political subdivision or authority thereof or therein, imposed by withholding with respect to the payment, will not be less than the amounts provided for in such Underlying Note to be then due and payable; provided, however, that the foregoing obligation to pay additional amounts shall not apply to: (i) any tax, assessment or governmental charge that would not have been so imposed but for the existence of any present or former connection between such Relevant Account Holder (or between a fiduciary, settlor, beneficiary, member or shareholder of, or holder of power over, such holder, if such Relevant Account Holder is an estate, trust, partnership or corporation) and the United States, including, without limitation, such Relevant Account Holder (or fiduciary, settlor, beneficiary, member, shareholder or holder of a power) being considered as: (A) being or having been present or engaged in a trade or business in the United States or having or having had a permanent establishment therein; (B) having a current or former relationship with the United States, including a relationship as a citizen or resident or being treated as a resident thereof; (C) being or having been a personal holding company, a controlled foreign corporation, a passive foreign investment company, a foreign personal holding company with respect to the United States, a corporation that has accumulated earnings to avoid United States Federal income tax or a private foundation or other tax-exempt organisation; or (D) an actual or a constructive "10-per cent shareholder" of the Issuer as defined in Section 871(h)(3) of the United States Internal Revenue Code of 1986, as amended (the "Code"); (ii) any Relevant Account Holder who is a fiduciary or partnership or other than the sole beneficial owner of the Underlying Note, but only to the extent that a beneficiary or settlor with respect to such fiduciary or member of such partnership or a beneficial owner of the Underlying Note would not have been entitled to the payment 47 of an additional amount had such beneficiary, settlor, member or beneficial owner been the Relevant Account Holder of such Underlying Note; (iii) any tax, assessment or governmental charge that would not have been imposed or withheld but for the failure of the Relevant Account Holder, if required, to comply with certification, identification or information reporting requirements under United States income tax laws, without regard to any tax treaty, with respect to the payment, concerning the nationality, residence, identity or connection with the United States of the Relevant Account Holder or a beneficial owner of such Underlying Note, if such compliance is required by United States income tax laws, without regard to any tax treaty, as a precondition to relief or exemption from such tax, assessment or governmental charge; (iv) any estate, inheritance, gift, sales, transfer, excise, wealth or personal property tax or any similar tax, assessment or governmental charge; (v) any tax, assessment or governmental charge that is payable otherwise than by withholding from the payment of the amounts receivable in respect of such Underlying Note; (vi) any tax, assessment or governmental charge required to be withheld by any paying agent from such payment of amounts receivable in respect of any Underlying Note, if such payment can be made without such withholding by any other paying agent; or (vii) any combination of items (i), (ii), (iii), (iv), (v) or (vi). As used in this Clause, "United States" means the United States of America, the Commonwealth of Puerto Rico and each possession of the United States of America and place subject to its jurisdiction and "United States Alien" means any corporation, partnership, individual or fiduciary that, as to the United States, is for United States Federal income tax purposes (A) a foreign corporation, (B) a foreign partnership one or more of the members of which is, for United States Federal income tax purposes, a foreign corporation, a non-resident alien individual or a non-resident alien fiduciary of a foreign estate or trust, (C) a non-resident alien individual or (D) a non-resident alien fiduciary of a foreign estate or trust. (b) Where the Issuer is Ciba Spezialitatenchemie Holding Deutschland GmbH: All payments in respect of the Underlying Note by the Issuer will be made without withholding or deduction for or on account of any present or future taxes or duties of whatever nature imposed or levied by or on behalf of Germany or any state (Bundesland), municipality or other political subdivision or any authority thereof or therein having power to tax, unless such withholding or deduction is required by law. In such event, the Issuer will pay such additional amounts as shall be necessary in order that the net amounts received by the Relevant Account Holders after such withholding or deduction shall equal the amounts which would otherwise have been receivable in respect of the Underlying Note in the absence of such withholding or deduction; except that no such additional amounts shall be payable with respect to any Underlying Note to or to the order of a Relevant Account Holder who is liable for such taxes or duties in respect of such Underlying Note by reason of his having some connection with Germany other than the mere holding of such Underlying 48 Note or with respect to any Underlying Note presented for payment to a paying agent which is required to deduct or withhold an amount for or on account of such taxes or duties if such amount can be paid without any deduction or withholding for or on account of any taxes or duties by any other paying agent. Any advance income tax (Zinsabschlagsteuer) levied in Germany since 1993 as well as the solidarity surcharge (Solidaritatszuschlag) imposed thereon since 1995 do not constitute a withholding or deduction within the meaning of this Clause 4(b). (c) Where the Issuer is Ciba Specialty Chemicals PLC: All payments by the Issuer in respect of the Underlying Notes shall be made without withholding or deduction for or on account of any present or future tax, duty or charge of whatever nature imposed or levied by or on behalf of the United Kingdom, or any authority thereof or therein having power to tax unless the withholding or deduction is required by law. In that event, the Issuer shall pay such additional amounts as will result (after such withholding or deduction) in the receipt by the Relevant Account Holders of the sums which would have been receivable (in the absence of such withholding or deduction) from the Issuer in respect of their Underlying Notes; except that no such additional amounts shall be payable with respect to any Underlying Note to or to the order of a person liable to such tax, duty or charge in respect of such Underlying Note by reason of his having some connection with the United Kingdom other than the mere holding or ownership of such Underlying Note or with respect to any Underlying Note presented for payment to a paying agent which is required to deduct or withhold an amount for or on account of such tax, duty or charge if such amount can be paid without any deduction or withholding for or on account of any tax, duty or charge by any other paying agent. 5. Each Issuer hereby warrants, represents and covenants with each Relevant Account Holder that it has all corporate power, and has taken all necessary corporate or other steps, to enable it to execute, deliver and perform this Deed, and that this Deed constitutes a legal, valid and binding obligation of the relevant Issuer enforceable in accordance with its terms subject to the laws of bankruptcy and other laws affecting the rights of creditors generally. 6. This Deed shall take effect as a Deed Poll for the benefit of the Relevant Account Holders from time to time and for the time being. This Deed shall be deposited with and held by a depository for Clearstream, Luxembourg and Euroclear, or any successor to the business thereof and for the time being (being at the date hereof The Chase Manhattan Bank at Trinity Tower, 9 Thomas More Street, London E1 9YT) until all the obligations of each Issuer hereunder have been discharged in full. 7. Each Issuer hereby acknowledges the right of every Relevant Account Holder to the production of, and the right of every Relevant Account Holder to obtain (upon payment of a reasonable charge) a copy of, this Deed, and further acknowledges and covenants that the obligations binding upon it contained herein are owed to, and shall be for the account of, each and every Relevant Account Holder, and that each Relevant Account Holder shall be entitled severally to enforce the said obligations against the relevant Issuer. 8. No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Deed, but this does not affect any right or remedy of any person which exists or is available apart from that Act. 49 9. This Deed is governed by, and shall be construed in accordance with, the laws of England. Each Issuer hereby irrevocably agrees, for the exclusive benefit of the Relevant Account Holders, that the courts of England are to have jurisdiction to settle any dispute which may arise out of, or in connection with, this Deed and that accordingly any suit, action or proceedings (together referred to as "Proceedings") arising out of, or in connection with, this Deed may be brought in such courts. Each Issuer irrevocably waives any objection which it may have now or hereafter to the laying of the venue of any Proceedings in any such court and any claim that any such Proceedings have been brought in an inconvenient forum and further irrevocably agrees that a judgment in any Proceedings brought in the English courts shall be conclusive and binding upon the relevant Issuer and may be enforced in the courts of any other jurisdiction (subject to the laws of the jurisdiction in which enforcement is sought). Nothing contained in this Clause shall limit any right to take Proceedings against any Issuer in any other court of competent jurisdiction, nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not (subject to the laws of the relevant jurisdictions). Ciba Specialty Chemicals Corporation and Ciba Spezialitatenchemie Holding Deutschland GmbH each hereby appoints Ciba Specialty Chemicals PLC at its registered office for the time being to accept service of process on its behalf. If Ciba Specialty Chemicals PLC shall cease to be registered under the laws of England and Wales, the relevant Issuer shall appoint another person with an office in London to accept such service. Nothing herein shall affect the right to serve process in any other manner permitted by law. 10. This Deed may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS whereof each Issuer has caused this Deed to be duly executed the day and year first above mentioned. 50 EXECUTED as a Deed under ) Seal by CIBA SPECIALTY CHEMICALS ) CORPORATION ) and SIGNED and ) DELIVERED as a deed on its ) behalf by ) in the presence of: ) Witness's Signature .................................... Name ................................... Address .................................... .................................. EXECUTED as a Deed under ) Seal by CIBA SPECIALTY CHEMICALS ) PLC and SIGNED and DELIVERED as ) a deed on its behalf by ) in the presence of: ) Witness's Signature .................................... Name ................................... Address .................................... .................................. 51 EXECUTED as a Deed under ) Seal by CIBA SPEZIALITATENCHEMIE ) HOLDING DEUTSCHLAND GMBH ) and SIGNED and DELIVERED as ) a deed on its behalf by ) ) in the presence of: ) Witness's Signature .................................... Name ................................... Address .................................... .................................. 52 SIGNATORIES The Issuers CIBA SPECIALTY CHEMICALS CORPORATION 560 White Plains Road Tarrytown New York 10591-9005 Telephone: 001 914 785 2000 Telefax: 001 914 785 2183 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING CIBA SPECIALTY CHEMICALS PLC Hulley Road Macclesfield Cheshire SK10 2NX Telephone: 44 1 625 421 933 Telefax: 44 1 625 619 637 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH Chemiestrasse D-68623 Lampertheim Germany Telephone: 00 49 620 6150 Telefax: 00 49 620 6151368 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING 53 The Guarantor CIBA SPECIALTY CHEMICALS HOLDING INC. Klybeckstrasse 141 CH-4002 Basle Switzerland Telephone: 00 41 61 636 2740 Telefax: 00 41 61 636 6828 Attention: Group Treasurer By: OLIVER STRUB KIRK ERSTLING The Dealers CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED One Cabot Square London E14 4QJ Telephone: 020 7888 4021 Telex: 892131 CSFB G Telefax 020 7888 3719 Attention: MTN Trading DEUTSCHE BANK AG LONDON Winchester House 1 Great Winchester Street London EC2N 2DB Telephone: 020 7545 2761 Telefax: 020 7541 2761 Telex: 94015555 DBLN G Attention: MTN Desk GOLDMAN SACHS INTERNATIONAL Peterborough Court 133 Fleet Street London EC4A 2BB Telephone: 020 7774 2295 Telex: 94012165 GSHH G Telefax: 020 7774 5711 Attention: Euro Medium Term Note Desk 54 J.P. MORGAN SECURITIES LTD. 60 Victoria Embankment London EC4Y 0JP Telephone: 020 7779 3469 Telex: 8954804 MGLTD G Telefax: 020 7325 8225 Attention: Euro Medium Term Note Desk Each by its duly authorised signatory: ALISTAIR FERGUSON UBS AG, acting through its business group UBS Warburg 1 Finsbury Avenue London EC2M 2PP Telephone: 44 20 7567 2324 Telex: 887434 UBSW G Telefax: 44 20 7568 3349 Attention: MTNs and Private Placements By: BERT SUER By: ALISTAIR FERGUSON EX-4.2 4 ex4-2.txt DEED OF COVENANT Exhibit 4.2 30th March, 2001 CIBA SPECIALTY CHEMICALS PLC CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH as Issuers -------------------------------------------- DEED OF COVENANT -------------------------------------------- ALLEN & OVERY London DEED OF COVENANT THIS DEED OF COVENANT is made on 30th March, 2001 by each of Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC and Ciba Spezialitatenchemie Holding Deutschland GmbH (each an "Issuer") in favour of the account holders of Clearstream Banking, societe anonyme ("Clearstream, Luxembourg") and Euroclear Bank S.A./N.V. as operator of the Euroclear System ("Euroclear"), or any successor to the business thereof or any other additional clearing system or systems as are specified in the Pricing Supplement relating to any Note (as defined below) (each a "Clearing System"). WHEREAS: (A) Each Issuer has entered into an amended and restated Program Agreement (the "Program Agreement", which expression includes the same as it may be amended, supplemented, novated or restated from time to time) dated 30th March, 2001 with Ciba Specialty Chemicals Holding Inc. (the "Guarantor") and the Dealers named therein under which the relevant Issuer proposes from time to time to issue Euro Medium Term Notes (the "Notes"), which amends and restates the amended and restated program agreement dated 16th June, 2000 with Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC, Ciba Spezialitatenchemie Holdings Deutschland GmbH, the Guarantor and the Dealers named therein (the "Principal Program Agreement"). (B) Each Issuer has also entered into an amended and restated Agency Agreement (the "Agency Agreement", which expression includes the same as it may be amended, supplemented, novated or restated from time to time) dated 30th March, 2001 between, inter alios, the Issuer and The Chase Manhattan Bank (the "Agent"). (C) The Notes will initially be represented by, and comprised in, Temporary Global Notes (the "Temporary Global Notes") and thereafter may be represented by, and comprised in, Permanent Global Notes (the "Permanent Global Notes" and together with the Temporary Global Notes, the "Global Notes"), such Global Notes representing a certain number of underlying Notes (the "Underlying Notes"). (D) Each Global Note will, after issue, be deposited with a common depository for one or more Clearing Systems (each such Clearing System or all such Clearing Systems together, the "Relevant Clearing System"). Upon such deposit of a Global Note the Underlying Notes represented by such Global Note will be credited to a securities account or securities accounts with the Relevant Clearing System. Any account holder with the Relevant Clearing System which has Underlying Notes credited to its securities account from time to time (each a "Relevant Account Holder") will, subject to and in accordance with the terms and conditions and operating procedures or management regulations of the Relevant Clearing System, be entitled to transfer such Underlying Notes and (subject to and upon payment being made by the relevant Issuer to the bearer in accordance with the terms of the relevant Global Note) will be entitled to receive payments from the Relevant Clearing System calculated by reference to the Underlying Notes credited to its securities account. (E) In certain circumstances specified in each Global Note, a Global Note will become void. The time at which a Global Note becomes void is hereinafter referred to as the "Relevant Time". In such circumstances each Relevant Account Holder will, subject to and in accordance with the terms of this Deed, acquire against the relevant Issuer all those rights which such Relevant Account Holder would have had if, prior to the Global Note becoming void, duly executed and authenticated Definitive Note(s) (as defined in the Agency Agreement) and, if the Notes are repayable in instalments, receipts in respect thereof (the "Receipts") and interest coupons 2 (the "Coupons") appertaining to the Definitive Note(s) (if appropriate) had been issued in respect of its Underlying Note(s) and such Definitive Notes(s), Receipts (if appropriate) and Coupons (if appropriate) were held and beneficially owned by such Relevant Account Holder. (F) The obligations of each Issuer under this Deed have been guaranteed by the Guarantor pursuant to the amended and restated Deed of Guarantee (the "Guarantee") executed by the Guarantor on 30th March, 2001 and an executed copy of the Guarantee has been deposited with and shall be held by the Agent for the time being for the Notes. A copy of the Guarantee shall be available for inspection at the office of the Agent for the time being (being at the date hereof at Trinity Tower, 9 Thomas More Street, London E1 9YT). (G) This Deed of Covenant amends and restates the amended and restated Deed of Covenant entered into by Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC, Ciba Spezialitatenchemie Holding Deutschland GmbH dated 16th June, 2000. This Deed of Covenant does not affect any Notes issued pursuant to the Principal Program Agreement prior to the date hereof. NOW THIS DEED WITNESSES AS FOLLOWS: 1. If any Global Note becomes void in accordance with the terms thereof the relevant Issuer hereby undertakes and covenants with each Relevant Account Holder (other than when any Relevant Clearing System is an account holder of any other Relevant Clearing System) that each Relevant Account Holder shall automatically acquire at the Relevant Time, without the need for any further action on behalf of any person, against the relevant Issuer all those rights which such Relevant Account Holder would have had if at the Relevant Time it held and beneficially owned duly executed and authenticated Definitive Note(s), Receipts (if appropriate) and Coupons (if appropriate) in respect of each Underlying Note represented by such Global Note which such Relevant Account Holder has credited to its securities account with the Relevant Clearing System at the Relevant Time. The relevant Issuer's obligation pursuant to this clause shall be a separate and independent obligation by reference to each Underlying Note which a Relevant Account Holder has credited to its securities account with the Relevant Clearing System and the relevant Issuer agrees that a Relevant Account Holder may assign its rights hereunder in whole or in part. 2. The records of the Relevant Clearing System shall be conclusive evidence of the identity of the Relevant Account Holders and the number of Underlying Notes credited to the securities account of each Relevant Account Holder. For the purposes hereof a statement issued by the Relevant Clearing System stating: (i) the name of the Relevant Account Holder to which such statement is issued; and (ii) the aggregate nominal amount of Underlying Notes credited to the securities account of such Relevant Account Holder as at the opening of business on the first day following the Relevant Time on which the Relevant Clearing System is open for business, shall be conclusive evidence of the records of the Relevant Clearing System at the Relevant Time. 3. In the event of a dispute, the determination of the Relevant Time by the Relevant Clearing System shall be final and conclusive for all purposes in connection with the Relevant Account Holders with securities accounts with the Relevant Clearing System. 3 4.(a) Where the Issuer is Ciba Specialty Chemicals Corporation: The Issuer will, subject to the exceptions and limitations set forth below, pay as additional interest on an Underlying Note such additional amounts as are necessary in order that the net amounts receivable pursuant to the terms of the Underlying Note by each Relevant Account Holder who is a United States Alien (as such term is defined below), after deduction for any present or future tax, assessment or governmental charge of the United States (as such term is defined below), or a political subdivision or authority thereof or therein, imposed by withholding with respect to the payment, will not be less than the amounts provided for in such Underlying Note to be then due and payable; provided, however, that the foregoing obligation to pay additional amounts shall not apply to: (i) any tax, assessment or governmental charge that would not have been so imposed but for the existence of any present or former connection between such Relevant Account Holder (or between a fiduciary, settlor, beneficiary, member or shareholder of, or holder of power over, such holder, if such Relevant Account Holder is an estate, trust, partnership or corporation) and the United States, including, without limitation, such Relevant Account Holder (or fiduciary, settlor, beneficiary, member, shareholder or holder of a power) being considered as: (A) being or having been present or engaged in a trade or business in the United States or having or having had a permanent establishment therein; (B) having a current or former relationship with the United States, including a relationship as a citizen or resident or being treated as a resident thereof; (C) being or having been a personal holding company, a controlled foreign corporation, a passive foreign investment company, a foreign personal holding company with respect to the United States, a corporation that has accumulated earnings to avoid United States Federal income tax or a private foundation or other tax-exempt organisation; or (D) an actual or a constructive "10-per cent shareholder" of the Issuer as defined in Section 871(h)(3) of the United States Internal Revenue Code of 1986, as amended (the "Code"); (ii) any Relevant Account Holder who is a fiduciary or partnership or other than the sole beneficial owner of the Underlying Note, but only to the extent that a beneficiary or settlor with respect to such fiduciary or member of such partnership or a beneficial owner of the Underlying Note would not have been entitled to the payment of an additional amount had such beneficiary, settlor, member or beneficial owner been the Relevant Account Holder of such Underlying Note; (iii) any tax, assessment or governmental charge that would not have been imposed or withheld but for the failure of the Relevant Account Holder, if required, to comply with certification, identification or information reporting requirements under United States income tax laws, without regard to any tax treaty, with respect to the payment, concerning the nationality, residence, identity or connection with the United States of the Relevant Account Holder or a beneficial owner of such Underlying Note, if such compliance is required by United States income tax laws, without regard to any tax treaty, as a precondition to relief or exemption from such tax, assessment or governmental charge; 4 (iv) any estate, inheritance, gift, sales, transfer, excise, wealth or personal property tax or any similar tax, assessment or governmental charge; (v) any tax, assessment or governmental charge that is payable otherwise than by withholding from the payment of the amounts receivable in respect of such Underlying Note; (vi) any tax, assessment or governmental charge required to be withheld by any paying agent from such payment of amounts receivable in respect of any Underlying Note, if such payment can be made without such withholding by any other paying agent; or (vii) any combination of items (i), (ii), (iii), (iv), (v) or (vi). As used in this Clause, "United States" means the United States of America, the Commonwealth of Puerto Rico and each possession of the United States of America and place subject to its jurisdiction and "United States Alien" means any corporation, partnership, individual or fiduciary that, as to the United States, is for United States Federal income tax purposes (A) a foreign corporation, (B) a foreign partnership one or more of the members of which is, for United States Federal income tax purposes, a foreign corporation, a non-resident alien individual or a non-resident alien fiduciary of a foreign estate or trust, (C) a non-resident alien individual or (D) a non-resident alien fiduciary of a foreign estate or trust. (b) Where the Issuer is Ciba Spezialitatenchemie Holding Deutschland GmbH: All payments in respect of the Underlying Note by the Issuer will be made without withholding or deduction for or on account of any present or future taxes or duties of whatever nature imposed or levied by or on behalf of Germany or any state (Bundesland), municipality or other political subdivision or any authority thereof or therein having power to tax, unless such withholding or deduction is required by law. In such event, the Issuer will pay such additional amounts as shall be necessary in order that the net amounts received by the Relevant Account Holders after such withholding or deduction shall equal the amounts which would otherwise have been receivable in respect of the Underlying Note in the absence of such withholding or deduction; except that no such additional amounts shall be payable with respect to any Underlying Note to or to the order of a Relevant Account Holder who is liable for such taxes or duties in respect of such Underlying Note by reason of his having some connection with Germany other than the mere holding of such Underlying Note or with respect to any Underlying Note presented for payment to a paying agent which is required to deduct or withhold an amount for or on account of such taxes or duties if such amount can be paid without any deduction or withholding for or on account of any taxes or duties by any other paying agent. Any advance income tax (Zinsabschlagsteuer) levied in Germany since 1993 as well as the solidarity surcharge (Solidaritatszuschlag) imposed thereon since 1995 do not constitute a withholding or deduction within the meaning of this Clause 4(b). (c) Where the Issuer is Ciba Specialty Chemicals PLC: All payments by the Issuer in respect of the Underlying Notes shall be made without withholding or deduction for or on account of any present or future tax, duty or charge of whatever nature imposed or levied by or on behalf of the United Kingdom, or any authority thereof or therein having power to tax unless the withholding or deduction is required by law. In that event, the Issuer shall pay such additional amounts as will result (after such withholding or deduction) in the receipt by the Relevant Account Holders of the sums which would have been receivable (in the absence of such withholding or deduction) from the Issuer in respect of their Underlying Notes; except that no such additional amounts shall be payable 5 with respect to any Underlying Note to or to the order of a person liable to such tax, duty or charge in respect of such Underlying Note by reason of his having some connection with the United Kingdom other than the mere holding or ownership of such Underlying Note or with respect to any Underlying Note presented for payment to a paying agent which is required to deduct or withhold an amount for or on account of such tax, duty or charge if such amount can be paid without any deduction or withholding for or on account of any tax, duty or charge by any other paying agent. 5. Each Issuer hereby warrants, represents and covenants with each Relevant Account Holder that it has all corporate power, and has taken all necessary corporate or other steps, to enable it to execute, deliver and perform this Deed, and that this Deed constitutes a legal, valid and binding obligation of the relevant Issuer enforceable in accordance with its terms subject to the laws of bankruptcy and other laws affecting the rights of creditors generally. 6. This Deed shall take effect as a Deed Poll for the benefit of the Relevant Account Holders from time to time and for the time being. This Deed shall be deposited with and held by a depository for Clearstream, Luxembourg and Euroclear, or any successor to the business thereof and for the time being (being at the date hereof The Chase Manhattan Bank at Trinity Tower, 9 Thomas More Street, London E1 9YT) until all the obligations of each Issuer hereunder have been discharged in full. 7. Each Issuer hereby acknowledges the right of every Relevant Account Holder to the production of, and the right of every Relevant Account Holder to obtain (upon payment of a reasonable charge) a copy of, this Deed, and further acknowledges and covenants that the obligations binding upon it contained herein are owed to, and shall be for the account of, each and every Relevant Account Holder, and that each Relevant Account Holder shall be entitled severally to enforce the said obligations against the relevant Issuer. 8. No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Deed, but this does not affect any right or remedy of any person which exists or is available apart from that Act. 9. This Deed is governed by, and shall be construed in accordance with, the laws of England. Each Issuer hereby irrevocably agrees, for the exclusive benefit of the Relevant Account Holders, that the courts of England are to have jurisdiction to settle any dispute which may arise out of, or in connection with, this Deed and that accordingly any suit, action or proceedings (together referred to as "Proceedings") arising out of, or in connection with, this Deed may be brought in such courts. Each Issuer irrevocably waives any objection which it may have now or hereafter to the laying of the venue of any Proceedings in any such court and any claim that any such Proceedings have been brought in an inconvenient forum and further irrevocably agrees that a judgment in any Proceedings brought in the English courts shall be conclusive and binding upon the relevant Issuer and may be enforced in the courts of any other jurisdiction (subject to the laws of the jurisdiction in which enforcement is sought). Nothing contained in this Clause shall limit any right to take Proceedings against any Issuer in any other court of competent jurisdiction, nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not (subject to the laws of the relevant jurisdictions). Ciba Specialty Chemicals Corporation and Ciba Spezialitatenchemie Holding Deutschland GmbH each hereby appoints Ciba Specialty Chemicals PLC at its registered office for the time being to accept service of process on its behalf. If Ciba Specialty Chemicals PLC shall cease to be registered under the laws of England and Wales, the relevant Issuer shall appoint another 6 person with an office in London to accept such service. Nothing herein shall affect the right to serve process in any other manner permitted by law. 10. This Deed may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS whereof each Issuer has caused this Deed to be duly executed the day and year first above mentioned. 7 EXECUTED as a Deed under ) Seal by CIBA SPECIALTY CHEMICALS ) CORPORATION ) and SIGNED and ) DELIVERED as a deed on its ) behalf by ) OLIVER STRUB KIRK ERSTLING in the presence of: ) Witness's Signature .........................................A. STEINER Name .........................................ANITA STEINER Address .........................................c/o CIBA SPECIALTY CHEMICALS INC ......................................... EXECUTED as a Deed under ) Seal by CIBA SPECIALTY CHEMICALS ) PLC and SIGNED and DELIVERED as ) a deed on its behalf by ) OLIVER STRUB KIRK ERSTLING in the presence of: ) Witness's Signature .........................................A. STEINER Name .........................................ANITA STEINER Address .........................................c/o CIBA SPECIALTY CHEMICALS INC ......................................... 8 EXECUTED as a Deed under ) Seal by CIBA SPEZIALITATENCHEMIE ) HOLDING DEUTSCHLAND GMBH ) and SIGNED and DELIVERED as ) a deed on its behalf by ) OLIVER STRUB KIRK ERSTLING ) in the presence of: ) Witness's Signature .........................................A. STEINER Name .........................................ANITA STEINER Address .........................................c/o CIBA SPECIALTY CHEMICALS INC ......................................... EX-4.3 5 ex4-3.txt DEED OF GUARANTEE Exhibit 4.3 30th March, 2001 CIBA SPECIALTY CHEMICALS HOLDING INC. as Guarantor --------------------------------------------- DEED OF GUARANTEE -------------------------------------------- ALLEN & OVERY London DEED OF GUARANTEE THIS DEED OF GUARANTEE is made on 30th March, 2001 by CIBA SPECIALTY CHEMICALS HOLDING INC., (the "Guarantor") in favour of the Relevant Account Holders (as defined in the Deed of Covenant referred to below) and the holders for the time being of the Notes (as defined below) and the interest coupons (if any) appertaining to the Notes ("Coupons"), the Coupons being attached on issue to Definitive Note(s) (as defined below). Each Relevant Account Holder, each holder of a Note and each holder of a Coupon is a "Holder". WHEREAS: (A) CIBA SPECIALTY CHEMICALS CORPORATION, CIBA SPECIALTY CHEMICALS PLC, CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH (the "Issuers" and each an "Issuer") and the Guarantor have entered into an amended and restated Program Agreement (the "Program Agreement", which expression includes the same as it may be amended or supplemented from time to time) dated 30th March, 2001 with the Dealers named therein, which amends and restates the amended and restated program agreement entered into by, inter alia, Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC and Ciba Spezialitatenchemie Holding Deutschland GmbH dated 16th June, 2000 (the "Principal Program Agreement"), under which each Issuer proposes from time to time to issue Euro Medium Term Notes (the "Notes", such expression to include each Definitive Note issued by an Issuer and each Global Note issued by an Issuer (where "Definitive Note" and "Global Note" have the meanings ascribed thereto in the Agency Agreement defined below) and to include any receipts issued in respect of Notes repayable in instalments); (B) each Issuer has executed a Deed of Covenant of even date (the "Deed of Covenant") relating to Global Notes issued by that Issuer pursuant to the Program Agreement; (C) the Issuers and the Guarantor have entered into an amended and restated agency agreement (the "Agency Agreement", which expression includes the same as it may be amended or supplemented from time to time) dated 30th March, 2001 with the Paying Agents named therein; and (D) this Deed of Guarantee amends and restates the amended and restated Deed of Guarantee made by the Guarantor dated 16th June, 2000, and does not affect any Notes issued pursuant to the Principal Program Agreement prior to the date hereof. NOW THIS DEED WITNESSES as follows: 1. Guarantee: The Guarantor irrevocably and unconditionally undertakes to secure by way of deed poll to each Holder the due and punctual payment as stipulated in an Issuer's Note or Coupon or under its Deed of Covenant, as the case may be. The Guarantor therefore undertakes to pay on first demand of such a Holder, irrespective of the validity and the legal effects of the above mentioned relationship in respect of a Note or Coupon or Deed of Covenant and waiving all rights of objection and defence arising therefrom any amount not paid by the relevant Issuer (including any premium or any other amounts of whatever nature or additional amounts) upon receipt of the written request for payment by such Holder and the confirmation in writing by the Agent that the relevant Issuer has not made such payments on the dates specified and in the amount called under the Guarantee. The Guarantor hereby expressly undertakes and secures that payments under this Guarantee will not be less than as stipulated in an Issuer's Note or Coupon. In implementation of this undertaking and in case Swiss withholding taxes are imposed in respect of payments made under this Guarantee, the 2 Guarantor undertakes, as a separate and independent obligation, to pay an increased amount on the relevant Note or Coupon so that the payment received by the Noteholder or Couponholder shall equal the amount actually stipulated in such Note or Coupon (assuming no such withholding applies). 2. Guarantor's Obligations Continuing: The Guarantor's obligations under this Guarantee are and will remain in full force and effect by way of continuing security until no sum remains payable under any Note, any Coupon or the Deed of Covenant. Furthermore, these obligations of the Guarantor are additional to, and not instead of, any security or other guarantee or indemnity at any time existing in favour of a Holder, whether from the Guarantor or otherwise. The Guarantor irrevocably waives all notices and demands whatsoever, except as provided herein. 3. Repayment to the Issuer: If any payment received by a Holder is, on the subsequent liquidation or insolvency of the relevant Issuer, avoided under any laws relating to liquidation or insolvency, such payment will not be considered as having discharged or diminished the liability of the Guarantor and this Guarantee will continue to apply as if such payment had at all times remained owing by the relevant Issuer. 4. Status of Guarantee: The payment obligations of the Guarantor under this Guarantee constitute direct, unconditional and (subject to clause 5 below) unsecured obligations of the Guarantor and (subject as aforesaid) rank and will rank pari passu with all other outstanding unsecured and unsubordinated indebtedness and monetary obligations of the Guarantor, present or future, including those in respect of deposits (other than obligations preferred by law). 5. Negative Pledge of the Guarantor: So long as any of the Notes remains outstanding, but not later than the time when payment for the full amount of principal and interest in respect of all outstanding Notes has been duly provided for, the Guarantor will procure that no Indebtedness of the Guarantor which is represented by bonds, notes or other securities which in any such case are listed or capable of being listed on any recognised Stock Exchange will be secured upon any of the present or future assets or revenues of the Guarantor unless all amounts payable under this Guarantee are secured equally and rateably with such other security or such other security or guarantee is granted to the Notes and Coupons as shall have been approved by an Extraordinary Resolution of the Noteholders. Any reference to an obligation being guaranteed shall include a reference to an indemnity being given in respect of payment thereof. As used herein "Indebtedness" means all indebtedness for money borrowed that is created, assumed, incurred or guaranteed in any manner by the Guarantor or for which the Guarantor is otherwise responsible or liable. 6. Tax Gross-up: All payments in respect of the Notes by the Guarantor shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of Switzerland, or any political sub-division of, or any authority in, or of, Switzerland having power to tax, unless the withholding or deduction of the Taxes is required by law. In that event, the Guarantor will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amount shall be payable in relation to any payment in respect of any Note or Coupon: 3 (i) by or on behalf of a person liable to such tax, duty or charge in respect of such Note, Receipt or Coupon by reason of his having some connection with Switzerland other than the mere holding or ownership of such Note, Receipt or Coupon; and/or (ii) presented for payment to the relevant Issuer more than 30 days after the Relevant Date (as defined in Condition 7(f) of the Terms and Conditions of the relevant Notes) except to the extent that a holder would have been entitled to additional amounts on presenting the same for payment on the last day of the period of 30 days; and/or (iii) to, or to a third party on behalf of, a holder who would be able to avoid such withholding or deduction by making a declaration of non-residence or similar claim for exemption but fails to do so; and/or (iv) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to any European Union Directive on the taxation of savings implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000, or any law implementing or complying with, or introduced in order to conform to, such Directive; and/or (v) presented for payment by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the EU. 7. Power to execute: The Guarantor hereby warrants, represents and covenants with each Holder that it has all corporate power, and has taken all necessary corporate or other steps, to enable it to execute, deliver and perform this Guarantee, and that this Guarantee constitutes a legal, valid and binding obligation of the Guarantor, enforceable in accordance with its terms subject to applicable bankruptcy, reorganisation, insolvency, fraudulent transfer, moratorium and other similar laws affecting creditor's rights generally from time to time in effect, and to general principles of equity, regardless of whether considered in a proceeding in law or at equity. 8. Deposit of Guarantee: This Guarantee shall take effect as a Deed Poll for the benefit of the Holders from time to time and for the time being. This Guarantee shall be deposited with and held by The Chase Manhattan Bank for the benefit of the Holders until all the obligations of the Guarantor hereunder have been discharged in full. 9. Production of Guarantee: The Guarantor hereby acknowledges the right of every Holder to the production of, and the right of every Holder to obtain (upon payment of a reasonable charge) a copy of, this Guarantee, and further acknowledges and covenants that the obligations binding upon it contained herein are owed to, and shall be for the account of, each and every Holder, and that each Holder shall be entitled severally to enforce the said obligations against the Guarantor. 10. Subrogation: Until all amounts which may be payable under the Notes, the Coupons and/or the Deed of Covenant have been irrevocably paid in full, the Guarantor shall not exercise any rights of subrogation in respect of any rights of any Holder or claim in competition with the Holders against the relevant Issuer. 11. Governing Law and Jurisdiction: This Guarantee is governed by and shall be construed in accordance with English law. The Guarantor irrevocably agrees for the benefit of each Holder that the courts of England are to have jurisdiction to settle any disputes which may 4 arise out of or in connection with this Guarantee and that accordingly any suit, action or proceedings arising out of or in connection with this Guarantee (together referred to as "Proceedings") may be brought in the courts of England. The Guarantor irrevocably waives any objection which it may have now or hereafter to the laying of the venue of the Proceedings in the courts of England and irrevocably agrees that a final judgment in any Proceedings brought in the courts of England shall be conclusive and binding upon the Guarantor and may be enforced in the courts of any other jurisdiction. Nothing contained in this clause shall limit any right to take Proceedings against the Guarantor in any other court of competent jurisdiction, nor shall the taking of Proceedings in none or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not. No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Global Note, but this does not affect any right or remedy of any person which exists or is available apart from that Act. The Guarantor hereby appoints Ciba Specialty Chemicals PLC as its agent for service of process in England in respect of any Proceedings and undertakes that in the event of it ceasing so to act it will appoint another person as its agent for that purpose. IN WITNESS whereof this Guarantee has been manually executed as a deed poll on behalf of the Guarantor. Executed as a deed ) by CIBA SPECIALTY CHEMICALS ) HOLDING INC. ) OLIVER STRUB KIRK ERSTLING acting by its attorneys ) and in the presence of: ) Witness's Signature: ..................................... A. STEINER Name: ..................................... ANITER STEINER Address: ..................................... c/o CIBA SPECIALTY CHEMICALS ..................................... Dated 30th March, 2001 EX-4.4 6 ex4-4.txt AGENCY AGREEMENT Exhibit 4.4 Dated 30th March, 2001 CIBA SPECIALTY CHEMICALS PLC CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH as Issuers - and - CIBA SPECIALTY CHEMICALS HOLDING INC. as Guarantor - and - THE CHASE MANHATTAN BANK as Agent - and - CHASE MANHATTAN BANK LUXEMBOURG S.A. as Paying Agent ________________________________________ AGENCY AGREEMENT in respect of a U.S.$2,000,000,000 EURO MEDIUM TERM NOTE PROGRAM (Amended and Restated) ________________________________________ ALLEN & OVERY London CONTENTS Clause Page 1. Definitions and interpretation...........................................2 2. Appointment of Agent and Paying Agents...................................7 3. Issue of Temporary Global Notes..........................................9 4. Determination of Exchange Date, issue of Permanent Global Notes and Definitive Notes and determination of end of Distribution Compliance Period..................................................................10 5. Issue of Definitive Notes...............................................11 6. Terms of Issue..........................................................11 7. Payments................................................................12 8. Determinations and notifications in respect of Notes and Interest Determination..................................................14 9. Notice of any withholding or deduction..................................16 10. Duties of the Agent in connection with early redemption.................16 11. Receipt and Publication of Notices......................................17 12. Cancellation of Notes, Receipts, Coupons and Talons.....................18 13. Issue of replacement Notes, Receipts, Coupons and Talons................19 14. Copies of documents available for inspection............................20 15. Meetings of Noteholders.................................................20 16. Commissions and expenses................................................21 17. Indemnity...............................................................21 18. Repayment by the Agent..................................................21 19. Conditions of appointment...............................................22 20. Communication between the parties.......................................23 21. Changes in Agent and other Paying Agents................................23 22. Merger and consolidation................................................24 23. Notification of changes to Paying Agents................................25 24. Change of specified office..............................................25 25. Notices.................................................................25 26. Taxes and stamp duties..................................................26 27. Currency indemnity......................................................26 28. Amendments..............................................................26 29. Descriptive headings....................................................27 30. Contracts (Rights of Third Parties) Act 1999............................27 31. Governing law and submission to jurisdiction............................27 32. Counterparts............................................................27 Schedules Appendix A...................................................................29 Form of Calculation Agency Agreement.........................................29 1. Terms and Conditions of the Notes...................................38 2. Forms of Global and Definitive Notes, Receipts, Coupons and Talons 61 3. Form of Deed of Guarantee...........................................97 4. Provisions for Meetings of Noteholders..............................101 5. Form of Put Notice..................................................108 6. Operating & Administrative Procedures Memorandum....................110 Signatories..................................................................135 AGENCY AGREEMENT in respect of a EURO MEDIUM TERM NOTE PROGRAM THIS AGREEMENT is made on 30th March, 2001 BETWEEN: (1) CIBA SPECIALTY CHEMICALS CORPORATION of 560 White Plains Road, Tarrytown, New York 10591-9005, United States ("CIBA US"); (2) CIBA SPECIALTY CHEMICALS PLC of Hulley Road, Macclesfield, Cheshire SK10 2NX, England ("CIBA UK"); (3) CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH of Chemiestrasse, D-68623 Lampertheim, Germany ("CIBA Germany"); (4) CIBA SPECIALTY CHEMICALS HOLDING INC. of Klybeckstrasse 141, CH-4002 Basel, Switzerland (the "Guarantor"); (5) THE CHASE MANHATTAN BANK of Trinity Tower, 9 Thomas More Street, London E1W 1YT (the "Agent", which expression shall include any successor agent appointed in accordance with clause 21); and (6) CHASE MANHATTAN BANK LUXEMBOURG S.A. of 5 Rue Plaetis, L-2338 Luxembourg (together with the Agent, the "Paying Agents", which expression shall include any additional or successor paying agent appointed in accordance with clause 21 and "Paying Agent" shall mean any of the Paying Agents). WHEREAS: (A) CIBA US, CIBA UK, CIBA Germany (each an "ISSUER" and together, the "ISSUERS") and the Guarantor have entered into an amended and restated program agreement dated 30th March, 2001 (the "PROGRAM AGREEMENT") with the Dealers named therein pursuant to which the Issuer may issue Euro Medium Term Notes (the "NOTES") in an aggregate nominal amount outstanding at any time of up to U.S.$2,000,000,000 (or its equivalent in other currencies). The Program Agreement amends and restates the amended and restated program agreement entered into by CIBA US, CIBA UK, CIBA Germany and the Guarantor dated 16th June, 2000 with the Dealers named therein. (B) CIBA US, CIBA UK, CIBA Germany, the Guarantor, the Agent and the Paying Agents (the "PRINCIPAL PARTIES") entered into an amended and restated Agency Agreement (the "PRINCIPAL AGENCY AGREEMENT") dated 16th June, 2000 in respect of U.S.$2,000,000,000 Euro Medium Term Note Program. (C) This Agreement amends and restates the Principal Agency Agreement. Any Notes issued on or after the date hereof (other than any such Notes issued so as to be consolidated and form a single Series with any Notes issued prior to the date hereof) shall be issued pursuant to this Agreement. This does not affect any Notes issued prior to the date hereof. 2 (D) Each issue of Notes will be initially represented by a temporary global Note exchangeable in whole or in part for definitive Notes or for a permanent global Note which will be exchangeable as described therein for definitive Notes. IT IS HEREBY AGREED as follows: 1. DEFINITIONS AND INTERPRETATION (1) Terms and expressions defined in the Program Agreement or the Notes or used in the applicable Pricing Supplement shall have the same meanings in this Agreement, except where the context requires otherwise or unless otherwise stated. (2) Without prejudice to the foregoing: "CLEARSTREAM, LUXEMBOURG" means Clearstream Banking, societe anonyme; "CONDITIONS" means, in relation to the Notes of any Series, the terms and conditions endorsed on or incorporated by reference into or attached to the Note or Notes constituting such Series, such terms and conditions being in or substantially in the form set out in Schedule 1 or in such other form, having regard to the terms of the Notes of the relevant Series, as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer as modified and supplemented by the Pricing Supplement applicable to the Notes of the relevant Series; "COUPON" means an interest coupon appertaining to a Definitive Note (other than a Zero Coupon Note), such coupon being: (i) if appertaining to a Fixed Rate Note, in the form or substantially in the form set out in Part IV A of Schedule 2 or in such other form, having regard to the terms of issue of the Notes of the relevant Series, as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer; or (ii) if appertaining to a Floating Rate Note or an Indexed Interest Note, in the form or substantially in the form set out in Part IV B of Schedule 2 or in such other form, having regard to the terms of issue of the Notes of the relevant Series, as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer; or (iii) if appertaining to a Definitive Note which is neither a Fixed Rate Note nor a Floating Rate Note nor an Indexed Interest Note, in such form as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer, and includes, where applicable, the Talon(s) appertaining thereto and any replacements for Coupons and Talons issued pursuant to Condition 10; "COUPONHOLDERS" means the several persons who are for the time being holders of the Coupons and shall, unless the context otherwise requires, include the holders of the Talons; "DEFINITIVE NOTE" means a definitive Note issued or, as the case may require, to be issued by the relevant Issuer in accordance with the provisions of the Program Agreement or any other agreement between the relevant Issuer, the Guarantor and the relevant Dealer in exchange for 3 either a Temporary Global Note or a Permanent Global Note (all as indicated in the applicable Pricing Supplement), such definitive Note being in the form or substantially in the form set out in Part III of Schedule 2 with such modifications (if any) as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer and having the Conditions endorsed thereon or attached thereto or, if permitted by the relevant authority or authorities and agreed by the relevant Issuer, the Guarantor and the relevant Dealer, incorporating the Conditions by reference and having the applicable Pricing Supplement (or the relevant provisions thereof) either endorsed thereon or attached thereto and (except in the case of a Zero Coupon Note) having Coupons and, where appropriate, Receipts and/or Talons attached thereto on issue; "DISTRIBUTION COMPLIANCE PERIOD" has the meaning given to such term in Regulation S under the Securities Act; "DUAL CURRENCY NOTE" means a Note in respect of which payments of principal and/or interest are made or to be made in such different currencies, and at rates of exchange calculated upon such basis or bases, as the relevant Issuer, the Guarantor and the relevant Dealer may agree (as indicated in the applicable Pricing Supplement); "EURIBOR" means the Euro-zone inter-bank offered rate; "EUROCLEAR" means Euroclear Bank S.A./N.V. as operator of the Euroclear System, or any successor to the business thereof; "EURO-ZONE" means the region composed of Member States of the European Union that are participating in the third stage of European economic and monetary union; "FIXED RATE NOTE" means a Note on which interest is calculated at a fixed rate payable in arrear on a fixed date or dates in each year and on the redemption date or on such other dates as may be agreed between the relevant Issuer, the Guarantor and the relevant Dealer (as indicated in the applicable Pricing Supplement); "FLOATING RATE NOTE" means a Note on which interest is calculated at a floating rate payable in respect of such period or on such date(s) as may be agreed between the relevant Issuer, the Guarantor and the relevant Dealer (as indicated in the applicable Pricing Supplement); "GLOBAL NOTE" means a Temporary Global Note and/or a Permanent Global Note, as applicable; "GUARANTEE" means the guarantee dated the date of this Agreement, substantially in the form set out in Schedule 3, executed as a deed poll by the Guarantor in respect of any Note and in respect of the obligations of the Issuers under the Deed of Covenant; "INDEXED INTEREST NOTE" means a Note in respect of which the amount payable in respect of interest is calculated by reference to an index and/or a formula as the relevant Issuer, the Guarantor and the relevant Dealer may agree (as indicated in the applicable Pricing Supplement); "INDEXED NOTE" means an Indexed Interest Note and/or an Indexed Redemption Amount Note, as applicable; 4 "INDEXED REDEMPTION AMOUNT NOTE" means a Note in respect of which the amount payable in respect of principal is calculated by reference to an index and/or a formula as the relevant Issuer, the Guarantor and the relevant Dealer may agree (as indicated in the applicable Pricing Supplement); "INTEREST COMMENCEMENT DATE" means, in the case of interest-bearing Notes, the date specified in the applicable Pricing Supplement from (and including) which such Notes bear interest, which may or may not be the Issue Date (but if no date is specified shall be the Issue Date); "ISDA DEFINITIONS" mean the 2000 ISDA Definitions, each as amended and updated as at the Issue Date of the first Tranche of Notes of the relevant Series and published by the International Swaps and Derivatives Association, Inc.; "ISSUE DATE" means the date of issue and purchase of a Note, in each case pursuant to and in accordance with the Program Agreement or any other agreement between the relevant Issuer, the Guarantor and the relevant Dealer, being in the case of any Permanent Global Note or Definitive Note, the same date as the date of issue of the Temporary Global Note which initially represented such Note; "ISSUE PRICE" means the price, generally expressed as a percentage of the nominal amount of the Notes, at which the Notes will be issued; "LIBOR" means the London inter-bank offered rate; "MATURITY DATE" means, in relation to a Note, the date on which it is expressed to be redeemable; "NOTE" means a note denominated in Australian dollars, Austrian Schillings, Canadian dollars, Czech koruna, Danish kroner, Deutsche Marks, Dutch guilders, euro, Finnish markkas, Hong Kong dollars, Irish pounds, Italian lire, Japanese Yen, Luxembourg francs, New Zealand dollars, Norwegian kroner, Portuguese escudos, South African Rand, Sterling, Swedish kronor, Swiss francs, U.S. dollars or such other currency or currencies as may be agreed between the relevant Issuer, the Guarantor and the relevant Dealer issued or to be issued by the relevant Issuer pursuant to the Program Agreement or any other agreement between the relevant Issuer, the Guarantor and the relevant Dealer and which shall initially be represented by, and comprised in, a Temporary Global Note which may (in accordance with the terms of such Temporary Global Note) be exchanged for either Definitive Notes or a Permanent Global Note which Permanent Global Note may (in accordance with the terms of such Permanent Global Note) in turn be exchanged for Definitive Notes (all as indicated in the applicable Pricing Supplement) and includes any replacements for a Note issued pursuant to Condition 10 and, where applicable, the Receipts relating thereto; "NOTEHOLDERS" means the several persons who are for the time being holders of the Notes save that, in respect of the Notes of any Series, for so long as such Notes or any part thereof are represented by a Global Note held on behalf of Euroclear and/or of Clearstream, Luxembourg, each person (other than Euroclear or Clearstream, Luxembourg) who is for the time being shown in the records of Euroclear or of Clearstream, Luxembourg as the holder of a particular nominal amount of the Notes of such Series (in which regard any certificate or other document issued by Euroclear or Clearstream, Luxembourg as to the nominal amount of such Notes standing to the account of any person shall be conclusive and binding for all 5 purposes save in the case of manifest error) shall be treated by the Issuer, the Guarantor, the Agent and any other Paying Agent as the holder of such nominal amount of such Notes for all purposes other than with respect to the payment of principal or interest on such Notes, for which purpose the bearer of the relevant Global Note shall be treated by the Issuer, the Guarantor, the Agent and any other Paying Agent as the holder of such nominal amount of such Notes in accordance with and subject to the terms of the relevant Global Note and this agreement and the expressions "NOTEHOLDER", "HOLDER OF NOTES" and related expressions shall be construed accordingly; "OUTSTANDING" means, in relation to the Notes, all the Notes issued other than (a) those which have been redeemed in full in accordance with the Conditions, (b) those in respect of which the date for redemption in accordance with the Conditions has occurred and the redemption moneys wherefor (including all interest (if any) accrued thereon to the date for such redemption and any interest (if any) payable under the Conditions after such date) have been duly paid to the Agent as provided herein (and, where appropriate, notice has been given to the Noteholders of the relevant Series in accordance with Condition 14) and remain available for payment against presentation of Notes, (c) those which have become void under Condition 8, (d) those which have been purchased and cancelled as provided in Condition 6, (e) those mutilated or defaced Notes which have been surrendered in exchange for replacement Notes pursuant to Condition 10, (f) (for the purpose only of determining the nominal amount of the Notes outstanding and without prejudice to their status for any other purpose) those Notes alleged to have been lost, stolen or destroyed and in respect of which replacement Notes have been issued pursuant to Condition 10, (g) Temporary Global Notes to the extent that they shall have been duly exchanged for Permanent Global Notes and/or Definitive Notes and Permanent Global Notes to the extent that they shall have been duly exchanged for Definitive Notes, in each case pursuant to their respective provisions and (h) Temporary Global Notes and Permanent Global Notes which have become void in accordance with their terms (provided that at the Relevant Time (as defined in the Deed of Covenant) the Underlying Notes (as defined in the Deed of Covenant) will be deemed to be still outstanding) and, PROVIDED THAT for each of the following purposes, namely: (i) the right to attend and vote at any meeting of the Noteholders or any of them; and (ii) the determination of how many and which Notes are for the time being outstanding for the purposes of paragraphs 2, 5 and 6 of Schedule 4 hereto, those Notes (if any) which are for the time being held by any person (including but not limited to any Issuer, the Guarantor or any of their respective Subsidiaries) for the benefit of any Issuer, the Guarantor or any of their respective Subsidiaries shall (unless and until ceasing to be so held) be deemed not to be outstanding; "PERMANENT GLOBAL NOTE" means a global note in the form or substantially in the form set out in Part II of Schedule 2 together with the copy of the applicable Pricing Supplement attached thereto with such modifications (if any) as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer, comprising some or all of the Notes of the same Series, issued by the relevant Issuer pursuant to the Program Agreement or any other agreement between the relevant Issuer, the Guarantor and the relevant Dealer in exchange for the whole or part of any Temporary Global Note issued in respect of such Notes; 6 "PROCEDURES MEMORANDUM" means the operating and administrative procedures memorandum set out in Schedule 6 hereto; "PUT NOTICE" means a notice in the form set out in Schedule 5; "RECEIPT" means a receipt attached on issue to a Definitive Note redeemable in instalments for the payment of an instalment of principal, such receipt being in the form or substantially in the form set out in Part V of Schedule 2 or in such other form as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer and includes any replacements for Receipts issued pursuant to Condition 10; "RECEIPTHOLDERS" means the several persons who are for the time being holders of the Receipts; "REFERENCE BANKS" means, in the case of sub-clause 8(2)(a)(i) below, those banks whose offered rates were used to determine such quotation when such quotation last appeared on the Relevant Screen Page and, in the case of sub-clause 8(2)(a)(ii) below, those banks whose offered quotations last appeared on the Relevant Screen Page when no fewer than three such offered quotations appeared; "REPLACEMENT AGENT" means the Paying Agent in Luxembourg; "SECURITIES ACT" means the United States Securities Act of 1933, as amended; "SERIES" means a Tranche of the Notes together with any further Tranche or Tranches of the Notes which are (i) expressed to be consolidated and form a single series and (ii) identical in all respects (including as to listing) except for their respective Issue Dates, Interest Commencement Dates and/or Issue Prices and the expressions "Notes of the relevant Series" and "holders of Notes of the relevant Series" and related expressions shall be construed accordingly; "TALONS" means the talons (if any) appertaining to, and exchangeable in accordance with the provisions therein contained for further Coupons appertaining to, a Definitive Note (other than a Zero Coupon Note), such talons being in the form or substantially in the form set out in Part VI of Schedule 2 or in such other form as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer and includes any replacements for Talons issued pursuant to Condition 10; "TEMPORARY GLOBAL NOTE" means a global note in the form or substantially in the form set out in Part I of Schedule 2 together with the copy of the applicable Pricing Supplement attached thereto with such modifications (if any) as may be agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer, comprising some or all of the Notes of the same Series, issued by the relevant Issuer pursuant to the Program Agreement or any other agreement between the Issuer and the relevant Dealer; "TRANCHE" means all Notes which are identical in all respects (including as to listing); and "ZERO COUPON NOTE" means a Note on which no interest is payable. 7 (3) Words denoting the singular number only shall include the plural number also and vice versa; words denoting one gender only shall include the other gender; and words denoting persons only shall include firms and corporations and vice versa. (4) All references in this Agreement to costs or charges or expenses shall include any value added tax or similar tax charged or chargeable in respect thereof. (5) For the purposes of this Agreement, the Notes of each Series shall form a separate series of Notes and the provisions of this Agreement shall apply mutatis mutandis separately and independently to the Notes of each Series and in this Agreement the expressions "Notes", "NOTEHOLDERS", "RECEIPTS", "RECEIPTHOLDERS", "COUPONS", "COUPONHOLDERS" and "TALONS" shall be construed accordingly. (6) All references in this Agreement to principal and/or interest or both in respect of the Notes or to any moneys payable by any Issuer and/or the Guarantor under this Agreement shall have the meaning set out in Condition 5(d). (7) All references in this Agreement to the "RELEVANT CURRENCY" shall be construed as references to the currency in which the relevant Notes and/or Coupons are denominated (or payable in the case of Dual Currency Notes). (8) In this Agreement, clause headings are inserted for convenience and ease of reference only and shall not affect the interpretation of this Agreement. All references in this Agreement to the provisions of any statute shall be deemed to be references to that statute as from time to time modified, extended, amended or re-enacted or to any statutory instrument, order or regulation made thereunder or under such re-enactment. (9) All references in this Agreement to an agreement, instrument or other document (including, without limitation, this Agreement, the Program Agreement, the Deed of Covenant, the Guarantee, the Procedures Memorandum, the Notes and any Conditions appertaining thereto) shall be construed as a reference to that agreement, instrument or document as the same may be amended, modified, varied or supplemented from time to time. (10) Any references herein to Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits, be deemed to include a reference to any additional or alternative clearing system approved by the relevant Issuer, the Guarantor and the Agent. 2. APPOINTMENT OF AGENT AND PAYING AGENTS (1) The Agent is hereby appointed, and the Agent hereby agrees to act, as agent of the Issuers and the Guarantor, upon the terms and subject to the conditions set out below, for the purposes of, inter alia: (a) completing, authenticating and delivering Global Notes and (if required) authenticating and delivering Definitive Notes; 8 (b) exchanging Temporary Global Notes for Permanent Global Notes or Definitive Notes, as the case may be, in accordance with the terms of such Temporary Global Notes; (c) exchanging Permanent Global Notes for Definitive Notes in accordance with the terms of such Permanent Global Notes; (d) paying sums due on Global Notes and Definitive Notes, Receipts and Coupons; (e) exchanging Talons for Coupons in accordance with the Conditions; (f) determining the end of the Distribution Compliance Period applicable to each Tranche; (g) unless otherwise specified in the applicable Pricing Supplement, determining the interest and/or other amounts payable in respect of the Notes in accordance with the Conditions; (h) arranging on behalf of any Issuer and/or the Guarantor for notices to be communicated to the Noteholders; (i) preparing and sending monthly reports to the Bank of England and ensuring that, as directed by the relevant Issuer, all necessary action is taken to comply with any reporting requirements of any competent authority in respect of any relevant currency as may be in force from time to time with respect to the Notes to be issued under the Program; (j) subject to the Procedures Memorandum, submitting to the relevant authority or authorities such number of copies of each Pricing Supplement which relates to Notes which are to be listed as the relevant authority or authorities may reasonably require; (k) acting as Calculation Agent in respect of Notes where named as such in the relevant Pricing Supplement; and (l) performing all other obligations and duties imposed upon it by the Conditions, this Agreement and the Procedures Memorandum. (2) Each Paying Agent is hereby appointed as paying agent of the Issuers and the Guarantor, upon the terms and subject to the conditions set out below, for the purposes of paying sums due on Notes, Receipts and Coupons and of performing all other obligations and duties imposed upon it by the Conditions and this Agreement. (3) Each of the Issuer and the Guarantor undertakes that, if the conclusions of the ECOFIN Council meeting of 26th-27th November, 2000 are implemented, it will ensure that it maintains a paying agent in an EU member state that will not be obliged to withhold or deduct tax pursuant to the Directive. 9 3. ISSUE OF TEMPORARY GLOBAL NOTES (1) Subject to sub-clause (2) below, following receipt of a faxed copy of the Pricing Supplement signed by any Issuer and the Guarantor, the relevant Issuer and the Guarantor hereby authorise the Agent and the Agent hereby agrees to take the steps required of the Agent in the Procedures Memorandum. For this purpose the Agent will, inter alia, on behalf of the relevant Issuer: (a) prepare a Temporary Global Note by attaching a copy of the applicable Pricing Supplement to a copy of the applicable master Temporary Global Note; (b) authenticate such Temporary Global Note; (c) deliver such Temporary Global Note to the specified common depositary of Euroclear and/or Clearstream, Luxembourg against receipt from the common depositary of confirmation that such common depositary is holding the Temporary Global Note in safe custody for the account of Euroclear and/or Clearstream, Luxembourg and to instruct Euroclear or Clearstream, Luxembourg or both of them (as the case may be) unless otherwise agreed in writing between the Agent and the relevant Issuer (i) in the case of an issue of Notes not subscribed pursuant to a Subscription Agreement, to credit the Notes represented by such Temporary Global Note to the Agent's distribution account, and (ii) in the case of Notes subscribed pursuant to a Subscription Agreement, to hold the Notes represented by such Temporary Global Note to the Issuer's order; and (d) ensure that the Notes of each Tranche are assigned a common code and ISIN by Euroclear and Clearstream, Luxembourg which are different from the common code and ISIN assigned to Notes of any other Tranche of the same Series until not earlier than 40 days after the completion of the distribution of the Notes of such Tranche as notified by the Agent to the relevant Dealer. (2) The Agent shall only be required to perform its obligations under sub-clause (1) above if it holds: (a) a master Temporary Global Note for Notes issued pursuant to the UK Banking Act 1987 (Exempt Transactions) Regulations 1997 and a master Temporary Global Note for other Notes, each duly executed by a person or persons authorised to execute the same on behalf of the relevant Issuer, which may be used by the Agent for the purpose of preparing a Temporary Global Note in accordance with sub-clause (1)(a); and (b) a master Permanent Global Note for Notes issued pursuant to the UK Banking Act 1987 (Exempt Transactions) Regulations 1997 and a master Permanent Global Note for other Notes, each duly executed by a person or persons authorised to execute the same on behalf of the relevant Issuer, which may be used by the Agent for the purpose of preparing a Permanent Global Note in accordance with clause 4 below. 10 4. DETERMINATION OF EXCHANGE DATE, ISSUE OF PERMANENT GLOBAL NOTES AND DEFINITIVE NOTES AND DETERMINATION OF END OF DISTRIBUTION COMPLIANCE PERIOD (1) (a) The Agent shall determine the Exchange Date for each Temporary Global Note in accordance with the terms thereof. Forthwith upon determining the Exchange Date in respect of any Tranche, the Agent shall notify such determination to the relevant Issuer, the Guarantor, the other Paying Agents, the relevant Dealer, Euroclear and Clearstream, Luxembourg. (b) The Agent shall deliver, upon notice from Euroclear or Clearstream, Luxembourg, a Permanent Global Note or Definitive Notes, as the case may be, in accordance with the terms of the Temporary Global Note. Where a Temporary Global Note is to be exchanged for a Permanent Global Note, the Agent is hereby authorised on behalf of the relevant Issuer: (i) in the case of the first Tranche of any Series of Notes, to prepare and complete a Permanent Global Note in accordance with the terms of the Temporary Global Note applicable to such Tranche by attaching a copy of the applicable Pricing Supplement to a copy of the applicable master Permanent Global Note; (ii) in the case of the first Tranche of any Series of Notes, to authenticate such Permanent Global Note; (iii) in the case of the first Tranche of any Series of Notes, to deliver such Permanent Global Note to the common depositary which is holding the Temporary Global Note applicable to such Tranche for the time being on behalf of Euroclear and/or Clearstream, Luxembourg either in exchange for such Temporary Global Note or, in the case of a partial exchange, on entering details of such partial exchange of the Temporary Global Note in the relevant spaces in Schedule Two of both the Temporary Global Note and the Permanent Global Note; and (iv) in any other case, by attaching a copy of the applicable Pricing Supplement to the Permanent Global Note applicable to the relevant Series and entering details of any exchange in whole or part as aforesaid. (2) (a) In the case of a Tranche in respect of which there is only one Dealer, the Agent will determine the end of the Distribution Compliance Period in respect of such Tranche as being the fortieth day (or such later day as may be specified in the applicable Pricing Supplement) following the date certified by the relevant Dealer to the Agent as being the date as of which distribution of the Notes of that Tranche was completed. (b) In the case of a Tranche in respect of which there is more than one Dealer but is not issued on a syndicated basis, the Agent will determine the end of the Distribution Compliance Period in respect of such Tranche as being the fortieth day (or such later day as may be specified in the applicable Pricing Supplement) following the latest of the dates certified by all the relevant Dealers to the Agent as being the respective 11 dates as of which distribution of the Notes of that Tranche purchased by each such Dealer was completed. (c) In the case of a Tranche issued on a syndicated basis, the Agent will determine the end of the Distribution Compliance Period in respect of such Tranche as being the fortieth day (or such later day as may be specified in the applicable Pricing Supplement) following the date certified by the Lead Manager to the Agent as being the date as of which distribution of the Notes of that Tranche was completed. (d) Forthwith upon determining the end of the Distribution Compliance Period in respect of any Tranche, the Agent shall notify such determination to the relevant Issuer, the Guarantor, Euroclear, Clearstream, Luxembourg, the relevant Dealer(s) (in the case of a non-syndicated issue) and the Lead Manager (in the case of a syndicated issue). 5. ISSUE OF DEFINITIVE NOTES (1) Upon notice from Euroclear or Clearstream, Luxembourg pursuant to the terms of a Temporary Global Note or a Permanent Global Note, as the case may be, the Agent shall deliver the relevant Definitive Note(s) in accordance with the terms of the relevant Global Note. For this purpose the Agent is hereby authorised on behalf of the relevant Issuer: (a) to authenticate such Definitive Note(s) in accordance with the provisions of this Agreement; and (b) to deliver such Definitive Note(s) to or to the order of Euroclear and/or Clearstream, Luxembourg either in exchange for such Global Note or, in the case of a partial exchange of a Temporary Global Note, on entering details of any partial exchange of the Temporary Global Note in the relevant space in Schedule Two of such Temporary Global Note. The Agent shall notify the relevant Issuer forthwith upon receipt of a request for issue of Definitive Note(s) in accordance with the provisions of a Temporary Global Note or Permanent Global Note, as the case may be, (and the aggregate nominal amount of such Temporary Global Note or Permanent Global Note, as the case may be, to be exchanged in connection therewith). (2) Each Issuer undertakes to deliver to the Agent sufficient numbers of executed Definitive Notes with, if applicable, Receipts, Coupons and Talons attached to enable the Agent to comply with its obligations under this clause. 6. TERMS OF ISSUE (1) The Agent shall cause all Temporary Global Notes, Permanent Global Notes and Definitive Notes delivered to and held by it under this Agreement to be maintained in safe custody and shall ensure that such Notes are issued only in accordance with the provisions of this Agreement and the relevant Global Note and Conditions. (2) Subject to the procedures set out in the Procedures Memorandum, for the purposes of clause 3(1) the Agent is entitled to treat a telephone or facsimile communication from a person purporting to be (and who the Agent believes in good faith to be) the authorised representative of any Issuer and/or the Guarantor named in the lists referred to in, or notified 12 pursuant to, clause 19(7) as sufficient instructions and authority of such Issuer and/or the Guarantor for the Agent to act in accordance with clause 3(1). (3) In the event that a person who has signed on behalf of any Issuer any Note not yet issued but held by the Agent in accordance with clause 3(1) ceases to be authorised as described in clause 19(7), the Agent shall (unless the relevant Issuer gives notice to the Agent that Notes signed by that person do not constitute valid and binding obligations of the relevant Issuer or otherwise until replacements have been provided to the Agent) continue to have authority to issue any such Notes, and the relevant Issuer hereby warrants to the Agent that such Notes shall, unless notified as aforesaid, be valid and binding obligations of such Issuer. Promptly upon such person ceasing to be authorised, the relevant Issuer shall provide the Agent with replacement Notes and upon receipt of such replacement Notes the Agent shall cancel and destroy the Notes held by it which are signed by such person and shall provide to the relevant Issuer a confirmation of destruction in respect thereof specifying the Notes so cancelled and destroyed. (4) If the Agent pays an amount (the "ADVANCE") to the Issuer on the basis that a payment (the "PAYMENT") has been, or will be, received from a Dealer and if the Payment is not received by the Agent on the date the Agent pays the relevant Issuer, the relevant Issuer (failing which the Guarantor) shall repay to the Agent the Advance and shall pay interest on the Advance (or the unreimbursed portion thereof) from (and including) the date such Advance is made to (but excluding) the earlier of repayment of the Advance and receipt by the Agent of the Payment (at a rate quoted at that time by the Agent as its cost of funding the Advance provided that evidence of the basis of such rate is given to the relevant Issuer and the Guarantor). (5) Except in the case of issues where the Agent does not act as receiving bank for the relevant Issuer in respect of the purchase price of the Notes being issued, if on the relevant Issue Date a Dealer does not pay the full purchase price due from it in respect of any Note (the "DEFAULTED NOTE") and, as a result, the Defaulted Note remains in the Agent's distribution account with Euroclear and/or Clearstream, Luxembourg after such Issue Date, the Agent will continue to hold the Defaulted Note to the order of the relevant Issuer. The Agent shall notify the relevant Issuer forthwith of the failure of the Dealer to pay the full purchase price due from it in respect of any Defaulted Note and, subsequently, shall notify the relevant Issuer forthwith upon receipt from the Dealer of the full purchase price in respect of such Defaulted Note. 7. PAYMENTS (1) The Issuer (failing which the Guarantor) will, before 10.00 a.m. (local time in the relevant financial centre of the payment), on each date on which any payment in respect of any Note becomes due, transfer to an account specified by the Agent such amount in the relevant currency as shall be sufficient for the purposes of such payment in funds settled through such payment system as the Agent and the relevant Issuer or, as the case may be, the Guarantor may agree. (2) The Issuer (failing which the Guarantor) will ensure that no later than 10.00 a.m. (London time) on the second Business Day (as defined below) immediately preceding the date on which any payment is to be made to the Agent pursuant to sub-clause (1), the Agent shall receive from the paying bank of the Issuer or, as the case may be, the Guarantor a payment confirmation in the form of a SWIFT message. 13 For the purposes of this clause "BUSINESS DAY" means a day which is both: (a) a day on which commercial banks and foreign exchange markets settle payments in London and any other place specified in the applicable Pricing Supplement as an Additional Business Centre; and (b) either (i) in relation to a payment to be made in a Specified Currency other than euro, a day on which commercial banks and foreign exchange markets settle payments in the principal financial centre of the country of the relevant Specified Currency (if other than London and any Additional Business Centre) and which, if the Specified Currency is New Zealand Dollars, shall be Auckland or (ii) in relation to a payment to be made in euro, a day on which the TARGET System is open, where "TARGET SYSTEM" means the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) System. Unless otherwise provided in the applicable Pricing Supplement, the principal financial centre for any currency shall be as provided in the ISDA Definitions. (3) The Agent shall ensure that payments of both principal and interest in respect of a Temporary Global Note will be made only to the extent that certification of non-U.S. beneficial ownership as required by U.S. securities laws and U.S. Treasury regulations (in the form set out in the Temporary Global Note) has been received from Euroclear and/or Clearstream, Luxembourg in accordance with the terms thereof. (4) The Agent or the relevant Paying Agent shall pay or cause to be paid all amounts due in respect of the Notes on behalf of each Issuer and the Guarantor in the manner provided in the Conditions. If any payment provided for in sub-clause (1) is made late but otherwise in accordance with the provisions of this Agreement, the Agent and each Paying Agent shall nevertheless make payments in respect of the Notes as aforesaid following receipt by it of such payment. (5) If for any reason the Agent considers in its sole discretion that the amounts to be received by the Agent pursuant to sub-clause (1) will be, or the amounts actually received by it pursuant thereto are, insufficient to satisfy all claims in respect of all payments then falling due in respect of the Notes, neither the Agent nor any Paying Agent shall be obliged to pay any such claims until the Agent has received the full amount of all such payments. (6) Without prejudice to sub-clauses (4) and (5), if the Agent pays any amounts to the holders of Notes, Receipts or Coupons or to any Paying Agent at a time when it has not received payment in full in respect of the relevant Notes in accordance with sub-clause (1) (the excess of the amounts so paid over the amounts so received being the "SHORTFALL"), the relevant Issuer (failing which the Guarantor) will, in addition to paying amounts due under sub-clause (1), pay to the Agent on demand interest (at a rate which represents the Agent's cost of funding the Shortfall as evidenced to the relevant Issuer and the Guarantor by the provision of details of the calculation of the cost of funding) on the Shortfall (or the unreimbursed portion thereof) until the receipt in full by the Agent of the Shortfall. (7) The Agent shall on demand promptly reimburse each Paying Agent for payments in respect of Notes properly made by such Paying Agent in accordance with this Agreement and the Conditions unless the Agent has notified the Paying Agent, prior to the opening of business in the location of the office of the Paying Agent through which payment in respect of the 14 Notes can be made on the due date of a payment in respect of the Notes, that the Agent does not expect to receive sufficient funds to make payment of all amounts falling due in respect of such Notes. (8) Whilst any Notes are represented by Global Notes, all payments due in respect of such Notes shall be made to, or to the order of, the holder of the Global Notes, subject to and in accordance with the provisions of the Global Notes. On the occasion of any such payment the Paying Agent to which the Global Note was presented for the purpose of making such payment shall cause the appropriate Schedule to the relevant Global Note to be annotated so as to evidence the amounts and dates of such payments of principal and/or interest as applicable. (9) If the amount of principal and/or interest then due for payment is not paid in full (otherwise than by reason of a deduction required by law to be made therefrom), the Paying Agent to which a Note is presented for the purpose of making such payment shall make a record of such Shortfall on the Note and such record shall, in the absence of manifest error, be prima facie evidence that the payment in question has not to that extent been made. (10) The obligations of the Guarantor as set forth in this clause 7 shall be based on the Guarantee only and not be deemed to be primary obligations of the Guarantor. 8. DETERMINATIONS AND NOTIFICATIONS IN RESPECT OF NOTES AND INTEREST DETERMINATION (1) DETERMINATIONS AND NOTIFICATIONS (a) The Agent shall make all such determinations and calculations (howsoever described) as it is required to do under the Conditions, all subject to and in accordance with the Conditions. (b) The Agent shall not be responsible to any Issuer, the Guarantor or to any third party (except in the event of negligence, default or bad faith of the Agent, as the case may be) as a result of the Agent having acted on any quotation given by any Reference Bank which subsequently may be found to be incorrect. (c) The Agent shall promptly notify (and confirm in writing to) the relevant Issuer, the Guarantor, the other Paying Agents and (in respect of a Series of Notes listed on a Stock Exchange) the relevant Stock Exchange and Listing Agent of, inter alia, each Rate of Interest, Interest Amount and Interest Payment Date and all other amounts, rates and dates which it is obliged to determine or calculate under the Conditions as soon as practicable after the determination thereof and of any subsequent amendment thereto pursuant to the Conditions. (d) The Agent shall use its best endeavours to cause each Rate of Interest, Interest Amount and Interest Payment Date and all other amounts, rates and dates which it is obliged to determine or calculate under the Conditions to be published as required in accordance with the Conditions as soon as possible after their determination or calculation. (e) If the Agent does not at any material time for any reason determine and/or calculate and/or publish the Rate of Interest, Interest Amount and/or Interest Payment Date in 15 respect of any Interest Period or any other amount, rate or date as provided in this clause, it shall forthwith notify the relevant Issuer, the Guarantor and the other Paying Agents of such fact. (f) Determinations with regard to Notes (including, without limitation, Indexed Notes and Dual Currency Notes) shall be made by the Calculation Agent specified in the applicable Pricing Supplement in the manner specified in the applicable Pricing Supplement. Unless otherwise agreed between the relevant Issuer, the Guarantor and the relevant Dealer or unless the Agent is the Calculation Agent (in which case the provisions of this Agreement shall apply), such determinations shall be made on the basis of a Calculation Agency Agreement substantially in the form of Appendix A to this Agreement. (2) INTEREST DETERMINATION, SCREEN RATE DETERMINATION INCLUDING FALLBACK PROVISIONS (a) Where Screen Rate Determination is specified in the applicable Pricing Supplement as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Period will, subject as provided below, be either: (i) the offered quotation; or (ii) the arithmetic mean (rounded if necessary to the fifth decimal place, with 0.000005 being rounded upwards) of the offered quotations, (expressed as a percentage rate per annum), for the Reference Rate for deposits in the Specified Currency for that Interest Period which appears or appear, as the case may be, on the Relevant Screen Page as at 11.00 a.m. (London time, in the case of LIBOR, or Brussels time, in the case of EURIBOR) on the Interest Determination Date in question plus or minus (as indicated in the applicable Pricing Supplement) the Margin (if any), all as determined by the Agent. If five or more such offered quotations are available on the Relevant Screen Page, the highest (or, if there is more than one such highest quotation, one only of such quotations) and the lowest (or, if there is more than one such lowest quotation, one only of such quotations) shall be disregarded by the Agent for the purpose of determining the arithmetic mean (rounded as provided above) of such offered quotations. (b) If the Relevant Screen Page is not available or, if in the case of sub-clause 8(2)(a)(i) above, no such offered quotation appears or, in the case of sub-clause 8(2)(a)(ii) above, fewer than three such offered quotations appear, in each case as at the time specified in the preceding paragraph the Agent shall request the principal London office (in the case of LIBOR) or Euro-zone office (in the case of EURIBOR) of each of the Reference Banks to provide the Agent with its offered quotation (expressed as a percentage rate per annum) for the Reference Rate at approximately 11.00 a.m. (London time, in the case of LIBOR, or Brussels time, in the case of EURIBOR) on the Interest Determination Date in question. If two or more of the Reference Banks provide the Agent with such offered quotations, the Rate of Interest for such Interest Period shall be the arithmetic mean (rounded if necessary to the fifth decimal place with 0.000005 being rounded upwards) of such offered quotations plus or minus (as appropriate) the Margin (if any), all as determined by the Agent. 16 (c) If on any Interest Determination Date one only or none of the Reference Banks provides the Agent with such offered quotations as provided in the preceding paragraph, the Rate of Interest for the relevant Interest Period shall be the rate per annum which the Agent determines as being the arithmetic mean (rounded if necessary to the fifth decimal place, with 0.000005 being rounded upwards) of the rates, as communicated to (and at the request of) the Agent by the Reference Banks or any two or more of them, at which such banks were offered, at approximately 11.00 a.m. (London time, in the case of LIBOR, or Brussels time, in the case of EURIBOR) on the relevant Interest Determination Date, deposits in the Specified Currency for a period equal to that which would have been used for the Reference Rate by leading banks in the London inter-bank market (in the case of LIBOR) or the Euro-zone inter-bank market (in the case of EURIBOR) plus or minus (as appropriate) the Margin (if any) or, if fewer than two of the Reference Banks provide the Agent with such offered rates, the offered rate for deposits in the Specified Currency for a period equal to that which would have been used for the Reference Rate, or the arithmetic mean (rounded as provided above) of the offered rates for deposits in the Specified Currency for a period equal to that which would have been used for the Reference Rate, at which, at approximately 11.00 a.m. (London time, in the case of LIBOR, or Brussels time, in the case of EURIBOR) on the relevant Interest Determination Date, any one or more banks (which bank or banks is or are in the opinion of the relevant Issuer suitable for such purpose) informs the Agent it is quoting to leading banks in the London inter-bank market (in the case of LIBOR) or the Euro-zone inter-bank market (in the case of EURIBOR) plus or minus (as appropriate) the Margin (if any), provided that, if the Rate of Interest cannot be determined in accordance with the foregoing provisions of this paragraph, the Rate of Interest shall be determined as at the last preceding Interest Determination Date (though substituting, where a different Margin is to be applied to the relevant Interest Period from that which applied to the last preceding Interest Period, the Margin relating to the relevant Interest Period, in place of the Margin relating to that last preceding Interest Period). (d) If the Reference Rate from time to time in respect of Floating Rate Notes is specified in the applicable Pricing Supplement as being other than LIBOR or, as the case may be, EURIBOR, the Rate of Interest in respect of such Notes will be determined as provided in the applicable Pricing Supplement. 9. NOTICE OF ANY WITHHOLDING OR DEDUCTION If any Issuer and/or the Guarantor is, in respect of any payment, compelled to withhold or deduct any amount for or on account of taxes, duties, assessments or governmental charges as specifically contemplated under the Conditions, such Issuer and/or the Guarantor shall give notice thereof to the Agent as soon as it becomes aware of the requirement to make such withholding or deduction and shall give to the Agent such information as it shall require to enable it to comply with such requirement. 10. DUTIES OF THE AGENT IN CONNECTION WITH EARLY REDEMPTION (1) If any Issuer decides to redeem any Notes for the time being outstanding prior to their Maturity Date in accordance with the Conditions, such Issuer shall give notice of such decision to the Agent not less than 15 days before the date on which the relevant Issuer will 17 give notice to the Noteholders in accordance with the Conditions of such redemption in order to enable the Agent to undertake its obligations herein and in the Conditions. (2) If some only of the Notes are to be redeemed on such date, the Agent shall, in the case of Definitive Notes, make the required drawing in accordance with the Conditions but shall give the relevant Issuer reasonable notice of the time and place proposed for such drawing and the relevant Issuer shall be entitled to send representatives to attend such drawing and shall, in the case of Notes in global form, co-ordinate the selection of Notes to be redeemed with Euroclear and Clearstream, Luxembourg, all in accordance with the Conditions. (3) The Agent shall publish the notice required in connection with any such redemption and shall at the same time also publish a separate list of the serial numbers of any Notes in definitive form previously drawn and not presented for redemption. Such notice shall specify the date fixed for redemption, the redemption amount, the manner in which redemption will be effected and, in the case of a partial redemption of Definitive Notes, the serial numbers of the Notes to be redeemed. Such notice will be published in accordance with the Conditions. The Agent will also notify the other Paying Agents of any date fixed for redemption of any Notes. (4) Each Paying Agent will keep a stock of Put Notices and will make such notices available on demand to holders of Definitive Notes, the Conditions of which provide for redemption at the option of Noteholders. Upon receipt of any Note deposited in the exercise of such option in accordance with the Conditions, the Paying Agent with which such Note is deposited shall hold such Note (together with any Receipts, Coupons and Talons relating to it deposited with it) on behalf of the depositing Noteholder (but shall not, save as provided below, release it) until the due date for redemption of the relevant Note consequent upon the exercise of such option, when, subject as provided below, it shall present such Note (and any such Receipts, Coupons and Talons) to itself for payment of the amount due thereon together with any interest due on such date in accordance with the Conditions and shall pay such moneys in accordance with the directions of the Noteholder contained in the relevant Put Notice. If, prior to such due date for its redemption, such Note becomes immediately due and repayable or if upon due presentation payment of such redemption moneys is improperly withheld or refused, the Paying Agent concerned shall post such Note (together with any such Receipts, Coupons and Talons) by uninsured post to, and at the risk of, the relevant Noteholder unless the Noteholder has otherwise requested and paid the costs of such insurance to the relevant Paying Agent at the time of depositing the Notes at such address as may have been given by the Noteholder in the relevant Put Notice. At the end of each period for the exercise of such option, each Paying Agent shall promptly notify the Agent of the principal amount of the Notes in respect of which such option has been exercised with it together with their serial numbers and the Agent shall promptly notify such details to the relevant Issuer. 11. RECEIPT AND PUBLICATION OF NOTICES (1) Forthwith upon the receipt by the Agent of a demand or notice from any Noteholder in accordance with the Conditions the Agent shall forward a copy thereof to the relevant Issuer and the Guarantor. (2) On behalf of and at the request and expense of each Issuer (failing which the Guarantor), the Agent shall cause to be published all notices required to be given by any Issuer or the Guarantor to the Noteholders in accordance with the Conditions. 18 12. CANCELLATION OF NOTES, RECEIPTS, COUPONS AND TALONS (1) All Notes which are redeemed, all Receipts or Coupons which are paid and all Talons which are exchanged shall be cancelled by the Agent or Paying Agent by which they are redeemed, paid or exchanged. In addition, all Notes which are purchased by or on behalf of any Issuer, the Guarantor or any of their respective subsidiaries and are surrendered to a Paying Agent for cancellation, together (in the case of Definitive Notes) with all unmatured Receipts, Coupons or Talons (if any) attached thereto or surrendered therewith, shall be cancelled by the Paying Agent to which they are surrendered. Each of the other Paying Agents shall give to the Agent details of all payments made by it and shall deliver all cancelled Notes, Receipts, Coupons and Talons to the Agent. (2) A certificate stating: (a) the aggregate nominal amount of Notes which have been redeemed and the aggregate amount paid in respect thereof; (b) the number of Notes cancelled together (in the case of Notes in definitive form) with details of all unmatured Receipts, Coupons or Talons (if any) attached thereto or delivered therewith; (c) the aggregate amount paid in respect of interest on the Notes; (d) the total number by maturity date of Receipts, Coupons and Talons so cancelled; and (e) (in the case of Definitive Notes) the serial numbers of such Notes, shall be given to the relevant Issuer and the Guarantor by the Agent as soon as reasonably practicable and in any event within three months after the date of such repayment, payment, cancellation or replacement, as the case may be. (3) The Agent shall destroy all cancelled Notes, Receipts, Coupons and Talons and, forthwith upon destruction, furnish the Issuer with a certificate of the serial numbers of the Notes (in the case of Notes in definitive form) and the number by maturity date of Receipts, Coupons and Talons so destroyed. (4) Without prejudice to the obligations of the Agent pursuant to sub-clause (2), the Agent shall keep a full and complete record of all Notes, Receipts, Coupons and Talons (other than serial numbers of Coupons, except those which have been replaced pursuant to Condition 10) and of their redemption, purchase by or on behalf of any Issuer or the Guarantor or any of their respective subsidiaries and cancellation, payment or replacement (as the case may be) and of all replacement Notes, Receipts, Coupons or Talons issued in substitution for mutilated, defaced, destroyed, lost or stolen Notes, Receipts, Coupons or Talons. The Agent shall in respect of the Coupons of each maturity retain (in the case of Coupons other than Talons) until the expiry of ten years from the Relevant Date in respect of such Coupons and (in the case of Talons) indefinitely either all paid or exchanged Coupons of that maturity or a list of the serial numbers of Coupons of that maturity still remaining unpaid or unexchanged. The Agent shall at all reasonable times make such record available to the relevant Issuer, the Guarantor and any persons authorised by either of them for inspection and for the taking of copies thereof or extracts therefrom. 19 (5) All records and certificates made or given pursuant to this clause and clause 13 shall make a distinction between Notes, Receipts, Coupons and Talons of each Series. 13. ISSUE OF REPLACEMENT NOTES, RECEIPTS, COUPONS AND TALONS (1) Each Issuer will cause a sufficient quantity of additional forms of Notes, Receipts, Coupons and Talons to be available, upon request, to the Replacement Agent at its specified office for the purpose of issuing replacement Notes, Receipts, Coupons and Talons as provided below. (2) The Replacement Agent will, subject to and in accordance with the Conditions and the following provisions of this clause, cause to be delivered any replacement Notes, Receipts, Coupons and Talons which any Issuer may determine to issue in place of Notes, Receipts, Coupons and Talons which have been lost, stolen, mutilated, defaced or destroyed. (3) In the case of a mutilated or defaced Note, the Replacement Agent shall ensure that (unless otherwise covered by such indemnity as the relevant Issuer may reasonably require) any replacement Note will only have attached to it Receipts, Coupons and Talons corresponding to those (if any) attached to the mutilated or defaced Note which is presented for replacement. (4) The Replacement Agent shall obtain verification in the case of an allegedly lost, stolen or destroyed Note, Receipt, Coupon or Talon in respect of which the serial number is known, that the Note, Receipt, Coupon or Talon has not previously been redeemed, paid or exchanged, as the case may be. The Replacement Agent shall not issue any replacement Note, Receipt, Coupon or Talon unless and until the claimant therefor shall have: (a) paid such reasonable costs and expenses as may be incurred in connection therewith; (b) furnished it with such evidence (including evidence as to the serial number of such Note, Receipt, Coupon or Talon) and indemnity (which may include a bank guarantee) as the relevant Issuer, the Guarantor and the Agent may reasonably require; (c) in the case of any mutilated or defaced Note, Receipt, Coupon or Talon, surrendered it to the Replacement Agent. (5) The Replacement Agent shall cancel any mutilated or defaced Notes, Receipts, Coupons and Talons in respect of which replacement Notes, Receipts, Coupons and Talons have been issued pursuant to this clause and shall furnish the relevant Issuer and the Guarantor with a certificate stating the serial numbers of the Notes, Receipts, Coupons and Talons so cancelled and, unless otherwise instructed by the relevant Issuer in writing, shall destroy such cancelled Notes, Receipts, Coupons and Talons and furnish the relevant Issuer and the Guarantor with a destruction certificate containing the information specified in sub-clause 12(3). (6) The Replacement Agent shall, on issuing any replacement Note, Receipt, Coupon or Talon, forthwith inform the relevant Issuer, the Guarantor, the Agent and the other Paying Agents of the serial number of such replacement Note, Receipt, Coupon or Talon issued and (if known) of the serial number of the Note, Receipt, Coupon or Talon in place of which such replacement Note, Receipt, Coupon or Talon has been issued. Whenever replacement Receipts, Coupons or Talons are issued pursuant to the provisions of this clause, the 20 Replacement Agent shall also notify the Agent and any other Paying Agents of the maturity dates of the lost, stolen, mutilated, defaced or destroyed Receipts, Coupons or Talons and of the replacement Receipts, Coupons or Talons issued. (7) The Agent shall keep a full and complete record of all replacement Notes, Receipts, Coupons and Talons issued and shall make such record available at all reasonable times to the Issuers, the Guarantor and any persons authorised by either of them for inspection and for the taking of copies thereof or extracts therefrom. (8) Whenever any Note, Receipt, Coupon or Talon for which a replacement Note, Receipt, Coupon or Talon has been issued and in respect of which the serial number is known is presented to the Agent or any of the other Paying Agents for payment, the Agent or, as the case may be, the relevant other Paying Agent shall immediately send notice thereof to the relevant Issuer, the Guarantor and the other Paying Agents. (9) The Paying Agents shall issue further Coupon sheets against surrender of Talons. A Talon so surrendered shall be cancelled by the relevant Paying Agent who (except where the Paying Agent is the Agent) shall inform the Agent of its serial number. Further Coupon sheets issued on surrender of Talons shall carry the same serial number as the surrendered Talon. 14. COPIES OF DOCUMENTS AVAILABLE FOR INSPECTION (1) The executed Guarantee shall be deposited with the Agent and shall be held in safe custody by it on behalf of the Noteholders, the Receiptholders and the Couponholders at its specified office for the time being. (2) Each Paying Agent shall hold available for inspection at its specified office during normal business hours copies of all documents required to be so available by the Conditions of any Notes or the rules of any relevant Stock Exchange (or any other relevant authority). For these above purposes, each Issuer and the Guarantor shall furnish the Paying Agents with sufficient copies of each of the relevant documents. 15. MEETINGS OF NOTEHOLDERS (1) The provisions of Schedule 4 hereto shall apply to meetings of the Noteholders and shall have effect in the same manner as if set out in this Agreement. (2) Without prejudice to sub-clause (1), each of the Agent and the other Paying Agents on the request of any Noteholder shall issue voting certificates and block voting instructions in accordance with Schedule 4 and shall forthwith give notice to the relevant Issuer and the Guarantor in writing of any revocation or amendment of a block voting instruction. Each of the Agent and the other Paying Agents will keep a full and complete record of all voting certificates and block voting instructions issued by it and will, not less than 24 hours before the time appointed for holding a meeting or adjourned meeting, deposit at such place as the Agent shall designate or approve, full particulars of all voting certificates and block voting instructions issued by it in respect of such meeting or adjourned meeting. 21 16. COMMISSIONS AND EXPENSES (1) The Issuers and the Guarantor agree to pay to the Agent such reasonable fees and commissions as the Issuers and the Guarantor and the Agent shall separately agree in respect of the services of the Agent and the Paying Agents hereunder and to reimburse any reasonable out-of-pocket expenses (including reasonable legal, printing, postage tax and cable) incurred by the Agent and the Paying Agents in connection with their said services including the expense of making such notifications and publications to Noteholders as are required by the Terms and Conditions of any Notes or as may be required by any Issuer. (2) In addition, the Issuers and the Guarantor jointly and severally agree with the Agent to reimburse its reasonable out-of-pocket expenses (including legal fees) incurred by the Agent in connection with the preparation, execution and delivery of this Agreement. (3) The Agent will make payment of the fees and commissions due hereunder to the Paying Agents and will reimburse their expenses promptly after the receipt of the relevant moneys from an Issuer or the Guarantor, as the case may be. None of the Issuers or the Guarantor shall be responsible for any such payment or reimbursement by the Agent to the Paying Agents. 17. INDEMNITY (1) Each Issuer will, severally as to itself, and the Guarantor will, jointly with the relevant Issuer and severally as to itself, indemnify the Agent and each of the Paying Agents and each of their directors, officers, employees and agents against any losses, liabilities, claims, actions or demands and any reasonable out-of-pocket costs and expenses (including, but not limited to, all reasonable costs, charges and expenses paid or incurred in disputing or defending any of the foregoing) which it may incur or which may be made against the Agent or any Paying Agent as a result of or in connection with its appointment or the exercise of its powers and duties hereunder except such as may result from its own default, negligence or bad faith or that of its officers, directors, employees or agents or the breach by it of the terms of this Agreement. (2) Each of the Agent and the Paying Agents will severally indemnify each of the Issuers and the Guarantor and each of their directors, officers, employees and agents against any loss, liability, claim, action or demand and any reasonable out-of-pocket costs and expenses (including, but not limited to, all reasonable costs, legal fees, charges and expenses paid or incurred in disputing or defending any of the foregoing) which the relevant company may incur or which may be made against the relevant company as a result of the breach by the Agent or such Paying Agents of the terms of this Agreement or its default, negligence or bad faith or that of its officers, directors, employees or agents. 18. REPAYMENT BY THE AGENT Upon any Issuer or the Guarantor, as the case may be, being discharged from its obligation to make payments in respect of any Notes pursuant to the relevant Conditions, and provided that there is no outstanding, bona fide and proper claim in respect of any such payments, the Agent shall forthwith on demand pay to the relevant Issuer sums equivalent to any amounts paid to it by the relevant Issuer or the Guarantor, as the case may be, for the purposes of such payments. 22 19. CONDITIONS OF APPOINTMENT (1) The Agent shall be entitled to deal with money paid to it by any Issuer or the Guarantor for the purpose of this Agreement in the same manner as other money paid to a banker by its customers except: (a) that it shall not exercise any right of set-off, lien or similar claim in respect thereof; (b) as provided in sub-clause (2) below; and (c) that it shall not be liable to account to any Issuer or the Guarantor for any interest thereon. (2) In acting hereunder and in connection with the Notes, the Agent and the other Paying Agents shall act solely as agents of the Issuers and the Guarantor and will not thereby assume any obligations towards or relationship of agency or trust for or with any of the owners or holders of the Notes, Receipts, Coupons or Talons. (3) The Agent and the other Paying Agents hereby undertake to the Issuers and the Guarantor to perform such obligations and duties, and shall be obliged to perform such duties and only such duties, as are herein, in the Conditions and in the Procedures Memorandum specifically set forth, and no implied duties or obligations shall be read into this Agreement or the Notes against the Agent and the other Paying Agents, other than the duty to act honestly and in good faith and to exercise the diligence of a reasonably prudent agent in comparable circumstances. (4) The Agent may consult with legal and other professional advisers and the written opinion of such advisers shall be full and complete protection in respect of any action taken, omitted or suffered hereunder in good faith and in accordance with the opinion of such advisers. (5) Each of the Agent and the other Paying Agents shall be protected and shall incur no liability for or in respect of any action taken, omitted or suffered in reliance upon any instruction, request or order from any Issuer or the Guarantor or any notice, resolution, direction, consent, certificate, affidavit, statement, cable, telex or other paper or document which it reasonably believes to be genuine and to have been delivered, signed or sent by the proper party or parties or upon written instructions from the Issuer or the Guarantor. (6) Any of the Agent and the other Paying Agents and their officers, directors and employees may become the owner of, or acquire any interest in, any Notes, Receipts, Coupons or Talons with the same rights that it or he would have if the Agent or the relevant other Paying Agent, as the case may be, concerned were not appointed hereunder, and may engage or be interested in any financial or other transaction with any Issuer or the Guarantor and may act on, or as depositary, trustee or agent for, any committee or body of holders of Notes or Coupons or in connection with any other obligations of any Issuer or the Guarantor as freely as if the Agent or the relevant other Paying Agent, as the case may be, were not appointed hereunder. (7) Each Issuer and the Guarantor shall provide the Agent with a certified copy of the list of persons authorised to execute documents and take action on its behalf in connection with this Agreement and shall notify the Agent immediately in writing if any of such persons ceases to be so authorised or if any additional person becomes so authorised together, in the case of an 23 additional authorised person, with evidence satisfactory to the Agent that such person has been so authorised. 20. COMMUNICATION BETWEEN THE PARTIES A copy of all communications relating to the subject matter of this Agreement between any Issuer or the Guarantor and the Noteholders, Receiptholders or Couponholders and any of the Paying Agents (other than the Agent) shall be sent to the Agent by the other relevant Paying Agent. 21. CHANGES IN AGENT AND OTHER PAYING AGENTS (1) Each Issuer and the Guarantor agree that, for so long as any Note is outstanding, or until moneys for the payment of all amounts in respect of all outstanding Notes have been made available to the Agent and have been returned to the relevant Issuer or the Guarantor, as the case may be, as provided herein (whichever is the later): (a) so long as any Notes are listed on any Stock Exchange or admitted to listing by any other relevant authority, there will at all times be a Paying Agent (which may be the Agent) with a specified office in such place as may be required by the rules and regulations of such Stock Exchange or other relevant authority; and (b) there will at all times be a Paying Agent (which may be the Agent) with its specified office in a country outside the tax jurisdiction of the Issuer; and (c) there will at all times be an Agent. In addition, each Issuer and the Guarantor shall forthwith appoint a Paying Agent having a specified office in New York City in the circumstances described in the final paragraph of Condition 5(b). Any termination, appointment or change in the Agent or Paying Agent shall only take effect (other than in the case of insolvency, when it shall be of immediate effect) after not less than 30 nor more than 45 days' prior notice thereof shall have been given to the Noteholders in accordance with Condition 14. (2) The Agent may (subject as provided in sub-clause (4) below) at any time resign as Agent by giving at least 90 days' written notice to the Issuers and the Guarantor of such intention on its part, specifying the date on which its desired resignation shall become effective. (3) The Agent may (subject as provided in sub-clause (4) below) be removed at any time by the Issuers and the Guarantor on at least 45 days' notice by the filing with it of an instrument in writing signed on behalf of the Issuers and the Guarantor specifying such removal and the date when it shall become effective. (4) Any resignation under sub-clause (2) or removal under sub-clauses (3) or (5) shall only take effect upon the appointment by the Issuers and the Guarantor as hereinafter provided, of a successor Agent and (other than in cases of insolvency of the Agent, when such resignation or removal shall become effective immediately) on the expiry of the notice to be given under clause 23. The Issuers and the Guarantor agree with the Agent that if, by the day falling ten days before the expiry of any notice under sub-clause (2), the Issuers and the Guarantor have not appointed a successor Agent, then the Agent shall be entitled, on behalf of the Issuers and the Guarantor, to appoint as a successor Agent in its place a reputable financial 24 institution of good standing which the Issuer and the Guarantor shall approve (such approval not to be unreasonably withheld or delayed). (5) In case at any time the Agent resigns, or is removed, or becomes incapable of acting or is adjudged bankrupt or insolvent, or files a voluntary petition in bankruptcy or makes an assignment for the benefit of its creditors or consents to the appointment of an administrator, liquidator or administrative or other receiver of all or a substantial part of its property, or admits in writing its inability to pay or meet its debts as they mature or suspends payment thereof, or if any order of any court is entered approving any petition filed by or against it under the provisions of any applicable bankruptcy or insolvency law or if a receiver of it or of all or a substantial part of its property is appointed or if any officer takes charge or control of it or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, a successor Agent, which shall be a reputable financial institution of good standing may be appointed by the Issuers and the Guarantor by an instrument in writing filed with the successor Agent. Upon the appointment as aforesaid of a successor Agent and acceptance by the latter of such appointment and (other than in case of insolvency of the Agent when it shall be of immediate effect) upon expiry of the notice to be given under clause 23 the Agent so superseded shall cease to be the Agent hereunder. (6) Subject to sub-clause (1), the Issuers and the Guarantor may, after prior consultation with the Agent, terminate the appointment of any of the other Paying Agents at any time and/or appoint one or more further other Paying Agents by giving to the Agent, and to the relevant other Paying Agent at least 45 days' notice in writing to that effect (other than in the case of insolvency of the other Paying Agent). (7) Subject to sub-clause (1), all or any of the Paying Agents may resign their respective appointments hereunder at any time by giving the Issuers, the Guarantor and the Agent at least 45 days' written notice to that effect. (8) Upon its resignation or removal becoming effective, the Agent or the relevant Paying Agent: (a) shall forthwith transfer all moneys held by it hereunder and, if applicable, the records referred to in clauses 12(4) and 13(7) to the successor Agent hereunder; and (b) shall be entitled to the payment by the Issuers or the Guarantor of its commissions, fees and expenses for the services therefore rendered hereunder in accordance with the terms of clause 16. (9) Upon its appointment becoming effective, a successor Agent and any new Paying Agent shall, without further act, deed or conveyance, become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of its predecessor or, as the case may be, a Paying Agent with like effect as if originally named as Agent or (as the case may be) a Paying Agent hereunder. 22. MERGER AND CONSOLIDATION Any corporation into which the Agent or any other Paying Agent may be merged or converted, or any corporation with which the Agent or any of the other Paying Agents may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Agent or any of the other Paying Agents shall be a party, or any corporation to which the Agent or any of the other Paying Agents shall sell or otherwise transfer all or 25 substantially all the assets of the Agent or any other Paying Agent shall, on the date when such merger, conversion, consolidation or transfer becomes effective and to the extent permitted by any applicable laws, become the successor Agent or, as the case may be, other Paying Agent under this Agreement without the execution or filing of any paper or any further act on the part of the parties hereto, unless otherwise required by the Issuers and the Guarantor, and after the said effective date all references in this Agreement to the Agent or, as the case may be, such other Paying Agent shall be deemed to be references to such corporation. Written notice of any such merger, conversion, consolidation or transfer shall forthwith be given to each Issuer and the Guarantor by the relevant Agent or other Paying Agent. 23. NOTIFICATION OF CHANGES TO PAYING AGENTS Following receipt of notice of resignation from the Agent or any other Paying Agent and forthwith upon appointing a successor Agent or, as the case may be, further or other Paying Agents or on giving notice to terminate the appointment of any Agent or, as the case may be, other Paying Agent, the Agent (on behalf of and at the expense of the Issuers and the Guarantor) shall give or cause to be given not more than 45 days' nor less than 30 days' notice thereof to the Noteholders in accordance with the Conditions. 24. CHANGE OF SPECIFIED OFFICE If the Agent or any other Paying Agent determines to change its specified office it shall give to the Issuers, the Guarantor and (if applicable) the Agent written notice of such determination giving the address of the new specified office which shall be in the same city and stating the date on which such change is to take effect, which shall not be less than 45 days thereafter. The Agent (on behalf and at the expense of the Issuers and the Guarantor) shall within 15 days of receipt of such notice (unless the appointment of the Agent or the other relevant Paying Agent, as the case may be, is to terminate pursuant to clause 21 on or prior to the date of such change) give or cause to be given not more than 45 days' nor less than 30 days' notice thereof to the Noteholders in accordance with the Conditions. 25. NOTICES (1) Any notice or communication given hereunder shall be sufficiently given or served: (a) if delivered in person to the relevant address specified on the signature pages hereof or such other address as may be notified by the recipient in accordance with this clause and, if so delivered, shall be deemed to have been delivered at time of receipt; or (b) if sent by facsimile to the relevant number specified on the signature pages hereof or such other number as may be notified by the recipient in accordance with this clause and, if so sent, shall be deemed to have been delivered when an acknowledgement of receipt is received. Where a communication is received after 5 p.m. local time in the place to which the communication is addressed it shall be deemed to be received and become effective on the next business day. 26 (2) A copy of any notice served in accordance with subclause (1) above on an Issuer shall be given to the Guarantor at: Klybeckstrasse 141 CH-4002 Basle Switzerland Telephone: 41 61 636 2740 Telefax: 41 61 636 6828 Attention: Group Treasurer 26. TAXES AND STAMP DUTIES The Issuers and the Guarantor jointly and severally agree to pay any and all stamp and other documentary taxes or duties which may be payable in Germany, the United States of America, the United Kingdom, the Grand Duchy of Luxembourg, Belgium or Switzerland in connection with the execution, delivery, performance and enforcement of this Agreement, the Deed of Covenant or the Deed of Guarantee. 27. CURRENCY INDEMNITY If, under any applicable law and whether pursuant to a judgment being made or registered against any Issuers and/or the Guarantor or in the liquidation, insolvency or analogous process of any Issuer and/or the Guarantor or for any other reason, any payment under or in connection with this Agreement is made or falls to be satisfied in a currency (the "other currency") other than that in which the relevant payment is expressed to be due (the "required currency") under this Agreement, then, to the extent that the payment (when converted into the required currency at the rate of exchange on the date of payment or, if it is not practicable for the Agent or the relevant other Paying Agent to purchase the required currency with the other currency on the date of payment, at the rate of exchange as soon thereafter as it is practicable for it to do so or, in the case of a liquidation, insolvency or analogous process at the rate of exchange on the latest date permitted by applicable law for the determination of liabilities in such liquidation, insolvency or analogous process) actually received by the Agent or the relevant other Paying Agent falls short of the amount due under the terms of this Agreement, the relevant Issuer and the Guarantor each undertakes that it shall, as a separate and independent obligation, indemnify and hold harmless the Agent and each other Paying Agent against the amount of such shortfall. For the purpose of this clause, "rate of exchange" means the rate at which the Agent or the relevant other Paying Agent is able on the relevant date to purchase the required currency with the other currency and shall take into account any premium and other costs of exchange. The parties hereto understand and agree that in the event that the required currency is replaced by the Euro after the date hereof, the Euro will not be considered an "other currency" for the purposes of this clause 27. 28. AMENDMENTS This Agreement may be amended in writing by agreement between the Issuers, the Guarantor, the Agent and the other Paying Agents, but without the consent of any Noteholder, Receiptholder or Couponholder, (i) for the purpose of curing any ambiguity or of curing, correcting or supplementing any defective provision contained herein or complying with mandatory provisions of the law of the jurisdiction in which the Issuer or Guarantor is incorporated or (ii) in any manner which the parties may mutually deem 27 necessary or desirable and which shall not be materially prejudicial to the interests of the Noteholders. The Issuers, the Guarantor and the Agent may also agree any modification pursuant to Condition 15. 29. DESCRIPTIVE HEADINGS The descriptive headings in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof. 30. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement, but this does not affect any right or remedy of a third party which exists or is available apart from that Act. 31. GOVERNING LAW AND SUBMISSION TO JURISDICTION (1) This Agreement is governed by, and shall be construed in accordance with, the laws of England. (2) Each party hereto hereby irrevocably agrees, for the exclusive benefit of the other parties hereto, that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together referred to as "Proceedings") arising out of or in connection with this Agreement may be brought in such courts. Each party hereto hereby irrevocably waives any objection which it may have now or hereafter to the laying of the venue of any such Proceedings in any such court and any claim that any such Proceedings have been brought in an inconvenient forum and hereby further irrevocably agrees that a judgment in any such Proceedings brought in the English courts shall be conclusive and binding upon it and may be enforced in the courts of any other jurisdiction (subject to the laws of the jurisdiction in which enforcement is sought). Nothing contained in this clause shall limit any right to take Proceedings against any party hereto in any other court of competent jurisdiction (outside the Contracting States as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982), nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not (subject to the laws of the relevant jurisdictions). Each of CIBA US, CIBA Germany and the Guarantor each hereby appoints CIBA UK as its agent for service of process, and undertakes that, in the event of CIBA UK ceasing so to act or ceasing to be registered in England, it will appoint another person, as the Agent may approve, as its agent for service of process in England in respect of any Proceedings. The Replacement Agent hereby appoints the Agent as its agent for service of process, and undertakes that, in the event of the Agent ceasing so to act or ceasing to be registered in England, it will appoint another person, as the Guarantor may approve, as its agent for service of process in England in respect of any Proceedings. Nothing herein shall affect the right to serve process in any other manner permitted by law. 32. COUNTERPARTS This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 28 IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date first above written. APPENDIX A FORM OF CALCULATION AGENCY AGREEMENT Dated [ ], 2[ ] [CIBA SPECIALTY CHEMICALS PLC/ CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] as Issuer - and - CIBA SPECIALTY CHEMICALS HOLDING INC. as Guarantor U.S. $2,000,000,000 EURO MEDIUM TERM NOTE PROGRAM _____________________________________ CALCULATION AGENCY AGREEMENT _____________________________________ ALLEN & OVERY London 30 CALCULATION AGENCY AGREEMENT in respect of a EURO MEDIUM TERM NOTE PROGRAM THIS AGREEMENT is made on [ ], 2[ ] BETWEEN: (1) [CIBA SPECIALTY CHEMICALS CORPORATION of 560 White Plains Road, Tarrytown, New York 10591-9005, United States/CIBA SPECIALTY CHEMICALS PLC of Hulley Road, Macclesfield, Cheshire SK10 2NX/CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH of Chemiestrasse D-68623 Lampertheim, Germany] (the "Issuer"); (2) CIBA SPECIALTY CHEMICALS HOLDING INC. of Klybeckstrase 141, CH-4002 Basle, Switzerland (the "Guarantor"); and (3) [.....] of [.....] (the "Calculation Agent", which expression shall include its successor or successors for the time being as calculation agent hereunder). WHEREAS: (A) The Issuer, the Guarantor and certain other subsidiaries of the Guarantor have entered into an amended and restated program agreement with the Dealers named therein dated o March, 2001 under which the Issuer and such other subsidiaries may issue Euro Medium Term Notes ("Notes"). (B) The Notes will be issued subject to and with the benefit of an amended and restated agency agreement (the "Agency Agreement") dated 30th March, 2001 and entered into between the Issuer, the Guarantor, such other subsidiaries, The Chase Manhattan Bank as Agent (the "Agent" which expression shall include its successor or successors for the time being under the Agency Agreement) and the other parties named therein. NOW IT IS HEREBY AGREED that: 1. APPOINTMENT OF THE CALCULATION AGENT The Issuer and the Guarantor hereby appoint [................] as Calculation Agent in respect of each Series of Notes described in the Schedule hereto (the "Relevant Notes") for the purposes set out in clause 2 below, all upon the provisions hereinafter set out. The agreement of the parties hereto that this Agreement is to apply to each Series of Relevant Notes shall be evidenced by the manuscript annotation and signature in counterpart of the Schedule hereto. 2. DUTIES OF CALCULATION AGENT The Calculation Agent shall in relation to each Series of Relevant Notes perform all the functions and duties imposed on the Calculation Agent by the terms and conditions of the Relevant Notes (the "Conditions") including endorsing the Schedule hereto appropriately in relation to each Series of Relevant Notes. 31 3. EXPENSES Save as provided in clause 4 below, the Calculation Agent shall bear all expenses incurred by it in connection with its said services. 4. INDEMNITY (1) The Issuer and the Guarantor shall jointly and severally indemnify and keep indemnified the Calculation Agent, its directors, officers, employees and agents against any losses, liabilities, claims, actions or demands and any reasonable out-of-pocket costs and expenses which it may incur or which may be made against it by third parties as a result of or in connection with its appointment or the exercise of its powers and duties under this Agreement except such as may result from its own default, negligence or bad faith or that of its officers, directors, employees or agents or the breach by it of the terms of this Agreement. The Issuer and the Guarantor must be notified immediately of such claims, actions or demands and be invited and permitted to participate in the defence thereof. (2) The Calculation Agent shall indemnify each of the Issuer and the Guarantor and each of their officers, directors, employees and agents against any losses, liabilities, claims, actions or demands and any reasonable out-of-pocket costs and expenses which it may incur or which may be made against it as a direct result of the breach by the Calculation Agent of the terms of this Agreement or its default, negligence or bad faith or that its agents, officers, directors or employees. The Calculation Agent must be notified immediately of such claims, actions or demands and be invited and permitted to participate in the defence thereof. 5. CONDITIONS OF APPOINTMENT (1) In acting hereunder and in connection with the Relevant Notes the Calculation Agent shall act as agent of the Issuer and the Guarantor and shall not thereby assume any obligations towards or relationship of agency or trust for or with any of the owners or holders of the Relevant Notes or the receipts or coupons (if any) appertaining thereto (the "Receipts" and the "Coupons", respectively). (2) In relation to each issue of Relevant Notes the Calculation Agent shall be obliged to perform such duties and only such duties as are herein and in the Conditions specifically set forth and no implied duties or obligations shall be read into this Agreement or the Conditions against the Calculation Agent, other than the duty to act honestly and in good faith and to exercise the diligence of a reasonably prudent agent in comparable circumstances. (3) The Calculation Agent may consult with legal and other professional advisers and the written opinion of such advisers shall be full and complete protection in respect of any action taken, omitted or suffered hereunder in good faith and in accordance with the opinion of such advisers. (4) The Calculation Agent shall be protected and shall incur no liability for or in respect of any action taken, omitted or suffered in reliance upon any instruction, request or order from the Issuer or the Guarantor or any notice, resolution, direction, consent, certificate, affidavit, statement, cable, telex or other paper or document which it reasonably believes to be genuine and to have been delivered, signed or sent by the proper party or parties or upon written instructions from the Issuer or the Guarantor. 32 (5) The Calculation Agent and any of its officers, directors and employees may become the owner of, or acquire any interest in, any Notes, Receipts or Coupons (if any) with the same rights that it or he would have if the Calculation Agent were not appointed hereunder, and may engage or be interested in any financial or other transaction with the Issuer or the Guarantor and may act on, or as depositary, trustee or agent for, any committee or body of holders of Notes or Coupons (if any) or in connection with any other obligations of the Issuer or the Guarantor as freely as if the Calculation Agent were not appointed hereunder. 6. TERMINATION OF APPOINTMENT (1) The Issuer and the Guarantor may terminate the appointment of the Calculation Agent at any time by giving to the Calculation Agent at least 45 days' prior written notice to that effect, provided that, so long as any of the Relevant Notes is outstanding: (a) such notice shall not expire less than 45 days before any date upon which any payment is due in respect of any Relevant Notes; and (b) notice shall be given in accordance with the Conditions to the holders of the Relevant Notes at least 30 days prior to any removal of the Calculation Agent. (2) Notwithstanding the provisions of sub-clause (1) above, if at any time: (a) the Calculation Agent becomes incapable of acting, or is adjudged bankrupt or insolvent, or files a voluntary petition in bankruptcy or makes an assignment for the benefit of its creditors or consents to the appointment of an administrator, liquidator or administrative or other receiver of all or any substantial part of its property, or it admits in writing its inability to pay or meet its debts as they may mature or suspends payment thereof, or if any order of any court is entered approving any petition filed by or against it under the provisions of any applicable bankruptcy or insolvency law or if a receiver of it or of all or a substantial part of its property is appointed or if any officer takes charge or control of the Calculation Agent or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; or (b) the Calculation Agent fails duly to perform any function or duty imposed upon it by the Conditions and this Agreement, the Issuer and the Guarantor may forthwith without notice terminate the appointment of the Calculation Agent, in which event notice thereof shall be given to the holders of the Relevant Notes in accordance with the Conditions as soon as practicable thereafter. (3) The termination of the appointment pursuant to sub-clause (1) or (2) above of the Calculation Agent hereunder shall not entitle the Calculation Agent to any amount by way of compensation but shall be without prejudice to any amount then accrued due. (4) The Calculation Agent may resign its appointment hereunder at any time by giving to the Issuer and the Guarantor at least 90 days' prior written notice to that effect. Following receipt of a notice of resignation from the Calculation Agent, the Issuer or the Guarantor shall promptly give notice thereof to the holders of the Relevant Notes in accordance with the Conditions. 33 (5) Notwithstanding the provisions of sub-clauses (1), (2) and (4) above, so long as any of the Relevant Notes is outstanding, the termination of the appointment of the Calculation Agent (whether by the Issuer, the Guarantor or by the resignation of the Calculation Agent) shall not be effective unless upon the expiry of the relevant notice a successor Calculation Agent has been appointed. (6) Any successor Calculation Agent appointed hereunder shall execute and deliver to its predecessor, the Issuer and the Guarantor an instrument accepting such appointment hereunder, and thereupon such a successor Calculation Agent, without further act, deed or conveyance, shall become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor with like effect as if originally named as the Calculation Agent hereunder. (7) If the appointment of the Calculation Agent hereunder is terminated (whether by the Issuer and the Guarantor or by the resignation of the Calculation Agent), the Calculation Agent shall on the date on which such termination takes effect deliver to the successor Calculation Agent any records concerning the Relevant Notes maintained by it (and copies of such documents and records as it is obliged by law or regulation to retain but except such documents it is required by law not to release), but shall have no other duties or responsibilities hereunder. (8) Any corporation into which the Calculation Agent may be merged or converted, or any corporation with which the Calculation Agent may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Calculation Agent shall be a party, or any corporation to which the Calculation Agent shall sell or otherwise transfer all or substantially all of its assets shall, on the date when such merger, consolidation or transfer becomes effective and to the extent permitted by any applicable laws, become the successor Calculation Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, unless otherwise required by the Issuer and the Guarantor, and after the said effective date all references in this Agreement to the Calculation Agent shall be deemed to be references to such corporation. Written notice of any such merger, conversion, consolidation or transfer shall forthwith be given to the Issuer, the Guarantor and the Agent. (9) Upon giving notice of the intended termination of the appointment of the Calculation Agent, the Issuer and the Guarantor shall use all reasonable endeavours to appoint a further financial institution of good standing as successor Calculation Agent. 7. NOTICES Any notice or communication given hereunder shall be sufficiently given or served: (a) if delivered in person to the relevant address specified on the signature pages hereof or such other address as may be notified by the recipient in accordance with this clause and, if so delivered, shall be deemed to have been delivered at time of receipt; or (b) if sent by facsimile to the relevant number specified on the signature pages hereof or such other number as may be notified by the recipient in accordance with this clause and, if so sent, shall be deemed to have been delivered when an acknowledgement of receipt is received (in the case of facsimile). 34 Where a communication is received after 5 p.m. local time in the place to which the communication is addressed it shall be deemed to be received and become effective on the next business day. 8. DESCRIPTIVE HEADINGS AND COUNTERPARTS (1) The descriptive headings in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof. (2) This Agreement may be executed in any number of counterparts, all of which, taken together, shall constitute one and the same agreement and any party may enter into this Agreement by executing a counterpart. 9. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement, but this does not affect any right or remedy of a third party which exists or is available apart from that Act. 10. GOVERNING LAW AND SUBMISSION TO JURISDICTION (1) This Agreement is governed by, and shall be construed in accordance with, the laws of England. (2) Each party hereto hereby irrevocably agrees, for the exclusive benefit of the other parties hereto, that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together referred to as "Proceedings") arising out of or in connection with this Agreement may be brought in such courts. Each party hereto hereby irrevocably waives any objection which it may have now or hereafter to the laying of the venue of any such Proceedings in any such court and any claim that any such Proceedings have been brought in an inconvenient forum and hereby further irrevocably agrees that a judgment in any such Proceedings brought in the English courts shall be conclusive and binding upon it and may be enforced in the courts of any other jurisdiction (subject to the laws of the jurisdiction in which enforcement is sought). Nothing contained in this clause shall limit any right to take Proceedings against any party in any other court of competent jurisdiction (outside the Contracting States, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982), nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not (subject to the laws of the relevant jurisdictions). The [Issuer and the] Guarantor [each] hereby appoints the [Issuer/CIBA Specialty Chemicals PLC] as its agent for service of process, and undertakes that, in the event of [the Issuer/CIBA Specialty Chemicals PLC] ceasing so to act or ceasing to be registered in England, it will appoint another person, as the Calculation Agent may approve, as its agent for the service of process in England in respect of any Proceedings. [The Calculation Agent hereby appoints [ ] as its agent for service of process, and undertakes that, in the event of [ ] ceasing so to act or ceasing to be registered in England, it will appoint another person, as the relevant Issuer or the Guarantor may approve, as its agent for service of process in England in respect of any Proceedings]. Nothing herein shall affect the right to serve process in any manner permitted by law. IN WITNESS whereof this Agreement has been entered into the day and year first above written. 35 36 SCHEDULE TO THE CALCULATION AGENCY AGREEMENT Series number Issue Date Maturity Date Title and Annotation by Nominal Calculation Amount Agent/Issuer 37 Issuer [CIBA SPECIALTY CHEMICALS CORPORATION 560 White Plains Road PO Box 2005 Tarrytown, New York 10591-9005 Telephone: 001 914 785 2000 Telefax: 001 914 785 2650 Attention: Treasurer]/ [CIBA SPECIALTY CHEMICALS PLC Hulley Road Macclesfield Cheshire SK10 2NX Telephone: 44 1 625 888 220 Telefax: 44 1 625 888 380 Attention: Treasurer]/ [CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH Chemiestrasse D-68623 Lampertheim Germany Telephone: 00 49 6206 152 810 Telefax: 00 49 6206 152 816 Attention: Treasurer] By: Guarantor CIBA SPECIALTY CHEMICALS HOLDING INC. Klybeckstrasse 141 CH-4002 Basle Switzerland Telephone: 00 41 61 636 2740 Telefax No: 00 41 61 636 6828 Attention: Group Treasurer By: By: 38 Calculation Agent [ ] Telephone: [ ] Telefax No: [ ] Attention: [ ] Without prejudice to the foregoing execution of the Agreement by the parties hereto, [Name of Luxembourg incorporated Calculation Agent] hereby expressly and specifically confirms its agreement with the provisions of clause 9(2) hereof for the purposes of Article 1 of the Protocol annexed to the Convention on jurisdiction and the enforcement of judgments in civil and commercial matters signed at Brussels on 27th September, 1968. [Name of Luxembourg incorporated Calculation Agent] By: 39 SCHEDULE 1 TERMS AND CONDITIONS OF THE NOTES 60 AGENT The Chase Manhattan Bank Trinity Tower 9 Thomas More Street London E1W 1YT PAYING AGENT Chase Manhattan Bank Luxembourg S.A. 5 Rue Plaetis L-2338 Luxembourg and/or such other or further Agent and other or further Paying Agents and/or specified offices as may from time to time be duly appointed by the Issuer and the Guarantor and notice of which has been given to the Noteholders. 61 SCHEDULE 2 FORMS OF GLOBAL AND DEFINITIVE NOTES, RECEIPTS, COUPONS AND TALONS PART I FORM OF TEMPORARY GLOBAL NOTE THIS GLOBAL NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR DELIVERED WITHIN THE UNITED STATES OR TO OR FOR THE BENEFIT OF U.S. PERSONS OTHER THAN PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. TERMS USED HEREIN SHALL HAVE THE MEANING ASCRIBED TO THEM IN REGULATION S UNDER THE SECURITIES ACT. [BY ACCEPTING THIS OBLIGATION, THE HOLDER REPRESENTS AND WARRANTS THAT IT IS NOT A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE OF THE UNITED STATES AND THE REGULATIONS THEREUNDER) AND THAT IT IS NOT ACTING FOR OR ON BEHALF OF A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE AND THE REGULATIONS THEREUNDER).] [ANY UNITED STATES PERSON (AS DEFINED IN THE INTERNAL REVENUE CODE OF THE UNITED STATES) WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.]2 [THIS NOTE CONSTITUTES [[COMMERCIAL PAPER]/[A SHORTER/LONGER] TERM DEBT SECURITY]3 ISSUED IN ACCORDANCE WITH REGULATIONS MADE UNDER SECTION 4 OF THE BANKING ACT 1987. THE ISSUER OF THIS NOTE IS [CIBA SPECIALTY CHEMICALS CORPORATION/CIBA SPECIALTY CHEMICALS PLC/CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH]4, WHICH IS NOT AN AUTHORISED INSTITUTION OR A EUROPEAN AUTHORISED INSTITUTION (AS SUCH TERMS ARE DEFINED IN THE BANKING ACT 1987 (EXEMPT TRANSACTIONS) REGULATIONS 1997). REPAYMENT OF THE PRINCIPAL AND PAYMENT OF ANY INTEREST OR PREMIUM IN CONNECTION WITH THIS NOTE HAS BEEN GUARANTEED BY CIBA SPECIALTY CHEMICALS HOLDING INC. WHICH IS NEITHER AN AUTHORISED INSTITUTION NOR A EUROPEAN AUTHORISED INSTITUTION.]5 - --------------- 1 This legend to appear on Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days or less. 2 This legend to appear on all Notes with a maturity of more than 183 days. 3 Include "commercial paper" if maturity of Notes is less than one year. Include "shorter" if maturity of Notes is ne year or more, but less than 3 years. Include "longer" if maturity of Notes is 3 years of more. 4 Delete as applicable. 5 Delete except (a) where the Notes are denominated in Sterling or (b) the net proceeds of the issue of the Notes are accepted in the United Kingdom. 62 [CIBA SPECIALTY CHEMICALS CORPORATION (a company incorporated under the laws of the State of Delaware, U.S.A.)/ CIBA SPECIALTY CHEMICALS PLC (a company incorporated with limited liability in England)/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH (a company incorporated with limited liability in Germany)] unconditionally and irrevocably guaranteed by CIBA SPECIALTY CHEMICALS HOLDING INC. (a company incorporated with limited liability in Switzerland) TEMPORARY GLOBAL NOTE This Global Note is a Temporary Global Note in respect of a duly authorised issue of Euro Medium Term Notes (the "Notes") of [Ciba Specialty Chemicals Corporation/Ciba Specialty Chemicals PLC/Ciba Spezialitatenchemie Holding Deutschland GmbH] (the "Issuer") described, and having the provisions specified, in the Pricing Supplement attached hereto (the "Pricing Supplement"). Payments in respect of the Notes have been unconditionally and irrevocably guaranteed by Ciba Specialty Chemicals Holding Inc. (the "Guarantor"). References herein to the Conditions shall be to the Terms and Conditions of the Notes as set out in Schedule 1 to the Agency Agreement (as defined below) as modified and supplemented by the information set out in the Pricing Supplement, but in the event of any conflict between the provisions of that Schedule and the information set out in the Pricing Supplement, the Pricing Supplement will prevail. Words and expressions defined or set out in the Conditions and/or the Pricing Supplement shall bear the same meaning when used herein. This Global Note is issued subject to, and with the benefit of, the Conditions and an amended and restated Agency Agreement (the "Agency Agreement", which expression shall be construed as a reference to that agreement as the same may be amended, supplemented or restated from time to time) dated 30th March, 2001 and made between, inter alia, the Issuer, the Guarantor, The Chase Manhattan Bank (the "Agent") and the other agents named therein. For value received the Issuer, subject to and in accordance with the Conditions, promises to pay to the bearer hereof on each Instalment Date (if the Notes are repayable in instalments) and on the Maturity Date and/or on such earlier date(s) as all or any of the Notes represented by this Global Note may become due and repayable in accordance with the Conditions, the amount payable under the Conditions in respect of such Notes on each such date and to pay interest (if any) on the nominal amount of the Notes from time to time represented by this Global Note calculated and payable as provided in the Conditions together with any other sums payable under the Conditions, upon presentation and, at maturity, surrender of this Global Note at the office of the Agent at Trinity Tower, 9 Thomas More Street, London E1W 1YT or at the specified office of any of the other paying agents located outside the United States (except as provided in the Conditions) from time to time appointed by the Issuer and the Guarantor in respect of the Notes, but in each case subject to the requirements as to certification provided herein. On any redemption or payment of an instalment or interest being made in respect of, or purchase and cancellation of, any of the Notes represented by this Global Note details of such redemption, payment or purchase and cancellation (as the case may 63 be) shall be entered by or on behalf of the Issuer in Schedule One hereto and the relevant space in Schedule One hereto recording any such redemption, payment or purchase and cancellation (as the case may be) shall be signed by or on behalf of the Issuer. Upon any such redemption, payment of an instalment or purchase and cancellation, as aforesaid, the nominal amount of the Notes represented by this Global Note shall be reduced by the nominal amount of such Notes so redeemed or purchased and cancelled or the amount of such instalment. The nominal amount of the Notes represented by this Global Note following any such redemption, payment of an instalment or purchase and cancellation as aforesaid or any exchange as referred to below shall be the nominal amount most recently entered by or on behalf of the Issuer in the relevant column in Part II, III or IV of Schedule One or Schedule Two hereto. Prior to the Exchange Date (as defined below), all payments (if any) on this Global Note will only be made to the bearer hereof to the extent that there is presented to the Agent by Clearstream, Luxembourg or Euroclear a certificate, substantially in the form set out in Schedule Three hereto, to the effect that it has received from or in respect of a person entitled to a particular nominal amount of the Notes (as shown by its records) a certificate in or substantially in the form of Certificate "A" as set out in Schedule Three hereto. The bearer of this Global Note will not be entitled to receive any payment of interest hereon due on or after the Exchange Date unless upon due certification exchange of this Global Note is improperly withheld or refused. On or after the date (the "Exchange Date") which is 40 days after the later of the Issue Date and completion of the distribution of the Tranche of Notes represented by this Global Note or such later date specified in the Pricing Supplement, this Global Note may be exchanged in whole or in part (free of charge) for, as specified in the Pricing Supplement, either security printed Definitive Notes and (if applicable) Coupons, Receipts and Talons in the form set out in Parts III, IV, V and VI respectively of Schedule 2 to the Agency Agreement (on the basis that all the appropriate details have been included on the face of such Definitive Notes and (if applicable) Coupons, Receipts and Talons and the Pricing Supplement (or the relevant provisions of the Pricing Supplement) have been either endorsed on or attached to such Definitive Notes) or a Permanent Global Note in or substantially in the form set out in Part II of Schedule 2 to the Agency Agreement (together with the Pricing Supplement attached thereto) upon notice being given by Euroclear and/or Clearstream, Luxembourg acting on the instructions of any holder of an interest in this Global Note and subject, in the case of Definitive Notes, to such notice period as is specified in the Pricing Supplement. If Definitive Notes and (if applicable) Coupons, Receipts and/or Talons have already been issued in exchange for all the Notes represented for the time being by the Permanent Global Note, then this Global Note may only thereafter be exchanged for Definitive Notes and (if applicable) Coupons, Receipts and/or Talons pursuant to the terms hereof. Presentation of this Global Note for exchange shall be made by the bearer hereof on any day (other than a Saturday or Sunday) on which banks are open for business in London at the office of the Agent specified above. The Issuer shall procure that the Definitive Notes or (as the case may be) the Permanent Global Note shall be so issued and delivered in exchange for only that portion of this Global Note in respect of which there shall have been presented to the Agent by Euroclear or Clearstream, Luxembourg a certificate, substantially in the form set out in Schedule Three hereto, to the effect that it has received from or in respect of a person entitled to a beneficial interest in a particular nominal amount of the Notes (as shown by its records) a certificate from such person in or substantially in the form of Certificate "A" as set out in Schedule Three hereto. 64 On an exchange of the whole of this Global Note, this Global Note shall be surrendered to the Agent. On an exchange of part only of this Global Note, details of such exchange shall be entered by or on behalf of the Issuer in Schedule Two hereto and the relevant space in Schedule Two hereto recording such exchange shall be signed by or on behalf of the Issuer, whereupon the nominal amount of this Global Note and the Notes represented by this Global Note shall be reduced by the nominal amount so exchanged. On any exchange of this Global Note for a Permanent Global Note, details of such exchange shall be entered by or on behalf of the Issuer in Schedule Two to the Permanent Global Note and the relevant space in Schedule Two thereto recording such exchange shall be signed by or on behalf of the Issuer. Until the exchange of the whole of this Global Note as aforesaid, the bearer hereof shall in all respects (except as otherwise provided herein) be entitled to the same benefits as if he were the bearer of Definitive Notes and the relative Coupons, Receipts and/or Talons (if any) in the forms set out in Parts III, Part IV, Part V and Part VI, respectively, of Schedule 2 to the Agency Agreement. In the event that this Global Note (or any part hereof) has become due and repayable in accordance with the Conditions or that the Maturity Date has occurred and, in either case, payment in full of the amount due has not been made to the bearer in accordance with the foregoing then, unless within the period of fifteen days commencing on the relevant due date payment in full of the amount due in respect of this Global Note is received by the bearer in accordance with the foregoing, this Global Note will become void at 8.00 p.m. (London time) on such fifteenth day and the bearer will have no further rights under this Global Note (but without prejudice to the rights which the bearer or any other person may have under the amended and restated Deed of Covenant executed, inter alia, by the Issuer on 30th March, 2001 in respect of the Euro Medium Term Notes issued under the Program Agreement pursuant to which this Global Note is issued). No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Global Note, but this does not affect any right or remedy of any person which exists or is available apart from that Act. This Global Note is governed by, and shall be construed in accordance with, English law. This Global Note shall not be valid unless authenticated by the Agent. IN WITNESS whereof the Issuer has caused this Global Note to be duly executed on its behalf. [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] By: ............................. Authorised Signatory Authenticated without recourse, warranty or liability by THE CHASE MANHATTAN BANK By: .......................... Authorised Signatory 65 Schedule One to the Temporary Global Note PART I INTEREST PAYMENTS Total amount Date of interest Amount of Confirmation of payment made payable interest paid on behalf of the Issuer - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- - --------- -------------- ---------------- -------------------------- 66 PART II PAYMENT OF INSTALMENT AMOUNTS Total amount Remaining nominal Confirmation of of Installment Amount of amount of this payment on Date Amounts Instalment Global Note following behalf of made payable Amounts paid such payment* the Issuer - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----------------- * See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 67 PART III REDEMPTIONS Remaining nominal Confirmation of Total amount Amount of amount of this redemption on Date principal principal Global Note following behalf of made payable paid such redemption* the Issuer - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----------------- * See most recent entry in Part II, III or IV of Schedule Two in order to determine this amount. 68 PART IV PURCHASES AND CANCELLATIONS Part of Remaining nominal nominal amount amount of this Confirmation of of this Global Global Note purchase and Date Note purchased following such purchase cancellation on behalf made and cancelled and cancellation* of the Issuer - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----------------- * See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 69 Schedule Two to the Temporary Global Note EXCHANGES FOR DEFINITIVE NOTES OR PERMANENT GLOBAL NOTE The following exchanges of a part of this Global Note for Definitive Notes or a Permanent Global Note have been made: Nominal amount of this Remaining nominal Global Note exchanged amount of this Global Notation made on Date for Definitive Notes or Note following such behalf of the made a Permanent Global Note exchange* Issuer - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ ________________________ * See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 70 Schedule Three to the Temporary Global Note FORM OF CERTIFICATE TO BE PRESENTED BY EUROCLEAR OR CLEARSTREAM, LUXEMBOURG [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [Title of Securities] (the "Securities") This is to certify that, based solely on certifications we have received in writing, by tested telex or by electronic transmission from member organisations appearing in our records as persons being entitled to a beneficial interest in a portion of the principal amount set forth below (our "Member Organisations") substantially to the effect set forth in the Agency Agreement, as of the date hereof, [ ] principal amount of the above-captioned Securities (i) is owned by persons that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source ("United States persons"), (ii) is owned by United States persons that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Sections 1.165-12(c)(1)(v)) ("financial institutions") purchasing for their own account or for resale, or (b) acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution has agreed, on its own behalf or through its agent, that we may advise the Issuer or the Issuer's agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) is owned by United States or foreign financial institutions for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and to the further effect that United States or foreign financial institutions described in clause (iii) above (whether or not also described in clause (i) or (ii)) have certified that they have not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions. As used herein, "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction; and its "possessions" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands. If the Securities are of the category contemplated in Section 230.903(c)(3) of Regulation S under the Securities Act of 1933, as amended (the "Act") then this is also to certify with respect to such principal amount of Securities set forth above that, except as set forth below, we have received in writing, by tested telex or by electronic transmission, from our Member Organisations entitled to a portion of such principal amount, certifications with respect to such portion, substantially to the effect that the Securities are beneficially owned by (a) non-U.S. person(s) or (b) U.S. person(s) who purchased the Securities in transactions which did not require registration under the Act. We further certify (i) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of the temporary global Security excepted in 71 such certifications and (ii) that as of the date hereof we have not received any notification from any of our Member Organisations to the effect that the statements made by such Member Organisations with respect to any portion of the part submitted herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as the date hereof. We understand that this certification is required in connection with certain tax laws and, if applicable, certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorise you to produce this certification to any interested party in such proceedings. Dated: [ ], 2[ ]* Yours faithfully, [Euroclear Bank S.A./N.V. as operator of the Euroclear System] or [Clearstream Banking, societe anonyme] By: ________________________________________________________________________ * To be dated no earlier than the Exchange Date 72 CERTIFICATE "A" [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [Title of Securities] (the "Securities") This is to certify that as of the date hereof, and except as set forth below, the above-captioned Securities held by you for our account (i) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source ("United States person(s)"), (ii) are owned by United States person(s) that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v)) ("financial institutions") purchasing for their own account or for resale, or (b) acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution hereby agrees, on its own behalf or through its agent, that you may advise the Issuer or the Issuer's agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) are owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and in addition if the owner of the Securities is a United States or foreign financial institution described in clause (iii) above (whether or not also described in clause (i) or (ii)) this is to further certify that such financial institution has not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions. If the Securities are of the category contemplated in Section 230.903(c)(3) of Regulation S under the Securities Act of 1933, as amended (the "Act") then this is also to certify with respect to such principal amount of Securities set forth above that, except as set forth below, the Securities are beneficially owned by (a) a non-U.S. person(s) or (b) a U.S. person(s) who purchased the Securities in transactions which did not require registration under the Act. As used in this paragraph, the term "U.S. person" has the meaning given to it by Regulation S under the Act. As used herein, "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction; and its "possessions" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands. We undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Securities held by you for our account in accordance with your documented procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date. This certification excepts and does not relate to [ ] of such interest in the above Securities in respect of which we are not able to certify and as to which we understand exchange and delivery of definitive Securities (or, if relevant, exercise of any right or collection of any interest) cannot be made until we do so certify. 73 We understand that this certification is required in connection with certain tax laws and, if applicable, certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorise you to produce this certification to any interested party in such proceedings. Dated: [ ], [ ]* Name of Person Making Certification By: __________________________________________________________ * To be dated no earlier than the fifteenth day prior to the Exchange Date. 74 PART II FORM OF PERMANENT GLOBAL NOTE THE GLOBAL NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR DELIVERED WITHIN THE UNITED STATES OR TO OR FOR THE BENEFIT OF U.S. PERSONS OTHER THAN PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. TERMS USED HEREIN SHALL HAVE THE MEANING ASCRIBED TO THEM IN REGULATION S UNDER THE SECURITIES ACT. [BY ACCEPTING THIS OBLIGATION, THE HOLDER REPRESENTS AND WARRANTS THAT IT IS NOT A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE OF THE UNITED STATES AND THE REGULATIONS THEREUNDER) AND THAT IT IS NOT ACTING FOR OR ON BEHALF OF A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE AND THE REGULATIONS THEREUNDER).]1 [ANY UNITED STATES PERSON (AS DEFINED IN THE INTERNAL REVENUE CODE OF THE UNITED STATES) WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.]2 [THIS NOTE CONSTITUTES [[COMMERCIAL PAPER]/[A SHORTER/LONGER] TERM DEBT SECURITY]3 ISSUED IN ACCORDANCE WITH REGULATIONS MADE UNDER SECTION 4 OF THE BANKING ACT 1987. THE ISSUER OF THIS NOTE IS [CIBA SPECIALTY CHEMICALS CORPORATION/CIBA SPECIALTY CHEMICALS PLC/CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH]4, WHICH IS NOT AN AUTHORISED INSTITUTION OR A EUROPEAN AUTHORISED INSTITUTION (AS SUCH TERMS ARE DEFINED IN THE BANKING ACT 1987 (EXEMPT TRANSACTIONS) REGULATIONS 1997). REPAYMENT OF THE PRINCIPAL AND PAYMENT OF ANY INTEREST OR PREMIUM IN CONNECTION WITH THIS NOTE HAS BEEN GUARANTEED BY CIBA SPECIALTY CHEMICALS HOLDING INC. WHICH IS NEITHER AN AUTHORISED INSTITUTION NOR A EUROPEAN AUTHORISED INSTITUTION]5. [CIBA SPECIALTY CHEMICALS CORPORATION.] (a company incorporated under the laws of the State of Delaware, U.S.A.)/ __________________ 1 This legend to appear on Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days or less. 2 This legend to appear on all Notes with a maturity of more than 183 days. 3 Include "commercial paper" if maturity of Notes is less than one year. Include "shorter" if maturity of Notes is one year or more, but less than 3 years. Include "longer" if maturity of Notes is 3 years or more. 4 Delete as applicable. 5 Delete except where (a) the Notes are denominated in Sterling or (b) the net proceeds of the issue of the Notes are accepted in the United Kingdom. 75 CIBA SPECIALTY CHEMICALS PLC (a company incorporated with limited liability in England)/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH (a company incorporated with limited liability in Germany)] unconditionally and irrevocably guaranteed by CIBA SPECIALTY CHEMICALS HOLDING INC. (a company incorporated with limited liability in Switzerland) PERMANENT GLOBAL NOTE This Global Note is a Permanent Global Note in respect of a duly authorised issue of Euro Medium Term Notes (the "Notes") of [Ciba Specialty Chemicals Corporation/Ciba Specialty Chemicals PLC/Ciba Spezialitatenchemie Holding Deutschland GmbH] (the "Issuer") described, and having the provisions specified, in the Pricing Supplement or Pricing Supplements attached hereto (together the "Pricing Supplement"). Payments in respect of the Notes have been unconditionally and irrevocably guaranteed by Ciba Specialty Chemicals Holding Inc. (the "Guarantor"). References herein to the Conditions shall be to the Terms and Conditions of the Notes as set out in Schedule 1 to the Agency Agreement (as defined below) as modified and supplemented by the information set out in the Pricing Supplement, but in the event of any conflict between the provisions of that Schedule and the information set out in the Pricing Supplement, the Pricing Supplement will prevail. Words and expressions defined or set out in the Conditions and/or the Pricing Supplement shall bear the same meaning when used herein. This Global Note is issued subject to, and with the benefit of, the Conditions and an amended and restated Agency Agreement (the "Agency Agreement", which expression shall be construed as a reference to that agreement as the same may be amended, supplemented or restated from time to time) dated 30th March, 2001 and made between, inter alia, the Issuer, the Guarantor, The Chase Manhattan Bank (the "Agent") and the other agents named therein. For value received the Issuer, subject to and in accordance with the Conditions, promises to pay to the bearer hereof on each Instalment Date (if the Notes are repayable in instalments) and on the Maturity Date and/or on such earlier date(s) as all or any of the Notes represented by this Global Note may become due and repayable in accordance with the Conditions, the amount payable under the Conditions in respect of such Notes on each such date and to pay interest (if any) on the nominal amount of the Notes from time to time represented by this Global Note calculated and payable as provided in the Conditions together with any other sums payable under the Conditions, upon presentation and, at maturity, surrender of this Global Note at the office of the Agent at Trinity Tower, 9 Thomas More Street, London E1W 1YT or at the specified office of any of the other paying agents located outside the United States (except as provided in the Conditions) from time to time appointed by the Issuer and the Guarantor in respect of the Notes. On any redemption or payment of an instalment or interest being made in respect of, or purchase and cancellation of, any of the Notes represented by this Global Note details of such redemption, payment or purchase and cancellation (as the case may be) shall be entered by or on behalf of the Issuer in Schedule One hereto and the relevant space in Schedule One hereto recording any such redemption, payment or purchase and cancellation (as the case may be) shall be signed by or on behalf of the Issuer. 76 Upon any such redemption, payment of an instalment or purchase and cancellation as aforesaid, the nominal amount of the Notes represented by this Global Note shall be reduced by the nominal amount of such Notes so redeemed or purchased and cancelled or the amount of such instalment. The nominal amount of the Notes represented by this Global Note following any such redemption, payment of an instalment or purchase and cancellation as aforesaid, or any exchange as referred to below shall be the nominal amount most recently entered by or on behalf of the Issuer in the relevant column in Part II, III or IV of Schedule One or Schedule Two hereto. On any exchange of the Temporary Global Note issued in respect of the Notes for this Global Note or any part hereof, details of such exchange shall be entered by or on behalf of the Issuer in Schedule Two hereto and the relevant space in Schedule Two hereto recording such exchange shall be signed by or on behalf of the Issuer, whereupon the nominal amount of the Notes represented by this Global Note shall be increased by the nominal amount of the Temporary Global Note so exchanged. This Global Note may be exchanged in whole but not in part (free of charge), for Definitive Notes and (if applicable) Coupons, Receipts and/or Talons in the form set out in Part III, Part IV, Part V and Part VI respectively, of Schedule 2 to the Agency Agreement (on the basis that all the appropriate details have been included on the face of such Definitive Notes and (if applicable) Coupons, Receipts and Talons and the Pricing Supplement (or the relevant provisions of the Pricing Supplement) have been endorsed on or attached to such Definitive Notes) either, as specified in the applicable Pricing Supplement: (i) upon not less than 60 days' written notice being given to the Agent by Euroclear and/or Clearstream, Luxembourg acting on the instructions of any holder of an interest in this Global Note; or (ii) only upon the occurrence of any Exchange Event. An "Exchange Event" means: (1) an Event of Default has occurred and is continuing; (2) the Issuer has been notified that either Euroclear or Clearstream, Luxembourg has been closed for business for a continuous period of 14 days (other than by reason of holiday, statutory or otherwise) or has announced an intention permanently to cease business or has in fact done so and no alternative clearing system is available; or (3) the Issuer has or will become obliged to pay additional amounts as provided for or referred to in Condition 7 which would not be required were the Notes represented by this Global Note in definitive form. If this Global Note is only exchangeable following the occurrence of an Exchange Event: (i) the Issuer will promptly give notice to Noteholders in accordance with Condition 14 upon the occurrence of an Exchange Event; and (ii) in the event of the occurrence of any Exchange Event, Euroclear and/or Clearstream, Luxembourg acting on the instructions of any holder of an interest in this Global Note may give notice to the Agent requesting exchange and in the event of the occurrence of an Exchange Event as described in (3) above, the Issuer may also give notice to the Agent 77 requesting exchange. Any such exchange shall occur no later than 15 days after the date of receipt of the relevant notice by the Agent. The first notice requesting exchange in accordance with the above provisions shall give rise to the issue of Definitive Notes for the total amount of Notes represented by this Global Note. Any such exchange as aforesaid will be made upon presentation of this Global Note at the office of the Agent specified above by the bearer hereof on any day (other than a Saturday or Sunday) on which banks are open for business in London. The aggregate nominal amount of Definitive Notes issued upon an exchange of this Global Note will be equal to the aggregate nominal amount of this Global Note. On an exchange of this Global Note, this Global Note shall be surrendered to the Agent. Until the exchange of this Global Note as aforesaid, the bearer hereof shall in all respects (except as otherwise provided herein) be entitled to the same benefits as if he were the bearer of Definitive Notes and the relative Coupons, Receipts and/or Talons (if any) in the forms set out in Part III, Part IV, Part V and Part VI, respectively, of Schedule 2 to the Agency Agreement. In the event that this Global Note (or any part hereof) has become due and repayable in accordance with the Conditions or that the Maturity Date has occurred and, in either case, payment in full of the amount due has not been made to the bearer in accordance with the foregoing then, unless within the period of fifteen days commencing on the relevant due date payment in full of the amount due in respect of this Global Note is received by the bearer in accordance with the foregoing, this Global Note will become void at 8.00 p.m. (London time) on such fifteenth day and the bearer will have no further rights under this Global Note (but without prejudice to the rights which the bearer or any other person may have under the amended and restated Deed of Covenant executed by the Issuer on 30th March, 2001 in respect of the Euro Medium Term Notes issued under the Program Agreement pursuant to which this Global Note is issued). No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Global Note, but this does not affect any right or remedy of any person which exists or is available apart from that Act. This Global Note is governed by, and shall be construed in accordance with, English law. This Global Note shall not be valid unless authenticated by the Agent. 78 IN WITNESS whereof the Issuer has caused this Global Note to be duly executed on its behalf. [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] By: ......................... Authorised Signatory Authenticated without recourse, warranty or liability by THE CHASE MANHATTAN BANK By: .......................... Authorised Signatory 79 Schedule One to the Permanent Global Note PART I INTEREST PAYMENTS Total amount Confirmation of Date of interest Amount of payment on behalf made payable interest paid of the Issuer - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- - ------ ------------- -------------- -------------------- 80 PART II PAYMENT OF INSTALMENT AMOUNTS Total amount Remaining nominal Confirmation of of Installment Amount of amount of this payment on Date Amounts Instalment Global Note following behalf of made payable Amounts paid such payment* the Issuer - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----------------- * See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 81 PART III REDEMPTIONS Remaining nominal Confirmation of Total amount Amount of amount of this redemption on Date principal principal Global Note following behalf of made payable paid such redemption* the Issuer - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----------------- * See most recent entry in Part II, III or IV of Schedule Two in order to determine this amount. 82 PART IV PURCHASES AND CANCELLATIONS Part of Remaining nominal nominal amount amount of this Confirmation of of this Global Global Note purchase and Date Note purchased following such purchase cancellation on behalf made and cancelled and cancellation* of the Issuer - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----- -------------- ------------ --------------------- ---------------- - ----------------- * See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 83 Schedule Two to the Temporary Global Note EXCHANGES FOR DEFINITIVE NOTES OR PERMANENT GLOBAL NOTE The following exchanges of a part of this Global Note for Definitive Notes or a Permanent Global Note have been made: Nominal amount of this Remaining nominal Global Note exchanged amount of this Global Notation made on Date for Definitive Notes or Note following such behalf of the made a Permanent Global Note exchange* Issuer - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ - ------ ----------------------- --------------------- ------------------ ________________________ * See most recent entry in Part II, III or IV of Schedule One or in this Schedule Two in order to determine this amount. 84 PART III FORM OF DEFINITIVE NOTE [Face of Note] _______________________________________________________________________ 00 000000 [ISIN] 00 000000 ________________________________________________________________________ THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR DELIVERED WITHIN THE UNITED STATES OR TO OR FOR THE BENEFIT OF U.S. PERSONS OTHER THAN PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. TERMS USED HEREIN SHALL HAVE THE MEANING ASCRIBED TO THEM IN REGULATION S UNDER THE SECURITIES ACT. [BY ACCEPTING THIS OBLIGATION, THE HOLDER REPRESENTS AND WARRANTS THAT IT IS NOT A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE OF THE UNITED STATES AND THE REGULATIONS THEREUNDER) AND THAT IT IS NOT ACTING FOR OR ON BEHALF OF A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE AND THE REGULATIONS THEREUNDER).]1 [ANY UNITED STATES PERSON (AS DEFINED IN THE INTERNAL REVENUE CODE OF THE UNITED STATES) WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.]2 [THIS NOTE CONSTITUTES [[COMMERCIAL PAPER]/[A SHORTER/LONGER] TERM DEBT SECURITY]3 ISSUED IN ACCORDANCE WITH REGULATIONS MADE UNDER SECTION 4 OF THE BANKING ACT 1987. THE ISSUER OF THIS NOTE IS [CIBA SPECIALTY CHEMICALS CORPORATION/CIBA SPECIALTY CHEMICALS PLC/CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH]4, WHICH IS NOT AN AUTHORISED INSTITUTION OR A EUROPEAN AUTHORISED INSTITUTION (AS SUCH TERMS ARE DEFINED IN THE BANKING ACT 1987 (EXEMPT TRANSACTIONS) REGULATIONS 1997). REPAYMENT OF THE PRINCIPAL AND PAYMENT OF ANY INTEREST OR PREMIUM IN CONNECTION WITH THIS NOTE HAS BEEN GUARANTEED BY CIBA SPECIALTY CHEMICALS HOLDING INC. WHICH IS __________________________ 1 This legend to appear on Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days or less. 2 This legend to appear on all Notes with a maturity of more than 183 days. 3 Include "commercial paper" if maturity of Notes is less than one year. Include "shorter" if maturity of Notes is one year or more, but less than 3 years. Include "longer" if maturity of Notes is 3 years or more. 4 Delete as applicable. 85 NEITHER AN AUTHORISED INSTITUTION NOR A EUROPEAN AUTHORISED INSTITUTION]5. [CIBA SPECIALTY CHEMICALS CORPORATION] (a company incorporated under the laws of the State of Delaware, U.S.A.)/ CIBA SPECIALTY CHEMICALS PLC (a company incorporated with limited liability in England)/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH (a company incorporated with limited liability in Germany)] unconditionally and irrevocably guaranteed by CIBA SPECIALTY CHEMICALS HOLDING INC. (a company incorporated with limited liability in Switzerland) [Specified Currency and Nominal Amount of Tranche] EURO MEDIUM TERM NOTES DUE [Year of Maturity] This Note is one of a duly authorised issue of Euro Medium Term Notes denominated in the Specified Currency maturing on the Maturity Date (the "Notes") of [Ciba Specialty Chemicals Corporation/Ciba Specialty Chemicals PLC/Ciba Spezialitatenchemie Holding Deutschland GmbH.] (the "Issuer"). Payments in respect of the Notes have been unconditionally and irrevocably guaranteed by Ciba Specialty Chemicals Holding Inc. (the "Guarantor"). References herein to the Conditions shall be to the Terms and Conditions [endorsed hereon/attached hereto/set out in Schedule 1 to the Agency Agreement (as defined below) which shall be incorporated by reference herein and have effect as if set out herein] as modified and supplemented by the Pricing Supplement (the "Pricing Supplement") (or the relevant provisions of the Pricing Supplement) endorsed hereon, but in the event of any conflict between the provisions of the Conditions and the information in the Pricing Supplement, the Pricing Supplement will prevail. This Note is issued subject to, and with the benefit of, the Conditions and an amended and restated Agency Agreement (the "Agency Agreement", which expression shall be construed as a reference to that agreement as the same may be amended, supplemented or restated from time to time) dated 30th March, 2001 and made between, inter alia, the Issuer, the Guarantor, The Chase Manhattan Bank (the "Agent") and the other agents named therein. For value received, the Issuer, subject to and in accordance with the Conditions, promises to pay to the bearer hereof [on each Instalment Date and] on the Maturity Date and/or on such earlier date(s) as this Note may become due and repayable in accordance with the Conditions, the amount payable under the Conditions in respect of this Note on each such date and to pay interest (if any) on this Note calculated and payable as provided in the Conditions together with any other sums payable under the Conditions. These Notes shall be governed by, and construed in accordance with, English law. ____________________ 5 Delete except where the Notes are denominated in Sterling or (b) the net proceeds of the issue of the Notes are accepted in the United Kingdom. 86 This Note shall not be validly issued unless authenticated by the Agent. 87 IN WITNESS whereof the Issuer has caused this Note to be duly executed on its behalf. [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] By: _____________________ Authorised Signatory Authenticated without recourse, warranty or liability by THE CHASE MANHATTAN BANK By: _____________________ Authorised Signatory 88 Terms and Conditions [Terms and Conditions to be as set out in Schedule 1 to the Agency Agreement] Pricing Supplement [Here to be set out text of Pricing Supplement relating to the Notes] 89 PART IV FORM OF COUPON (Face of Coupon) [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [Specified Currency and Nominal Amount Tranche] NOTES DUE [Year of Maturity] Series No. [ ] Part A [For Fixed Rate Notes:- This Coupon is payable to bearer, separately Coupon for negotiable and subject to the Terms and [ ] Conditions of the said Notes. due on [ ] Part B [For Floating Rate Notes or Indexed Interest Notes:- Coupon for the amount due in accordance with Coupon due the Terms and Conditions on the said Notes on in [ ] the Interest Payment Date falling in [ ]]. This Coupon is payable to bearer, separately negotiable and subject to such Terms and Conditions, under which it may become void before its due date.] THE NOTE PERTAINING HERETO HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR DELIVERED WITHIN THE UNITED STATES OR TO OR FOR THE BENEFIT OF U.S. PERSONS OTHER THAN PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. TERMS USED HEREIN SHALL HAVE THE MEANING ASCRIBED TO THEM IN REGULATION S UNDER THE SECURITIES ACT. 90 [BY ACCEPTING THIS OBLIGATION, THE HOLDER REPRESENTS AND WARRANTS THAT IT IS NOT A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE OF THE UNITED STATES AND THE REGULATIONS THEREUNDER) AND THAT IT IS NOT ACTING FOR OR ON BEHALF OF A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE AND THE REGULATIONS THEREUNDER).]1 [ANY UNITED STATES PERSON (AS DEFINED IN THE INTERNAL REVENUE CODE OF THE UNITED STATES) WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES TAX LAWS INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.]2 ________________________________________________________________________ 00 000000 [ISIN] 00 000000 ________________________________________________________________________ ____________________ 1 This legend to appear on Coupons attaching to Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days or less. 2 This legend to appear on Coupons attaching to Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days or more and all other Coupons. 91 (Reverse of Coupon) AGENT The Chase Manhattan Bank Trinity Tower 9 Thomas More Street London E1W 1YT PAYING AGENT Chase Manhattan Bank Luxembourg S.A. 5 Rue Plaetis L-2338 Luxembourg and/or such other or further Agent and other or further Paying Agents and/or specified offices as may from time to time be duly appointed by the Issuer and the Guarantor and notice of which has been given to the Noteholders. 92 (On the front) PART V FORM OF RECEIPT THE NOTE PERTAINING HERETO HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR DELIVERED WITHIN THE UNITED STATES OR TO OR FOR THE BENEFIT OF U.S. PERSONS OTHER THAN PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. TERMS USED HEREIN SHALL HAVE THE MEANING ASCRIBED TO THEM IN REGULATION S UNDER THE SECURITIES ACT. [BY ACCEPTING THIS OBLIGATION, THE HOLDER REPRESENTS AND WARRANTS THAT IT IS NOT A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE OF THE UNITED STATES AND THE REGULATIONS THEREUNDER) AND THAT IT IS NOT ACTING FOR OR ON BEHALF OF A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE AND THE REGULATIONS THEREUNDER).]1 [ANY UNITED STATES PERSON (AS DEFINED IN THE INTERNAL REVENUE CODE OF THE UNITED STATES) WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.]2 [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [Specified Currency and Nominal Amount of Tranche] EURO MEDIUM TERM NOTES DUE [Year of Maturity] Series No. [ ] Receipt for the sum of [ ] being the instalment of principal payable in accordance with the Terms and Conditions endorsed on the Note to which this Receipt appertains (the "Conditions") on [ ]. This Receipt is issued subject to and in accordance with the Conditions which shall be binding upon the holder of this Receipt (whether or not it is for the time being attached to such Note) and is payable at the specified office of the Agent or any of the Paying Agents set out on the reverse of the Note to which this Receipt appertains (and/or any other or further Paying Agents and/or specified offices as may from time to time be duly appointed and notified to the Noteholders). __________________ 1 This legend to appear on Receipts pertaining to Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days or less. 2 This legend to appear on Receipts pertaining to Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days or more and on all other Receipts. 93 This Receipt must be presented for payment together with the Note to which it appertains. The Issuer shall have no obligation in respect of any Receipt presented without the Note to which it appertains or any unmatured Receipts. [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] By:___________________ Authorised Signatory 94 PART VI FORM OF TALON THE NOTE PERTAINING HERETO HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR DELIVERED WITHIN THE UNITED STATES OR TO OR FOR THE BENEFIT OF U.S. PERSONS OTHER THAN PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. TERMS USED HEREIN SHALL HAVE THE MEANING ASCRIBED TO THEM IN REGULATION S UNDER THE SECURITIES ACT. [BY ACCEPTING THIS OBLIGATION, THE HOLDER REPRESENTS AND WARRANTS THAT IT IS NOT A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE OF THE UNITED STATES AND THE REGULATIONS THEREUNDER) AND THAT IT IS NOT ACTING FOR OR ON BEHALF OF A UNITED STATES PERSON (OTHER THAN AN EXEMPT RECIPIENT DESCRIBED IN SECTION 6049(B)(4) OF THE INTERNAL REVENUE CODE AND THE REGULATIONS THEREUNDER).]1 [ANY UNITED STATES PERSON (AS DEFINED IN THE INTERNAL REVENUE CODE OF THE UNITED STATES) WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.]2 (On the front) [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [Specified Currency and Nominal Amount of Tranche] EURO MEDIUM TERM NOTES DUE [Year of Maturity] Series No. [ ] On and after [ ] further Coupons [and a further Talon] appertaining to the Note to which this Talon appertains will be issued at the specified office of the Agent or any of the Paying Agents set out on the reverse hereof (and/or any other or further Paying Agents and/or specified offices as may from time to time be duly appointed and notified to the Noteholders) upon production and surrender of this Talon. __________________________ 1 This legend to appear on Talons pertaining to Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days or less. 2 This legend to appear on Talons pertaining to Notes issued by Ciba Specialty Chemicals Corporation with a maturity of 183 days and on all other Talons. 95 This Talon may, in certain circumstances, become void under the Terms and Conditions endorsed on the Notes to which this Talon appertains. [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] By: _______________________ Authorised Signatory 96 (Reverse of Receipt and Talon) AGENT The Chase Manhattan Bank Trinity Tower 9 Thomas More Street London E1W 1YT PAYING AGENT Chase Manhattan Bank Luxembourg S.A. 5 Rue Plaetis L-2338 Luxembourg and/or such other or further Agent and other or further Paying Agents and/or specified offices as may from time to time be duly appointed by the Issuer and the Guarantor and notice of which has been given to the Noteholders. 97 SCHEDULE 3 FORM OF DEED OF GUARANTEE THIS DEED OF GUARANTEE is made on 30th March, 2001 by CIBA SPECIALTY CHEMICALS HOLDING INC., (the "Guarantor") in favour of the Relevant Account Holders (as defined in the Deed of Covenant referred to below) and the holders for the time being of the Notes (as defined below) and the interest coupons (if any) appertaining to the Notes ("Coupons"), the Coupons being attached on issue to Definitive Note(s) (as defined below). Each Relevant Account Holder, each holder of a Note and each holder of a Coupon is a "Holder". WHEREAS: (A) CIBA SPECIALTY CHEMICALS CORPORATION, CIBA SPECIALTY CHEMICALS PLC, CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH (the "Issuers" and each an "Issuer") and the Guarantor have entered into an amended and restated Program Agreement (the "Program Agreement", which expression includes the same as it may be amended or supplemented from time to time) dated 30th March, 2001 with the Dealers named therein, which amends and restates the amended and restated program agreement entered into by, inter alia, Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC and Ciba Spezialitatenchemie Holding Deutschland GmbH dated 16th June, 2000 (the "Principal Program Agreement"), under which each Issuer proposes from time to time to issue Euro Medium Term Notes (the "Notes", such expression to include each Definitive Note issued by an Issuer and each Global Note issued by an Issuer (where "Definitive Note" and "Global Note" have the meanings ascribed thereto in the Agency Agreement defined below) and to include any receipts issued in respect of Notes repayable in instalments); (B) each Issuer has executed a Deed of Covenant of even date (the "Deed of Covenant") relating to Global Notes issued by that Issuer pursuant to the Program Agreement; (C) the Issuers and the Guarantor have entered into an amended and restated agency agreement (the "Agency Agreement", which expression includes the same as it may be amended or supplemented from time to time) dated 30th March, 2001 with the Paying Agents named therein; and (D) this Deed of Guarantee amends and restates the amended and restated Deed of Guarantee made by the Guarantor dated 16th June, 2000, and does not affect any Notes issued pursuant to the Principal Program Agreement prior to the date hereof. NOW THIS DEED WITNESSES as follows: 1. Guarantee: The Guarantor irrevocably and unconditionally undertakes to secure by way of deed poll to each Holder the due and punctual payment as stipulated in an Issuer's Note or Coupon or under its Deed of Covenant, as the case may be. The Guarantor therefore undertakes to pay on first demand of such a Holder, irrespective of the validity and the legal effects of the above mentioned relationship in respect of a Note or Coupon or Deed of Covenant and waiving all rights of objection and defence arising therefrom any amount not paid by the relevant Issuer (including any premium or any other amounts of whatever nature or additional amounts) upon receipt of the written request for payment by such Holder and the confirmation in writing by the Agent that the relevant Issuer has not made such payments 98 on the dates specified and in the amount called under the Guarantee. The Guarantor hereby expressly undertakes and secures that payments under this Guarantee will not be less than as stipulated in an Issuer's Note or Coupon. In implementation of this undertaking and in case Swiss withholding taxes are imposed in respect of payments made under this Guarantee, the Guarantor undertakes, as a separate and independent obligation, to pay an increased amount on the relevant Note or Coupon so that the payment received by the Noteholder or Couponholder shall equal the amount actually stipulated in such Note or Coupon (assuming no such withholding applies). 2. Guarantor's Obligations Continuing: The Guarantor's obligations under this Guarantee are and will remain in full force and effect by way of continuing security until no sum remains payable under any Note, any Coupon or the Deed of Covenant. Furthermore, these obligations of the Guarantor are additional to, and not instead of, any security or other guarantee or indemnity at any time existing in favour of a Holder, whether from the Guarantor or otherwise. The Guarantor irrevocably waives all notices and demands whatsoever, except as provided herein. 3. Repayment to the Issuer: If any payment received by a Holder is, on the subsequent liquidation or insolvency of the relevant Issuer, avoided under any laws relating to liquidation or insolvency, such payment will not be considered as having discharged or diminished the liability of the Guarantor and this Guarantee will continue to apply as if such payment had at all times remained owing by the relevant Issuer. 4. Status of Guarantee: The payment obligations of the Guarantor under this Guarantee constitute direct, unconditional and (subject to clause 5 below) unsecured obligations of the Guarantor and (subject as aforesaid) rank and will rank pari passu with all other outstanding unsecured and unsubordinated indebtedness and monetary obligations of the Guarantor, present or future, including those in respect of deposits (other than obligations preferred by law). 5. Negative Pledge of the Guarantor: So long as any of the Notes remains outstanding, but not later than the time when payment for the full amount of principal and interest in respect of all outstanding Notes has been duly provided for, the Guarantor will procure that no Indebtedness of the Guarantor which is represented by bonds, notes or other securities which in any such case are listed or capable of being listed on any recognised Stock Exchange will be secured upon any of the present or future assets or revenues of the Guarantor unless all amounts payable under this Guarantee are secured equally and rateably with such other security or such other security or guarantee is granted to the Notes and Coupons as shall have been approved by an Extraordinary Resolution of the Noteholders. Any reference to an obligation being guaranteed shall include a reference to an indemnity being given in respect of payment thereof. As used herein "Indebtedness" means all indebtedness for money borrowed that is created, assumed, incurred or guaranteed in any manner by the Guarantor or for which the Guarantor is otherwise responsible or liable. 6. Tax Gross-up: All payments in respect of the Notes by the Guarantor shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of Switzerland, or any political sub-division of, or any authority in, or of, Switzerland having power to tax, unless the withholding or deduction of the Taxes is 99 required by law. In that event, the Guarantor will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amount shall be payable in relation to any payment in respect of any Note or Coupon: (i) by or on behalf of a person liable to such tax, duty or charge in respect of such Note, Receipt or Coupon by reason of his having some connection with Switzerland other than the mere holding or ownership of such Note, Receipt or Coupon; and/or (ii) presented for payment to the relevant Issuer more than 30 days after the Relevant Date (as defined in Condition 7(f) of the Terms and Conditions of the relevant Notes) except to the extent that a holder would have been entitled to additional amounts on presenting the same for payment on the last day of the period of 30 days; and/or (iii) to, or to a third party on behalf of, a holder who would be able to avoid such withholding or deduction by making a declaration of non-residence or similar claim for exemption but fails to do so; and/or (iv) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to any European Union Directive on the taxation of savings implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000, or any law implementing or complying with, or introduced in order to conform to, such Directive; and/or (v) presented for payment by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the EU. 7. Power to execute: The Guarantor hereby warrants, represents and covenants with each Holder that it has all corporate power, and has taken all necessary corporate or other steps, to enable it to execute, deliver and perform this Guarantee, and that this Guarantee constitutes a legal, valid and binding obligation of the Guarantor, enforceable in accordance with its terms subject to applicable bankruptcy, reorganisation, insolvency, fraudulent transfer, moratorium and other similar laws affecting creditor's rights generally from time to time in effect, and to general principles of equity, regardless of whether considered in a proceeding in law or at equity. 8. Deposit of Guarantee: This Guarantee shall take effect as a Deed Poll for the benefit of the Holders from time to time and for the time being. This Guarantee shall be deposited with and held by The Chase Manhattan Bank for the benefit of the Holders until all the obligations of the Guarantor hereunder have been discharged in full. 9. Production of Guarantee: The Guarantor hereby acknowledges the right of every Holder to the production of, and the right of every Holder to obtain (upon payment of a reasonable charge) a copy of, this Guarantee, and further acknowledges and covenants that the obligations binding upon it contained herein are owed to, and shall be for the account of, each and every Holder, and that each Holder shall be entitled severally to enforce the said obligations against the Guarantor. 100 10. Subrogation: Until all amounts which may be payable under the Notes, the Coupons and/or the Deed of Covenant have been irrevocably paid in full, the Guarantor shall not exercise any rights of subrogation in respect of any rights of any Holder or claim in competition with the Holders against the relevant Issuer. 11. Governing Law and Jurisdiction: This Guarantee is governed by and shall be construed in accordance with English law. The Guarantor irrevocably agrees for the benefit of each Holder that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Guarantee and that accordingly any suit, action or proceedings arising out of or in connection with this Guarantee (together referred to as "Proceedings") may be brought in the courts of England. The Guarantor irrevocably waives any objection which it may have now or hereafter to the laying of the venue of the Proceedings in the courts of England and irrevocably agrees that a final judgment in any Proceedings brought in the courts of England shall be conclusive and binding upon the Guarantor and may be enforced in the courts of any other jurisdiction. Nothing contained in this clause shall limit any right to take Proceedings against the Guarantor in any other court of competent jurisdiction, nor shall the taking of Proceedings in none or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not. No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Global Note, but this does not affect any right or remedy of any person which exists or is available apart from that Act. The Guarantor hereby appoints Ciba Specialty Chemicals PLC as its agent for service of process in England in respect of any Proceedings and undertakes that in the event of it ceasing so to act it will appoint another person as its agent for that purpose. IN WITNESS whereof this Guarantee has been manually executed as a deed poll on behalf of the Guarantor. Executed as a deed ) by CIBA SPECIALTY CHEMICALS ) HOLDING INC. ) acting by its attorneys ) and in the presence of: ) Witness's Signature: ---------------------- Name: ---------------------- Address: ---------------------- ---------------------- Dated 30th March, 2001 101 SCHEDULE 4 PROVISIONS FOR MEETINGS OF NOTEHOLDERS 1. As used in this Schedule the following expressions shall have the following meanings unless the context otherwise requires: (i) "voting certificate" shall mean an English language certificate issued by a Paying Agent and dated in which it is stated: (a) that on the date thereof Notes (not being Notes in respect of which a block voting instruction has been issued and is outstanding in respect of the meeting specified in such voting certificate and any adjourned such meeting) bearing specified serial numbers were deposited with such Paying Agent or (to the satisfaction of such Paying Agent) were held to its order or under its control and that no such Notes will cease to be so deposited or held until the first to occur of: (1) the conclusion of the meeting specified in such certificate or, if applicable, any adjourned such meeting; and (2) the surrender of the certificate to the Paying Agent who issued the same; and (b) that the bearer thereof is entitled to attend and vote at such meeting and any adjourned such meeting in respect of the Notes represented by such certificate; (ii) "block voting instruction" shall mean an English language document issued by a Paying Agent and dated in which: (a) it is certified that Notes (not being Notes in respect of which a voting certificate has been issued and is outstanding in respect of the meeting specified in such block voting instruction and any adjourned such meeting) have been deposited with such Paying Agent or (to the satisfaction of such Paying Agent) were held to its order or under its control and that no such Notes will cease to be so deposited or held until the first to occur of: (1) the conclusion of the meeting specified in such document or, if applicable, any adjourned such meeting; and (2) the surrender to the Paying Agent not less than 48 hours before the time for which such meeting or any adjourned such meeting is convened of the receipt issued by such Paying Agent in respect of each such deposited Note which is to be released or (as the case may require) the Note or Notes ceasing with the agreement of the Paying Agent to be held to its order or under its control and the giving of notice by the Paying Agent to the Issuer in accordance with paragraph 17 hereof of the necessary amendment to the block voting instruction; 102 (b) it is certified that each holder of such Notes has instructed such Paying Agent that the vote(s) attributable to the Note or Notes so deposited or held should be cast in a particular way in relation to the resolution or resolutions to be put to such meeting or any adjourned such meeting and that all such instructions are during the period commencing 48 hours prior to the time for which such meeting or any adjourned such meeting is convened and ending at the conclusion or adjournment thereof neither revocable nor capable of amendment; (c) the total number and the serial numbers of the Notes so deposited or held are listed distinguishing with regard to each such resolution between those in respect of which instructions have been given as aforesaid that the votes attributable thereto should be cast in favour of the resolution and those in respect of which instructions have been so given that the votes attributable thereto should be cast against the resolution; and (d) one or more persons named in such document (each hereinafter called a "proxy") is or are authorised and instructed by such Paying Agent to cast the votes attributable to the Notes so listed in accordance with the instructions referred to in paragraph (c) above as set out in such document. The holder of any voting certificate or the proxies named in any block voting instruction shall for all purposes in connection with the relevant meeting or adjourned meeting of Noteholders be deemed to be the holder of the Notes to which such voting certificate or block voting instruction relates and the Paying Agent with which such Notes have been deposited or the person holding the same to the order or under the control of such Paying Agent shall be deemed for such purposes not to be the holder of those Notes. (iii) References herein to the "Notes" are to the Notes in respect of which the relevant meeting is convened. 2. The relevant Issuer or the Guarantor may at any time and, upon a requisition in writing of Noteholders holding not less than five per cent. in nominal amount of the Notes for the time being outstanding, shall convene a meeting of the Noteholders and if the relevant Issuer makes default for a period of seven days in convening such a meeting the same may be convened by the requisitionists. Whenever the relevant Issuer or the Guarantor is about to convene any such meeting it shall forthwith give notice in writing to the Agent and the Dealers of the day, time and place thereof and of the nature of the business to be transacted thereat. Every such meeting shall be held at such time and place as the Agent may approve. 3. At least 21 days' notice (exclusive of the day on which the notice is given and the day on which the meeting is held) specifying the place, day and hour of meeting shall be given to the Noteholders prior to any meeting of the Noteholders in the manner provided by Condition 14. Such notice shall state generally the nature of the business to be transacted at the meeting thereby convened but (except for an Extraordinary Resolution) it shall not be necessary to specify in such notice the terms of any resolution to be proposed. Such notice shall include a statement to the effect that Notes may be deposited with Paying Agents for the purpose of obtaining voting certificates or appointing proxies not less than 24 hours before the time fixed for the meeting or that, in the case of corporations, they may appoint representatives by resolution of their directors or other governing body. A copy of the notice 103 shall be sent by post to the Issuer (unless the meeting is convened by the relevant Issuer) and to the Guarantor (unless the meeting is convened by the Guarantor). 4. Some person (who may but need not be a Noteholder) nominated in writing by the relevant Issuer shall be entitled to take the chair at every such meeting but if no such nomination is made or if at any meeting the person nominated shall not be present within fifteen minutes after the time appointed for holding the meeting the Noteholders present shall choose one of their number to be Chairman. 5. At any such meeting one or more persons present holding Notes or voting certificates or being proxies and holding or representing in the aggregate not less than twenty per cent. in nominal amount of the Notes for the time being outstanding shall (except for the purpose of passing an Extraordinary Resolution (as defined in paragraph 20 below)) form a quorum for the transaction of business and no business (other than the choosing of a Chairman) shall be transacted at any meeting unless the requisite quorum be present at the commencement of business. The quorum at any such meeting for passing an Extraordinary Resolution shall (subject as provided below) be one or more persons present holding Notes or voting certificates or being proxies and holding or representing in the aggregate not less than 50 per cent. in nominal amount of the Notes for the time being outstanding PROVIDED THAT at any meeting the business of which includes any of the following matters (each of which shall only be capable of being effected after having been approved by Extraordinary Resolution) namely: (i) modification of the Maturity Date of the Notes or reduction or cancellation of the nominal amount payable upon maturity; or (ii) reduction or cancellation of the amount payable or modification of the payment date in respect of any interest in respect of the Notes or variation of the method of calculating the rate of interest in respect of the Notes; or (iii) reduction of any Minimum Interest Rate and/or Maximum Interest Rate specified in the applicable Pricing Supplement of any Note; or (iv) modification of the currency in which payments under the Notes and/or the Receipts and/or Coupons appertaining thereto are to be made; or (v) modification of the majority required to pass an Extraordinary Resolution; or (vi) the sanctioning of any such scheme or proposal as is described in paragraph 18(F) below; or (vii) alteration of this proviso or the proviso to paragraph 6 below; the quorum shall be one or more persons present holding Notes or voting certificates or being proxies and holding or representing in the aggregate not less than 75 per cent. in nominal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the holders of Notes will be binding on all holders of Notes, whether or not they are present at the meeting, and on all holders of Coupons appertaining to such Notes. 6. If within fifteen minutes after the time appointed for any such meeting a quorum is not present the meeting shall if convened upon the requisition of Noteholders be dissolved. In 104 any other case it shall stand adjourned to the same day in the next week (or if such day is a public holiday the next succeeding business day) at the same time and place (except in the case of a meeting at which an Extraordinary Resolution is to be proposed in which case it shall stand adjourned for such period being not less than 14 days nor more than 42 days, and at such place as may be appointed by the Chairman and approved by the Agent) and at such adjourned meeting one or more persons present holding Notes or voting certificates or being proxies (whatever the nominal amount of the Notes so held or represented by them) shall (subject as provided below) form a quorum and shall (subject as provided below) have power to pass any Extraordinary Resolution or other resolution and to decide upon all matters which could properly have been dealt with at the meeting from which the adjournment took place had the requisite quorum been present PROVIDED THAT at any adjourned meeting the business of which includes any of the matters specified in the proviso to paragraph 5 above the quorum shall be one or more persons present holding Notes or voting certificates or being proxies and holding or representing in the aggregate not less than a clear majority in nominal amount of the Notes for the time being outstanding. 7. Notice of any adjourned meeting at which an Extraordinary Resolution is to be submitted shall be given in the same manner as notice of an original meeting but as if 10 were substituted for 21 in paragraph 3 above and such notice shall (except in cases where the proviso to paragraph 6 above shall apply when it shall state the relevant quorum) state that one or more persons present holding Notes or voting certificates or being proxies at the adjourned meeting whatever the nominal amount of the Notes held or represented by them will form a quorum. Subject as aforesaid it shall not be necessary to give any notice of an adjourned meeting. 8. Every question submitted to a meeting shall be decided in the first instance by a show of hands and in case of equality of votes the Chairman shall both on a show of hands and on a poll have a casting vote in addition to the vote or votes (if any) to which he may be entitled as a Noteholder or as a holder of a voting certificate or as a proxy. 9. At any meeting, unless a poll is (before or on the declaration of the result of the show of hands) demanded by the Chairman or the relevant Issuer or by one or more persons present holding Notes or voting certificates or being proxies (whatever the nominal amount of the Notes so held by them), a declaration by the Chairman that a resolution has been carried or carried by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against such resolution. 10. Subject to paragraph 12 below, if at any such meeting a poll is so demanded it shall be taken in such manner and subject as hereinafter provided either at once or after an adjournment as the Chairman directs and the result of such poll shall be deemed to be the resolution of the meeting at which the poll was demanded as at the date of the taking of the poll. The demand for a poll shall not prevent the continuance of the meeting for the transaction of any business other than the motion on which the poll has been demanded. 11. The Chairman may with the consent of (and shall if directed by) any such meeting adjourn the same from time to time and from place to place but no business shall be transacted at any adjourned meeting except business which might lawfully (but for lack of required quorum) have been transacted at the meeting from which the adjournment took place. 105 12. Any poll demanded at any such meeting on the election of a Chairman or on any question of adjournment shall be taken at the meeting without adjournment. 13. Any director or officer of the Issuer or the Guarantor and their respective lawyers may attend and speak at any meeting. Save as aforesaid, but without prejudice to the proviso to the definition of "outstanding" in clause 1(2) of this Agreement, no person shall be entitled to attend and speak nor shall any person be entitled to vote at any meeting of the Noteholders or join with others in requisitioning the convening of such a meeting unless he either produces the Note or Notes of which he is the holder or a voting certificate or is a proxy. None of the Issuers, the Guarantor nor any of their respective subsidiaries shall be entitled to vote at any meeting in respect of Notes held by it for the benefit of any such company and no other person shall be entitled to vote at any meeting in respect of Notes held by it for the benefit of any such company. Nothing herein contained shall prevent any of the proxies named in any block voting instruction from being a director, officer or representative of or otherwise connected with the Issuer or the Guarantor. 14. Subject as provided in paragraph 13 hereof at any meeting: (A) on a show of hands every person who is present in person and produces a Note or voting certificate or is a proxy shall have one vote; and (B) on a poll every person who is so present shall have one vote in respect of: (i) in the case of a meeting of the holders of Notes all of which are denominated in a single currency, each minimum integral amount of such currency; and (ii) in the case of a meeting of the holders of Notes denominated in more than one currency, each U.S.$1.00 or, in the case of a Note denominated in a currency other than U.S. dollars, the equivalent of U.S.$1.00 in such currency at the Agent's spot buying rate for the relevant currency against U.S. dollars at or about 11.00 a.m. (London time) on the date of publication of the notice of the relevant meeting (or of the original meeting of which such meeting is an adjournment), or such other amount as the Agent shall in its absolute discretion stipulate in nominal amount of Notes so produced or represented by the voting certificate so produced or in respect of which he is a proxy. Without prejudice to the obligations of the proxies named in any block voting instruction any person entitled to more than one vote need not use all his votes or cast all the votes to which he is entitled in the same way. 15. The proxies named in any block voting instruction need not be Noteholders. 16. Each block voting instruction together (if so requested by the relevant Issuer) with proof satisfactory to the relevant Issuer of its due execution on behalf of the relevant Paying Agent shall be deposited at such place as the Agent shall approve not less than 24 hours before the time appointed for holding the meeting or adjourned meeting at which the proxies named in the block voting instruction propose to vote and in default the block voting instruction shall not be treated as valid unless the Chairman of the meeting decides otherwise before such meeting or adjourned meeting proceeds to business. A certified copy of each block 106 voting instruction shall be deposited with the Agent before the commencement of the meeting or adjourned meeting but the Agent shall not thereby be obliged to investigate or be concerned with the validity of or the authority of the proxies named in any such block voting instruction. 17. Any vote given in accordance with the terms of a block voting instruction shall be valid notwithstanding the previous revocation or amendment of the block voting instruction or of any of the Noteholders' instructions pursuant to which it was executed PROVIDED THAT no intimation in writing of such revocation or amendment shall have been received from the relevant Paying Agent by the relevant Issuer at its registered office (or such other place as may have been approved by the Agent for the purpose) by the time being 24 hours before the time appointed for holding the meeting or adjourned meeting at which the block voting instruction is to be used. 18. A meeting of the Noteholders shall in addition to the powers hereinbefore given have the following powers exercisable by Extraordinary Resolution (subject to the provisions relating to quorum contained in paragraphs 5 and 6 above) only, namely: (A) power to sanction any compromise or arrangement proposed to be made between the Issuer and the Guarantor and the Noteholders and Couponholders or any of them; (B) power to sanction any abrogation, modification, compromise or arrangement in respect of the rights of the Noteholders and Couponholders against the relevant Issuer and the Guarantor or against any of its property whether such rights shall arise under this Agreement, the Notes or the Coupons or otherwise; (C) power to assent to any modification of the provisions contained in this Agreement or the Conditions, the Notes, the Coupons, the Guarantee or the Deed of Covenant which shall be proposed by the Issuer or the Guarantor; (D) power to give any authority or sanction which under the provisions of this Agreement or the Notes is required to be given by Extraordinary Resolution; (E) power to appoint any persons (whether Noteholders or not) as a committee or committees to represent the interests of the Noteholders and to confer upon such committee or committees any powers or discretions which the Noteholders could themselves exercise by Extraordinary Resolution; (F) power to sanction any scheme or proposal for the exchange or sale of the Notes for, or the conversion of the Notes into or the cancellation of the Notes in consideration of, shares, stock, notes, bonds, debentures, debenture stock and/or other obligations and/or securities of the Issuer or any other company formed or to be formed, or for or into or in consideration of cash, or partly for or into or in consideration of such shares, stock, notes, bonds, debentures, debenture stock and/or other obligations and/or securities as aforesaid and partly for or into or in consideration of cash; and (G) power to approve the substitution of any entity in place of (i) the Issuer (or any previous substitute) as the principal debtor in respect of the Notes and the Coupons or (ii) the Guarantor (or any previous substitute) as guarantor under the Guarantee. 107 19. Any resolution passed at a meeting of the Noteholders duly convened and held in accordance with the provision hereof shall be binding upon all the Noteholders whether present or not present at such meeting and whether or not voting and upon all Couponholders and Receiptholders and each of them shall be bound to give effect thereto accordingly and the passing of any such resolution shall be conclusive evidence that the circumstances justify the passing thereof. Notice of the result of the voting on any resolution duly considered by the Noteholders shall be published in accordance with Condition 14 by the relevant Issuer within 14 days of such result being known PROVIDED THAT the non-publication of such notice shall not invalidate such resolution. 20. The expression "Extraordinary Resolution" when used in this Agreement or the Conditions means a resolution passed at a meeting of the Noteholders duly convened and held in accordance with the provisions herein contained by a majority consisting of not less than 75 per cent. of the persons voting thereat upon a show of hands or if a poll be duly demanded then by a majority consisting of not less than 75 per cent. of the votes given on such poll. 21. Minutes of all resolutions and proceedings at every such meeting as aforesaid shall be made and duly entered in books to be from time to time provided for that purpose by the relevant Issuer and any such Minutes as aforesaid if purporting to be signed by the Chairman of the meeting at which such resolutions were passed or proceedings had shall be conclusive evidence of the matters therein contained and until the contrary is proved every such meeting in respect of the proceedings of which Minutes have been made shall be deemed to have been duly held and convened and all resolutions passed or proceedings had thereat to have been duly passed or had. 22. Subject to all other provisions contained herein the Agent may without the consent of the relevant Issuer, the Guarantor, the Noteholders or the Couponholders prescribe such further regulations regarding the requisitioning and/or the holding of meetings of Noteholders and attendance and voting thereat as the Agent may in its sole discretion think fit. 108 SCHEDULE 5 FORM OF PUT NOTICE [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [title of relevant Series of Notes] By depositing this duly completed Notice with any Paying Agent for the above Series of Notes (the "Notes") the undersigned holder of such Notes surrendered with this Notice and referred to below irrevocably exercises its option to have such Notes redeemed in accordance with Condition 6(e) on [redemption date]. This Notice relates to Notes in the aggregate nominal amount of _______ bearing the following serial numbers: - --------------------------------------------- - --------------------------------------------- - --------------------------------------------- If the Notes referred to above are to be returned (1) to the undersigned under clause 10(4) of the Agency Agreement, they should be returned by post to the following address outside the United States: - ------------------------- - ------------------------- - ------------------------- Payment Instructions Please make payment in respect of the above-mentioned Notes by [cheque posted to the above address/transfer to the following bank account] (2): Bank: ----------------------------- Branch Address outside the United States: ----------------------------- Branch Code: ----------------------------- Account Number: ----------------------------- Signature of holder: ----------------------------- 109 Duly authorised on behalf of [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [To be completed by recipient Paying Agent] Details of missing unmatured Coupons ---------------------------(3) Received by: ----------------------- [Signature and stamp of Paying Agent] At its office at: ----------------------- On: ----------------------- Notes (1) The Agency Agreement provides that Notes so returned will be sent by post, uninsured and at the risk of the Noteholder, unless the Noteholder otherwise requests and pays the costs of such insurance to the relevant Paying Agent at the time of depositing the Note referred to above. (2) Delete as applicable. (3) Only relevant for Fixed Rate Notes (which are not also Indexed Redemption Amount Notes) in definitive form. N.B. The Paying Agent with whom the above-mentioned Notes are deposited will not in any circumstances be liable to the depositing Noteholder or any other person for any loss or damage arising from any act, default or omission of such Paying Agent in relation to the said Notes or any of them unless such loss or damage was caused by the fraud or gross negligence of such Paying Agent or its directors, officers or employees. This Put Notice is not valid unless all of the paragraphs requiring completion are duly completed. Once validly given this Put Notice is irrevocable except in the circumstances set out in clause 10(4) of the Agency Agreement. 110 SCHEDULE 6 Dated 30th March, 2001 CIBA SPECIALTY CHEMICALS PLC CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH as Issuers - and - CIBA SPECIALTY CHEMICALS HOLDING INC. as Guarantor __________________________________ OPERATING & ADMINISTRATIVE PROCEDURES MEMORANDUM in respect of a U.S.$2,000,000,000 EURO MEDIUM TERM NOTE PROGRAM (Amended and Restated) ___________________________________ ALLEN & OVERY London 111 The aggregate nominal amount of all Notes outstanding at any time will not, subject as provided below, exceed U.S.$2,000,000,000 or its equivalent in other currencies at the time of agreement to issue, subject to increase as provided in the Program Agreement. The Program Agreement provides for the increase in the nominal amount of Notes that may be issued under the Program. In that event, this Procedures Memorandum shall apply to the Program as increased. The documentation of the Program provides for the issue of Notes denominated in any currency or currencies as may be agreed between the relevant Issuer, the Guarantor and the relevant Dealer (subject to certain restrictions as to minimum and/or maximum maturities as set out in the Offering Circular describing the Program) and being any of: o Fixed Rate Notes o Floating Rate Notes o Zero Coupon Notes o Dual Currency Notes o Indexed Interest Notes o Indexed Redemption Amount Notes o Instalment Notes o Partly Paid Notes o other forms of Notes agreed between the relevant Dealer or Lead Manager, the relevant Issuer and the Guarantor All terms with initial capitals used herein without definition shall have the meanings given to them in the Offering Circular dated 30th March, 2001 (the "Offering Circular" as supplemented), or, as the case may be, the amended and restated Program Agreement dated 30th March, 2001 (the "Program Agreement" as amended, supplemented or restated) between the Issuers, the Guarantor and the Dealers named therein pursuant to which the Issuer may issue Euro Medium Term Notes. OPERATING PROCEDURES Dealers must confirm all trades directly with the Issuer, the Guarantor and the Agent. A. RESPONSIBILITIES OF THE AGENT The Agent will, in addition to the responsibilities in relation to settlement described in Annexe A, be responsible for the following: (i) in the case of Notes which are to be listed on a Stock Exchange, distributing, or procuring the distribution, to the Stock Exchange and any other relevant authority such number of copies of the Pricing Supplement required by the Stock Exchange and such other relevant authority; (ii) in the case of Notes which are to be listed on a Stock Exchange, immediately notifying the relevant Issuer and the relevant Dealer if at any time the Agent is notified by the Listing Agent or the Stock Exchange that the listing of a Tranche of Notes has been refused or otherwise will not take place; and (iii) determining the end of the Distribution Compliance Period in respect of a Tranche in accordance with clause 4 of the Agency Agreement. The Agent shall upon determining the end of the Distribution Compliance Period in respect of any Tranche 112 notify the relevant Issuer, the Guarantor, Euroclear, Clearstream, Luxembourg and the relevant Dealer or Lead Manager, as the case may be. B. RESPONSIBILITIES OF DEALER/LEAD MANAGER (i) Each Dealer/Lead Manager will be responsible for preparing and agreeing with the relevant Issuer and the Guarantor a Pricing Supplement (substantially in the form of Annexe C hereto) giving details of each Tranche of Notes to be issued. (ii) In the case of an issue not to be subscribed pursuant to a Subscription Agreement, each Dealer which agrees to purchase Notes from the relevant Issuer will be responsible for notifying the Agent upon completion of the distribution of the Notes of each Tranche purchased by that Dealer. In the case of an issue of Notes to be subscribed pursuant to a Subscription Agreement, the Lead Manager will be responsible for notifying the Agent upon completion of the distribution of the Notes of such issue. C. SETTLEMENT The settlement procedures set out in Annexe A shall apply to each issue of Notes (Part 1 in the case of issues not to be subscribed pursuant to a Subscription Agreement, Part 2 in the case of issues to be subscribed pursuant to a Subscription Agreement), unless otherwise agreed between the relevant Issuer, the Guarantor, the Agent and the relevant Dealer or the Lead Manager, as the case may be. With issues of Notes to be listed on a Stock Exchange other than the Luxembourg Stock Exchange more time may be required to comply with the relevant Stock Exchange's listing requirements and with issues of Dual Currency or Indexed Notes more time may be required to settle documentation. A Trading Desk and Administrative Contact List is set out in Annexe D. N.B.: ALL COMMUNICATIONS WITH ANY ISSUER MUST BE COPIED TO THE GUARANTOR. 113 ANNEXE A PART 1 SETTLEMENT PROCEDURES FOR ISSUES NOT TO BE SUBSCRIBED PURSUANT TO A SUBSCRIPTION AGREEMENT References below to the "Issuer" is to the "relevant Issuer". Day Latest Action London time No later 2.00 p.m. The Issuer and the Guarantor may agree terms than Issue with one or more of the Dealers for the Date minus 5 issue and purchase of Notes (whether pursuant to an unsolicited bid from a Dealer or pursuant to an enquiry by the Issuer). The Dealer instructs the Agent to obtain a common code and ISIN from Euroclear or Clearstream, Luxembourg. In the case of the first Tranche of Notes of a Series, the Agent telephones Euroclear or Clearstream, Luxembourg with a request for a common code and ISIN for such Series and in the case of a subsequent Tranche of Notes of that Series the Agent telephones Euroclear or Clearstream, Luxembourg with a request for a temporary common code and ISIN for such Tranche. Each common code and ISIN is notified by the Agent to the Issuer and each Dealer which has reached agreement with the Issuer. 3.00 p.m. If a Dealer has reached agreement with the Issuer and the Guarantor by telephone, such Dealer confirms the terms of the agreement to the Issuer and the Guarantor by fax (substantially in the form set out in Annexe B) attaching a copy of the Pricing Supplement (substantially in the form set out in Annexe C). The Dealer sends a copy of that fax to the Agent for information. 5.00 p.m. The Issuer and the Guarantor confirm their agreement to the terms on which the issue of Notes is to be made (including the form of the Pricing Supplement) by each signing and returning a copy of the Pricing Supplement to the relevant Dealer. The Issuer also confirms its instructions to the Agent (including, in the case of Floating Rate Notes, for the purposes of rate fixing) to carry out the duties to be carried out by the Agent under these Settlement Procedures and the Agency Agreement including preparing, authenticating and issuing a Temporary Global Note for the Tranche of Notes which is to be purchased and in the case of 114 Day Latest Action London time the first Tranche of a Series, where the Pricing Supplement for such Tranche does not specify that such Temporary Global Note is to be exchangeable only for Notes in definitive form, a Permanent Global Note for such Series, giving details of such Notes. The Issuer confirms such instructions by sending a copy by fax of the signed P the signed Pricing Supplement shall be conclusive evidence of the agreement (save in the case of manifest error) and shall be binding on the parties accordingly. No later than In the case of Notes which are to be listed Issue Date on a Stock Exchange, the Agent also minus 3 notifies, or the notification to, the relevant Stock Exchange and any other relevant authority by fax or by hand of the details of the Notes to be issued by sending the Pricing Supplement to the relevant Stock Exchange and any other relevant authority. Issue Date 3.00 p.m. The relevant Dealer instructs Euroclear and/ minus 2 or Clearstream, Luxembourg to debit its account and pay the purchase price, against delivery of the Notes, to the Agent's account with Euroclear and/or Clearstream, Luxembourg on the Issue Date and the Agent receives details of such instructions through the records of Euroclear and/or Clearstream, Luxembourg. In the case of Floating Rate Notes, the Agent notifies Euroclear, Clearstream, Luxembourg , the Issuer, the Guarantor (if applicable) the relevant Stock Exchange and the relevant Dealer by telex or fax of the Rate of Interest for the first Interest Period (if already determined). Where the Rate of Interest has not yet been determined, this will be notified in accordance with this paragraph as soon as it has been determined. Issue Date minus 1 3.00 p.m. The Agent prepares and authenticates a Temporary Global Note for each Tranche of Notes which is to be purchased and, where required as specified above, a Permanent Global Note in respect of the relevant Series. The conditions precedent in the Program agreement are satisfied and/or waived. The Temporary Global Note and any such Permanent Global Note are then delivered by the Agent to a common depositary for Euroclear and Clearstream, Luxembourg and instructions are given by the Agent to Euroclear or, as the case may be, Clearstream, Luxembourg to credit the Notes represented by such 115 Day Latest Action London time Temporary Global Note to the Agent's distribution account. The Agent further instructs Euroclear or, as the case may be, Clearstream, Luxembourg to debit from the distribution account the nominal amount of the relevant Tranche of Notes and to credit such nominal amount to the account of such Dealer with Euroclear or Clearstream, Luxembourg against payment to the account of Tranche of Notes for value on the Issue Date. The relevant Dealer gives corresponding instructions to Euroclear or Clearstream, Luxembourg. The parties (which for this purpose shall include the Agent) may agree to arrange for "free delivery" to be made through the relevant clearing system if specified in the applicable Pricing Supplement, in which case these Settlement Procedures will be amended accordingly. Issue Date Euroclear and Clearstream, Luxembourg debit and credit accounts in accordance with instructions received by them. The Agent pays to the Issuer for value on the Issue Date the aggregate purchase moneys received by it to such account of the Issuer as shall have been notified to the Agent for the purpose. On or subsequent The Agent notifies the Issuer and Guarantor to the Issue Date forthwith in the event that a Dealer does not pay the purchase price due from it in respect of a Note. The Agent notifies the Issuer of the issue of Notes giving details of the Global Note(s) and the nominal amount represented thereby. The Agent confirms the issue of Notes to the relevant Stock Exchange and any other relevant authority. The relevant Dealer promptly notifies the Agent that the distribution of the Notes purchased by it has been completed. The Agent promptly notifies the Issuer, the Guarantor, the relevant Dealers, Euroclear and Clearstream, Luxembourg of the date of the end of the Distribution Compliance Period with respect to the relevant Tranche of Notes. 116 ANNEXE A PART 2 SETTLEMENT PROCEDURES FOR ISSUES SUBSCRIBED PURSUANT TO A SUBSCRIPTION AGREEMENT References below to the "Issuer" is to the "relevant Issuer". Day Latest time Action No later than The Issuer and the Guarantor may, Issue Date minus 10 subject to the execution of the (or such other number Subscription Agreement referred to of days agreed between below, agree terms with a Dealer the Issuer, the (which expression in this Part 2 Guarantor, the Lead includes any entity to be appointed Manager and the Agent) as a dealer under the Subscription Agreement referred to below) (the "Lead Manager") for the issue and purchase of Notes to be subscribed pursuant to a Subscription Agreement (whether pursuant to an unsolicited bid by such Lead Manager or pursuant to an enquiry by the Issuer). The Lead Manager may invite other Dealers (new or additional) approved by the Issuer and the Guarantor to join an underwriting syndicate either on the basis of an invitation telex agreed between the Issuer, the Guarantor and the Lead Manager or on the terms of the Pricing Supplement referred to below and the Subscription Agreement. The Lead Manager and any such Dealers are together referred to as the "Managers". The Lead Manager instructs the Agent to obtain a common code and ISIN from Euroclear or Clearstream, Luxembourg. In the case of the first Tranche of Notes of a Series, the Agent telephones Euroclear or Clearstream, Luxembourg with a request for a common code and ISIN for such Series and in the case of a subsequent Tranche of Notes of that Series the Agent telephones Euroclear or Clearstream, Luxembourg with a request for a temporary common code and ISIN for such Tranche. Each Common Code and ISIN is notified by the Agent to the Issuer and the Lead Manager. 117 Day Latest time Action The Issuer, the Guarantor and the Lead Manager agree a form of Pricing Supplement prepared by or on behalf of the Lead Manager (in substantially the form of Annexe C) which is submitted to the lawyers rendering a legal opinion in connection with the relevant issue for approval. A draft Subscription Agreement (in substantially the form of Appendix E to the Program Agreement or such other form as may be agreed between the Issuer, the Guarantor and the Lead Manager) is also prepared. The Subscription Agreement may, if so agreed, be called by another name. The Lead Manager sends a copy of the agreed, be Subscription Agreement to any other Manager at least two full days (as defined in the Explanatory Notes to this Annexe A) before the Subscription Agreement is intended to be signed. At the same time the Lead Manager sends a copy of the Offering Circular and Program Agreement (together with such other items from the Initial Documentation List as the Lead Manager deems appropriate) to any other Manager which has not previously received such documents. The Subscription Agreement and Pricing Supplement are agreed and executed and a copy of the Pricing Supplement is sent by fax to the Agent which shall act as the Agent's authorisation (including, in the case of Floating Rate Notes, for the purposes of rate fixing) to carry out the duties to be carried out by it under these Settlement Procedures and the Agency Agreement including preparing, authenticating and issuing a Temporary Global Note for the Tranche of Notes which is to be purchased and in the case of the first Tranche of a Series, where the Pricing Supplement does not specify that such Temporary Global Note is to be exchangeable only for Notes in definitive form, a Permanent Global Note for such Series, giving details of such Notes. No later than In the case of Notes to be listed on a Issue Date Stock Exchange, the Agent notifies or minus 3 procure the notification to, the relevant Stock Exchange by fax or by hand of the details of the Notes to be issued by sending the Pricing Supplement to the relevant Stock Exchange and any other relevant authority. No later than The Lead Manager instructs Euroclear Issue Date and/or Clearstream, Luxembourg to minus 2 debit its account and pay the purchase price, against delivery of the Notes as instructed by the Lead Manager to the account specified by the Issuer. 118 Day Latest time Action Issue Date 3.00 p.m. In the case of Floating Rate Notes, minus 2 the Agent notifies Euroclear, Clearstream, Luxembourg, the Issuer, the Guarantor, the relevant Stock Exchange (if applicable) and the Lead Manager by telex or fax of the Rate of Interest for the first Interest Period (if already determined). Where the Rate of Interest has not yet been determined, this will be notified in accordance with this paragraph as soon as it has been determined. Issue Date agreed time The Agent prepares and authenticates a minus 1 (in the Temporary Global Note for each Tranche case of pre-closed of Notes which is to be purchased, issues) or Issue and where required as specified above, Date (in any other a Permanent Global Note in respect case) (the "Payment of the relevant Series. The Instruction Date") conditions precedent in the Subscription Agreement and the Program Agreement are satisfied and/or waived. The Temporary Global Note and any such Permanent Global Note are then delivered by the Agent to a common depositary for Euroclear and Clearstream, Luxembourg and instructions are given by the Agent (on behalf of the Issuer) to the common depositary to hold the Notes represented by such Temporary Global Note to the Issuer's order. The Lead Manager instructs the common depositary to request Euroclear and/or Clearstream, Luxembourg to credit such nominal amount of the relevant Tranche of Notes to the accounts of the persons entitled thereto with Euroclear or Clearstream, Luxembourg against payment to the specified account of the Issuer of the purchase price for the relevant Tranche of Notes for value on the Issue Date. The common depositary issues a payment confirmation in respect of this payment. Issue Date Payment is effected and Euroclear and/or Clearstream, Luxembourg debit and credit accounts in accordance with instructions received by them. The Agent notifies the Issuer of the issue of Notes giving details of the Global Note(s) and the nominal amount represented thereby. The Agent confirms the issue of Notes to the relevant Stock Exchange and any other relevant authority. On or subsequent to the Each other Manager (if any) promptly Issue Date notifies the Lead Manager when the distribution of the Notes purchased by it has been completed. The Lead 119 Manager promptly notifies the Agent upon completion of the distribution of the Notes of the relevant Tranche. The Agent promptly notifies the Issuer, the Guarantor, the Lead Manager, Euroclear and Clearstream, Luxembourg of the date of the end of the Distribution Compliance Period with respect to the relevant Tranche of Notes. 120 Explanatory Notes to Annexe A - ------------------------------ (a) Each "day" is a day on which banks and foreign exchange markets are open for business in London, counted in reverse order from the proposed Issue Date. (b) The Issue Date must be a Business Day. For the purposes of this Memorandum, "Business Day" means a day which is both: (i) a day on which commercial banks and foreign exchange markets settle payments in London and any other place as is specified in the applicable Pricing Supplement (each an "Additional Business Centre"); and (ii) either (1) in relation to Notes denominated or payable in a Specified Currency other than euro, a day on which commercial banks and foreign exchange markets settle payments in the principal financial centre of the country of the relevant Specified Currency (if other than London or any Additional Business Centre) and which, if the Specified Currency is New Zealand Dollars, shall be Auckland) or (2) in relation to Notes denominated or payable in euro, a day on which the TARGET System is open. "TARGET System" means the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) System. Unless otherwise provided in the applicable Pricing Supplement, the principal financial centre for any currency shall be as provided in the 2000 ISDA Definitions, each as amended and updated as at the Issue Date of the first Tranche of Notes of the relevant Series and published by the International Swaps and Derivatives Association, Inc. (c) Times given are the approximate times for the taking of the action in question and are references to London time. 121 ANNEXE B FORM OF DEALER'S CONFIRMATION FOR ISSUES WITH NO SUBSCRIPTION AGREEMENT [Date] To: [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] and: CIBA SPECIALTY CHEMICALS HOLDING INC. c.c. The Chase Manhattan Bank [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [Title of relevant Tranche of Notes (specifying type of Notes)] issued pursuant to the U.S.$2,000,000,000 Euro Medium Term Note Program We hereby confirm the agreement for the issue to us of [describe issue] Notes due [ ] (the "Notes") under the above Program pursuant to the terms of issue set out in the Pricing Supplement which we are faxing herewith. [The selling commission in respect of the Notes will be [ ] per cent. of the nominal amount of the Notes and will be deductible from the net proceeds of the issue.] The Notes are to be credited to [Euroclear/Clearstream, Luxembourg] account number [ ] in the name of [Name of Dealer]. Please confirm your agreement to the terms of issue by signing and faxing to us a copy of the following Pricing Supplement. Please also fax a copy of the Pricing Supplement to the Agent. For and on behalf of [Name of Dealer] By: --------------------------- Authorised signatory 122 ANNEXE C FORM OF PRICING SUPPLEMENT [Date] [Ciba Specialty Chemicals Corporation/ Ciba Specialty Chemicals PLC/ Ciba Spezialitatenchemie Holding Deutschland GmbH] Issue of [Aggregate Nominal Amount of Tranche] [Title of Notes] Guaranteed by Ciba Specialty Chemicals Holding Inc. under the USD 2,000,000,000 Euro Medium Term Note Program [The Notes constitute [commercial paper/shorter term debt securities/longer term debt securities] issued in accordance with regulations made under section 4 of the Banking Act 1987. The Issuer of the Notes is not an authorized institution or a European authorized institution (as such terms are defined in the Banking Act 1987 (Exempt Transactions) Regulations 1997). Repayment of the principal and payment of any interest or premium in connection with the Notes has been guaranteed by Ciba Specialty Chemicals Holding Inc., which is neither an authorized institution nor a European authorized institution]. ** This document constitutes the Pricing Supplement relating to the issue of Notes described herein. Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Offering Circular dated [ ]. This Pricing Supplement must be read in conjunction with such Offering Circular. [Include whichever of the following apply or specify as "Not Applicable" (N/A). Note that the numbering should remain as set out below, even if "Not Applicable" is indicated for individual paragraphs or sub-paragraphs. Italics denote directions for completing the Pricing Supplement.] 1. (i) Issuer: [ ] (ii) Guarantor: Ciba Specialty Chemicals Holding Inc. 2. (i)] Series Number: [ ] [(ii) Tranche Number: [ ] (If fungible with an existing Series, details of that Series, including the date on which the Notes become fungible)] 3. Specified Currency [ ] or Currencies: 4. Aggregate Nominal Amount: 123 - Tranche: [ ] - Series: [ ] 5. Issue Price of Tranche: [ ] percent 6. Specified Denominations: [In the case of Notes with a maturity of 183 days or less issued by (i) Ciba Specialty Chemicals Corporation and (ii) where proceeds of the issuance are on-lent to a U.S. entity, the minimum denomination for such Notes shall be USD 500 000 (or the equivalent thereof at exchange rates applicable on the relevant date of calculation)] 7. [(i)] Issue Date: [ ] (ii) Interest Commencement Date (if different from the Issue Date): [ ]] 8. Maturity Date: [Fixed rate - specify date/ Floating rate - Interest Payment Date falling in [specify month and year]] 9. Interest Basis: [[ ] percent Fixed Rate] [[LIBOR/EURIBOR] +/- [ ] percent Floating Rate] [Zero Coupon] [Indexed Interest] [specify other] (further particulars specified below) 10. Redemption/Payment Basis: [Redemption at par] [Indexed Redemption] [Dual Currency] [Partly Paid] [Installment] [specify other] 11. Change of Interest Basis or [Specify details of any provision for Basis or Redemption/Payment change of Notes into another Interest Basis] Redemption/Payment Basis: 12. Put/Call Options: [Investor Put] [Issuer Call] [(further particulars specified below)] 13. Listing: [Luxembourg/specify other/None] 14. Method of distribution: [Syndicated/Non-syndicated] 124 PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE 15. Fixed Rate Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Rate[(s)] of Interest: [ ] percent per annum [payable [annually/semi-annually/quarterly/monthly] in arrears] (ii) Interest Payment Date(s): [ ] in each year (iii) Fixed Coupon Amount(s): [ ] per [ ] in nominal amount (iv) Broken Amount(s): [Insert particulars of any initial or final broken interest amounts which do not correspond with the Fixed Coupon Amounts] (v) Fixed Day Count Fraction: [30/360 or Actual/Actual (ISMA) or specify other] (Note that if interest is not payable on a regular basis (for example, if there are Broken Amounts specified) Actual/Actual (ISMA) will not be a suitable Fixed Day Count Fraction) (vi) Interest Determination [ ] in each year Date(s): [Insert interest payment dates except where there are long or short periods. In these cases, insert regular interest payment dates] (NB: Only relevant where Day Count Fraction is Actual/Actual (ISMA)) (vii) Other terms relating to the method of calculating interest for Fixed Rate [None/Give details] Notes: 16. Floating Rate Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Specified Period(s)/ Specified Interest Payment [ ] Dates: (ii) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/[specify other]] (iii) Additional Business [ ] Center(s): (iv) Manner in which the Rate of 125 Interest and Interest Amount is to be determined: [Screen Rate Determination/ISDA Determination/specify other] (v) Party responsible for calculating the Rate of Interest and Interest [ ] Amount (if not the Principal Paying Agent): (vi) Screen Rate Determination: - Reference Rate: [ ] (Either LIBOR, EURIBOR or other, although additional information is required if other - including fallback provisions in the Agency Agreement) - Interest Determination Date(s): [ ] (Second London business day prior to the start of each Interest Period if LIBOR and second TARGET day prior to the start of each Interest Period if EURIBOR) - Relevant Screen Page: [ ] (in the case of EURIBOR, if not Telerate 248 ensure it is a page which shows a composite rate) (vii) ISDA Determination: - Floating Rate Option: [ ] - Designated Maturity: [ ] - Reset Date(s): [ ] (viii) Margin(s): [+/-] [ ] percent per annum (ix) Minimum Rate of Interest: [ ] percent per annum (x) Maximum Rate of Interest: [ ] percent per annum (xi) Floating Day Count Fraction: [ ] (xii) Fall back provisions, rounding provisions and any other terms relating to the method of calculating interest on Floating Rate 126 Notes, if different from those [ ] set out in the Conditions: 17. Zero Coupon Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Accrual Yield: [ ] percent per annum (ii) Reference Price: [ ] (iii) Any other formula/basis of determining amount payable: [ ] (Consider applicable day count fraction if euro denominated) 18. Indexed Interest Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Index/Formula: [give or annex details] (ii) Calculation Agent responsible for calculating the principal and/or [ ] interest due: (iii) Provisions for determining coupon where calculation by reference to Index and/or [ ] Formula is impossible or impracticable: (iv) Specified Period(s)/ Specified Interest Payment Dates: [ ] (v) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/specify other] (vi) Additional Business Center(s): [ ] (vii) Minimum Rate of Interest: [ ] percent per annum (viii) Maximum Rate of Interest: [ ] percent per annum (ix) Floating Day Count Fraction: [ ] 127 19. Dual Currency Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Rate of Exchange/method of calculating Rate of [give details] Exchange: (ii) Calculation Agent, if any, responsible for calculating [ ] the principal and/or interest due: (iii) Provisions applicable where [ ] calculation by reference to Rate of Exchange is impossible or impracticable: (iv) Person at whose option [ ] Specified Currency(ies) is/are payable: PROVISIONS RELATING TO REDEMPTION 20. Issuer Call: [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Optional Redemption Date(s): [ ] (ii) Optional Redemption Amount(s) and method, if any, of [ ] calculation of such amount(s): (iii) If redeemable in part: (a) Minimum Redemption Amount[ ] (b) Higher Redemption Amount [ ] (iv) Notice period (if other than as set out in the [ ] Conditions): 21. Investor Put: [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) 128 (i) Optional Redemption Date(s): [ ] (ii) Optional Redemption Amount(s) and method, if any, of calculation of [ ] such amount(s): (iii) Notice period (if other than as set out in the [ ] Conditions): 22. Final Redemption Amount [Par/specify other/see Appendix] 23. Early Redemption Amount(s) payable on redemption for taxation reasons or on event of default and/or the method of calculating the same (if required or if different from that set out in Condition 6(f)): [ ] GENERAL PROVISIONS APPLICABLE TO THE NOTES 24. Form of Notes: Temporary Global Note exchangeable for a Permanent Global Note which is exchangeable for Definitive Notes [on 60 days notice given at any time/only upon an Exchange Event] [n.b. the latter option is not available to Ciba Specialty Chemicals Corporation or where proceeds are to be on-lent to a United States entity]. [Temporary Global Note exchangeable for Definitive Notes on and after the Exchange Date.] 25. Additional Financial Center(s) [Not Applicable/give details] or other special provisions (Note that this item relates to the place relating to Payment Dates: of payment and not Interest Period end dates to which item 16(iii) relates) 26. Talons for future Coupons or Receipts to be attached to Definitive Notes (and dates on which such Talons mature): [Yes/No. If yes, give details] 27. Details relating to Partly Paid Notes: amount of each payment comprising the Issue Price and date on which 129 each payment is to be made and, if different from those specified in the Temporary Global Note, consequences of failure to pay, including any right of the Issuer to forfeit the Notes and interest due on [Not Applicable/give details] late payment: 28. Details relating to Installment Notes: amount of each installment, date on which each payment is to be made: [Not Applicable/give details] 29. Redenomination applicable: Redenomination [not] applicable (If Redenomination is applicable, specify either the applicable Fixed Day\ Count Fraction or any provisions necessary to deal with floating rate interest calculation (including alternative reference rates)) 30. Details relating to Installment Notes: Specify Installment Amounts and Installment Dates: [Not Applicable/give details] 31. Other terms or special conditions: [Not Applicable/give details] DISTRIBUTION 32. (i) If syndicated, names of Managers: [Not Applicable/give names] (ii) Stabilizing Manager (if any): [Not Applicable/give name] 33. If non-syndicated, name of relevant Dealer: [Not Applicable/give name] 34. Whether TEFRA D rules applicable or TEFRA rules not TEFRA D/TEFRA not applicable] applicable 35. Additional selling restrictions: [Not Applicable/give details] OPERATIONAL INFORMATION 36. Any clearing system(s) other [Not Applicable/give name(s) and than Euroclear and Clearstream, number(s)] Luxembourg and the relevant identification number(s): 37. Delivery: Delivery [against/free of] payment 38. Additional Paying Agent(s) (if any): [ ] 130 39. [Notes in respect of which the issue proceeds are accepted by the Issuer in the United Kingdom and which are to be listed. The text set out below may be deleted if the Issuer is relying on any of Regulation 13(4)(c) to (g) of the Banking Act 1987 (Exempt Transactions) Regulations 1997] The Issuer confirms that it: (a) has complied with its obligations under the relevant rules (as defined in the Banking Act 1987 (Exempt Transactions) Regulations 1997 (the "Regulations ")) in relation to the admission to and continuing listing of the Program and of any previous issues made under it and listed on the same exchange as the Program; (b) will have complied with its obligations under the relevant rules in relation to the admission to listing of such Notes by the time when such Notes are so admitted; (c) has not, since the last publication, if any, in compliance with the relevant rules of information about the Program, any previous issues made under it and listed on the same exchange as the Program, or the Notes, having made all reasonable inquiries, become aware of any change in circumstances which could reasonably be regarded as significantly and adversely affecting its ability to meet its obligations as Issuer in respect of the Notes as they fall due; and (d) has complied and will continue to comply with its obligations under the Regulations to lodge all relevant information (as defined in the Regulations) in relation to any such Notes with the UK Listing Authority. _____________________________________________________________________________ ISIN: [ ] Common Code: [ ] _____________________________________________________________________________ [If the Issuer is relying on Regulation 13(4)(b) and the Offering Circular does not include one, include here a summary of the tax treatment relevant to the United Kingdom resident holders of the Notes.] [LISTING APPLICATION This Pricing Supplement comprises the details required to list the issue of Notes described herein pursuant to the listing of the USD 2 000 000 000 Euro Medium Term Note Program of Ciba Specialty Chemicals Corporation/Ciba Specialty Chemicals PLC/Ciba Spezialitatenchemie Holding Deutschland GmbH] 131 RESPONSIBILITY The Issuer and the Guarantor accept responsibility for the information contained in this Pricing Supplement. Signed on behalf of the Issuer: Signed on behalf of the Guarantor: By:------------------------------ By:------------------------------ Duly authorized Duly authorized By:------------------------------ Duly authorized 132 ANNEXE D TRADING DESK AND ADMINISTRATIVE INFORMATION The Issuers CIBA SPECIALTY CHEMICALS CORPORATION 560 White Plains Road PO Box 2005 Tarrytown, New York 10591-9005 Telephone: 1 914 785 2000 Telefax: 1 914 785 2650 Attention: Treasurer CIBA SPECIALTY CHEMICALS PLC Hulley Road Macclesfield Cheshire SK10 2NX Telephone: 44 1 625 888 220 Telefax: 44 1 625 888 380 Attention: Treasurer CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH Chemiestrasse D-68623 Lampertheim Germany Telephone: 49 6206 152810 Telefax: 49 6206 152816 Attention: Treasurer The Guarantor CIBA SPECIALTY CHEMICALS HOLDING INC. Klybeckstrasse 141 CH-4002 Basle Switzerland Telephone: 41 61 636 2740 Telefax: 41 61 636 6828 Attention: Group Treasurer 133 The Dealers CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED One Cabot Square London E14 4QJ Telephone: 44 20 7888 4021 Telex: 892131 CSFB G Telefax 44 20 7888 3719 Attention: MTN Trading DEUTSCHE BANK AG LONDON Winchester House 1 Great Winchester Street London EC2N 2DB Telephone: 44 20 7545 2761 Telex: 94 01 5555 DBLN G Telefax: 44 20 7541 2761 Attention: MTN Desk GOLDMAN SACHS INTERNATIONAL Peterborough Court 133 Fleet Street London EC4A 2BB Telephone: 44 20 7774 2295 Telex: 94012165 GSHH G Telefax: 44 20 7774 5711 Attention: Euro Medium Term Note Desk J.P. MORGAN SECURITIES LTD. 60 Victoria Embankment London EC4Y 0JP Telephone: 44 20 7779 3469 Telex: 8954804 MGLTD G Telefax: 44 20 7325 8225 Attention: Euro Medium Term Note Desk UBS AG, acting through its business group UBS Warburg 1 Finsbury Avenue London EC2M 2PP Telephone: 44 20 7567 2324 Telex: 887434 UBSW G Telefax: 44 20 7568 3349 134 Attention: MTNs and Private Placements The Agent The Chase Manhattan Bank Trinity Tower 9 Thomas More Street London E1W 1YT Telephone: 44 1202 347430 Telex: 8954681 CMB G Telefax: 44 1202 347438 Attention: Manager, Institutional Trust Services 135 SIGNATORIES The Issuers CIBA SPECIALTY CHEMICALS CORPORATION 560 White Plains Road PO Box 2005 Tarrytown, New York 10591-9005 Telephone: 001 914 785 2000 Telefax: 001 914 785 2650 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING CIBA SPECIALTY CHEMICALS PLC Hulley Road Macclesfield Cheshire SK10 2NX Telephone: 44 1 625 888 220 Telefax: 44 1 625 888 380 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH Chemiestrasse D-68623 Lampertheim Germany Telephone: 00 49 6206 152 810 Telefax: 00 49 6206 152 816 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING 136 The Guarantor CIBA SPECIALTY CHEMICALS HOLDING INC. Klybeckstrasse 141 CH-4002 Basle Switzerland Telephone: 00 41 61 636 2740 Telefax: 00 41 61 636 6828 Attention: Group Treasurer By: OLIVER STRUB By: KIRK ERSTLING The Agent THE CHASE MANHATTAN BANK, LONDON BRANCH Trinity Tower 9 Thomas More Street London E1W 1YT Telephone: 44 1202 347430 Telex No: 8954681 CMB G Telefax No: 44 1202 347438 Attention: Manager, Institutional Trust Services By: STUART KING CHASE MANHATTAN BANK LUXEMBOURG S.A. 5 rue Plaetis L-2338 Luxembourg All communications should be sent care of the Agent By: STUART KING Without prejudice to the foregoing execution of the Agreement by the parties hereto, Chase Manhattan Bank Luxembourg S.A. hereby expressly and specifically confirms its agreement with the provisions of clause 30(2) hereof for the purposes of Article 1 of the Protocol annexed to the Convention on jurisdiction and the enforcement of judgments in civil and commercial matters signed at Brussels on 27th September, 1968. CHASE MANHATTAN BANK LUXEMBOURG S.A. By: STUART KING -----END PRIVACY-ENHANCED MESSAGE-----