-----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, HxcpvvAxuDTxU1xSp/fRUMIjtgdK9Fc7uVYLv1FF+S+EIHFo3aETVi7y0fbXax8R cx/yYNm1XXIUXPZNUe/jNQ== 0000950157-03-000051.txt : 20030204 0000950157-03-000051.hdr.sgml : 20030204 20030204153712 ACCESSION NUMBER: 0000950157-03-000051 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIBA SPECIALTY CHEMICALS HOLDING INC /FI/ CENTRAL INDEX KEY: 0001035497 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-56040 FILM NUMBER: 03538537 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 ciba20-f.txt ANNUAL REPORT As Filed with the Securities and Exchange Commission on February 4, 2003 ________________________________________________________________________________ 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, 2002 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 9 per share Ordinary shares, par value CHF 9 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, 2002. 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 Currency Translation....................................................1 Cautionary Statement Regarding Forward-Looking Statements...............1 PART I ............................................................1 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..................................8 Item 5. Operating and Financial Review and Prospects...............29 Item 6. Directors, Senior Management and Employees.................58 Item 7. Major Shareholders and Related Party Transactions..........69 Item 8. Financial Information......................................70 Item 9. The Offer and Listing......................................71 Item 10. Additional Information.....................................74 Item 11. Quantitative and Qualitative Disclosures About Market......79 Risk Item 12. Description of Securities Other than Equity Securities.....79 PART II ...........................................................80 Item 13 Defaults, Dividend Arrearages and Delinquencies............80 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds......................................80 Item 15. Controls and Procedures....................................80 Item 16. [Reserved].................................................80 PART III ...........................................................81 Item 17. Financial Statements.......................................81 Item 18. Financial Statements.......................................81 Item 19. Exhibits...................................................81 Signature..................................................83 Introduction This Annual Report on Form 20-F relates to the registered shares with a nominal value of 9 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, 2002, 2001, 2000, 1999 and 1998, and for each of the years in the five-year period ended December 31, 2002 (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, 2002, which was CHF 1.3833 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, 2002, 2001 and 2000, and for each of the years in the three year period ended December 31, 2002, 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 Annual Report 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, accounting policies, market size, market share, market demands, volumes, prices, margins, research and development, capital expenditures, cash flows, debt levels, patents, outlook 2003, 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. All forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. 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 following comparative table of selected consolidated financial data presents EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and EBITDA margin. These non-U.S. GAAP financial indicators form part of the Company's value based management reporting system and are used by management to analyze the results of operations and financial condition of the Company. The Company derives EBITDA and EBITDA margin from financial measures prepared in accordance with U.S. GAAP. The way in which these financial indicators are derived is described in footnotes (11) and (12) at the end of this Selected Financial Data. 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. The selected consolidated financial data as of December 31, 2002, 2001, 2000, 1999 and 1998, and for each of the years in the five-year period ended December 31, 2002, 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.
2002 2001 2000 1999 1998 ------------------------------------------------------------ (in millions of CHF, except percentages, share, per share and number of employees data) - ----------------------------------------------------------------------------------------------------------------------- Results of operations(1) Net sales .................................................. 7 085 7 367 7 902 7 244 6 632 Operating income (loss) .................................... 788 761 876 632 (528) Income (loss) from continuing operations(2) ................ 406 380 418 238 (971) Income (loss) from discontinued operations, net of tax(3)(4). - - 34 87 (13) Cumulative effect of change in accounting principles, net of tax(5) .................................................. - 2 - - - - ----------------------------------------------------------------------------------------------------------------------- Net income (loss)(6) ....................................... 406 382 452 325 (984) - ----------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per share: Continuing operations(2) ................................... 5.92 5.72 6.31 3.58 (14.65) Discontinued operations(4) ................................. - - 0.50 1.31 (0.20) Cumulative effects of change in accounting principles(5) ... - 0.04 - - - - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) per share(6) ............................. 5.92 5.76 6.81 4.89 (14.85) - ----------------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share: Continuing operations(2) ................................... 5.92 5.72 6.31 3.58 (14.65) Discontinued operations(4) ................................. - - 0.50 1.31 (0.20) Cumulative effects of change in accounting principles(5) ... - 0.04 - - - - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) per share(6) ............................. 5.92 5.76 6.81 4.89 (14.85) - ----------------------------------------------------------------------------------------------------------------------- Equity per share(7) ........................................ 63.16 59.08 56.82 54.74 48.94 Dividend per share(8) ...................................... - 2.00 2.00 2.00 2.00 Capital reduction per share(8) .............................. 3.00 1.00 - - - - ----------------------------------------------------------------------------------------------------------------------- Weighted average number of Shares outstanding: Basic ....................................................68 549 964 66 419 147 66 311 879 66 454 357 66 293 130 Diluted ..................................................68 575 058 66 419 147 66 311 879 66 462 898 66 293 130 - ----------------------------------------------------------------------------------------------------------------------- Other data - continuing operations Net sales development in CHF percentage .................... (4)% (7)% 9% 9% 7% - ----------------------------------------------------------------------------------------------------------------------- Operating income (loss) .................................... 788 761 876 632 (528) Depreciation and amortization of other intangible assets ... 385 408 406 402 380 Amortization of goodwill ................................... - 61 64 52 38 Restructuring and special charges(9) ....................... - - 2 - 1 286 - ----------------------------------------------------------------------------------------------------------------------- EBITDA(10), before restructuring and special charges ....... 1 173 1 230 1 348 1 086 1 175 - ----------------------------------------------------------------------------------------------------------------------- EBITDA margin(11), before restructuring and special charges.. 16.6% 16.7% 17.1% 15.0% 17.7% EBIT margin(12) ............................................ 11.1% 10.3% 11.1% 8.7% (8.0)% - ----------------------------------------------------------------------------------------------------------------------- Capital expenditures ....................................... 250 259 249 267 396 Research and development ................................... 294 276 293 256 249 Personnel costs ............................................ 1 752 1 796 2 047 1 836 1 883 - ----------------------------------------------------------------------------------------------------------------------- Number of employees at year end ............................ 19 007 19 683 20 306 20 117 21 148 - -----------------------------------------------------------------------------------------------------------------------
2
2002 2001 2000 1999 1998 ------------------------------------------------------------ (in millions of CHF, except percentages, share, per share and number of employees data) - ----------------------------------------------------------------------------------------------------------------------- Results of operations as adjusted, excluding goodwill amortization(1) Operating income (loss) .................................... 788 822 940 684 (490) Income (loss) from continuing operations(2) ................ 406 441 482 290 (933) - ----------------------------------------------------------------------------------------------------------------------- Net income (loss)(6) ....................................... 406 443 520 387 (934) - ----------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per share: Continuing operations(2) ................................... 5.92 6.64 7.27 4.37 (14.08) Net income (loss) per share(6) ............................. 5.92 6.68 7.83 5.83 (14.10) - ----------------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share: Continuing operations(2) ................................... 5.92 6.64 7.27 4.37 (14.08) Net income (loss) per share(6) ............................. 5.92 6.68 7.83 5.83 (14.10) - ----------------------------------------------------------------------------------------------------------------------- Balance sheet data - ----------------------------------------------------------------------------------------------------------------------- Current assets ............................................. 5 314 4 827 4 797 4 272 4 284 Property, plant and equipment, net ......................... 3 196 3 565 3 787 3 914 3 853 Total assets ............................................... 11 792 11 718 12 105 12 407 12 045 Short-term debt ............................................ 1 496 316 371 1 174 1 905 Long-term debt ............................................. 2 344 3 678 3 859 4 265 3 648 Common stock ............................................... 649 721 721 721 721 Shareholders' equity ....................................... 4 354 3 908 3 754 3 638 3 252 - ----------------------------------------------------------------------------------------------------------------------- Business Segment data(13) Plastic Additives Net sales .................................................. 1 813 1 834 1 959 1 784 1 609 - ----------------------------------------------------------------------------------------------------------------------- Operating income ........................................... 245 275 319 279 276 Depreciation and amortization of other intangible assets 101 113 104 98 99 - ----------------------------------------------------------------------------------------------------------------------- EBITDA(10)................................................... 346 388 423 377 375 - ----------------------------------------------------------------------------------------------------------------------- EBITDA margin(11) .......................................... 19.1% 21.1% 21.6% 21.1% 23.3% EBIT margin(12) ............................................ 13.5% 15.0% 16.3% 15.6% 17.2% - ----------------------------------------------------------------------------------------------------------------------- Coating Effects Net sales .................................................. 1 920 1 944 2 118 1 955 1 823 - ----------------------------------------------------------------------------------------------------------------------- Operating income ........................................... 341 312 371 307 299 Depreciation and amortization of other intangible assets ... 99 99 104 96 93 - ----------------------------------------------------------------------------------------------------------------------- EBITDA(10)................................................... 440 411 475 403 392 - ----------------------------------------------------------------------------------------------------------------------- EBITDA margin(11) .......................................... 22.9% 21.1% 22.4% 20.6% 21.5% EBIT margin(12) ............................................ 17.7% 16.1% 17.5% 15.7% 16.4% - ----------------------------------------------------------------------------------------------------------------------- Water & Paper Treatment(14) Net sales .................................................. 1 409 1 486 1 558 1 408 1 100 - ----------------------------------------------------------------------------------------------------------------------- Operating income ........................................... 98 65 92 50 81 Depreciation and amortization of other intangible assets .... 88 92 95 101 87 - ----------------------------------------------------------------------------------------------------------------------- EBITDA(10)................................................... 186 157 187 151 168 - ----------------------------------------------------------------------------------------------------------------------- EBITDA margin(11) .......................................... 13.2% 10.6% 12.0% 10.7% 15.3% EBIT margin(12) ............................................ 7.0% 4.4% 5.9% 3.6% 7.4% - ----------------------------------------------------------------------------------------------------------------------- Textile Effects Net sales .....................................................1 544 1 673 1 841 1 683 1 678 - ----------------------------------------------------------------------------------------------------------------------- Operating income ................................................142 181 204 116 110 Depreciation and amortization of other intangible assets ......... 66 67 71 63 62 - ----------------------------------------------------------------------------------------------------------------------- EBITDA(10)................................................... 208 248 275 179 172 - ----------------------------------------------------------------------------------------------------------------------- EBITDA margin(11) .......................................... 13.5% 14.8% 14.9% 10.6% 10.2% EBIT margin(12) ............................................ 9.2% 10.8% 11.1% 6.9% 6.6% - ----------------------------------------------------------------------------------------------------------------------- Home & Personal Care ....................................... Net sales .................................................. 399 430 426 414 422 Operating income ........................................... 56 67 58 62 68 Depreciation and amortization of other intangible assets .... 26 28 22 23 23 - ----------------------------------------------------------------------------------------------------------------------- EBITDA(10)................................................... 82 95 80 85 91 - ----------------------------------------------------------------------------------------------------------------------- EBITDA margin(11) .......................................... 20.6% 22.2% 18.8% 20.5% 21.5% EBIT margin(12) ............................................ 14.0% 15.7% 13.5% 15.0% 16.1% - ----------------------------------------------------------------------------------------------------------------------- Discontinued operations(15) Performance Polymers business Net sales .................................................. - - 774 1 729 1 791 - ----------------------------------------------------------------------------------------------------------------------- Operating income (loss) .................................... - - 57 131 (17) Gain on sale, net of tax ................................... - - 34 - - - -----------------------------------------------------------------------------------------------------------------------
3 (1) As of January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized to earnings. The results of operations on an adjusted basis, excluding goodwill amortization, for the years prior to 2002 are shown in the Summary of Selected Financial Data in the "Results of operations as adjusted, excluding goodwill amortization" section (see Note 1 to the Consolidated Financial Statements). For the year 2000 and prior years, net income as adjusted excludes goodwill amortization from continuing operations and from discontinued operations (see footnote (11) below). (2) 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 and CHF 1 274 million or CHF 19.22 per share in 1998. (3) 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 (15) below). (4) 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. (5) As of January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended which replaced existing pronouncements and practices with a single, integrated accounting framework for derivatives and hedging activities. (see Note 1 to the Consolidated Financial Statements). (6) 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. (7) 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. (8) For 2002 the Board of Directors proposes to carry forward the entire retained earnings of Ciba Specialty Chemicals Holding Inc. and not to pay a dividend. The Board of Directors, however, proposes a cash payment to its shareholders resulting from a capital reduction of CHF 3 per share. The capital reduction is subject to shareholder approval at the Annual General Meeting to be held on March 6, 2003. If approved the capital reduction will take the form of a reduction in the nominal value of each share from CHF 9 per share by CHF 3 per share to CHF 6 per share. The Company expects, subject to various conditions and approval, that the payments of the capital reduction will be made to the shareholders on May 23, 2003. The proposed capital reduction, based on the USD exchange rate of December 31, 2002 is USD 2.17 per share. Based on the US$ exchange rate at the payment date of June 28, 2002, the 2001 capital reduction per share was USD 0.67. Based on the US$ exchange rate at the respective payment dates of the 2001, 2000, 1999, and 1998 dividends, the US$ equivalent of the dividend per share was US$ 1.19, US$ 1.23, US$ 1.25 and US$ 1.36, respectively. (9) 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. (10) EBITDA is calculated as operating income plus depreciation and amortization of other intangible assets and amortization of goodwill. (11) EBITDA margin is EBITDA expressed as a percentage of net sales. (12) EBIT margin is operating income (loss) expressed as a percentage of net sales. (13) In 2002, the Company implemented SFAS No. 142 "Goodwill and Other Intangible Assets". As a result of adopting this standard, the Company reclassified certain goodwill and other intangible assets to the segments that were previously reported as corporate items and not allocated to the segments. In addition, the Company reclassified goodwill amortization that was previously allocated to the segments to corporate and reclassified other intangible amortization from corporate to the segments corresponding to the other intangible asset reclassification. Amounts reported for the previous periods have been restated to conform to the 2002 presentation. (14) 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. (15) 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). Included in the Performance Polymers results is goodwill amortization of CHF 4 million in 2000, CHF 10 million in 1999 and CHF 12 million in 1998. 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 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 2002 ..................................... 1.5566 1.7190 1.3833 1.3833 ------------------------------------------------------------------------------------------------------------- Months 2002 January .......................... 1.7190 1.6417 1.7190 February ......................... 1.7179 1.6835 1.7025 March ............................ 1.7060 1.6568 1.6786 April ............................ 1.6740 1.6215 1.6216 May .............................. 1.6155 1.5621 1.5693 June ............................. 1.5672 1.4885 1.4920 July ............................. 1.5062 1.4387 1.4833 August ........................... 1.5188 1.4703 1.5007 September ........................ 1.5202 1.4730 1.4758 October .......................... 1.5140 1.4793 1.4805 November ......................... 1.4895 1.4434 1.4645 December ......................... 1.4845 1.3833 1.3833 2003 January .......................... 1.4015 1.3512 1.3683 - -----------------------------------------------------------------------------------------------------------------
(1) Represents the average of the Noon Buying Rates on the last business day of each month during the relevant year. 4 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". RISK FACTORS Prospective purchasers and existing holders of the ADSs 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 ADSs. 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 "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, including the following: 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 faced 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 2002 was, for example, characterized by a continuous uncertain economic environment. The expected economic recovery in the United States and the rest of the NAFTA region did not fully occur. European economies, particularly the German, United Kingdom and French economies continued to remain weak. Economic performance in South America softened, compared to 2001, having been affected by the political and economic crises in the region. In the Asia-Pacific region, the Japanese market has not yet recovered from its lows of 1999, remaining sluggish throughout 2002. The China Region continued to grow, with real GDP growth remaining at between 7 to 8 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. The economic conditions in the NAFTA, Europe, and parts of Asia-Pacific, particularly Japan may continue to worsen or not fully recover, which could have a material adverse effect on the Company's results of operations and financial position. In addition, an adverse development in the political and social stability in the regions where the Company operates, 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 Swiss franc, euro, U.S. dollar, Japanese yen, and British pound relative to each other. For more information, see "Item 5. Operating and Financial Review and Prospects--Currency Trends" in this Annual Report. 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, continued price competition as well as additional risks inherent in international operations in developing regions. 5 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, and the Company may not be successful in these efforts at all times. 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. The Company has in the past received and may continue to receive in the future communications asserting that certain of its products or their applications infringe on the proprietary rights of others. In the recent past, the Company has experienced a significant increase in intellectual property conflicts, either initiated by the Company or by third parties. In management's opinion there is no material pending litigation against the Company regarding any intellectual property claim but there could be in the future. Such legal proceedings or 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 research, technical and management personnel from their regular responsibilities. Furthermore, successful legal proceedings or claims against the Company could suspend the development and manufacture of products using the contested invention, or require the Company to pay substantial penalties or royalties. 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 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 significant 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. 6 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 or found to have 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 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 ADSS. Certain 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 ADSs. 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 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. The introduction of the euro in twelve of the fifteen member states of the European Union may continue to have an impact on the Company's operations. These potential impacts include, but are not limited to, increased cross-border price transparency and tax and legal implications (such as easier harmonization). THE COMPANY'S SHARE PRICE MAY BE HIGHLY VOLATILE AND SUBJECT TO SUDDEN AND SIGNIFICANT DROPS. The trading price of the Shares and the ADSs 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 economic trends and other factors, some of which are unrelated to the operating performance of the Company. For more information on the historical price ranges of the Company's shares and the ADSs see "Item 9. The Offer and Listing - Principal Trading Market and Price Range.". 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. THE COMPANY'S INABILITY TO SUCCESSFULLY MANAGE AND INTEGRATE BUSINESSES ACQUIRED OR ITS ALLIANCES MAY ADVERSELY IMPACT THE COMPANY'S RESULTS OPERATIONS AND FINANCIAL CONDITION. The Company has made and expects to continue to make acquisitions and to enter into alliances from time to time. Acquisitions and alliances present significant challenges and risks relating to the integration of the acquired business into the existing business of the Company. There can be no assurances that the Company will manage the integration of acquisitions and alliances successfully. 7 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 at that time, 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, information technology (IT) infrastructure 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 speeded 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 and is expected to be completed in 2003. 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 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. 8 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 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. 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. To expand the flame retardant business of Plastic Additives and its offerings to combine flame retardancy with other effect additives in customized solutions, the Company, in May 2002, purchased Melapur B.V. ("Melapur") from DSM N.V. for approximately CHF 22 million. Melapur markets and distributes halogen-free melamine-based flame retardants. If the Melapur business reaches certain sales milestones over the next three years, additional purchase consideration of up to CHF 5 million (euro 3.5 million) will be paid to DSM N.V. Capital expenditures Ciba Specialty Chemicals' aggregate capital expenditures for property, plant and equipment were CHF 250 million in 2002, CHF 259 million in 2001 and CHF 249 million in 2000. In 2002 and 2001, 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, which was finished in 2001) and the core Water & Paper Treatment business (increasing the production for cationic monomers in the United States, which was finished in 2001). 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 2002, the Company had net sales from continuing operations of CHF 7 085 million, operating income of CHF 788 million and net income of CHF 406 million. Net sales, by geographic region of the Company for the past three years were as follows:
2002 2001 2000 --------------- --------------- -------------- amounts in CHF millions Sales in % Sales in % Sales in % ----- ---- ----- ---- ----- ---- Europe ............................ 2 721 38% 2 755 37% 2 913 37% Americas(1) ....................... 2 459 35% 2 654 36% 2 936 37% Asia Pacific(2) ................... 1 095 27% 1 958 27% 2 053 26% - ----------------------------------------------------------------------------------------------------------- Total net sales ................... 7 085 100% 7 367 100% 7 902 100% - ----------------------------------------------------------------------------------------------------------- (1) The Americas are comprised of the regions North, Central and South America. (2) Asia Pacific is comprised of the regions Asia, Africa, the Middle East, Australia and New Zealand.
9 ORGANIZATION The Company's organizational structure consists of five Segments focused on specific customer markets and various Group Service Units focused on providing cost efficient support services to the Segments. To ensure that innovation efforts are successfully shared across Segments the Company has created a corporate technology office under the leadership of a Chief Technology Officer. All Segments share the support functions provided by the Group Service Units, which include finance and accounting, human resources, communications, information technology (IT) infrastructure, legal and supply chain services. SEGMENTS 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. Net sales, by Segment, of the Company for the past three years were as follows:
2002 2001 2000 --------------- ------------- -------------- amounts in CHF millions Sales in % Sales in % Sales in % ----- ---- ----- ---- ----- ---- Plastic Additives ................. 1 813 25.6% 1 834 24.9% 1 959 24.8% Coating Effects ................... 1 920 27.1% 1 944 26.4% 2 118 26.8% Water & Paper Treatment ........... 1 409 19.9% 1 486 20.2% 1 558 19.7% Textile Effects ................... 1 544 21.8% 1 673 22.7% 1 841 23.3% Home & Personal Care .............. 399 5.6% 430 5.8% 426 5.4% - ----------------------------------------------------------------------------------------------------------- Total net sales(1) ................ 7 085 100% 7 367 100% 7 902 100% - -----------------------------------------------------------------------------------------------------------
(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. 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, pigments, as well as additive and pigment concentrates, for the coatings, printing, imaging, electronic, plastics and synthetic 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 serves the paper and water treatment industries. The Segment offers products and services to the global paper and board industry focused on increasing mill productivity as well as "effect chemicals" which provides solutions for its customers in order to determine appearance, handling and performance of the paper or board. The Segment also offers products and services used to treat the water streams in industrial and municipal applications and to improve the efficiency of mineral and oil processing as well as soil additives and specialty monomers. 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 standard development, 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 suppliers to the home and personal care market. The Segment develops, manufactures and markets products for home and personal care end-use industries. Among its broad range of product offerings are whiteners for detergents, antimicrobials for hygiene effects for a variety of home and personal care products, UV absorbers for sunscreens and hair dyes. 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, they allow the Segments to fully concentrate on serving their markets and customers and 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 Services organization is responsible for distribution of all the finished products and order processing, warehousing and transportation of products. They also are responsible for negotiating and managing the Company's major transport partners, including the negotiation of the service contracts. The Supply Chain Services organization maintains shared order desks 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 has been introduced and is being operated by the Supply Chain Services organization to ensure adequate coverage of the Company's distribution requirements.. Supply Chain Services is in the process of completing the integration of the Company's three supply chains into a single global supply chain, which is expected to be completed during 2003. The Supply Chain Services organization is also currently working to significantly reduce the number of partners in the transportation area with the ultimate goal to co-operate with one global Lead Logistics Provider. 10 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 participation 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 6 million in 2002; CHF 8 million in 2001 and CHF 113 million in 2000. 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, 2002 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's manufacturing facilities in 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., increasing its holding from 50 percent to 60 percent. As a result, beginning in 2001, its operations have been consolidated with those of the Company. 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. 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. 11 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 and 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 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' 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 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 fields to explore in attractive markets, the Company has a Chief 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 is in the process of completing the integration of its previous three supply chains into a single global supply chain system that will increase efficiency across the Company. This initiative is ongoing and the integration is expected to be completed during 2003. 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. 12 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, 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 15 billion in 2002, of which the polymer products and base polymers market represented CHF 8 billion and the lubricant additives market CHF 7 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, 2002, 2001 and 2000.
(amounts in millions of CHF) 2002 2001 2000 ------------ ----------- ------------ Total Segment net sales ............................ 1 813 1 834 1 959 Operating income ................................... 245 275 319 Capital expenditures ............................... 86 80 67 Research and development expenditures .............. 81 73 82 Contribution to the consolidated Company net sales from continuing operations, in percentage ......... 25.6% 24.9% 24.8% ----------------------------------------------------------------------------------------------------------
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 Products for 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 Products for Polymer Design such as 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. In addition to the Segment's traditional Ciba(R) IRGANOX(R) heat stabilizer range, Ciba(R) IRGANOX(R) HP and Ciba(R) IRGANOX(R) XP are examples of how additives support the polymer industry with new, innovative products and services. Both the Ciba(R) IRGANOX(R) HP and Ciba(R) IRGANOX(R) XP ranges combine HP-136, the Company's innovative lactone technology, with established high-performance phosphites. Some examples of applications for 13 these products are Ciba(R) IRGANOX(R) HP which ensures excellent stabilization for polyurethane foams and provides excellent protection of polyolefin during processing. The Ciba(R) IRGAFOS(R) processing stabilizer range ensures efficiency in processing and maintenance of polymer properties across a broad range of processing conditions. Ciba(R) FIBERSTAB(R) L & Ciba(R) 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. Ciba(R) FIBERSTAB(R) L is particularly suited for PP fiber applications such as carpets and hygienic non-wovens. Ciba(R) 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, Ciba(R) CHIMASSORB(R) 2020 exemplifies Ciba's continuing efforts to achieve the best performance in UV light protection possible, complimenting the already comprehensive range of Ciba(R) CHIMASSORB(R) light stabilisers. Ciba(R) TINUVIN(R) light stabilizers /UV absorbers constitute a complete range of products for providing light stability to polyolefins, engineering plastics, adhesives and elastomers. Examples of new innovative products include Ciba(R) TINUVIN(R) 123 S as the preferred solution for demanding polyolefin outdoor applications and Ciba(R) TINUVIN(R) 1577 as 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, Ciba(R) IRGASTAT and ATMER(TM)- antistatic agents, ATMER(TM) SA - slip agents, Ciba(R) IRGAGUARD(TM) antimicrobial line, including Ciba(R) IRGAGUARD(TM) A - antialgae and Ciba(R) IRGAGUARD(TM) B - antibacterial, - antimicrobials, Ciba(R) IRGACLEAR(R) - clarifying agents, Ciba(R) SHELFPLUS(R) - shelf life extension, Ciba(R) FLAMESTAB(R)NOR(TM) - 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 a new focus on surface modification, the Segment is improving materials with special physical effects, thereby improving surface properties and product performance. A step in this 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 trend of plastics replacing other materials, such as glass and wood, is expected to continue. This offers the Segment opportunities 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 market approach that emphasizes customer contact and quick response times. In 2001, Plastic Additives Segment introduced "CIBA EXPERT SERVICES(TM)" which enhances the customers' business performance via the delivery of knowledge-based services. This is accomplished by applying a global services network possessing Plastic Additives' comprehensive expertise and experience in the plastics industry. "CIBA EXPERT SERVICES(TM)" 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 and o Additives packages for industrial lubricants. 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 and ashless antioxidants for lubricants are becoming more important with increased environmental awareness and regulation. CUSTOMERS AND END-USER MARKETS In 2002, end-user markets such as the packaging industry accounted for approximately 27 percent of the Segment's sales, the construction industry for 17 percent, the plastic industry for 15 percent, automotive industry for 8 percent, the agricultural industry for 6 percent and the lubricants industries for 8 percent. A number of other smaller end-user markets account for the remaining 19 percent of the Segment's sales. The top ten customers of the Segment accounted for approximately 34 percent of the Segment's 2002 sales. RESEARCH AND DEVELOPMENT Plastic Additives spends approximately 4 percent of sales each year on research and development activities (CHF 81 million in 2002). 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 Patents covering some of the Segment's important products such as light stabilizers, antioxidants and processing stabilizers expired in 2001 and 2002. 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. 14 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, Great Lakes and Lubrizol. In addition, 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, pigments, pigment and additive concentrates for the coatings, printing, imaging, electronic plastics and synthetic 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 serves five industry-focused markets: (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, 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 2002. Growth in the global pigments market tends to track Gross Domestic Product (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. 15 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, 2002, 2001 and 2000.
(amounts in millions of CHF) 2002 2001 2000 ------------------------------------------------------------------------------------------------------- Total Segment net sales ............................ 1 920 1 944 2 118 Operating income ................................... 341 312 371 Capital expenditures ............................... 74 66 65 Research and development expenditures .............. 100 96 102 Contribution to the consolidated Company net sales from continuing operations, in percentage ......... 27.1% 26.4% 26.8% -------------------------------------------------------------------------------------------------------
STRATEGY EXPANSION THROUGH INNOVATIVE TECHNOLOGY The goal for the Coating Effects Segment is to expand the business through growth beyond the traditional 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 key 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 Segment is promoting its recent entry into the polymer specialties sector, particularly with its dispersants and 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 the business. 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 photographic applications, 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 2002, 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 2002 sales. In 2002, the end-user markets such as the automotive industry accounted for approximately 22 percent of the Segment's sales, the imaging and publication industry for 16 percent, the packaging industry for 16 percent, the electronics industry for 13 percent and the construction industry for 11 percent of the Segment's sales. A number of other smaller end-user markets account for the remaining 22 percent. 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 100 million in 2002). 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. 16 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 for waterborne, powder or radiation curable systems. Certain patents covering some of the Segment's important products such as a hindered amine light stabilizer and an algaecide expired in 2001. In addition one of the photoinitiator patents for ink applications will expire in 2003. Management is of the opinion that expiration of these patents will only have a limited 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 2003, the Company has newer patents covering more recently launched or yet to be launched products. 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 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. WATER & PAPER TREATMENT Water & Paper Treatment offers products and services for the market segment paper and board 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 treat the water streams in industrial and municipal applications and to improve the efficiency of mineral and oil processing as well as soil additives and specialty monomers. 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 18 billion in 2002, of which the paper market represented CHF 12 billion and the water treatment market represented CHF 6 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, 2002, 2001 and 2000.
(amounts in millions of CHF) 2002 2001 2000 -------------------------------------------------------------------------------------------------------- Total Segment net sales ............................ 1 409 1 486 1 558 Operating income ................................... 98 65 92 Capital expenditures ............................... 35 52 52 Research and development expenditures .............. 29 34 36 Contribution to the consolidated Company net sales from continuing operations, in percentage ......... 19.9% 20.2% 19.7% -------------------------------------------------------------------------------------------------------
STRATEGY PROVIDER OF CHOICE IN WATER & PAPER TREATMENT Water & Paper Treatment intends to complete the turnaround and establish a growth platform. To accomplish this, the Segment will continue to rationalize its total cost base, drive productivity and efficiency in its manufacturing base, and align all processes in terms of business process excellence. In the paper market, the Segment 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, in the water treatment market, the Segment 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 17 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(TM), 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 2002 Water & Paper Treatment supplied products and services to the paper and board, municipal and industrial waste-water treatment industries. The top ten customers of the Segment accounted for approximately 19 percent of the Segment's 2002 sales. In 2002, end-user markets such as the paper and board industry accounted for approximately 53 percent of the Segment's sales, the waste water specialties industry for 21 percent, the extractives and process technologies industry for 12 percent and the agricultural industry for 3 percent. A number of other smaller end-user markets account for the remaining 11 percent of Segment sales. RESEARCH AND DEVELOPMENT Water & Paper Treatment spends approximately 2 percent of sales each year on research and development activities (CHF 29 million in 2002). 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 2002 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 auxiliaries 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 13 billion in 2002. Demand for textile dyes and chemicals is mainly driven by developments in the textiles markets, such as fashion trends, the level of personal disposable incomes and by environmental regulations. The textile industry is shifting to Asia, and even within Asia 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). 18 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, 2002, 2001 and 2000.
(amounts in millions of CHF) 2002 2001 2000 ------------------------------------------------------------------------------------------------------ Total Segment net sales ............................ 1 544 1 673 1 841 Operating income ................................... 142 181 204 Capital expenditures ............................... 34 32 37 Research and development expenditures .............. 36 39 44 Contribution to the consolidated Company net sales from continuing operations, in percentage ......... 21.8% 22.7% 23.3% -------------------------------------------------------------------------------------------------------
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(R) 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. In February 2002, a global cooperation agreement between Ciba and DuPont Textiles and Interiors (DTI) was announced. The agreement enables both companies to share intellectual and technical resources and serve the increasingly sophisticated needs of the consumer for easy care and other effects. It includes Ciba(R)OLEOPHOBOL(R) fabric protector products for protection against stains as well as access to DuPont's TEFLON(R) brand. The Segment's core European markets are experiencing a plateau in demand, however, substantial growth opportunities continue in Eastern Europe, Asia and Latin America. CUSTOMERS AND END-USER MARKETS In 2002 Textile Effects supplied the clothing/apparel industry, the home furnishing industry and the industrial textile industry (including automotive textiles). In 2002, the top ten customers of the Segment accounted for approximately 8 percent of the Segment's 2002 sales. The customer base of the textile dyes market is highly fragmented. In 2002, the end-user markets of the fibers, carpets, textiles industries accounted approximately for 94 percent of the Segment's sales with the automotive industry accounting for the remaining 6 percent. While the clothing/apparel industry is predominant in Asia, the automotive textiles and the carpet industry is focused in North America and Europe. RESEARCH AND DEVELOPMENT Textile Effects spends approximately 2 percent of sales each year on research projects (CHF 36 million in 2002). 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 polyamide and wool, replacements for indigo, and sulphur and naphthol dyes. Textile chemicals currently being developed by the Segment include ecologically improved flame retardants, more efficient Ultraviolet (UV) absorbers and optical brighteners, economical Oil and Water repellents, range of improved products for Easy Care and the whole process chemicals range to increase the efficiency and simplify dyeing and printing processes. Also technologies towards new effects, like microencapsulation, application of nanoparticles and use of biotechnological processes are in the R&D focus. COMPETITION The markets in which Textile Effects operates are highly competitive. There are worldwide overcapacities predominantly in textile dyes 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, and 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. On the chemicals side Bayer acquired Sybron. 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. 19 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) personal care. Among its major product offerings into these industries are whiteners for detergents, antimicrobials providing hygiene benefits 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 2002 sales, management estimates that the Home & Personal Care is the leading global manufacturer of whiteners and the leading provider of antimicrobials of hygiene, mainly to the personal care industry. 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 2002. 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, 2002, 2001 and 2000.
(amounts in millions of CHF) 2002 2001 2000 -------------------------------------------------------------------------------------------------------- Total Segment net sales ............................ 399 430 426 Operating income ................................... 56 67 58 Capital expenditures ............................... 18 25 23 Research and development expenditures .............. 30 24 21 Contribution to the consolidated Company net sales from continuing operations, in percentage ......... 5.6% 5.8% 5.4% --------------------------------------------------------------------------------------------------------
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 established customer relationships. The Segment seeks to achieve rapid market acceptance of its line of UV absorbers in sunscreens as well as laundry detergents and rinse conditioners. It pursues profitable growth in the personal care market, including moisturizers, hair dyes and conditioners. The Segment's 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, result from these marketing strategies. 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(R) antimicrobials providing hygiene benefits in soaps, toothpaste, detergents, and disinfectants; Ciba(R) SALCARE(R) rheology modifiers and conditioning polymers; Ciba(R) TINODERM(R) 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, United States and Japanese markets, while the emerging markets of Asia and South America continue to show signs of growth. Hygiene effects are high value-adding antimicrobial ingredients supplied to the personal care, home and fabric care industries. Main applications include soaps, deodorants, toothpastes, dishwashing liquids, detergents and disinfectants for hospitals and medical purposes. The Segment's antimicrobial solutions IRGASAN(R), IRGACARE(R) and TINOSAN(R) 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 as well used in detergents. Growth prospects are particularly strong in regions where concern 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 cosmetic and hygiene applications. Rheology modifiers allow customers to produce formulations to the highest standards of quality and consistency. Colorants are used in a range of products including soaps and toothpaste. The Segment also utilizes microscopic nanocolloid technology for the delivery of 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 2002 Home & Personal Care supplied the home and fabric care and the personal care industries. The top ten customers of the Segment accounted for approximately 62 percent of the Segment's 2002 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 2002, 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. 20 RESEARCH AND DEVELOPMENT Home & Personal Care spends approximately 8 percent of sales each year on research and development activities (CHF 30 million in 2002). 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, as well as customer relationships. The importance of these competitive factors varies among the customer industries served by the Segment. 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 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. 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 more information, see Note 3 to the Consolidated Financial Statements. MANUFACTURING The Company has 63 manufacturing sites in 25 countries in important regions of the world. Currently, 39 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 70 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 four non-consolidated joint ventures, predominantly in Asia. The Company's production costs, excluding raw materials, amounted to approximately 23 percent of sales in 2002, 23 percent in 2001 and 22 percent 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. For example the Company closed its production site at Old Bridge, New Jersey, USA, at the end 2001 and moved all production activities to West Memphis, Arkansas, USA. 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 until 2008. Plastic Additives is investing in the Hindered Amine Stabilizer area, primarily in the NAFTA region. These projects are expected to be completed in 2004, with a total estimated total cost of approximately CHF 70 million. Between 1999 and 2001, Coating Effects invested in new manufacturing facilities in the United Kingdom and the United States for granules, DPP and Quinacridone pigments. The investments totaled approximately CHF 280 million. Water & Paper Treatment invested, from 1999 to 2001, approximately CHF 80 million in a production site in West Memphis, Arkansas, United States, which allows for backward integration in the field of cationic monomers. During the period from 2002 to 2004, Water & Paper Treatment's expects to invest more than CHF 40 million to upgrade its production site at Bradford, United Kingdom and West Memphis, Arkansas, United States. Textile Effects invested approximately CHF 14 million from 1998 to 2000 in a consolidated production joint venture in Thailand. In addition, Textile Effects has implemented a new Key Manufacturing Base Concept in Panyu, China, which was finished in 2002, at a total cost of approximately CHF 15 million. Home & Personal Care invested approximately CHF 10 million in Grenzach, Germany and Basel, Switzerland in a production facility for a new UV absorber for skin protection, which was completed in 2002. The Company is strengthening its position in emerging markets, particularly Asia, by expanding its facilities in these areas. For example, Plastic Additives invested from 1997 to 2001 approximately CHF 100 million in a new facility in Shanghai, China and approximately CHF 15 million in an antioxidants plant in Goa, India. 21 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 Services 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 purchases a large number of raw materials and intermediates from third parties around the world for its manufacturing processes, and strives to optimize the supply chain for each Segment. 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 has limited backward integration and has out-sourced production where economically feasible. In 2002, the Company experienced a slight overall decrease in its cost for raw materials. This was achieved through strategic actions in purchasing, leverage between Segments and support from key supplier and partners. 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. 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 around 400 product names. In the recent past, the Company has experienced a significant increase in intellectual property conflicts, either initiated by the Company or by third parties. 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 22 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 of chemical substances, the most significant to the Company's business are the 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. 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. The Company has also worked with certain of its customers in a joint effort to obtain FDA approval of the antimicrobial triclosan, which was obtained. On November 21, 2002, the Company announced that a Food Contact Notification became effective for its Ciba(R) IRGAGUARD(TM) B 5000 silver-based inorganic antimicrobial, allowing its use as an antimicrobial agent in all types of food contact polymers. IRGAGUARD B 5000 is now listed on the U.S. FDA website. In addition, this product is registered for use under the U.S. EPA's Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) as a material preservative and antimicrobial agent for use in the manufacture of polymer, plastic and textile products to protect the finished article itself. 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. 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. 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 ADSs trade on the New York Stock Exchange (see Item 9 - The Offer and Listing). The following table identifies the Company's significant subsidiaries, their jurisdiction of incorporation or residence, the Company's ownership interest in each subsidiary and the principal function of the subsidiary.
Group Holdings in % Principal Function of company ------------------------------------------------------------ Service/ Selling Manufacturing Research Finance EUROPE Austria Ciba Spezialitaetenchemie GmbH, Hard ................................ 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, Saint Fons ........................... 100 o o Ciba Specialty Chemicals Masterbatch SA, Saint Jeoire en Faucigny..... 100 o o o
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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, Thessaloniki.................... 100 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.r.l.., 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 Melapur B.V., Heerlen ................................................ 100 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, Goeteborg ....................... 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 Turkey Ciba Oezel Kimyevi Ueruenler 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 Eurofinance 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., Mississauga ........ 100 o Chile Ciba Especialidades Quimicas Ltd., Santiago de Chile ................ 100 o o Ciba Especialidades Quimicas Conosur S.A., Santiago de Chile ........ 67 o .. Colombia Ciba Especialidades Quimicas S.A., Bogota ........................... 100 o o
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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 ASIA-PACIFIC Australia Ciba Specialty Chemicals Pty. Ltd., Thomastown ...................... 100 o o 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 o Ciba Specialty Chemicals (India) Ltd., Mumbai(1) .................... 69 o o Diamond Dye-Chem Limited, Mumbai .................................... 51 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., Osaka.................................. 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 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 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 outstanding shares of the company as of December 31, 2002 was approximately CHF 43 million (INR 1 454 million). 25 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 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) Bradford, United Kingdom 28 Water & Paper Treatment (water treatment and paper chemicals, inks, soil additives, intermediate monomers, rheology modifiers and textile chemicals) Clayton, United Kingdom 22 Textile Effects (direct, disperse and acid dyes) Water & Paper Treatment (specialty chemicals for paper coating) Grenzach, Germany 52 Home & Personal Care (whiteners, specialty colors, antimicrobials, new businesses, cationic and solvent soluble dyes) Coating Effects (high performance pigments) Grimsby, United Kingdom 19 Water & Paper Treatment (water treatment chemicals) Heerenveen, Netherlands 2 Coating Effects (defoamers, slip and leveling, high molecular weight dispersants, wetting and dispersing agents) Huningue, France 12 Coating Effects (high performance pigment preparations, imaging and coating additives) Plastic Additives (polymer additives and process and lubricant additives) Kaisten, Switzerland 59 Plastic Additives (polymer additives) 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) Maastricht, Netherlands 11 Coating Effects (dispersions and inorganic pigments) Monthey, Switzerland (2) 11 Home & Personal Care (whiteners) Coating Effects (high performance pigments) Mortara & Trivolzio, Italy 17 Coating Effects (imaging and coating additives) Paisley, United Kingdom 17 Coating Effects (classical pigments) Pontecchio Marconi, Italy 12 Plastic Additives (polymer additives and production of insecticides for a third party) Saint Fons, France 9 Textile Effects (metal-complex and acid dyes) Saint Jeoire, France 5 Coating Effects (masterbatches) Schweizerhalle, Switzerland 1 Coating Effects (polymer additives, imaging and coating additives) Textile Effects (standardization) AMERICAS Albermarle, North Carolina 21 Textile Effects (textile chemicals) United States of America (USA)(3) Atotonilquillo, Mexico 43 Textile Effects (disperse, basic and acid dyes, textile chemicals) Home & Personal Care (whiteners, photobleach) Camacari, Brazil 14 Plastic Additives (polymer additives) Charlotte, North Carolina USA 6 Textile Effects (dyeing and printing auxiliaries) Estrada do Colegio, Brazil 4 Home & Personal Care (whiteners, fabric finishing) McIntosh, Alabama USA 637 Plastic Additives (polymer additives and imaging and coating additives) Home & Personal Care (whiteners) Mississauga, Canada(3) 2 Plastic Additives (polymer additives) Newport, Delaware USA 15 Coating Effects (high performance pigments) Puebla, Mexico 22 Plastic Additives (polymer additives and process and lubricant additives) St. Gabriel, Louisiana USA 81 Textile Effects (reactive and acid dyes) Suffolk, Virginia USA 89 Water & Paper Treatment (water treatment chemicals) West Memphis, Arkansas USA 60 Water & Paper Treatment (water treatment chemicals)
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ASIA-PACIFIC Ai-oi, Japan(4) - Plastic Additives (polymer additives and imaging and coating additives) Ankleshwar, India 2 Home & Personal Care (whiteners) Candra Sari, Indonesia 5 Textile Effects (textile chemicals) Chiba, Japan(5) - Plastic Additives (polymer additives) Goa, India 14 Plastic Additives (polymer additives) Isohara, Japan(6) 8 Plastic Additives (polymer additives) Kaohsiung, Taiwan 4 Plastic Additives (polymer additives) Mahachai, Thailand 4 Textile Effects (reactive dyes for cellulose) Panyu, China(7) 5 Textile Effects (textile chemicals) Perth, Australia 2 Water & Paper Treatment (water treatment chemicals) Qingdao, China(8) 1 Coating Effects (classical pigments) Qingdao, China(9) 1 Textile Effects (wool and disperse dyes) Shanghai, China(10) 6 Plastic Additives (polymer additives) Ulsan, South Korea(11) 7 Coating Effects (classical pigments) - ---------------------------------------------------------------------------------------------------------------- (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) The closures of these manufacturing sites will be completed in 2003. (4) Joint venture with Chemipro Kasai Kaisha, Ltd., in which the Company holds a 51 percent interest. (5) Joint venture with Mitsui Petrochemical and Musashino-Geigy, in which the Company holds a 40 percent interest. (6) 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. (7) Venture with Panyu City Shilou Town Economical Development Company Limited, in which the Company holds a 95 percent interest. (8) Venture with Qingdao Double Peach, in which the Company holds a 91.4 percent interest. (9) Venture with Qingdao Double Peach, in which the Company holds a 94 percent interest. (10) 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 interest. (11) Joint venture with Daihan Color Ind., Co., Ltd., in which the Company holds a 50 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 the Company's 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. In management's opinion, 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 614 million at December 31, 2002 and CHF 748 million at December 31, 2001 have been recorded in the accompanying Consolidated Balance Sheets. The decrease in the provision of CHF 134 million in 2002 compared to 2001 relates to usage of the provision of CHF 82 million and to foreign currency exchange rate effects of CHF 52 million. The Company's environmental protection and improvement cash expenditures were approximately CHF 96 million in 2002 (CHF 43 million in 2001), including investments in construction, operations and maintenance and usage of the provision. 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 which business unit allegedly used the site before the Spin-off. 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. 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. 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 as described in the following paragraphs. 27 At its Toms River, New Jersey remediation site the Company began implementation of the of a large bio-remediation project which will take eight to ten years to complete. Based on management's current estimates, the Company's environmental provisions are adequate to cover the expected costs to complete this remediation plan. 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 Company settled all the medical monitoring and personal injury cases in 2002, the total amount of which was sufficiently provided for in the Company's environmental reserve. The case seeking property damages is still in litigation, but the Company does not believe the outcome of this case will have any material adverse impact on its financial position. Following the settlement of the above mentioned personal injury cases, the Company received three additional personal injury claims against its subsidiary in the United States in connection with the Toms River site. No law suits, however, have yet been filed with respect to these claims. The Company does not believe these additional claims have merit and does not believe that these additional claims will have any material adverse impact on its financial position. The planning for the total remediation of the waste disposal site in Bonfol, Switzerland, which was closed in 1976, is ongoing. The responsibility for the remediation lies with eight chemical enterprises 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. In the Basel region several landfills (Switzerland, France and Germany) contain chemical waste besides other industrial und household wastes. Presently eleven landfills are the subject of investigations carried out with the authorities by the 'Interessengemeinschaft Deponiesicherheit Regio Basel', an association of the involved pharmaceutical and chemical enterprises (including the Company). As of December 31, 2002, no remedial actions have been defined or required in a legally binding form. 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. See "Item 3. Key Information--Risk Factors--Environmental laws and regulations may expose the Company to liability and result in increased costs." 28 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 The Company follows applicable corporate governance guidelines including the "Swiss Code of Best Practice", the Corporate Governance guideline of the Swiss Exchange (SWX) as well as the "U.S. Sarbanes-Oxley Act" of 2002 and the applicable rules and regulations in effect thereunder. In certain sections of this Management's Discussion and Analysis, some of the results have been adjusted to exclude restructuring payments, and also in the "Year in Review 2001 compared to 2000". 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, 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 until May 31, 2000, the date of the divestment (see Note 3 to the Consolidated Financial Statements). CURRENCY TRENDS 2002 COMPARED TO 2001 The average exchange rates for the major currencies used to translate the consolidated statements of income into Swiss francs were significantly different in 2002 as compared to 2001. The average rate for the U.S. dollar (USD), British pound (GBP) the euro (EUR) and the Japanese yen (JPY) depreciated against the Swiss franc. With respect to the USD, the average rate used for translating the statement of income was CHF 1.56 per USD in 2002, as compared to CHF 1.68 per USD in 2001. With respect to the EUR, the average rate used for translating the statement of income was CHF 1.47 per EUR in 2002, as compared to CHF 1.51 per EUR in 2001. The December 31, 2002 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, 2001. These currency trends resulted in currency effects on the Swiss franc statement of income and on the Swiss franc balance sheet items and should be considered in the analysis of the Company's results of operations and financial position. 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 - 2002 Compared to 2001" - "Treasury management", "Consolidated balance sheets" and "Liquidity and capital resources" in this Management's Discussion and Analysis, as well as "Item 11. - Quantitative and Qualitative Disclosures About Market Risk". 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 and should be considered in the analysis of the Company's results of operations and financial position. 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" - "Treasury management", "Consolidated balance sheets" and "Liquidity and capital resources" in this Management's Discussion and Analysis. CRITICAL ACCOUNTING POLICIES The consolidated financial statements of the Company are sensitive to accounting methods, assumptions and estimates that form the basis of these financial statements and accompanying notes. Critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered in conjunction with reviewing the Company's financial statements and the discussion in this Management's Discussion and Analysis. Note 1 to the Consolidated Financial Statements in this Annual Report describes the significant accounting policies and methods used in the preparation of the Company's Consolidated Financial Statements. Following are the Company's critical accounting policies impacted by judgments, assumptions and estimates. Impairment of property, plant and equipment, goodwill and other intangible assets The Company periodically evaluates property, plant and equipment, goodwill and other intangible assets for potential impairment. The impairment review process requires significant management estimates and judgments regarding the future cash flows expected to result from the use and, if 29 applicable, the eventual disposition of the respective assets and other factors to determine the fair value of the respective assets. The key variables which management must estimate in determining these expected future cash flows and fair values include sales volumes, sale prices, sales growth, production and operating costs, capital expenditures, market conditions, and other economic factors. Significant management judgment is involved in estimating these variables, and such estimates are inherently uncertain; however, the assumptions used are consistent with the Company's internal planning. Management periodically evaluates and updates the estimates based on the conditions that influence these variables. If such assets are considered impaired, they are written down to fair value as appropriate. The assumptions and conditions for determining impairments of property, plant and equipment, goodwill and other intangible assets, reflect management's best assumptions and estimates, but these items involve inherent uncertainties as described above, many of which are not under management's control. As a result, the accounting for such items could result in different estimates or amounts if management used different assumptions or if different conditions occur in future accounting periods. 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. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, the protracted length of the clean-up periods and evolving technologies. 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 recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The assumptions and conditions for determining the level of the environmental liabilities reflects management's best assumptions and estimates, but these items involve inherent uncertainties as described above, many of which are not under management's control. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future accounting periods. For further discussion related to environmental matters, see Note 22 to the Consolidated Financial Statements and "Item 4 - Information on the Company - - Environmental Matters". Pension and other postretirement benefits The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including discount rates, expected return on plan assets, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually based on current economic conditions and, if required, also for any changes to the terms and conditions of the pension and postretirement plans. These assumptions can be affected by (i) for the discount rate, changes in rates of return on high-quality fixed income investments currently available in the market and those expected to be available during the period to maturity of the pension benefits; (ii) for the expected return on plan assets, changes in the pension plans strategic asset allocations to various investment types or to long-term return trend rates in the capital markets in which the pension fund's assets are invested; (iii) for future compensation levels, on future labor market conditions; and (iv) for health care cost trend rates, on the rate of medical cost inflation in the regions of the world where these benefits are offered to the Company's employees. The weighted average actuarial assumptions used to compute the pension and postretirement benefit obligation for 2002, 2001 and 2000 are disclosed in Note 19 to Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ from the assumptions used in calculating the annual retirement benefit liabilities and costs are accumulated and amortized over future periods and therefore generally affect recognized expense and recorded obligations in future accounting periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company's pension and other postretirement obligations and expenses in future accounting periods. Income taxes Deferred tax assets and liabilities are determined using enacted tax rates for the effects of net operating losses and temporary differences between the book and tax bases of assets and liabilities. The Company records a valuation allowance on deferred tax assets when appropriate to reflect the expected future tax benefits to be realized. In determining the appropriate valuation allowance, certain judgments are made by management relating to recoverability of deferred tax assets, use of tax loss carryforwards, level of expected future taxable income and available tax planning strategies. These assumptions are updated periodically by management based on the current business conditions affecting the Company and overall economic conditions. These management judgments are therefore subject to change based on, but not limited to, factors such as (i) changes in the profitability of the Company's subsidiaries, as well as for the Company as a whole, (ii) the ability of the Company to successfully execute its tax planning strategies and (iii) the accuracy of the Company's estimates of the potential effect that changes in tax legislation, in the jurisdictions where the Company operates, may have on the Company's future taxable profits. Failure by the Company to achieve forecasted taxable income and the failure to execute its tax planning strategies may affect the ultimate realization of certain deferred tax assets. Factors that may affect the Company's ability to achieve sufficient forecasted taxable income and successfully execute its tax planning strategies include, but are not limited to, increased competition, general economic conditions, a decline in sales or earnings, loss of market share or delays in product availability and changes in tax legislation. In addition, the Company operates within multiple taxing jurisdictions and is subject to audits in these jurisdictions. These audits can involve complex issues that may require an extended period of time for resolution. In management's opinion adequate provisions for income taxes have been made. USE OF CERTAIN SUPPLEMENTARY FINANCIAL INDICATORS The following comparative discussion of the results of operations and financial condition of the Company includes certain non-U.S. GAAP financial indicators which form part of the Company's value based management reporting system and are used by management to analyze the results of operations and financial condition of the Company. Such non-U.S. GAAP financial indicators include EBITDA (Earnings Before Interest, Taxes, 30 Depreciation and Amortization), EBITDA margin, EBITDA interest coverage ratio, free cash flow, operating cash flows before restructuring payments and net debt. These financial indicators are derived from financial measures prepared in accordance with U.S. GAAP. The way these non-U.S. GAAP financial indicators are derived, as well as definitions of other financial terms used in this Management's Discussion and Analysis is shown in the "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 - 2002 Compared to 2001 -------------------------------------- 2002 2001(1) ------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net sales ............................................................ 7 085 7 367 Gross profit ......................................................... 2 356 2 379 Operating income ..................................................... 788 761 Income from continuing operations .................................... 406 380 Net income ........................................................... 406 382 Basic and diluted earnings per share: Income from continuing operations per share .......................... 5.92 5.72 Net income per share ................................................. 5.92 5.76 ------------------------------------------------------------------------------------------------------------- OTHER DATA Operating income ..................................................... 788 761 Depreciation and amortization of other intangible assets .............. 385 408 Amortization of goodwill .............................................. - 61 ------------------------------------------------------------------------------------------------------------- EBITDA ............................................................... 1 173 1 230 ------------------------------------------------------------------------------------------------------------- Operating cash flows .................................................. 1 038 1 054 Operating cash flows, before restructuring payments(2) ............... 1 050 1 100 Free cash flow(3) .................................................. 683 779 ------------------------------------------------------------------------------------------------------------- Net debt(4) ........................................................... 1 463 2 351 Shareholders' equity at year-end ..................................... 4 354 3 908 ------------------------------------------------------------------------------------------------------------- Dividend per share(5) ................................................ - 2.00 Capital reduction per share(5) ....................................... 3.00 1.00 ------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS AS ADJUSTED, EXCLUDING GOODWILL AMORTIZATION(1) Operating income ..................................................... 788 822 Income from continuing operations .................................... 406 441 Net income ........................................................... 406 443 Basic and diluted earnings per share: Income from continuing operations per share .......................... 5.92 6.64 Net income per share ................................................. 5.92 6.68 ------------------------------------------------------------------------------------------------------------- KEY PERFORMANCE RATIOS Sales development .................................................... (4) % (7) % Sales development in local currencies ................................ 3 % (3) % Expressed as a percentage of sales: Gross profit ......................................................... 33.3 % 32.3 % Operating income ..................................................... 11.1 % 10.3 % Income from continuing operations .................................... 5.7 % 5.2 % Net income ........................................................... 5.7 % 5.2 % EBITDA................................................................. 16.6 % 16.7 % -------------------------------------------------------------------------------------------------------------
(1) Effective January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized to earnings. For comparison purposes to the 2002 reported results, the results of operations on an adjusted basis, excluding goodwill amortization, for the year 2001 are shown in the table above in the "Results of operations as adjusted excluding goodwill amortization" section (see Note 1 to Consolidated Financial Statements). (2) Restructuring payments were CHF 12 million in 2002 and CHF 46 million in 2001. (3) For the calculation of free cash flow, see the corresponding table in the "Liquidity and Capital resources" section of this Management's Discussion and Analysis. (4) For the calculation of net debt, see the corresponding table in the "Consolidated balance sheets" section of this Management's Discussion and Analysis. (5) For 2002, the Board of Directors proposes to carry forward the entire retained earnings of Ciba Specialty Chemicals Holding Inc. and not to pay a dividend. The Board of Directors, however, proposes a cash payment to the shareholders resulting from a capital reduction of CHF 3 per share. For further information see the "Operational review" section of this Management's Discussion and Analysis and "Item 8. Financial Information - Dividends and Dividend Policy". 31 OVERVIEW The weakening of the global economic environment of the year 2001 continued during 2002. Following slight signs of recovery during the spring, the economic climate noticeably declined towards the end of the year. The U.S. economy showed volatile and mixed economic development. In the second quarter of 2002, economic growth was noticeable but was followed by a significant weakening by the end of the year. European economic development was sluggish, with Germany experiencing an above average decline in growth. In Asia, the China Region remained the global growth engine in 2002. The volatile sales development indicates a cautious buying pattern of the customers in the Company's market segments. Towards the end of the year, a slight increase in inventories at the Company's customers was noticed. OPERATIONAL REVIEW Tight cost management compensated for difficult market conditions Net sales at CHF 7 085 million increased in local currencies by 3 percent. The Company improved its market position in a difficult environment. Sales in Swiss francs decreased by 4 percent compared to the prior year. Through the Company's continued focus on global sourcing of raw materials and its position in the chemicals value chain, the Company benefited from a decrease in raw material prices mainly during the first half of the year 2002. The decrease in raw material prices slowed down during the second half of the year and by the end of the year, the Company experienced price increases for some raw materials. In 2002, a higher capacity utilization compared to 2001 also contributed to the increase of the gross profit margin. In absolute terms, gross profit decreased to CHF 2 356 million from CHF 2 379 million in the prior year. This decline is attributable to unfavorable currency fluctuations. Due to numerous process improvements, normal fluctuation and the completion of restructuring programs that had been previously announced, the number of employees was reduced by 676 full-time equivalents ("FTEs") to 19 007 FTEs in 2002, compared to 19 683 FTEs in 2001. The integration of the original three supply chains into one single supply chain progresses according to plan and will be completed in 2003. The rationalization of the Information Technology (IT) support structure was completed during 2002. While these proactive actions to protect profitability were generally successful in reducing the Company's cost base in 2002, compared to the previous year, they were unable to fully compensate for unfavorable currency fluctuations. The weakening of most currencies against the Swiss franc, particularly the U.S. dollar, the British pound, the euro and the Japanese yen, had a significant negative effect on the Company's results. Effective January 1, 2002, in accordance with new U.S. GAAP accounting rules, the Company no longer amortized goodwill to earnings. As a result of goodwill not being amortized, the Company's operating income in 2002 was improved by CHF 61 million, as compared to prior year. Operating income increased by CHF 27 million to CHF 788 million compared to CHF 761 million in the prior year. Income from continuing operations was CHF 406 million or CHF 5.92 per share in 2002 compared to CHF 380 million or CHF 5.72 per share in the prior year. Net income was CHF 406 million or CHF 5.92 per share in 2002 compared to CHF 382 million or CHF 5.76 per share in the prior year. The Company's EBITDA and EBITDA margin were CHF 1 173 million and 16.6 percent, respectively, in 2002 compared to CHF 1 230 million and 16.7 percent, respectively, in 2001. Free cash flow of CHF 683 million further enhances the Company's financial position The Company's continued focus on the generation of cash further strengthened the financial position of the Company. Improved operational performance plays a crucial role in sustaining high cash flows for the Company. In addition, inventory levels and accounts receivables were reduced to 34.7 percent of net sales in 2002, compared to 35.2 percent in 2001. Capital expenditures remained relatively stable at 2001 levels and continue to be focused on efficiency improvement projects, remaining below the level of annual depreciation. The combination of cash flows generated from operations and effective asset management resulted in free cash flow of CHF 683 million in 2002 compared to CHF 779 million in 2001. The continuing focus on operational efficiencies, cash flow and portfolio management resulted in a reduction of the Company's net debt to CHF 1 463 million in 2002, an improvement of CHF 888 million from 2001 levels. The Company's treasury share transactions, as well as the capital reduction payment made in 2002, are excluded from the Company's definition of free cash flow. In 2002, the net effect from the sale of the Company's treasury shares and the capital reduction also contributed to reduction of net debt. EBITDA interest cover has improved to 10.66 in 2002 from 9.18 in 2001. EBITDA interest cover is calculated as EBITDA (2002: CHF 1 173 million; 2001: CHF 1 230 million) divided by net interest - interest expense less interest income (2002: CHF 110 million; 2001: CHF 134 million). The Company continues to optimize its business portfolio through selective acquisitions to strengthen its focus on its core businesses and to improve profitability In order to improve the product range for flame retardants and integrated formulation with effect combinations in the Plastic Additives Segment, the Company purchased "Melapur B.V." ("Melapur") from DSM N.V. in May 2002. Melapur manufactures and distributes halogen-free flame retardants on melamine basis. The Board of Directors of the Company proposes also for the year 2002 the same distribution of CHF 3 per share For 2001, the Company made a total payment to its shareholders of CHF 3 per share CHF 2 per share as dividend and CHF 1 per share in cash resulting from a share capital reduction. For 2002, the Board of Directors proposes to also make a total payment to shareholders of CHF 3 per share, but exclusively in the form of a capital reduction. If approved, the capital reduction will take the form of a reduction in the nominal value of each common share from CHF 9 per share by CHF 3 per share to CHF 6 per share. The capital reduction is subject to shareholder approval at the Annual General Meeting to be held on March 6, 2003. If approved, the Company expects that payment of the capital reduction will be made to the shareholders on May 23, 2003, subject to various conditions. 32 FINANCIAL REVIEW Sales increased by 3 percent in local currencies Net sales in local currencies increased by 3 percent. In Swiss francs sales decreased by 4 percent to CHF 7 085 million. Sales development in 2002 compared to 2001 resulted from the following factors: CONSOLIDATED SALES DEVELOPMENT 2002 COMPARED TO 2001 ------------------------------------------------------------------------- Volume/product mix(1) .................... 6% Price .................................... (3)% Currency ................................. (7)% ------------------------------------------------------------------------- Total in Swiss francs .................... (4)% ------------------------------------------------------------------------- (1) Includes acquisition effects of 1 percent. Sales for the year started off moderately as a result of the continued weak economic environment. Sales in Europe and in the NAFTA region started to improve during the second quarter and weakened slightly towards the end of the year. As a consequence of volatile market conditions and mixed economic development, sales in 2002 showed a rather high oscillation from month to month compared to 2001. Contributing to the sales decline in Swiss francs was the strengthening of the Swiss franc compared to other currencies, particularly against the U.S. dollar, the British pound, the euro and the Japanese yen, resulting in a reduction in sales in Swiss francs of 4 percent compared to 2001. In these difficult economic conditions, the Company experienced sales price erosion of 3 percent but was able to compensated for this by a volume/product mix increase of 6 percent. This emphasizes the overall quality of the Company's product portfolio and customer partnerships. Sales in local currencies increased in some of the major markets in EUROPE, except in the United Kingdom and in France. In Swiss francs, sales declined. In the AMERICAS, sales in local currencies increased in North America and Central America, but decreased in Swiss francs. Sales in South America showed a stronger increase in local currencies than the rest of the Americas, but declined in Swiss francs. In most of the major markets in ASIA-PACIFIC, sales increased in local currencies. The China Region and Australia showed increased sales also in Swiss francs. Whereas in the other major markets of the region, sales in Swiss francs declined. In the China Region, sales increased by double digits in local currencies. GEOGRAPHIC SALES DISTRIBUTION 2002 2001 ------------------------------------------------------------------------- Europe .................................... 38 % 37 % Americas(1) ............................... 35 % 36 % Asia Pacific(2) ........................... 27 % 27 % ------------------------------------------------------------------------- (1) The Americas are comprised of the regions North, Central and South America. (2) Asia Pacific is comprised of the regions Asia, Africa, the Middle East, Australia and New Zealand. Profit margins remained relatively stable and benefited from the Company's cost reduction programs The gross profit margin improved to 33.3 percent of sales compared to 32.3 percent in the prior year. The increase in gross profit was achieved through price reductions on raw materials and effective control on other production costs, combined with relatively stable selling prices. In the first half of 2002, raw material prices declined due to the continuation of the Company's policy to purchase supplies globally through its worldwide organization and its position in the chemical value chain. In the second half of the year, the decline of raw material prices slowed down and prices started to increase for some raw materials towards the end of the year. Process improvements in production with respective staff reductions combined with the increased plant utilization due to higher production output further improved the gross profit margin. Selling, general and administrative expenses decrease Selling, general and administrative expenses decreased in absolute terms by CHF 11 million to CHF 1 247 million, compared to CHF 1 258 million in 2001. Selling, general and administrative expenses expressed as a percentage of sales were 17.6 percent compared to 17.1 percent in the prior year. The Company's continuous efforts to streamline its operational structure, the cost initiatives under the Company's reorganization program "Fit For Growth!" as announced in 2001, process improvements and the completion of previously announced restructuring programs, resulted in a reduction of personnel levels and a decrease in selling, general and administrative expenses that offset most of the negative impacts. The Company had higher variable compensation expenses in 2002 compared to 2001, as compensation levels are partly linked to achieving performance targets, which were only partly met in 2002, and to a lesser extent in 2001. The Company also had in 2001 non-recurring income related to providing third party services to Vantico, a company that was established by the purchaser of the Company's Performance Polymers business. These service contracts have expired and will not be renewed. In 2003, selling, general and administrative expenses will be adversely affected by higher costs relating to pension funds and insurance. Effective January 1, 2003, the company will adopt the fair value method of accounting for stock option plans as defined in SFAS No. 123 "Accounting for Stock-based Compensation". As a consequence, future employee stock option grants and other stock based compensation plans will be recorded as expenses over the vesting period of the award based on their fair values as of the date the award is granted. However, continuous cost control programs and further process improvements are expected to offset these negative impacts. Continuing commitment to research and development Research and development expenses as a percentage of sales increased to 4.2 percent in 2002 compared to 3.8 percent in 2001. In absolute terms, research and development expenses increased by CHF 18 million to CHF 294 million in 2002 as compared to CHF 276 million in 2001, an increase of 7 percent in Swiss francs or 9 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 33 innovation. As part of the reorganization, announced in February 2001, certain research and development activities, mostly focused on innovative new ideas 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 new formulations used to enter new markets 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 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 Water & Paper Treatment Segment introduced a series of environmentally friendly fluorine chemicals for the paper market, which prevent, for example, food-packaging papers from being stained by fatty content. In parallel, 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 ceased to apply with the adoption of SFAS No. 142 As of January 1, 2002, in accordance with new U.S. GAAP accounting rules, the Company no longer amortizes any goodwill to earnings, but instead is required to review its recoverability through annual impairment testing. Other identifiable intangibles continue to be amortized to earnings over their estimated useful lives. The Company adopted the new accounting rule effective January 1, 2002. Upon adoption of this accounting rule, an initial impairment test of the goodwill as of January 1, 2002 was required. In addition, the Company was required to perform an annual impairment test of goodwill during 2002. The Company tested the recoverability of its goodwill as of January 1, 2002 and as of December 31, 2002, concluding as of each respective date that the book value of goodwill was not impaired. For further information see the "Supplemental Information - Change in accounting policy and new accounting standards" section below and Note 1 to Consolidated Financial Statements. In 2001, the goodwill amortization expense was CHF 61 million. Amortization of other intangibles The amortization of other intangibles remained relatively constant at CHF 33 million compared to CHF 31 million in 2001. The increase was a result of recent acquisitions during 2002 and acquisitions that occurred at the end of 2001. Income from earnings of equity affiliates decreased 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 6 million in 2002 from CHF 8 million in 2001. 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 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. Operating income and EBITDA adversely affected by lower sales levels and unfavorable currency developments 2002 2001 -------------------------------------------------------------------------- Operating income (EBIT) ........................ 788 761 EBITDA ........................................ 1 173 1 230 EBIT margin ................................... 11.1% 10.3% EBITDA margin ................................. 16.6% 16.7% 2002 compared to 2001 -------------------------------------------------------------------------- Operating income (EBIT) ........................ 4% EBITDA ........................................ (5)% -------------------------------------------------------------------------- Operating income increased by CHF 27 million in 2002 and the EBIT margin increased by 0.8 percent points to 11.1 percent of sales. Increased sales in local currencies, favorable raw material prices, process improvements and proactive measures for cost control contributed to these improvements. The strengthening of the Swiss franc against most currencies negatively impacted operating income by approximately CHF 165 million. The amortization of goodwill amounted to CHF 61 million in 2001. EBITDA declined by CHF 57 million compared to 2001, mainly as a result of the unfavorable currency fluctuation of the Swiss franc against other currencies. In local currencies, EBITDA increased by 10 percent. The EBITDA margin of 16.6 percent in 2002 maintained at the previous year's level. Restructuring and special charges, net - prior year programs completed in 2002 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. The restructuring accrual at January 1, 2002 relates to the 2000 restructuring projects, announced in the second half of 2000. These restructuring programs were completed during 2002 and are described below. The Company implemented a program ("Fit For Growth!") in 2001 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 business segments, a Chief Technology Officer at the 34 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, which is expected to be completed during 2003, 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 business growth. During 2002, in connection with the "Fit For Growth!" program initiated in 2001, the Company reduced its headcount by an additional 676 employees. These reductions in the number of employees were achieved through productivity gains realized from the implementation of the new organizational structures introduced in 2001. The reductions were made, for the most part, through attrition and the very limited hiring of new personnel. In 2001, under the "Fit For Growth!" program, the Company reduced its headcount by 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. The 2000 year programs 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 that were incurred in 2000 related to the reduction of approximately 238 FTEs in the United States and Southern Europe, principally in the administration, sales and marketing functions and, in addition, the manufacturing functions in the United States. These restructuring programs were completed during 2002. Under all programs reported and through additional initiatives in the last two years, the company reduced its headcount from 20 306 FTEs at end of 2000 by 1 299 employees to 19 007 FTEs at the end of 2002. The costs and activity associated with the 2000 restructuring programs during 2002 are summarized below: Severance Other costs costs Total -------------------------------------------------------------------------- January 1, 2002 ................... 5 7 12 Amounts utilized(1) .............. (5) (7) (12) -------------------------------------------------------------------------- December 31, 2002 ................ 0 0 0 -------------------------------------------------------------------------- (1) Includes currency adjustments. PLASTIC ADDITIVES RESULTS Sales decreased to CHF 1 813 million in 2002 or by 1 percent in Swiss francs and increased by 6 percent in local currencies. Sales development in 2002 compared to 2001 resulted from the following factors: Sales development 2002 compared to 2001 -------------------------------------------------------------------------- Volume/product mix(1) ................................ 10% Price ................................................ (4)% Currency ............................................. (7)% -------------------------------------------------------------------------- Total in Swiss francs ................................ (1)% -------------------------------------------------------------------------- (1) Includes acquisition effects of less than 1 percent. Sales increased in local currencies due to strong volume growth, particularly in lubricant additives, while sales in Swiss francs declined slightly. Base polymers and polymer products sales also increased in local currencies, despite the competitive environment and pricing strategies of competitors. In response to these market conditions, sales price reductions were necessary to maintain the Segment's market position. Geographically, sales in EUROPE increased both in local currencies and to a lesser extent in Swiss francs. Sales growth was positive in the majority of the region in local currencies. In the AMERICAS, sales declined in Swiss francs but grew in local currencies, fuelled especially by a favorable second half in the United States. In ASIA PACIFIC, sales levels increased in local currencies, with sales in China being particularly solid. Sales were, however, slightly lower in Swiss francs. 2002 2001 ------------------------------------------------------------------------- OPERATING INCOME (EBIT) Absolute in CHF ..................................... 245 275 As a percentage of sales (EBIT margin) .............. 13.5% 15.0% EBITDA ------------------------------------------------------------------------- Absolute in CHF ..................................... 346 388 As a percentage of sales (EBITDA margin) ............ 19.1% 21.1% -------------------------------------------------------------------------- Operating income and EBITDA were adversely affected by lower sales and unfavorable currency fluctuations. Improvements made to the operating cost structure in addition to productivity gains could not fully offset sales price declines. These impacts led to a slight decline in gross profit margin 35 levels. Selling, general and administration costs remained stable at the prior year level, despite a higher level of variable compensation expense in 2002 compared to 2001. This is due to the compensation being partly linked to achieving specified performance targets, which the Segment met in 2002, and to a lesser extent in 2001. The Segment continued its investment in future growth through research and development activities, which were maintained at the level of approximately 5% of sales. In addition, during 2002 the Segment completed the acquisition of Melapur B.V., a provider of environmentally friendly, halogen-free flame retardants, strengthening the Segment's position in this market. ASSET MANAGEMENT 2002 2001 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF ................................. 378 420 As a percentage of sales ........................ 21% 23% Capital expenditure in CHF ......................... 86 80 Invested capital in CHF ............................ 1 236 1 403 Total assets in CHF ................................ 1 493 1 623 -------------------------------------------------------------------------- The Segment continued to focus on asset management during 2002, resulting in a lower investment in assets compared to the prior year. Despite higher sales volume, inventory levels were further reduced below prior year levels, improving both in absolute and intensity terms. Receivables levels were also lower in both absolute and intensity terms. In addition, payable levels increased above prior year levels. Capital expenditures were mainly focused on efficiency and improvements programs at the production facilities and were below the level of depreciation. The combination of currency effects, lower investment than annual depreciation in fixed assets and the effective management of current assets led to a reduction in total assets and invested capital. COATING EFFECTS RESULTS Sales decreased to CHF 1 920 million in 2002 or by 1 percent in Swiss francs but increased by 5 percent in local currencies. Sales development in 2002 compared to 2001 resulted from the following factors: Sales development 2002 compared to 2001 -------------------------------------------------------------------------- Volume/product mix(1) ................................ 8% Price ................................................ (3)% Currency ............................................. (6)% -------------------------------------------------------------------------- Total in Swiss francs ................................ (1)% -------------------------------------------------------------------------- (1) Includes acquisition effects of 2 percent. Sales grew in local currencies due to the strong volume growth, particularly in the coatings, imaging and plastics market sectors, while in Swiss francs sales declined slightly. Continued sales growth of patented products into the automotive industry and the introduction of new and innovative products in the plastic markets, where the Segment is well positioned to meet increasing demand for materials substitutes, also contributed to the sales growth. The global printing ink industry continued to be very challenging in the traditional publication areas, although digital printing products continued to grow strongly. The information storage sector remains a difficult market, whereas growth opportunities have occurred in displays and microelectronics. Geographically, sales in EUROPE increased in both Swiss francs and in local currencies. In the AMERICAS, sales levels increased in local currencies, supported by a good second half of 2002 in the United States. ASIA PACIFIC sales increased in local currencies and were marginally lower in Swiss francs. 2002 2001 -------------------------------------------------------------------------- OPERATING INCOME (EBIT) Absolute in CHF .................................... 341 312 As a percentage of sales (EBIT margin) ............. 17.7% 16.1% EBITDA -------------------------------------------------------------------------- Absolute in CHF .................................... 440 411 As a percentage of sales (EBITDA margin) ........... 22.9% 21.1% -------------------------------------------------------------------------- Operating income and EBITDA increased both in absolute terms and as a percentage of sales, despite being adversely affected by slightly lower sales and unfavorable currency fluctuations. This improvement was primarily due to lower raw material costs, in conjunction with increased capacity utilization and cost savings realized through continued streamlining activities at selected production facilities. These factors contributed to a significant improvement in gross margin levels. Selling, general and administrative costs were slightly higher, primarily due to the higher level of variable compensation expense in 2002 compared to 2001. This is due to the compensation being partly linked to achieving specified performance targets, which the Segment met in 2002, and to a lesser extent in 2001. Investment in research and development continued at the high level of the prior year, being approximately 5% of sales. 36 ASSET MANAGEMENT 2002 2001 ------------------------------------------------------------------------ Net current operating assets: Absolute in CHF ............................... 575 658 As a percentage of sales ...................... 30% 34% Capital expenditure in CHF ....................... 74 66 Invested capital in CHF .......................... 1 834 2 001 Total assets in CHF .............................. 2 107 2 249 ------------------------------------------------------------------------ In 2002, the Segment continued its focus on the management of its assets. Inventory levels were below those of the prior year and improved in both absolute and intensity terms. Receivable levels were also lower in both absolute and intensity terms. Payable levels increased above prior year levels. Capital expenditures were focused primarily on efficiency and productivity programs and were below the level of depreciation. The combination of currency effects, lower investment than annual depreciation in fixed assets and the effective management of current assets led to a reduction in total assets and invested capital. WATER & PAPER TREATMENT RESULTS Sales decreased to CHF 1 409 million in 2002 or by 5 percent in Swiss francs but increased by 1 percent in local currencies. Sales development in 2002 compared to 2001 resulted from the following factors: SALES DEVELOPMENT 2002 COMPARED TO 2001 ------------------------------------------------------------------------ Volume/product mix ................................. 4% Price .............................................. (3)% Currency ........................................... (6)% ------------------------------------------------------------------------ Total in Swiss francs .............................. (5)% ------------------------------------------------------------------------ Water Treatment sales increased slightly in local currencies, but were lower in Swiss francs. The Segment continues to operate in a difficult economic environment, particularly in the United States where overall demand for its products remains weak. Competitive pricing continues to negatively affect the sales performance. Sales into the paper industry were slightly above prior year levels in local currencies, despite strong competition and the pricing strategies of key competitors. This was achieved, in part, as a result of new product introductions. Geographically, sales in EUROPE increased in local currencies and declined marginally in Swiss francs. Performance was mixed in the region. In the AMERICAS, sales decreased in both Swiss francs and in local currencies, driven mainly by the NAFTA region. South America again showed a strong performance in local currencies. Sales in ASIA PACIFIC increased both in Swiss francs and in local currencies with sales in China being particularly solid. 2002 2001 -------------------------------------------------------------------------- OPERATING INCOME (EBIT) Absolute in CHF .................................. 98 65 As a percentage of sales (EBIT margin) ........... 7.0% 4.4% EBITDA -------------------------------------------------------------------------- Absolute in CHF .................................. 186 157 As a percentage of sales (EBITDA margin) ......... 13.2% 10.6% -------------------------------------------------------------------------- Operating income and EBITDA increased both in absolute terms and as a percentage of sales. This was achieved despite the weak sales development through the successful implementation of rightsizing initiatives undertaken to reduce the operating cost base of the Segment by lowering selling, general and administrative costs, idle capacity costs, raw material costs and energy costs. The reduction in selling, general and administrative costs was achieved mainly from lower personnel costs, as a consequence of the completion of the headcount reduction programs, initiated in prior years. Investments in research and development remained stable at approximately 2 percent of sales. ASSET MANAGEMENT 2002 2001 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF .................................... 335 357 As a percentage of sales ........................... 24% 24% Capital expenditure in CHF ............................ 35 52 Invested capital in CHF ............................... 2 429 2 596 Total assets in CHF .................................... 2 606 2 790 -------------------------------------------------------------------------- The Segment was again successful in effectively managing its assets. Inventory and receivable levels were below the prior year. Capital expenditures were well below the level of the prior year, with investments focused mainly on debottlenecking projects. The combination of currency fluctuations, lower investment than annual depreciation in fixed assets and the effective management of current assets led to a reduction in total assets and invested capital. 37 TEXTILE EFFECTS RESULTS Sales decreased to CHF 1 544 million in 2002 or by 8 percent in Swiss francs and by 2 percent in local currencies. Sales development in 2002 compared to 2001 resulted from the following factors: SALES DEVELOPMENT 2002 COMPARED TO 2001 ----------------------------------------------------------------------- Volume/product mix ................................ 2% Price ............................................. (4)% Currency .......................................... (6)% ----------------------------------------------------------------------- Total in Swiss francs ............................. (8)% ----------------------------------------------------------------------- The Segment continued to face challenges from weak overall demand in the textile dyes markets. In Europe, there were further textile mill closures. This coupled with the continued low level of activity in the wool sector and intensified competition in the market, contributed to the weak performance. In the textile chemicals markets, however, the Segment was able to increase sales in local currencies compared to the prior year, despite the difficult market conditions. In particular, the Segment posted a strong performance in its offering of effects chemicals, where demand for innovative oil and water repellant products, in conjunction with close customer alliances, continues to result in further market share gains. Geographically, in EUROPE, sales were below the prior year in both Swiss francs and in local currencies. Sales declines were experienced across all major European markets. In the AMERICAS, sales declined in Swiss francs and were slightly lower in local currencies. In the United States, a slight recovery was seen in the second half of the year, although sales remained below prior year levels in both Swiss francs and in local currency. In the ASIA PACIFIC region, sales increased in local currencies, particularly in the China Region and India, but declined in Swiss francs. 2002 2001 -------------------------------------------------------------------------- OPERATING INCOME (EBIT) Absolute in CHF .................................. 142 181 As a percentage of sales (EBIT margin) ........... 9.2% 10.8% EBITDA -------------------------------------------------------------------------- Absolute in CHF .................................. 208 248 As a percentage of sales (EBITDA margin) ......... 13.5% 14.8% -------------------------------------------------------------------------- Operating income and EBITDA, in both absolute terms and as a percentage of sales were adversely affected by lower sales and unfavorable currency fluctuations. The Segment continued its initiatives to improve productivity and to reduce its cost structures during the year. The cost savings achieved out of these initiatives together with the reduction in raw material costs could not fully compensate for the lower sales levels and, as a consequence, gross profit margins were lower when compared to the prior year. Selling, general and administrative costs were lower compared to the prior year due to the lower cost base achieved, in part from further reductions in the number of employees. Investment in research and development remained stable at approximately 2 percent of sales. ASSET MANAGEMENT 2002 2001 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF ........................... 532 641 As a percentage of sales .................. 34% 38% Capital expenditure in CHF ................... 34 32 Invested capital in CHF ...................... 1 291 1 490 Total assets in CHF .......................... 1 495 1 676 -------------------------------------------------------------------------- The Segment continued its efforts in the area of reducing its net current operating assets. Successful initiatives to further harmonize inventory management resulted in lower inventory levels in both absolute and intensity terms. Receivable levels in both absolute and intensity terms were well below those of the prior year. In addition, payable levels increased above prior year levels. The combination of effective management of current assets, lower capital investment than annual depreciation in fixed assets, together with currency fluctuations, resulted in a reduction of total assets and invested capital. HOME & PERSONAL CARE RESULTS Sales decreased to CHF 399 million in 2002 or by 7 percent in Swiss francs and increased by 1 percent in local currencies. Sales development in 2002 compared to 2001 resulted from the following factors: SALES DEVELOPMENT 2002 COMPARED TO 2001 --------------------------------------------------------------------------- Volume/product mix .................................... 2% Price ................................................. (1)% Currency .............................................. (8)% --------------------------------------------------------------------------- Total in Swiss francs ................................. (7)% --------------------------------------------------------------------------- 38 Sales in Home & Personal Care remained relatively stable in local currency in comparison to a strong performance last year, but declined significantly in Swiss francs. As a significant proportion of the Segment's sales are made in the Americas, the strengthening of the Swiss franc against the U.S. dollar and the other currencies in the region negatively affected the Swiss franc sales performance. In the personal care market, sales increased in local currencies as lower sales in hygiene effects were offset by growth new effects, particularly UV-filters and hair dyes. In the home and fabric care market sector, the negative impact of price competition and lower volumes in selected whitener products was offset by growth in new effects products in the areas of protection, colorants and home care specialties, resulting in a stable sales performance compared to the prior year. Geographically, sales in EUROPE increased both in Swiss francs and in local currencies, driven by the acceleration of new product launches. Performance among the countries was mixed. In the AMERICAS, sales increased in local currencies but declined in Swiss francs in all major markets in both North and South America. In ASIA PACIFIC, sales declined both in Swiss francs and in local currencies. 2002 2001 -------------------------------------------------------------------------- OPERATING INCOME (EBIT) Absolute in CHF .................................... 56 67 As a percentage of sales (EBIT margin) .............14.0% 15.7% EBITDA -------------------------------------------------------------------------- Absolute in CHF .................................... 82 95 As a percentage of sales (EBITDA margin) ...........20.6% 22.2% -------------------------------------------------------------------------- Operating income and EBITDA both in absolute terms and as a percentage of sales were adversely affected by lower sales and unfavorable currency fluctuations. Continued tight controls on costs, reductions in raw material costs and operational improvements could not fully compensate for the decline in sales, resulting in a decline in EBIT and EBITDA margins. Selling, general and administrative costs remained relatively stable compared to the prior year. In keeping with the Segment's long-term commitment to product innovation, investments in research and development activities increased to approximately 8 percent of sales. ASSET MANAGEMENT 2002 2001 -------------------------------------------------------------------------- Net current operating assets: Absolute in CHF .................................. 93 98 As a percentage of sales ......................... 23% 23% Capital expenditure in CHF .......................... 18 25 Invested capital in CHF ............................. 294 340 Total assets in CHF ................................. 356 401 -------------------------------------------------------------------------- The Segment maintained its good asset management record, reducing its asset base. Increases in inventory levels required to meet demand for new products and decreases in payable levels were offset by lower receivable levels, in both absolute and intensity terms. Capital investments were lower than the prior year and were focused primarily on efficiency and productivity programs and were below the level of depreciation. The effects of the reduction in net current assets, lower capital investment than annual depreciation in fixed assets, together with currency fluctuations, resulted in a reduction of total assets and invested capital. TREASURY MANAGEMENT The international financial markets in 2002 remained volatile. The major trends in the markets, which were the focus of the Company's treasury management, included the weakening of the major currencies against the Swiss franc, and during the latter part of the year, the strengthening of the euro against the U.S. dollar, and movements in interest rates. During 2002, the U.S. dollar fluctuated against the Swiss franc from a high of approximately CHF 1.72 to a low of approximately CHF 1.38. The Swiss franc balance sheet year-end rate was at CHF 1.43 against the U.S. dollar in 2002 versus CHF 1.63 at the end of 2001. During 2002, the euro fluctuated against the Swiss franc from a high of approximately CHF 1.48 to a low of approximately CHF 1.45. At the end of 2002, the Swiss franc was at a level of CHF 1.46 against the euro versus CHF 1.47 at the end of 2001. As a consequence of the anticipated economic recovery not being fully realized in the United States and the relatively flat economic growth in Europe, global interest rates fell below 2001 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 2002 to 4.02 percent, which is below 2001 levels. The Company's net interest costs decreased by CHF 24 million to CHF 110 million in 2002 compared to CHF 134 million in 2001. This decrease resulted primarily 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 2002, other financial expense, net which includes foreign currency exchange gains and losses, net hedging expenses, and losses on financial investments, is CHF 105 million, an increase of CHF 46 million, compared to the net expense of CHF 59 million in 2001. Included in other financial expense in 2002 is a CHF 43 million loss on certain of the Company's short-term investments and financial investments in unconsolidated companies, primarily Hexcel Corporation. The Company was required to record these losses since the decline in market values below the Company's historical cost basis in these financial investments was, in management's opinion, no longer deemed temporary. The remainder of the other financial, expense, net, excluding the loss on 39 investments, remained relatively stable compared to the prior year, despite the effects of the strengthening of the Swiss franc against the U.S. dollar and the other major currencies, and the effects of currency exchange losses caused by the devaluation of the Brazilian Real, the Mexican Peso and the Argentinean Peso. Throughout 2002, the Company continued to maintain its long-term debt ratings of 'A' from Standard & Poors and of 'A2' from Moody's. In management's opinion, based on the Company's current financial position, its credit protection ratios are strong for its rating category. In accordance with its risk management policy for country risk, the Company increased short-term debt due to local funding needs by CHF 22 million. In 2001 short-term debt was reduced by CHF 48 million. When economically feasible, the Company selectively retires portions of its long-term debt. Free cash flow utilized for this purpose amounted to CHF 19 million in 2002 versus CHF 110 million in 2001. The Company's remaining cash reserves will be utilized in future periods to continue to maintain short-term debt at stable levels, to repay the straight bond debt in May 2003 and the convertible bond debt in July 2003, in accordance with their terms, and to repay of long-term debt when it is economically advantageous to the Company. The Company may, if and when it is economically advantageous, issue new debt either under the EMTN Program or as a Bond issuance as partial funding of the long-term debt amounts that are due in 2003. As of January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, which replaced existing pronouncements and practices for derivatives and hedging activities with a single, integrated accounting framework. Upon adoption of SFAS No. 133, 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 Consolidated Financial Statements. EFFECTIVE TAX RATE The Company reported an effective tax rate of 27 percent in 2002, a reduction of 5 percent compared to 32 percent reported in 2001. This reduction in the effective tax rate results, in part, from goodwill not being amortized for financial reporting purposes, in accordance with the Company's adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" (see Note 1 to Consolidated Financial Statements), as a considerable portion of the Company's goodwill is non-deductible for tax purposes. In 2002, the effective tax rate was also impacted by a lower amount of other non-deductible items (see Note 15 to Consolidated Financial Statements). 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. Excluding the impact of these 2001 non-recurring events, for comparability with the 2002 effective tax rate, the effective tax rate in 2001 would have been 30 percent. NET INCOME AND EARNINGS PER SHARE NET INCOME 2002 2001 -------------------------------------------------------------------------- Income from continuing operations ...................... 406 380 Cumulative effects of change in accounting principles ... - 2 -------------------------------------------------------------------------- Net income ............................................. 406 382 -------------------------------------------------------------------------- EARNINGS PER SHARE, BASIC AND DILUTED 2002 2001 -------------------------------------------------------------------------- Continuing operations ................................. 5.92 5.72 Cumulative effects of change in accounting principles... - 0.04 -------------------------------------------------------------------------- Net income ............................................ 5.92 5.76 -------------------------------------------------------------------------- Earnings per share amounts were computed by dividing income from continuing operations, cumulative effects of change in accounting principles and net income, respectively, by the weighted average number of shares outstanding. CONSOLIDATED BALANCE SHEETS Strong focus on asset management continues to reduce net debt SELECTED BALANCE SHEET DATA AS OF DECEMBER 31, 2002 2001 --------------------------------------------------------------------------- Cash and cash equivalents and short-term investments... 2 377 1 643 Total assets ......................................... 11 792 11 718 Total shareholders' equity ........................... 4 354 3 908 --------------------------------------------------------------------------- The continued emphasis on the management of operational assets led to a reduction in total assets of CHF 660 million, excluding cash and cash equivalents and short-term investments. This reduction was achieved through continued proactive asset management in the areas of inventories and accounts receivable and through the continued efforts to focus the Company's capital expenditures on efficiency and safety improvement related items. Proposed investments in additional production capacity continue to be carefully evaluated to ensure that sufficient market demand exists to justify the investment. The Company also 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 2002, used for translating the balance sheet into Swiss francs, had a significant effect. Most major currencies particularly the U.S. dollar, the British pound, the Japanese yen and to a lesser extent the euro depreciated against the Swiss franc. 40 The continued focus on cash and asset management resulted in significantly lower net debt in 2002. The table below shows the movement in net debt from December 31, 2001 to December 31, 2002.
Total Cash & cash Short-term Total Net debt development from 2001 to 2002 debt equivalents investments net debt ------------------------------------------------------------------------------------------------------------ December 31, 2001 .............................. 3 994 1 602 41 2 351 Cash flows increase (decrease), net ............ 4 833 (25) (804) Currency effects and other ..................... (158) (74) 0 (84) ------------------------------------------------------------------------------------------------------------ December 31, 2002 .............................. 3 840 2 361 16 1 463 ------------------------------------------------------------------------------------------------------------
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 888 million in 2002. Net debt amounted to CHF 1 463 million in 2002 compared to CHF 2 351 million in 2001. Short-term debt, excluding the current portion of long-term debt, and long-term debt, including the current portion, remained relatively stable in 2002 compared to 2001. This was achieved through the Company's ability to finance its working capital needs through cash flows generated from its operating activities. LIQUIDITY AND CAPITAL RESOURCES Liquidity - Net cash provided by operating activities in excess of CHF 1 billion and free cash flow at CHF 683 million in 2002
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001 2000 ------------------------------------------------------------------------------------------------------- Net cash from continuing operations, before restructuring payments .. 1 050 1 100 1 065 Cash used for restructuring payments ................................ (12) (46) (35) Net cash provided by discontinued operations ........................ - - 1 ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities .......................... 1 038 1 054 1 031 -------------------------------------------------------------------------------------------------------
The Company's continued focus on asset management and effective cash management again showed good results in the Company's cash generation during 2002. The Company generated cash flows from its operating activities, before restructuring payments, of CHF 1 050 million in 2002 compared to CHF 1 100 million in 2001 and CHF 1 065 million in 2000.
CASH FLOWS FROM INVESTING ACTIVITIES 2002 2001 2000 -------------------------------------------------------------------------------------------------------------- Capital expenditures .................................................. (250) (259) (249) Sale (acquisition) of businesses, net of cash ......................... (116) (144) 1 566 Proceeds from sale of assets and changes in loans and other long-term assets ................................................................ 17 69 (42) Cash flows used in investing activities, discontinued operations ...... - - (4) -------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ................... (349) (334) 1 271 --------------------------------------------------------------------------------------------------------------
In 2002, the net cash used in acquisition and divestment activities amounted to CHF 116 million. The most significant costs incurred related to additional cash payments for separation cost attributable to the divestment of the Performance Polymers business, which amounted to approximately CHF 69 million. This is lower than the Company's prior year estimate of cash payments to be made due to delays in the settlement of certain matters between the parties that is out of the direct control of the Company. The remaining CHF 47 million was used primarily for minor strategic business acquisitions, including the acquisition of the flame retardant business of Melapur B.V. from DSM N.V. 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. 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.
CASH FLOWS FROM FINANCING ACTIVITIES 2002 2001 2000 ------------------------------------------------------------------------------------------------------------- Increase (Decrease) in short-term and long-term debt, net ................ 4 (152) (1 339) Dividends paid ........................................................... (134) (132) (133) Capital reduction paid ................................................... (69) - - Treasury stock transactions and other .................................... 343 9 (36) ------------------------------------------------------------------------------------------------------------- NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 144 (275) (1 508) -------------------------------------------------------------------------------------------------------------
41 The Company's short-term and long-term debt increased slightly by CHF 4 million in 2002 compared to a reduction of CHF 152 million in 2001 and CHF 1 339 million in 2000. Short-term debt increased by CHF 22 million in 2002, due to certain subsidiaries local funding needs, compared to a decrease of CHF 48 million in 2001 and CHF 844 million in 2000. When economically feasible, the Company selectively retires portions of its long-term debt. Free cash flow utilized for this purpose amounted to CHF 19 million in 2002 versus CHF 110 million in 2001 and CHF 499 million in 2000. The Company's remaining cash reserves will be utilized in future periods to continue to maintain short-term debt at stable levels, for repayment of the straight bond debt in May 2003 and the convertible bond debt in July 2003, in accordance with their terms and for the repayment of long-term debt when it is economically advantageous to the Company. The Company might, when it is economically advantageous, issue new debt either under the EMTN Program or as a Bond issuance for part of the long-term debt amounts that are due in 2003. At the Company's Annual General Meeting on March 22, 2002, the shareholders approved the Board of Directors proposal for an unchanged dividend of CHF 2 per share and an extraordinary payment to the shareholders in the form of a capital reduction of CHF 1 per share. The capital reduction was in the form of a reduction in the nominal value of each common share from CHF 10 per share to CHF 9 per share. The Company paid the dividend on March 27, 2002, which amounted to CHF 134 million and paid the capital reduction on June 28, 2002, which totaled CHF 69 million. As a result of treasury stock transaction, the Company received net proceeds of CHF 344 million in 2002 compared to CHF 9 million in 2001 and a use of cash for net acquisition of treasury shares of CHF (40) million in 2000. For further details, refer to Note 17 to Consolidated Financial Statements.
FREE CASH FLOWS 2002 2001 2000 -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities ............................. 1 038 1 054 1 031 Add: Restructuring payments ......................................... 12 46 35 Less: Net cash used in investing activities .......................... (349) (334) 1 271 Add: (Sale) acquisition of business, net of cash .................... 116 144 (1 566) Less: Dividends ...................................................... (134) (132) (133) Other ................................................................ 0 1 0 -------------------------------------------------------------------------------------------------------------- FREE CASH FLOW ....................................................... 683 779 638 --------------------------------------------------------------------------------------------------------------
Free cash flow amounted to CHF 683 million in 2002 compared to CHF 779 million in 2001 and CHF 638 million in 2000. This stable result, despite the difficult economic environment, is primarily a consequence of the Company's 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 2002 proposed distributions to the Company's shareholders to be made in 2003, see the Operational Review section of this Management's 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 9 to 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, for the next one to two years, intends to maintain the Company's capital expenditure levels 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. As described above, the Company may, if and when it is economically advantageous, issue new debt either under the EMTN Program or as a Bond issuance as partial funding for the long-term debt amounts that are due in 2003. However, there can be no assurances that the debt capital markets will be available to the Company on appropriate terms. For further information on capital resources available to the Company, see Notes 13 and 14 to Consolidated Financial Statements and Supplemental Information - Capital resources - additional information" section of this Management's Discussion and Analysis. OUTLOOK 2003 In the upcoming quarters, Ciba Specialty Chemicals does not expect substantial changes in the current trading conditions. In such a challenging market environment, it is particularly important to continue to reduce the cost base by increasing operational efficiency and by adhering to strict 42 expense controls. The Company will need to compensate for around CHF 60 million in additional expenses, mainly for an increase in pension contributions and higher insurance premiums. Despite the anticipated challenging first two quarters of the year, for the full year the Company expects sales in local currencies, the EBITDA margin and net income in Swiss francs to be above the levels of 2002. With the continuous strong focus on cash generation, the Company is striving to achieve a free cash flow for 2003 in excess of CHF 600 million. These forecasts are based on the assumption of an economic recovery later in the year in the United States and, afterwards, in Europe, as well as reasonably stable currency exchange rates vis-a-vis the Swiss franc, and, as usual, the effects of potential acquisitions are not included. In addition, the Company continues to monitor developments in the geopolitical climate globally and is prepared to react accordingly. See "Cautionary Statement Regarding Forward-Looking 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 - ADDITIONAL INFORMATION The Company maintains 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 298 million as of December 31, 2002 (2001: CHF 314 million). The Company maintained a multicurrency revolving loan facility that provided for borrowings in multiple currencies up to CHF 400 million at an interest rate of London Interbank Offered Rate ("LIBOR") plus 21.5 basis points. There were no borrowings outstanding under this facility during 2002 and 2001. This facility expired on July 11, 2002. On January 24, 2003, the Company entered into a new multicurrency revolving loan facility agreement that provides for borrowings in multiple currencies up to CHF 500 million. A commitment fee of 45 percent of the applicable margin per annum, currently at 0.1125 percent, is paid on the average unused facility. The loans bear interest at an interest rate of LIBOR plus 25 basis points, subject to adjustment on a sliding scale, in the range of LIBOR plus 22.5 to 42.5 basis points, depending on the Company's Standard & Poor's and Moody's debt rating. The facility expires on January 23, 2006. As of January 31, 2003, there were no borrowings outstanding under this facility. As of December 31, 2002, the Company had available unused credit lines under its other bank overdraft and credit facilities of a total of approximately CHF 753 million (2001: CHF 1 040 million). The Company's principle commercial paper programs are in the United States and provide for short-term borrowings up to USD 1.0 billion (approximately CHF 1.4 billion). At December 31, 2002 and at December 31, 2001, no amounts were outstanding under these programs. 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, including current portions, was CHF 3 542 million as of December 31, 2002 (2001: CHF 3 680 million). The Company maintains a Euro Medium-Term Note ("EMTN") program under which the Company may issue up to USD 2.0 billion (approximately CHF 2.8 billion) multicurrency, unsecured, unsubordinated notes with a minimum maturity of one month and at fixed, floating or indexed interest rates. The Company had outstanding borrowings under this EMTN program at December 31, 2002 of approximately CHF 959 million (2001: CHF 1 009 million). As of December 31, 2002 the Company had available borrowings under this EMTN program of approximately CHF 1.9 billion. In May 2003, CHF 247 million (USD 175 million) of the these EMTN borrowings are due for repayment in accordance with its terms. Of the remaining outstanding EMTN borrowings, CHF 168 million (EUR 114 million) is due in 2005 and CHF 544 million (GBP 243 million) is due in 2013. The Company's commercial paper and EMTN programs, as described above, are uncommitted and the availability of future funds thereunder depends to a large extent on market conditions. The Company, in July 1998, issued USD 687 million (CHF 1.0 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), with the conversion price being subject to the usual adjustments. In 2001, the Company repurchased approximately CHF 91 million (USD 59 million) of these bonds, and the remaining outstanding balance will be repaid on July 10, 2003, in accordance with the terms of the bonds. The Company also has outstanding at both December 31, 2002 and 2001, CHF 1300 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 substantially complies with all such laws. For further information, see Note 22 to Consolidated Financial Statements and "Item 4. Information on the Company--Property, Plant and Equipment; Manufacturing--Environmental Matters." 43 LONG-TERM OBLIGATIONS, COMMITMENTS AND CONTINGENCIES The Company has various purchase commitments for materials, supplies and items of permanent investment incident to the ordinary course of business. These commitments are not in excess of current market prices and reflect normal business operations. The Company has outstanding at December 31, 2002, various long-term obligations that will become due in 2003 and beyond. These various purchase commitments and long-term obligations will have an effect on the Company's future liquidity and capital resources. The table below shows, by major category of commitment and long-term obligations outstanding as of December 31, 2002, the Company's current estimate of their annual maturities.
Payments by year, as from December 31, 2002 ---------------------------------------------- Less than 1 1 to 3 3 to 5 More than Total year years years 5 years ---------------------------------------------------------------------------------------------------------- Long-term debt, including current portion(1) ...... 3 492 1 208 169 2 2 113 Long-term obligations, including current portion(2) 1 665 128 153 140 1 244 Raw material purchase commitments ................... 421 171 250 - - Fixed asset and other purchase commitments 160 61 99 - - Lease commitments .....................................113 44 46 16 7 ---------------------------------------------------------------------------------------------------------- Total ............................................5 851 1 612 717 158 3 364 ----------------------------------------------------------------------------------------------------------
(1) Long-term debt shown is the face amount of the debt obligations. The amounts reported on the Consolidated Balance Sheets and in Note 14 to Consolidated Financial Statements are net of discounts and premiums, in accordance with U.S. GAAP. (2) Estimated payments for long-term obligations have been determined by the Company based on payment schedules for those long-term obligations where set payments exist. For long-term obligations with no set payment schedules, estimates have been made by the Company based on the most likely timing of cash payments based on the facts and circumstances that exist as of December 31, 2002. The ultimate timing of these future cash flows may differ due to events and circumstances that are out of the direct control of the Company. Also included is liabilities related to environmental matters, which are further discussed in Note 22 to Consolidated Financial Statements and "Item 4. Information on the Company--Property, Plant and Equipment; Manufacturing--Environmental Matters." In addition to the long-term obligations and commitments disclosed above, the Company in the normal course of business, provided guarantees to third parties. The Company estimates that the fair value of these guarantees is not material and does not expect to incur losses as a result of these guarantees. As of December 31, 2002, the Company has provided guarantees to third parties for indebtedness of others of approximately CHF 18 million of which CHF 6 million expire in 2003, CHF 10 million expire in 2004 and CHF 2 million expire in 2005. In connection with past divestments of businesses, the Company has issued certain indemnifications to the purchasers of those businesses related to the past actions of the Company in the area of compliance with environmental and tax regulations. At December 31, 2002, the Company had issued CHF 34 million of environmental indemnifications that decrease to CHF 22 million in 2008 and which expire in 2009. In addition, the Company has outstanding environmental indemnifications that were issued to the purchaser of its Performance Polymers business, which was sold in May 2000. These environmental indemnifications are further discussed in Note 22 to Consolidated Financial Statements and "Item 4. Information on the Company--Property, Plant and Equipment; Manufacturing--Environmental Matters". The Company has issued certain tax indemnifications in connection with divestments of businesses and in connection with certain debt financing arrangements of the Company, that are unlimited in amount and, in certain instances, in time. As of December 31, 2002, the Company has recorded a liability related to the environmental indemnifications in the amount of CHF 13 million (2001: CHF 13 million) and for the tax indemnifications a liability has been recorded in the amount of CHF 1 million (2001: CHF 1 million). The Company operates in countries where political, economic, social, legal and regulatory developments can 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 Consolidated Financial Statements. In the ordinary course of business, the Company is involved in lawsuits, claims, investigations and proceedings, including product liability, intellectual property, commercial, environmental, and health and safety matters. 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. For further information on commitments and contingencies, see Note 22 to Consolidated Financial Statements. EURO CONVERSION The introduction of the euro in the twelve of the fifteen member states of the European Union may continue to have an impact on the Company's operations. These potential impacts include, but are not limited to, increased cross-border price transparency and tax and legal implications (e.g. easier harmonization). Based on the Company's experiences to date, management is of the opinion that the introduction of the euro 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." TAX MATTERS 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 were initiated by Novartis against the Company 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 During 2002, the Company adopted several new accounting standards that were issued by the Financial Accounting Standards Board ("FASB"). In addition, the Company will be required to adopt certain other new accounting standards during 2003 that have been issued by the FASB as of December 31, 2002, but were not required to be adopted during 2002. For further information regarding the impact on the Company's results of operations and financial position from the adoption of the these new FASB standards in 2002 and the potential impact from the adoption of the 44 new FASB standards in 2003, refer to the discussion below and to the "Financial Review" section of this Management's Discussion and Analysis under the sub-sections "Amortization of Goodwill ceased to apply with the adoption of SFAS No. 142" and "Selling, general and administration expenses decreases". Derivative financial instruments Effective January 1, 2001, the Company adopted 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 9 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 results of operations and financial position in either 2002 or 2001. Goodwill and intangible assets In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets". The Company fully adopted SFAS No. 142 effective January 1, 2002. An initial impairment test of goodwill was required to be performed as of January 1, 2002. The Company completed the initial impairment test and determined that its reported goodwill was not impaired. SFAS No. 142 requires that goodwill acquired in a business combination be capitalized at acquisition cost and requires that goodwill no longer be amortized to earnings. On an annual basis, the Company is required to evaluate the book value of goodwill at the reporting unit level for impairment using a two step impairment test. Other identifiable intangibles will continue to be amortized to earnings over their estimated useful lives. The amortization of goodwill ceased upon adoption of SFAS No. 142. The standard was 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 was 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. During 2002, the Company completed the annual impairment test of goodwill and determined that its reported goodwill is not impaired. In connection with past acquisitions, the Company in prior years had included, for financial reporting purposes, goodwill and certain identifiable intangible assets in the same balance sheet caption. SFAS No. 141 and SFAS No. 142 required the carrying amount of identifiable intangible assets to be stated separately from goodwill on the balance sheet. The amounts reported for 2001 have been reclassified to conform to the 2002 presentation. For a reconciliation of previously reported 2001 and 2000 financial information to the adjusted basis amounts excluding goodwill amortization, which is no longer required under SFAS No. 142, see Note 1 to Consolidated Financial Statements. 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 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 August 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 as required adopted this standard as of January 1, 2002. The adoption did not have an effect on the Company's 2002 results of operations and financial position. Rescission of FASB Statements No. 4, 44, and 64, amendments to SFAS No. 13, and technical corrections In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". The rescission of SFAS No. 4 and SFAS No. 64 eliminates the requirement to report material gains and losses from the extinguishment of debt as an extraordinary item in the statement of income that are not unusual or infrequent in nature. The rescission of SFAS No. 44 does not impact the Company. The Company is required to adopt the provisions of these rescissions as of January 1, 2003 and does not expect the adoption to have a material effect on the results of its operations and financial position. The amendment to SFAS No. 13 "Accounting for Leases" eliminated an inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company is required to and has adopted these provisions for transactions occurring after May 15, 2002. There was no impact on the Company's results of operations and financial position upon adoption. Certain other existing authoritative pronouncements have been amended to make various technical corrections, clarify meanings, or describe their 45 applicability under changed conditions. The Company is required to adopt these provisions as of January 1, 2003 and does not expect the adoption to have a material effect on the results of its operations and financial position. Accounting for costs associated with exit or disposal activities In June 2002, the FASB issued SFAS No. 146 "Accounting for Cost Associated with Exit or Disposal Activities" which addresses the accounting for restructuring and similar costs. This standard supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This standard requires that a liability associated with an exit activity that does not involve a newly acquired company in a business combination, or a disposal activity covered by SFAS No. 144, be recognized when the liability is incurred instead of recognizing the liability at the date of a company's commitment to an exit plan, as was required under EITF Issue No. 94-3. The statement establishes that the fair value of the liability is the objective for initial measurement of the liability and requires that the liability be updated for any changes in its fair value each reporting period. With respect to one-time employee termination costs, SFAS No. 148 changed the accounting in situations where the employee to be terminated is required to render service between the notification date of their termination and the date the employee will be terminated in order to receive any termination benefits. For these situations when the required post-notification service period extends beyond the minimum retention period required by local law, the fair value liability will be amortized over the service period. The Company is required to adopt this new standard for any exit or disposal activities that are initiated after December 31, 2002. The impact of the adoption of SFAS No. 146 on the Company's future financial position or results of operations will depend upon the timing of and facts underlying any future exit or disposal activities. Accounting and disclosure for guarantees In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by it in issuing the guarantee. It also expands the disclosure requirements in the financial statements of the guarantor with respect to its obligations under certain guarantees that it has issued. The Company is required to adopt the initial recognition and initial measurement accounting provisions of this interpretation on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not anticipate the adoption to have a material effect on the Company's financial position or results of operations. The disclosure requirements are required to and have been adopted by the Company as of December 31, 2002 (see Note 22 to Consolidated Financial Statements). Stock based compensation Effective January 1, 2003, the Company will adopt the fair value method of accounting for stock option plans as defined in SFAS No. 123 "Accounting for Stock-Based Compensation." As a consequence, future employee stock option grants and other stock based compensation plans will be recorded as an expense over the vesting period of the award based on their fair values at the date the stock based compensation is granted. The FASB has issued, in December 2002, SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment to FASB Statement No. 123" that allows companies adopting the fair value method permitted under SFAS No. 123 to choose from three alternative transition methods. The Company has elected to adopt the modified prospective method that recognizes stock based compensation expense from January 1, 2003 as if the fair value based accounting method had been used to account for all outstanding unvested employee awards granted, modified or settled in prior years. The ultimate impact on the future years' results of operations and financial position will depend upon the level of stock-based compensation granted in future years. Assuming no additional stock based compensation grants are made in 2003 and no additional forfeitures of outstanding unvested grants, the Company estimates the additional compensation expense associated with its current outstanding awards will be CHF 5 million in 2003, CHF 3 million after tax, and CHF 1 million in 2004, CHF 0.6 million after tax. SFAS No. 148 also amends certain annual disclosure provisions of SFAS No. 123. The Company has adopted these disclosure requirements in 2002, as permitted in accordance with the statement. SFAS No. 148 also requires the disclosure in interim financial statements the pro forma net income and earnings per share determined as if the Company had used the fair value method of accounting for its stock based compensation plans in accordance with the fair value method for all periods for which it has not been applied. Previously this pro forma disclosure was only required for annual financial statements. For the pro forma net income and earnings per share of the Company for 2002, 2001 and 2000 determined as if the Company had used the fair value method of accounting for its stock based compensation plans, see Note 18 to Consolidated Financial Statements. In 2002 and prior years, the Company has applied the disclosure-only provisions of SFAS No. 123 in accounting for its stock-based compensation plans that permitted the application of the intrinsic value method, as defined in Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. Under APB Opinion No. 25, the Company recognized no compensation expense related to certain stock based compensation plans, as certain stock options have been granted at a price equal to the market price on the day of the grant and the discount offered under its employee share ownership plan was at a discount rate permitted without requiring compensation costs to be recorded. 46 YEAR IN REVIEW - 2001 COMPARED TO 2000 -------------------------------------- 2001 2000 ----------------------------------------------------------------------------- RESULTS OF OPERATIONS 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 ----------------------------------------------------------------------------- OTHER DATA Operating income ........................................ 761 876 Depreciation and amortization of other intangible assets . 408 406 Amortization of goodwill.................................. 61 64 ----------------------------------------------------------------------------- EBITDA.................................................... 1 230 1 346 Restructuring and special charges, net .................. 0 2 ----------------------------------------------------------------------------- EBITDA, before restructuring and special charges ......... 1 230 1 348 ----------------------------------------------------------------------------- Operating cash flows 1 054 1 031 Operating cash flows, before restructuring payments(2) .. 1 100 1 065 Free cash flow(3) ....................................... 779 638 ----------------------------------------------------------------------------- Net debt(4) ............................................. 2 351 2 983 Shareholders' equity at year end ........................ 3 908 3 754 Dividend per share(5) ................................... 2.00 2.00 Capital reduction per share(5) .......................... 1.00 - ----------------------------------------------------------------------------- RESULTS OF OPERATIONS AS ADJUSTED EXCLUDING GOODWILL AMORTIZATION(1) Operating income ....................................... 822 940 Income from continuing operations ...................... 441 482 Net income 443 520 Basic and diluted earnings per share: Income from continuing operations per share ............ 6.64 7.27 Net income per share ................................... 6.68 7.83 ----------------------------------------------------------------------------- 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% ----------------------------------------------------------------------------- (1) Effective January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets, which requires that goodwill no longer be amortized to earnings. For comparison purposes to the 2002 reported results, the results of operations on an adjusted basis, excluding goodwill amortization, for the year 2001 and 2000 are shown in the table above in the "Results of operations as adjusted excluding goodwill amortization" section (see Note 1 to Consolidated Financial Statements). (2) Restructuring payments were CHF 46 million in 2001 and CHF 35 million in 2000. (3) For the calculation of free cash flow see the corresponding table in section "Year in Review - 2002 Compared to 2001 - Liquidity and Capital resources" above in this Management's Discussion and Analysis. (4) For the calculation of net debt in 2001 see the corresponding table in section "Year in Review - 2002 Compared to 2001 - Consolidated balance sheets" in this Management's Discussion and Analysis. Net debt for 2000 is calculated as total debt of CHF 4 230 less cash and cash equivalents of CHF 1 179 million, less short-term investments of CHF 68. (5) For 2001, the shareholders approved, at the Annual General Meeting on March 22, 2002, the Board of Directors proposal for an unchanged dividend of CHF 2 per share and an extraordinary payment to the shareholders in the form of a capital reduction of CHF 1 per share. The capital reduction was in the form of a reduction in the nominal value of each common share from CHF 10 per share by CHF 1 per share to CHF 9 per share. The Company paid the capital reduction on June 28, 2002 and the 2001 dividend was paid on March 27, 2002. The 2000 dividend, based on 2000 results, was paid on March 28, 2001. 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 47 economic crisis. In the Asia-Pacific region, the Japanese market had 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 implemented 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 and is expected to be completed during 2003. Decisive and timely action protected 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 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 continued 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 in 2003 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 enhanced 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 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 improved to 9.18 from 6.47 in 2000. The Company optimized 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. 48 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 proposed 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 proposed 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' was proposed in the form of a capital reduction of CHF 1 per share. The capital reduction proposed was in the form of a reduction in the nominal value of each common share from CHF 10 per share to CHF 9 per share. The 2001 dividend and capital reduction were both approved at the shareholders' meeting on March 22, 2002. The 2001 dividend was paid on March 27, 2002 and the capital reduction was paid on June 28, 2002. FINANCIAL REVIEW Sales declined 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 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 reflected 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 the regions North, Central and South America. (2) Asia Pacific is comprised of the regions 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 decreased 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 improvementwas achieved as a result of the Company's continuous efforts to streamline its operational structures. Cost savings and headcount reductionswere 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 implemented other targeted cost control programs thatwere 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 49 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. Continued 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'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 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 continued 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 remained 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 no longer amortize any goodwill to earnings, but instead is 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 "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 decreased 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 was 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. 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. 50 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 2001 restructuring programs and special charges refer to the discussion above in the section "Year in Review - 2002 Compared to 2001 - Financial Review - Restructuring and special charges, net" of this Management's Discussion and Analysis. 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 9 to 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. In 2002, the Company completed all of its outstanding restructuring programs that were announced in prior years. For further information, see Note 12 to Consolidated Financial Statements. 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 through continuing innovation and close customer partnerships. Continued 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 .................................. 275 319 As a percentage of sales (EBIT margin) ........... 15.0% 16.3% 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 continued at the level of approximately 4 percent of sales. 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)% ------------------------------------------------------------------------- 51 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. 2001 2000 ------------------------------------------------------------------------- OPERATING INCOME (EBIT) Absolute in CHF ............................. 312 371 As a percentage of sales (EBIT margin) ...... 16.1% 17.5% 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 continued 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. 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. 2001 2000 -------------------------------------------------------------------------- OPERATING INCOME (EBIT) Absolute in CHF ....................................... 65 92 As a percentage of sales (EBIT margin) ................ 4.4% 5.9% 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 actionswere 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. 52 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. 2001 2000 -------------------------------------------------------------------------- Operating income (EBIT) Absolute in CHF ............................. 181 204 As a percentage of sales (EBIT margin) ...... 10.8% 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. The impact from the productivity improvement initiatives together with the 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. 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. 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% -------------------------------------------------------------------------- 53 Operating income and EBITDA increased both in absolute and intensity terms. Stable volumes and a continued 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. 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, continued to monitor its currency exposures and, where appropriate, 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 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 was 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 were 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 CHF 844 million in 2000. When economically feasible, the Company also selectively retired 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. 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", as amended. Upon adoption, 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, refer to the discussion above in the section "Year in Review - 2002 Compared to 2001 - Treasury Management and "Supplemental Information - Change in accounting policy and new accounting standards" of this Management's Discussion and Analysis as well as Notes 1 and 9 to Consolidated Financial Statements. 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. 54 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. DISCONTINUED OPERATIONS - PERFORMANCE POLYMERS BUSINESS SOLD Divestment underscored 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. The administrative service contracts have expired and were not 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. 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 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 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. 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. 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. For further information, refer to Note 3 to Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations 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 this Management's Discussion and Analysis of Financial Condition and Results of Operations with regard to trends, revenues, costs, net income, accounting policies, market size, market share, market demands, volumes, prices, margins, research and development, capital expenditures, cash flows, debt levels, patents, outlook 2003, 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. All forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. 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." 55 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 in the capital markets 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 MARGIN is operating income (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 a pro forma dividend payment of CHF 2 per share. 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 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 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. INTENSITY is an amount 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 or a prepaid asset has been recognized 56 for these plans. This additional minimum pension liability has no impact on income as it is offset by recording an intangible asset, if certain conditions are met, and by reducing shareholders' equity. 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 local currencies 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. OPERATING CASH FLOWS BEFORE RESTRUCTURING PAYMENTS is net cash provided by operating activities before restructuring payments. 57 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES CORPORATE GOVERNANCE THE BOARD OF DIRECTORS AND ITS COMMITTEES The Board of Directors of Ciba Specialty Chemicals defines the strategic direction and supervises the overall affairs of the Company, while the implementation of strategies and the day-to-day management is vested in the Executive Committee. The Board also reviews the Company's key plans and objectives, identifies external risks and opportunities, and initiates required activities. The Members of the Board are elected by the General Meeting of Shareholders for a term of between one and four years; a re-election is possible. The Company has a staggered board. The Chairman is elected by the Board from its members. A Board Member may tender his or her resignation during the term of his or her office. The Shareholders' Meeting may vote to remove a Board Member. The Board continues to commit itself to maintaining the highest standards of integrity and transparency in its governance of the Company. The Board charter reflects recent developments in corporate governance principles including the Swiss Code of Best Practice and the Board believes that it is in compliance with well recognized corporate governance standards, in particular with regard to: o A Lead Director having been appointed by the Board who is entitled to convene on his own and chair meetings of the Board o Broad supervisory and reviewing powers being held by the Board directly supported by Internal Audit o With the exception of the Chairman, the Members of the Board both being non-executive directors and independent from the Company o Having Board Committees with a majority of non-executive, independent directors o Having an Audit Committee exclusively comprised of outside directors o Providing continuous and comprehensive information to Board members including periodic and yearly reports prepared by management on finances, strategies, research and development, production planning and risk management TOPICS OF THE BOARD IN 2002 In 2002, the Board focused on the following key topics besides the overall supervision of the Company's affairs and the preparation of the annual accounts and the General Meeting of the Shareholders: global production, product stewardship, supply chain, corporate governance including implications of the U.S. Sarbanes-Oxley Act on the Company, performance review of board members, management development, development of the sales and the capital markets, outlook and strategic analysis of the Company's segments. DIRECTORS The members of the Board of Directors are as follows:
Year Year Significant Date of appointed term positions outside Name Birth Nationality to Board expires the Company - ---------------------------------------------------------------------------------------------------------------------------- Armin Meyer July 25, 1949 Swiss 1997 2004 Member of the Board of Chairman and CEO Directors, Zurich Financial Services, Zurich Member of the Board, CEFIC (European Chemical Industry Council), Brussels Member Foundation Board IMD - International Institute for Management Development, Lausanne - ---------------------------------------------------------------------------------------------------------------------------- Kurt Feller August 31, 1937 Swiss 1999 2003(1) Chairman of the Board of Vice Chairman Directors, Rieter Lead Director Holding Ltd., Winterthur Chairman of the Board of Directors, Geberit Ltd., Jona Member of the Board of Directors, Scintilla Ltd., Solothurn Member of the Board of Directors, Buro-Furrer Ltd., Zurich - ---------------------------------------------------------------------------------------------------------------------------- Erwin W. Heri March 6, 1954 Swiss 1997 2003(1) Consultant in Finance and Asset Management Member of the Board of Directors, Hilti Ltd., Schaan Chairman of the Board of Trustees, Anlagestiftung Winterthur, Winterthur Member of the Board of Trustees, Publica, Pensionskasse des Bundes, Bern - ---------------------------------------------------------------------------------------------------------------------------- Gertrud Hoehler January 10, 1941 German 1997 2004 Management Consultant Member of the Board of Directors, Baloise-Holding, Basel Member of the Board of Directors, Georg Fischer Ltd., Schaffhausen - ---------------------------------------------------------------------------------------------------------------------------- Jean-Marie Pierre September 30, 1939 French 1997 2006 Professor of Chemistry, Nobel Lehn Prize Winner Member of the Scientific Advisory Board of Aventis, Strasbourg Member of the Scientific Board of the Novartis Venture Fund, Basel - ---------------------------------------------------------------------------------------------------------------------------- Peter Littmann Dec. 21, 1947 German 1997 2006 Chairman and Chief Executive Officer, Brandinsider GmbH, Hamburg Member of the Board of Directors, Compass Ltd. (Bata Shoe Company), Toronto Member of the Advisory Board, Nijenrode University, The Netherlands Member of the Harvard University Art Museum's Visiting Committee, Cambridge, Massachusetts - ----------------------------------------------------------------------------------------------------------------------------
58
Year Year Significant Date of appointed term positions outside Name Birth Nationality to Board expires the Company - ---------------------------------------------------------------------------------------------------------------------------- Uli Sigg April 29, 1946 Swiss 1999 2003(1) Chairman of the Board of Directors, Ringier Group Member of the Board, Infront Holding AG - ---------------------------------------------------------------------------------------------------------------------------- Hans-Ulrich Mueller June 25, 1941 Swiss 1997 - Member of the Board of SGCI (Secretary, not member (Schweiz. Gesellschaft fuer of the Board) Chemische Industrie), Zurich - ----------------------------------------------------------------------------------------------------------------------------
(1) At the Company's Annual General Meeting of Shareholders to be held on March 6, 2003, Messieurs Feller, Heri and Sigg are proposed to be re-elected as Members of the Board for an additional term of four years. With the exception of Armin Meyer, who is also CEO of Ciba Specialty Chemicals, all other Board Members are both non-executive directors and independent from the Company. More biographical details of the Board Members are available at the Company's website, www.cibasc.com/view.asp?id=1726. None of the non-executive directors has ever been a member of the management of the Company or any of its subsidiaries and none of them has or had a substantial business relationship with the Company or any of its subsidiaries in the last four financial years. There is no cross-involvement among the boards of directors of the Company and other listed Swiss companies. There are no service contracts between any director and the Company providing for benefits upon termination of employment. Four standing Board Committees in the areas of audit, finance, human resources and compensation and nomination provide 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, approves auditing services to be performed by the external 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 specific laws and regulations governing the preparation and filing of financial statements. The Audit Committee reviews complaints regarding accounting, internal accounting controls or auditing matters of employees. o FINANCE COMMITTEE: Armin Meyer (chairman), Kurt Feller, Erwin W. Heri Mission: Develops principles for financial planning, accounting and 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 and 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 resource 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 resource policy and supports the preservation and enhancement of the Company's reputation in the Human Resources area. The Compensation Committee assesses the emoluments of the members of the Board and its Committees and prepares a request to the Board concerning the emoluments and the terms of employment of the CEO and the members of the Executive Committee. The Lead Director is the chairman of the Human Resources and Compensation Committee. o NOMINATION COMMITTEE: Armin Meyer (chairman), Gertrud Hoehler, Peter Littmann, Kurt Feller Mission: Develops the principles for the selection of candidates for election or re-election to the Board by the General Meeting and prepares a selection of candidates in accordance with these criteria. The Nomination Committee nominates the candidates for the appointments made by the Board. The chairman of the Board is the chairman of the Nomination Committee. The Company's "Rules governing the Organization" and committee Charters set out in detail the powers and responsibilities of the Board and its Committees. In order for the Board and its Committees to pass resolutions, at least half of its Members must be personally present, which may be deemed satisfied if simultaneous communication is ensured, such as by telephone or video conference. The full Board meets at least 6 times per year. 59 THE COMPANY'S EXECUTIVE COMMITTEE
Date of Significant positions Name Birth Nationality Function outside the Company - --------------------------------------------------------------------------------------------------------------------------------- Armin Meyer July 25, 1949 Swiss Chief Member of the Board of Directors, Executive Officer Zurich Financial Services, Zurich Member of the Board of CEFIC (European Chemical Industry Council), Brussels Member of the Foundation Board IMD-International Institute for Management Development, Lausanne - --------------------------------------------------------------------------------------------------------------------------------- Michael Jacobi January 30, 1953 German Chief Member of the Board of Financial Officer Industrie-Holding, Berne Member of the commission and of the committee of Swiss GAAP, FER, Zurich - --------------------------------------------------------------------------------------------------------------------------------- Brendan Cummins May 18, 1951 Irish Executive None Vice President International Coordination and Human Resources - --------------------------------------------------------------------------------------------------------------------------------- Martin Riediker June 28, 1952 Swiss Chief Member of the Board, Technology Officer American Chemistry Council, Arlington - --------------------------------------------------------------------------------------------------------------------------------- Hermann Angerer Dec. 23, 1947 Swiss Head None Segment Coating Effects - --------------------------------------------------------------------------------------------------------------------------------- Christoph Biedermann March 19, 1957 Swiss Head None Segment Textile Effects - --------------------------------------------------------------------------------------------------------------------------------- Mark Garrett May 11, 1962 Australian Head Member of the Board of TEGEWA Segment Water & Industry Association, Frankfurt am Main Paper Treatment - --------------------------------------------------------------------------------------------------------------------------------- Felix Meyer Feb. 18, 1953 Swiss Head None Segment Plastic Additives - --------------------------------------------------------------------------------------------------------------------------------- Tim Schlange January 15, 1963 German Head None Segment Home & Personal Care - --------------------------------------------------------------------------------------------------------------------------------- Mr. Armin Meyer and Mr. Felix Meyer are not related.
ARMIN MEYER became Chairman of the Board of Ciba Specialty Chemicals in autumn 2000. Starting January 1, 2001, he in addition took over as Chief Executive Officer. He streamlined the Company structure and shifted priority targets to profitable growth, innovation, highly qualified people as well as cash generation. He has been a Member of the Board of the Company since its spin-off in 1997. Previously Armin Meyer was Head of the global Building Technologies Segment of ABB Ltd. As of 1995, he was a member of the Executive Committee of ABB, a global technology Group. Armin Meyer started his career in 1976 when he joined the former Brown Boveri Ltd. (BBC) as development engineer. In 1980 he became Head of Research and Development for industrial motors and took over as Head of the international business unit for electrical power generators in 1984. Further steps included the presidency of ABB Drives Ltd. as well as of ABB Power Generation Ltd. In 1995, he became Head of the Power Generation Segment. In 1998, he took over as Head of the Building Technologies Segment. Armin Meyer, born 1949 in Zurich, Switzerland, holds a Ph.D. in electrical engineering from the Swiss Federal Institute of Technology (ETH) in Zurich. In addition to his responsibilities at ABB, Armin Meyer was also Professor for Electrical Engineering and Drives at ETH, Zurich for twelve years. MICHAEL JACOBI joined Ciba-Geigy's finance area in 1978. In 1980, Michael Jacobi moved to Brazil as Corporate Controller and later was appointed Treasurer. In 1986, he moved to the United States where he led the financial department at the Toms River Plant in New Jersey. After further management training at Harvard, he returned to the Finance department in Basel in 1987 as Head of Management Accounting. He became Group Controller of Ciba-Geigy in 1990, responsible for the Company's overall corporate financial accounting and reporting. In 1997, he was appointed Chief Financial Officer for Ciba Specialty Chemicals, responsible for Treasury, Mergers and Acquisitions (M&A), Investor Relations, Control and Information Management. Michael Jacobi serves on the Council of the Foundation for Accounting and Reporting Recommendations and plays a significant role in setting Swiss guidelines for accounting and disclosure. He has a doctorate in Economics from the university of St. Gallen. BRENDAN CUMMINS was appointed head of International Coordination and Human Resources on December 1, 2001. Brendan Cummins joined Ciba-Geigy in Ireland in 1971 as an Accountancy Student. In 1974, he assumed the position of Planning and Information Manager in Ireland. In 1979, he moved to Ciba-Geigy Singapore as Treasury Head and, in 1981, was appointed Head of Finance and Administration South East Asia. In 1984, he transferred to Hong Kong as Head of Finance and HR North Asia with project responsibility for China. In 1990, he moved to Philippines as Head of Pharmaceutical Division and later that year was appointed in combination Group Company Head. In 1994, he transferred to the UK as Head of Finance and HR of Ciba-Geigy Horsham. In 1995, he returned to the Far East as Group Company Head China and, in 1997, assumed the position of Regional President Greater China for Ciba Specialty Chemicals. In 1999, he moved to Basel and was appointed Global Head of Whiteners and, in 2000, he established and headed the Global Business Unit Home & Personal Care. In 2001, he worked for Irish Fertilizer Industries as Managing Director. He has a degree in accounting and is a Fellow of The Institute of Company Accountants. 60 MARTIN RIEDIKER was appointed Chief Technology Officer in 2001. Martin Riediker joined Ciba-Geigy in 1982 as a photochemist in central research at Ciba-Geigy in Basel. In 1988, he moved to the United States as Vice President, Research and Development (R&D) for the Polymers Division and was later appointed Vice President and General Manager of the North American Resins Business Unit in 1991. He was named Head of Ciba's US Polymers Division in 1994. Riediker was named as Global President of the Consumer Care Division in 1995. He also took direct charge of the Detergents and Cosmetics Business Units. In 1997 he was named Global President of the Consumer Care Division and member of the Executive Committee of Ciba Specialty Chemicals. Mr Riediker has a Doctorate in Chemistry and did Post-Doctoral Studies at Princeton University. HERMANN ANGERER was appointed Head of Coating Effects Segment in 2001. He joined Ciba-Geigy Limited in 1981 as a development chemist in the Additives Division in Basel. In 1985, he assumed the global marketing responsibility for radiation curing additives in the Business Unit Imaging and Coating Additives. In 1990, he was appointed Head of the Business Unit Additives for Lubricants. In 1996, he moved to Japan as Head Additives Division, responsible for the markets in Japan and South Korea. In 1999, he moved to Germany, responsible for the German holding company of Ciba Specialty Chemicals and the Additives Division in the Central Europe region. Mr Angerer holds a Ph.D. in Chemical Engineering from the Swiss Federal Institute of Technology Zurich. CHRISTOPH BIEDERMANN was appointed Head of Textile Effects Segment in 2001. From 1982 to 1985, Christoph Biedermann worked for ABB as Project Engineer in Switzerland and Commissioning Engineer in South Africa. From 1986 to 1989, he was Associate and Project Manager at McKinsey in Zurich, Switzerland. In 1990 he joined ABB Drives AG as Manager of High Power Semiconductors. In 1991 he was appointed Manager of Electrical Machines. From 1994 to 1997, he was Manager Business Unit Total Optimization of Processes at ABB Business Area Automation & Drives. In 1997, Christoph Biedermann was appointed President of ABB Industrie AG Switzerland. Since 1999, he was also a member of the Management Committee ABB Switzerland, responsible for the Segment Automation. Mr Biedermann holds a Diploma in Electrical Engineering from the Swiss Federal Institute of Technology, Zurich and has an MBA from INSEAD, Fontainebleau, France. MARK GARRETT was appointed Head of the Water & Paper Treatment Segment in 2001. He joined Ciba-Geigy in Australia in 1986 and worked there as Information and Planning Manager. In 1989, he moved to the Swiss headquarters in Basel, working in Finance and as Marketing Center Manager and Business Development Manager. In 1995, he became head of the Business Unit Paper and in 1996 he was appointed Global Head of the Business Segment Whiteners. In 1998, Garrett became Global Head of the Business Unit Textile Chemicals where he successfully integrated three textile chemical businesses into one Business Unit that became a worldwide leader in its field. Garrett joined DuPont from Ciba Specialty Chemicals in September 2000, initially as Director Corporate Plans before becoming the Global Business Director Tyvek/Typar. Mark Garrett holds the following degrees: Bachelor of Arts, Economics, University of Melbourne, Melbourne, and Master of Applied Information Systems, Royal Melbourne Institute of Technology, Melbourne, Australia. FELIX MEYER was appointed Head of the Plastic Additives Segment in 2001. Felix Meyer joined Ciba-Geigy Limited in 1981 as Marketing Specialist for Polymer Additives and was appointed Head of Marketing for Polyolefin Additives in 1984. In 1987, he became Product Manager for Antioxidants, was promoted in 1990 to Head of Business Product Management and then to Head of Strategic Affairs, Additives Division in 1993. From 1994 to 1996 he was responsible for Purchasing and Materials Management and was a member of the Executive Committee of Ciba Additives GmbH in Lampertheim, Germany. In 1996, he assumed responsibility as Global Head of the Business Unit Polymer Additives and member of the Management Committee Additives Division. Mr Meyer has a Diploma in Chemical Engineering and a Ph.D. in Physical Chemistry from the Swiss Federal Institute of Technology, Lausanne. TIM SCHLANGE joined Ciba-Geigy's Corporate Planning staff in 1992. In 1994, Schlange assumed a marketing and sales position with Ciba Vision. In 1996, he began as Head of the Market Center Basic Polyolefins in a global marketing role for the Polymer Additives Business Unit. In 1999, he was appointed Transition Manager for the project management of the divestment of the Performance Polymers Division. In 2000, he headed Strategic Business Development for the Consumer Care Division. Since 2001, he has been Head of the Home & Personal Care Segment. He has a doctorate in Economics from the university of St. Gallen. There are no management agreements between the Company or its management bodies and any third parties. So as to promote honest and ethical conduct, legal compliance, prompt internal reporting, accountability, full, fair, accurate, timely, and understandable disclosure in public reports, the Company relies on its "Rules governing the Organization", its "Code of Conduct", its "Social Policy Statement" and its "Insider Trading Policy" as well principles of Swiss law which require an employee to behave honestly and in an ethical way. In management's opinion, all these rules amount to a "Code of Ethics". COMPENSATION NON-EXECUTIVE MEMBERS OF THE BOARD In 2002, the non-executive members of the Board in aggregate received as remuneration, bonuses and other benefits a total of CHF 691 008. In addition, they were given 3 831 Shares by the Company and held a total of 18 330 Shares as at December 31, 2002 (including those allocated in 2002). 61 In addition, these persons have been given the following options by the Company:
Year Term of allocation (years) Subscription ratio Number Strike price (CHF) - ---------------------------------------------------------------------------------------------------------------------------- 1997 8 1:1 23 632 108.70 1998 5 1:1 3 284 163.70 1999 5 1:1 4 108 112.09 2000 5 1:1 2 562 107.09 2001 5 1:1 6 892 111.09 2002 5 1:1 9 280 111.09 - ----------------------------------------------------------------------------------------------------------------------------
EXECUTIVE MEMBER OF THE BOARD AND MEMBERS OF THE EXECUTIVE COMMITTEE In 2002, the executive member of the Board and the members of the group Executive Committee in aggregate received as salaries, bonuses and other benefits inclusive any voluntary company pension contributions a total of CHF 7 795 438. In addition, they were given 28 330 Shares by the Company (of which most are restricted) and held a total of 67 745 Shares as at December 31, 2002 (including those allocated in 2002).
Year Term of allocation (years) Subscription ratio Number Strike price (CHF) - ---------------------------------------------------------------------------------------------------------------------------- 1997 8 1:1 63 624 108.70 1998 5 1:1 18 613 163.70 1999 5 1:1 28 970 112.09 2000 5 1:1 23 549 107.09 2001 5 1:1 65 672 111.09 2001 4y and 10.5 Supplementary grant months 1:1 19 572 111.09 2002 5 1:1 135 640 111.09 - ----------------------------------------------------------------------------------------------------------------------------
HIGHEST TOTAL COMPENSATION In 2002, the member of the Board with the highest total compensation received as salary, bonus and other benefits inclusive any voluntary Company pension contributions a total of CHF 2 641 271. In addition, in 2002, this person was allocated 5 965 restricted Shares, 2 232 unrestricted Shares and 31 000 options (terms as indicated above). ADDITIONAL FEES AND LOANS None of the above mentioned persons has received any fees or any compensation for services rendered to the Company during 2002 other than disclosed in this report, nor have they been extended any loans. FORMER MEMBERS Four former executive members of the Company's Board and of the group management have received a total compensation of CHF 2 568 313 in 2002. This amount includes contributions in the form of Shares and options and voluntary Company pension contributions. It also includes the salary paid to former Executive Committee members who became employees of the Company. CLOSELY LINKED PERSONS The Company has never made any share or cash contribution to any Closely Linked Person, i.e. to a third party which is closely linked to members of the board or to members of the group Executive Committee. However, they may have acquired Shares of the Company or options on their own. Also, the Company never paid any fees to such persons nor has it granted them any loans. Shareholdings of Closely Linked Persons - if any - are included in the figures reported above. Base salaries of the Members of the Board and of the Executive Committee 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, established at the beginning of the year. THE COMPANY'S SHARES AND SHAREHOLDERS The Company's nominal share capital amounts to CHF 649 171 053 and is divided in 72 130 117 shares with a nominal value of CHF 9 each. Until June 28, 2002, the nominal value per share amounted to CHF 10. The Board of Directors proposes to the shareholders of the Company to further reduce the Company's share capital from CHF 649 171 053 by CHF 216 390 351 to CHF 432 780 702 by reducing the nominal value of each of the Company's Shares from CHF 9 by CHF 3 to CHF 6 and by making a cash payment to the Company's shareholders of CHF 3 per Share. The shareholders will vote on this proposal at the Company's General Meeting of Shareholders on March 6, 2003. For the Company's major subsidiaries, see Item 4 "Information on the Company - Organizational Structure". The Company only has one class of shares and has no bonus certificates. Each share is entitled to any dividends proposed by the Board and approved by the shareholders, and has one vote, subject to the limitations set out below. The Company has an authorized capital of CHF 36 million, conditional capital for acquisitions of CHF 36 million and conditional capital for employee participation plans of CHF 18 million. For additional 62 information please refer to article 4 of the Company's Articles of Association which can be downloaded as a pdf file from http://www.cibasc.com/image. ASP?ID=1704. The German version - which is legally binding - can be downloaded from http://www.cibasc.com/image.ASP?ID=1705. For changes in capital, see Note 17 to the Consolidated Financial Statements. For information about the Company's major shareholders see Item 7 "Major Shareholders and Related Party Transactions - Major Shareholders". The Company has no cross holdings nor has it executed any pooling or management agreements. 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. In 2002, the Board granted no such exception and currently no shareholder has the benefit of any such exception. For purposes of the 2 percent rule, individuals and/or legal entities acting in concert are considered to be one shareholder. Nominees may be entered with the right to vote for more than 2 percent of the voting stock, if the nominee discloses the names, addresses and number of shares of those persons for which it holds the shares. For information about the Company's treasury stock, see Note 17 to the Consolidated Financial Statements and the Consolidated Balance Sheets. At the Company's general meeting, no person may vote more than 5 percent of the Company's stock, with the exception of depositaries, corporate bodies, independent proxies or nominees complying with their duty to disclose the names, addresses and number of shares of those persons for which it holds the shares. Any shareholder may demand that an item be put on the agenda of the general meeting if he represents shares held with a nominal value of at least CHF 1 million. Such a demand must be made in writing at least 60 days before the Annual General Meeting ("AGM"). In line with good Corporate Governance, the Board proposes to the shareholders to reduce the above threshold amount to CHF 600 000, so as to ensure that 100 000 Shares are sufficient to have an item put on the agenda. The shareholders will vote on this proposal at the Company's General Meeting of Shareholders on March 6, 2003. The record date for participation at the AGM is usually fifteen days before the general meeting while persons who have subsequently become shareholders may register their voting rights at the AGM Office if the shareholder can prove that he or she is the owner of the shares and that these shares are not being voted otherwise. There is no provision in the Articles or under Swiss law requiring a presence 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 the elimination of transfer restrictions, (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. 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. Under Swiss law, dividends may be 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 22, 2002, a dividend of CHF 2 per Share was approved in respect of the fiscal year 2001. In addition, the shareholders approved a capital reduction of CHF 1 per Share and a cash payment of the same amount to the shareholders. For 2002, the Board proposes to the shareholders to carry forward the entire retained earnings, not to pay a dividend and to make a cash payment of CHF 3 per share from a capital reduction. The shareholders will vote on this proposal at the Company's General Meeting of Shareholders on March 6, 2003. EQUITY LINKED DEBT The Company has a USD 687 milllion convertible bond outstanding. The bond matures on July 10, 2003. For details see Note 14 to Consolidated Financial Statements. 63 SHARE AND OPTION PLANS The Company's share and option plans are further described in Note 18 to Consolidated Financial Statements. CHANGE OF CONTROL PROVISIONS If a shareholder acquires securities of a listed Swiss company and thereby exceeds the threshold of 33 1/3 percent of the voting rights, it has to offer to acquire the remaining shares ("mandatory offer obligation"). By shareholders' resolution, this threshold may be raised to 49 percent ("opting up"). A company may also opt out of the mandatory offer obligation. In its articles of association, the Company has no opting out or opting up provision. All members of the Company's Executive Committee have an "employee retention agreement" with the Company which enables them to be involved in a transaction with a third party that considers to take over the Company in a way which does not affect their status as employees. AUDITORS Effective August 6, 2002, Ciba Specialty Chemicals Holding Inc., Basel, replaced its statutory and group auditors Arthur Andersen AG, Zurich, with Ernst & Young Ltd, Zurich, to implement a resolution taken by its shareholders on March 22, 2002. This resolution was taken in anticipation of Arthur Andersen's inability to safeguard the Company's interests. Ernst & Young Ltd's lead audit partner, Eric Ohlund, who had formerly been with Arthur Andersen AG, has supervised the Company's audit since 1997. The audit fees paid by the Company in 2002 to Ernst & Young and to Arthur Andersen amounted to CHF 3.3 million. In addition, the Company paid CHF 2.3 million to Ernst & Young and to Arthur Andersen for other services in 2002. The auditors of the Company are present at those Board meetings during which the annual accounts of the Company are discussed and the items and proposals to the general meeting of the shareholders of the Company are decided upon. The auditors are also present at the meetings of the audit committee where audit mandate and audit planning are discussed. Any other participation is as required. The audit committee will introduce processes for the pre-approval of audit and of non-audit services. During a preliminary assessment on a world-wide basis, there has been found to be no material issue. The Company is fully on track with its preparations and will implement appropriate additional processes as soon as the respective regulation has come into effect. INFORMATION POLICY The Company also reports to the exchanges on which it is listed, the SWX Swiss Exchange and the New York Stock Exchange ("NYSE"). Its reports submitted to the U.S. stock exchange supervision authority, the Securities and Exchange Commission ("SEC"), may also be downloaded from: http://www.sec.gov/cgi-bin/srch-edgar?text=ciba+specialty+chemicals+holding. The Company's official means of communication is the Swiss Official Gazette of Commerce. Enquiries may also be made to Investor Relations, telephone + 41 61 636 5081 and to Group Communications, telephone +41 61 636 4444. The Company's website is www.cibasc.com EMPLOYEES The Company employee's worldwide totaled 19 007 in 2002, 19 683 in 2001 and 20 306 in 2000. The following table shows the number of employees at the end of December 31, 2002.
EUROPE AMERICAS ASIA-PACIFIC TOTAL - ------------------------------------------------------------------------------- 2002 Plastic Additives .................. 1 569 1 163 530 3 262 Coating Effects .................... 3 023 396 491 3 910 Water & Paper Treatment ............ 1 541 697 226 2 464 Textile Effects .................... 2 120 611 848 3 579 Home & Personal Care ............... 987 436 299 1 722 Unallocated Group Services ......... 2 006 969 853 3 828 Headquarters ....................... 242 0 0 242 - ------------------------------------------------------------------------------- Total Company ......................11 488 4 272 3 247 19 007 - -------------------------------------------------------------------------------
In 2002, the Company ceased allocating its Group Service Units' employees to the Segments or to Headquarters for internal management reporting purposes. The December 31, 2001 employee data shown in the table below has been reclassified to conform to the 2002 presentation of the number of employees. 64
Europe Americas Asia-Pacific Total - ------------------------------------------------------------------------------- 2001 Plastic Additives ................ 1 591 1 288 544 3 423 Coating Effects .................. 3 096 393 462 3 951 Water & Paper Treatment .......... 1 597 718 208 2 523 Textile Effects .................. 2 261 629 879 3 769 Home & Personal Care ............. 1 003 443 304 1 750 Unallocated Group Services ....... 2 074 1 083 869 4 026 Headquarters ..................... 241 - - 241 ------------------------------------------------------------------------------ Total Company ....................11 863 4 554 3 266 19 683 ------------------------------------------------------------------------------
In 2001, the Company implemented a new organizational structure, which created five Segments focused on specific customer markets and various Group Service Units focused on providing cost efficient support services to the Segments. See "Item 4. Information on the Company--Business Overview". Information related to the employees of these five Segments and the Group Service Units, for prior years by individual Segment and for the Group Service Units 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 for the Segments in total, including the employees of the Segments that were transferred to the Group Service Units as a result of the reorganization, and the number of employees in the Unallocated and Headquarters categories.
Europe Americas Asia-Pacific Total - ------------------------------------------------------------------------------- 2000 Segments in total .................11 399 4 735 2 901 19 035 Unallocated ....................... 491 306 257 1 054 Headquarters ...................... 217 - - 217 - ------------------------------------------------------------------------------- Total Company .....................12 107 5 041 3 158 20 306 - -------------------------------------------------------------------------------
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 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 As of January 1, 2003, the Company will adopt the fair value method of accounting for stock option plans as defined in SFAS No. 123 "Accounting for Stock-Based Compensation." As a consequence, future employee stock option grants and other stock based compensation plans will be recorded as an expense over the vesting period of the award based on their fair values at the date the stock based compensation is granted. For further information, see "Item 5. Operating and Financial Review and Prospects - Management's Discussion and Analysis of Financial Condition and Results of Operations - Supplemental Information - Change in accounting policy and new accounting standards" and Notes 1 and 18 to Consolidated Financial Statements. In 2002, in connection with the capital reduction of CHF 1 per share (see note 17 to Consolidated Financial Statments), the Company, in accordance with the terms of its stock option plans, reduced the exercise price of its outstanding stock options ("the capital reduction repricing"). 65 No compensation expense was recorded as a result of the capital reduction repricing. For the Leverage Executive Asset Plan, which is described below, the capital reduction repricing was set by the investment bank. All exercise prices disclosed herein have been accordingly adjusted. 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 (a total of 1 153 600 options) with an exercise price of CHF 110 per share, the market value of the shares at the grant date (after the capital reduction repricing, the exercise price was CHF 108.70 per share). 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 were 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 of December 31, 2002, a total of 50 468 share options have been exercised. As a result of terminations from the program, a total of 60 318 options (2001: 58 502; 2000: 55 776 options) have been returned to the Company. As of January 31, 2003, there has been no additional share options exercised or returned to the Company as compared to December 31, 2002. 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, also include grants of restricted shares of common stock of the Company to senior management, other key 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 2002, 2001 and 2000, no compensation expense was recorded for the options issued under this plan. The following table summarizes option activity under the LTIP for the three year period ended December 31, 2002 and from January 1, 2003 through January 31, 2003:
Weighted average Options exercise price outstanding - -------------------------------------------------------------------------------------------------- Balance at December 31, 1999 ................................ 132.57 857 908 Options granted ............................................. 107.23 461 210 Options canceled/forfeited .................................. 117.21 (19 218) - -------------------------------------------------------------------------------------------------- Balance at December 31, 2000 ................................ 123.81 1 299 900 - -------------------------------------------------------------------------------------------------- Options granted ........................... 111.07 461 444 Options issued on conversion of stock appreciation rights .... 163.70 60 799 Options canceled/forfeited .................................. 114.61 (43 694) - -------------------------------------------------------------------------------------------------- Balance at December 31, 2001 ................................ 122.09 1 778 449 - -------------------------------------------------------------------------------------------------- Options granted ............................................. 111.09 481 401 Options exercised ........................................... 110.90 (32 098) Options canceled/forfeited .................................. 113.41 (32 413) - -------------------------------------------------------------------------------------------------- Balance at December 31, 2002 ................................ 119.97 2 195 339 - -------------------------------------------------------------------------------------------------- Options granted ............................................. 0 0 Options canceled/forfeited .................................. 122.59 (3 021) Options expired .............................................. 163.70 (264 355) - -------------------------------------------------------------------------------------------------- Balance at January 31, 2003 ................................. 113.97 1 927 963 - --------------------------------------------------------------------------------------------------
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, adjusted to CHF 163.70 after the capital reduction repricing. 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 163.70. In 2001 and 2000, no compensation expense was recognized on the stock appreciation rights. 66 The following table summarizes the status of stock options outstanding and exercisable at January 31, 2003:
- -------------------------------------------------------------------------------------------------------- Stock Options Outstanding Stock Options Exercisable - -------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted average average average exercise Number of remaining Number of remaining Exercise price-outstanding/ outstanding contractual outstanding contractual price range exercisable options life options life (in years) (in years) - -------------------------------------------------------------------------------------------------------- 107.09 - 114.09.... 110.44/111.12 1 800 000 4.2 693 247 4.3 163.70 ........... 163.70/163.70 127 963 4.9 127 963 4.9 - -------------------------------------------------------------------------------------------------------- 1 927 963 821 210 - --------------------------------------------------------------------------------------------------------
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. In connection with the LTIP 2002, the Company granted 85 128 restricted shares of common stock, which are restricted for three years from the date of grant, to 683 participants. The market value of the common stock at date of grant was CHF 112 per share. Compensation expense of approximately CHF 10 million has been recognized in 2002 in relation to the grant of these shares. 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 (a total of 24 028 options) 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, adjusted to CHF 181.70 after the capital reduction repricing. These options vest after four years and expire after seven years from date of grant. As of December 31, 2002, 12 560 of the stock options have been forfeited. In 2002, 2001 and 2000, no compensation expense was recorded under this plan. As of January 31, 2003, there has been no share options exercised or additional share options returned to the Company as compared to December 31, 2002. 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 2002, 1 660 employees (2001: 2 279 employees; 2000: 2 836 employees) purchased 29 499 shares (2001: 40 069 shares; 2000: 50 099 shares) for which approximately CHF 3 million (2001: 4 million; 2000: CHF 5 million) was paid to the Company. In 2002, 2001 and 2000, no compensation expense was recorded under this plan. In the period from January 1, 2003 through January 31, 2003, no Shares have been purchased under the plan. MAB - In 1998, the Company established a "Mitarbeiterbeteiligungsplan" (Employee Investment Plan) which grants annually to most employees in Switzerland (as an enhancement to their pension plan arrangements) the right to purchase 20 shares (from 2003, 25 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 may be adjusted). The rights vest at the grant date and become exercisable at the date of the employees' retirement or termination. The following table summarizes option activity under the MAB for the three year period ended December 31, 2002 and from January 1, 2003 through January 31, 2003:
Exercise Rights price outstanding - ------------------------------------------------------------------------------- Balance at December 31, 1999 ...................... 15 188 640 Rights granted .................................... 15 83 260 Rights exercised .................................. 15 (39 140) - ------------------------------------------------------------------------------- Balance at December 31, 2000 ...................... 15 232 760 - ------------------------------------------------------------------------------- Rights granted .................................... 15 86 240 Rights exercised .................................. 15 (16 260) - ------------------------------------------------------------------------------- Balance at December 31, 2001 ...................... 15 302 740 - ------------------------------------------------------------------------------- Rights granted .................................... 15 86 040 Rights exercised .................................. 15 (18 500) - ------------------------------------------------------------------------------- Balance at December 31, 2002 ...................... 15 370 280 - ------------------------------------------------------------------------------- Rights granted .................................... 15 105 275 Rights exercised .................................. 15 (1 350) - ------------------------------------------------------------------------------- Balance at January 31, 2003 ....................... 15 474 205 - -------------------------------------------------------------------------------
67 Compensation expense is recorded in the year the rights are granted and, in 2002, CHF 8 million (2001: CHF 8 million, 2000: CHF 10 million) of compensation expense was recorded under this plan. PSP - In 2001, the Company established a Performance Share Plan (PSP) for selected senior and 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 1 675 rights (2001: 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 2002 and 2001. As of January 31, 2003, the there has been no additional grants of rights or additional rights returned to the Company as compared to December 31, 2002. CHANGE IN CONTROL AND RESERVE OF SHARES Upon a change in control of the Company (defined as for 30 percent LEAP, for 33.33 percent other than 1998, which is 50 percent, for LTIP program and 20 percent for PSP, 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. At December 31, 2002, the Company had approximately 2.0 million shares (2001: 1.8 million shares; 2000: 1.7 million shares) of treasury stock reserved for issuance under the various stock based compensation plans. For further information see Note 18 to Consolidated Financial Statements. 68 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. MAJOR SHAREHOLDERS According to the Share Registrar of the Company and other publicly available information as of January 31, 2003 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. January 31, January 31, February 12, 2003 2002 2001 - ------------------------------------------------------------------------------- Artisan Partners Limited, USA-Wisconsin 5.0% - - BNP Paribas (Suisse) SA, Geneva* - - 2.2% Chase Nominees Ltd, London* 5.3% 3.1% - Putnam Group, Boston (1) 5.2% 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, 2003, according to the Share Register, there were 207 registered holders of ordinary shares in the United States. These ordinary shareholders in the United States collectively held 510 079 ordinary shares, or approximately 0.7 percent of the Company's total issued and outstanding Shares as of that date. Also as of January 31, 2003, there were 304 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 81 190 ADRs, or approximately 0.1 percent of the issued and outstanding ordinary 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. For further information see Note 18 to the Consolidated Financial Statements. 69 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 2003, approximately 99 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. 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, some third parties initiated arbitration proceedings against the Company. This dispute has been settled and will not have any material adverse effect on the financial position or results of operations of the Company. In connection with its Toms River, New Jersey site in the United States, the Company was named as a defendant in several actions, most of which most of which were settled by the end of 2002 "(see "Item 4. Information on the Company - Environmental Matters" of this Annual Report). 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 Company's Annual General Meeting held on March 22, 2002, the shareholders approved the Board's proposal to pay a dividend of CHF 2.00 per share, in respect of the fiscal year 2001. The Company paid the dividend on March 27, 2002, which totaled CHF 134 million. At this meeting, the shareholders also approved the Board's proposal to pay an extraordinary payment to the shareholders in the form of a capital reduction of CHF 1 per share. The capital reduction was in the form of a reduction in the nominal value of each common share from CHF 10 per share by CHF 1 per share to CHF 9 per share. The Company paid the capital reduction on June 28, 2002, which totaled CHF 69 million. For 2002 the Board of Directors proposes to carry forward the entire retained earnings of Ciba Specialty Chemicals Holding Inc. and not to pay a dividend. The Board of Directors, however, proposes a cash payment to its shareholders resulting from a capital reduction of CHF 3 per share. The capital reduction is subject to shareholder approval at the Annual General Meeting to be held on March 6, 2003. If approved the capital reduction will take the form of a reduction in the nominal value of each share from CHF 9 per share by CHF 3 per share to CHF 6 per share. The Company expects, subject to various conditions and approval, that the payment of the capital reduction will be made to the shareholders on May 23, 2003. SIGNIFICANT CHANGES Except has otherwise disclosed in this Annual Report, no significant change has occurred since the date of the Consolidated Financial Statements included in this Annual Report. 70 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 ADSs, 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 - --------------------- 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 2002 .............................................. 128.00 89.75 92.53 64.88 Quarterly highs and lows - ------------------------ 2002 First Quarter ................................. 128.00 103.25 76.25 61.51 Second Quarter ................................ 128.00 113.53 85.79 76.09 Third Quarter ................................. 122.00 89.75 82.67 60.81 Fourth Quarter ................................ 108.75 93.75 78.62 67.77 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 Monthly highs and lows - ---------------------- 2002 January ....................................... 110.50 103.25 64.28 60.84 February ...................................... 125.75 108.75 73.86 63.88 March ......................................... 128.00 121.50 76.25 72.38 April ......................................... 128.00 122.25 78.93 75.39 May ........................................... 127.00 122.00 80.93 77.74 June .......................................... 122.95 113.53 82.41 76.09 July .......................................... 122.00 89.75 82.25 60.51 August ........................................ 116.75 91.00 77.80 60.64 September ..................................... 110.50 93.05 74.87 63.05 October ....................................... 105.25 93.75 71.09 63.32 November ...................................... 108.75 100.75 73.18 67.80 December ...................................... 108.50 94.50 78.44 68.31 2003 January ....................................... 101.50 81.75 74.18 59.75 - --------------------------------------------------------------------------------------------------------
71 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 ADS. Trading Prices on the New York Stock Exchange Price per ADS(1) - ------------------------------------------------------------------------------------------ High Low ---------- ---------- in USD Annual highs and lows - --------------------- 2000 (from August 2, 2000) ..................................... 33.25 26.88 2001 ........................................................... 35.44 24.00 2002 ........................................................... 40.60 30.83 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 2002 First Quarter ................................................. 38.61 31.44 Second Quarter ................................................ 40.20 37.31 Third Quarter ................................................. 40.60 30.83 Fourth Quarter ................................................ 36.75 31.75 Monthly highs and lows - ---------------------- 2002 January ....................................................... 32.63 31.44 February ...................................................... 36.75 31.88 March ......................................................... 38.61 36.00 April ......................................................... 38.38 37.31 May ........................................................... 40.11 38.10 June .......................................................... 40.20 37.90 July .......................................................... 40.60 30.83 August ........................................................ 38.10 31.90 September ..................................................... 36.34 31.73 October ....................................................... 35.09 31.75 November ...................................................... 36.75 35.11 December ...................................................... 35.79 33.71 2003 January ....................................................... 36.60 30.15 - ------------------------------------------------------------------------------------------
(1) One ADS represents one half of one share of the Company. On January 31, 2003, the last reported sale price was for Shares on the Swiss Exchange CHF 86.00 and for ADS's on the New York Stock Exchange USD 31.80 According to the Share Registrar of the Company, as of December 31, 2002, there were 210 United States resident shareholders holding 626 787 Shares, representing approximately 0.87 percent of the issued and outstanding Shares as of such date, and there were 303 registered United States resident holders of American Depositary Receipts holding 81 114 ADRs, representing approximately 0.06 percent of the issued and outstanding Shares as of such date. 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 - ------------------------------------------------------------------------------- 2002 ....................... 440 000 300 000 370 000 275 000 2001 ....................... 285 000 190 000 330 000 284 000 - -------------------------------------------------------------------------------- 72 The information presented in the table below represents, for the periods indicated, the average approximate daily volumes of the ADS traded on the New York Stock Exchange. First Second Third Fourth Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------- 2002 ........................ 4 130 4 094 5 720 4 386 2001 ........................ 1 868 1 251 3 619 2 103 - -------------------------------------------------------------------------------- The above information was supplied by the Swiss Exchange via the Swiss Market Feed, Citibank N.A., and Reuters, all of which supply such data to their 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 98 members. As of December 31, 2002, 258 Swiss companies and 140 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, 2002, was CHF 656 billion. As of December 31, 2002, the 10 largest companies in terms of market capitalization (free float) represented CHF 516 billion, or approximately 79 percent of the Swiss Exchange's aggregate market capitalization. Average monthly trading volume during 2002 was CHF 88.6 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. 73 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 Annual Report, 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 For information on dividends, see "Item 6 -Directors, Senior Management and Employees" section of this Annual Report. THE SHARES For information on the Shares, see "Item 6 -Directors, Senior Management and Employees" section of this Annual Report. 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 74 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 For information on Mandatory bid rule, see "Item 6 -Directors, Senior Management and Employees" section of this Annual Report. 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. 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 (Sonderpruefung). 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. For additional information on shareholders' meeting, see "Item 6 - Directors, Senior Management and Employees" section of this Annual Report. 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 held on March 22, 2002, the Board proposed to the shareholders another two year extension. The shareholders voted in favor of such extension. 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 Gazette of Commerce. 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 75 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. 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. See "Item 7. - Major Shareholders and Related Party Transactions" in this Annual Report. MATERIAL CONTRACTS ADR DEPOSIT AGREEMENT 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 and 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. 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 then 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 Eurofinance Ltd., 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 27, 2002. As of December 31, 2002, approximately CHF 959 million (USD 684 million) was outstanding indebtedness of the Company under the program. 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 76 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. 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 82I for individuals, Form 82C for corporations, Form 82E 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, 2002. 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. 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. 77 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 30 percent for payments made in 2002 and 2003, 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. 78 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 cash flow 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 2002, 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 also been undertaken. The fair value of foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates. As of December 31, 2002, 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 70 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 97 million as of December 31, 2002. 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, 2002, 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. 79 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. CONTROLS AND PROCEDURES. Pursuant to rules adopted by the Securities and Exchange Commission as directed by Section 302 of the Sarbanes-Oxley Act of 2002, the Company is providing the following information: As of a date within 90 days of the date of the filing of this Form 20-F Annual Report (the "Evaluation Date") the Company conducted an evaluation (under the supervision and with the participation of the Company's chief executive officer and chief financial officer), pursuant to Rule 13a-15 promulgated under the Securities and Exchange Act of 1934, as amended (the "Exchange Act") of the effectiveness of design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's chief executive officer and chief financial officer have concluded that as of the Evaluation Date such disclosure controls and procedures were reasonably designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Since the last evaluation by the Company of the Company's internal controls there have not been any significant changes in the internal controls, or in factors that could significantly affect the internal controls. ITEM 16. [RESERVED]. 80 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-34 ITEM 19. EXHIBITS. (a) The following consolidated financial statements, together with the auditors' reports of Ernst & Young Ltd and Arthur Andersen AG, are filed as part of this Annual Report: Index to Consolidated Financial Statements Page -------- Report of Independent Auditors Ernst & Young .............................. F-2 Independent Auditors' Report - Arthur Andersen AG ......................... F-3 Consolidated Statements of Income for the Years ended December 31, 2002, 2001 and 2000 .................................. F-4 Consolidated Balance Sheets at December 31, 2002 and 2001 ................. F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 2001 and 2000 ........................................ F-6 Consolidated Statements of Shareholders' Equity for the Years ended December 31, 2002, 2001 and 2000 .................................. F-7 Business Segment Data ..................................................... F-8 Geographic Data .......................................................... F-11 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 Annual Report: +1.1 Articles of Association of Ciba Specialty Chemicals Holding Inc. dated March 22, 2002. **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. 4.1 EMTN Programme Agreement in respect of a USD 2 billion Euro Medium Term Note Programme dated March 27, 2002, among Ciba Specialty Chemicals PLC, Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals Eurofinance Ltd., Ciba Spezialitatenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals Holding Inc., UBS AG and the additional parties named therein. 4.2 EMTN Deed of Covenant in respect of a USD 2 billion Euro Medium Term Note Programme dated March 27, 2002, by each of Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals Eurofinance Ltd., Ciba Specialty Chemicals PLC, Ciba Spezialitatenchemie 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. 4.3 EMTN Deed of Guarantee in respect of a USD 2 billion Euro Medium Term Note Programme dated March 27, 2002, by Ciba Specialty Chemicals Holding Inc. 4.4 EMTN Agency Agreement in respect of a USD 2 billion Euro Medium Term Note Programme dated March 27, 2002, among Ciba Specialty Chemicals PLC, Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals Eurofinance Ltd., Ciba Spezialitatenchemie 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. 81 **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. 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 Subsidiaries of the Company 10.1 Consent of Ernst & Young Ltd. - ------------------- + Incorporated by reference from the Form 6-K of Ciba Specialty Chemicals Holding Inc., filed August 28, 2002. (File No. 333-56040). * 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) 82 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 4, 2003 83 CERTIFICATION I, Armin Meyer, Chairman of the Board and Chief Executive Officer of Ciba Specialty Chemicals Holding Inc., certify that: 1. I have reviewed this annual report on Form 20-F of Ciba Specialty Chemicals Holding Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Armin Meyer -------------------------- Name: Armin Meyer Title: Chairman of the Board and Chief Executive Officer Date: February 4, 2003 84 I, Michael Jacobi, Chief Financial Officer of Ciba Specialty Chemicals Holding Inc., certify that: 1. I have reviewed this annual report on Form 20-F of Ciba Specialty Chemicals Holding Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Michael Jacobi ------------------------ Name Michael Jacobi Title: Chief Financial Officer Date: February 4, 2003 85 Index to Consolidated Financial Statements Page Report of Independent Auditors - Ernst & Young Ltd ...................... F-2 Independent Auditors' Report - Arthur Andersen AG ...................... F-3 Consolidated Statements of Income for the Years ended December 31, 2002, 2001 and 2000................................. F-4 Consolidated Balance Sheets at December 31, 2002 and 2001 ............... F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 2001 and 2000................................. F-6 Consolidated Statements of Shareholders' Equity for the Years ended December 31, 2002, 2001 and 2000................................. F-7 Business Segment Data .................................................. F-8 Geographic Data ........................................................ F-11 Notes to Consolidated Financial Statements ............................. F-12 F-1 REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CIBA SPECIALTY CHEMICALS HOLDING INC. We have audited the accompanying consolidated balance sheet of Ciba Specialty Chemicals Holding Inc. as of December 31, 2002, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended, appearing on pages F-4 to F-34 of this Annual Report. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Ciba Specialty Chemicals Holding Inc. as of December 31, 2001 and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations as a foreign associated firm of the Securities and Exchange Commission Practice Section of the American Institute of Certified Public Accountants and whose report dated January 18, 2002 expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ciba Specialty Chemicals Holding Inc. at December 31, 2002, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets. As discussed above, the financial statements of Ciba Specialty Chemicals Holding Inc. as of December 31, 2001, and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations as a foreign associated firm of the Securities and Exchange Commission Practice Section of the American Institute of Certified Public Accountants. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards (Statement) No. 142, "Goodwill and Other Intangible Assets," which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 1 with respect to 2001 and 2000 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized, deferred credits related to an excess over cost, equity method goodwill, and changes in amortization periods for intangible assets that will continue to be amortized as a result of initially applying Statement No. 142 (including any related tax effects) to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 financial statements taken as a whole. Zurich, January 17, 2003 Ernst & Young Ltd /s/ Eric Ohlund /s/ Martin Mattes Eric Ohlund Martin Mattes Certified Public Accountant Swiss Certified Accountant (in charge of the audit) F-2 INDEPENDENT AUDITORS' REPORT(1) 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 /s/ Eric Ohlund /s/ Patrick Fawer Eric G. Ohlund Patrick Fawer Basel, Switzerland, January 18, 2002 (1) The report is a copy of the previously issued report. The predecessor auditor has not reissued the report. F-3 CONSOLIDATED STATEMENTS OF INCOME (in millions of Swiss francs, except share and per share data)
Year ended December 31, Notes 2002 2001(1) 2000(1) - ---------------------------------------------------------------------------------------------------------------- Net sales 7 085 7 367 7 902 Cost of goods sold 4 729 4 988 5 333 - ---------------------------------------------------------------------------------------------------------------- GROSS PROFIT 2 356 2 379 2 569 Selling, general and administrative 1 247 1 258 1 417 Research and development 294 276 293 Amortization of goodwill 1 0 61 64 Amortization of other intangible assets 1,8 33 31 30 Income from earnings of equity affiliates 9 (6) (8) (113) Restructuring and special charges 12 0 0 2 - ---------------------------------------------------------------------------------------------------------------- OPERATING INCOME 788 761 876 Interest expense (159) (203) (265) Interest income 49 69 56 Other financial expense, net (105) (59) (14) - ---------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 573 568 653 Provision for income taxes 15 154 178 228 - ---------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 419 390 425 Minority interest 13 10 7 - ---------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 406 380 418 - ---------------------------------------------------------------------------------------------------------------- Gain on sale of discontinued operations, net of tax 3 0 0 34 Cumulative effects of change in accounting principles, net of 1 0 2 0 tax - ---------------------------------------------------------------------------------------------------------------- NET INCOME 406 382 452 - ---------------------------------------------------------------------------------------------------------------- PER SHARE DATA 20 BASIC AND DILUTED EARNINGS PER SHARE Continuing operations 5.92 5.72 6.31 Discontinued operations 0.00 0.00 0.50 Cumulative effects of change in accounting principles 0.00 0.04 0.00 - ---------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE 5.92 5.76 6.81 - ---------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING Basic 68 549 964 66 419 147 66 311 879 Diluted 68 575 058 66 419 147 66 311 879 - ----------------------------------------------------------------------------------------------------------------
(1) Effective January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets". In 2001 and 2000, on an adjusted basis, excluding goodwill amortization, operating income would have been CHF 822 million (2000: CHF 940 million), income from continuing operations before income taxes and minority interest CHF 629 million (2000: CHF 717 million), income from continuing operations before minority interest CHF 451 million (2000: CHF 489 million), income from continuing operations CHF 441 million (2000: CHF 482 million), net income CHF 443 million (2000: CHF 520 million) and basic and diluted earnings per share CHF 6.68 (2000: CHF 7.83). See Notes to Consolidated Financial Statements F-4 CONSOLIDATED BALANCE SHEETS (in millions of Swiss francs, except share and per share data)
December 31, Notes 2002 2001 - ---------------------------------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents 2 361 1 602 Short-term investments 16 41 Accounts receivable, net 4 1 014 1 066 Inventories 5 1 446 1 526 Prepaid and other current assets 477 592 - ---------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 5 314 4 827 - ---------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 6 3 196 3 565 Goodwill 1,7 1 382 1 417 Other intangible assets, net 1,8 694 730 Financial investments 9 172 193 Other assets 10 1 034 986 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 11 792 11 718 - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable 549 490 Short-term debt 13 1 496 316 Income taxes payable 108 81 Accruals and other current liabilities 11 942 1 090 - ---------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 3 095 1 977 - ---------------------------------------------------------------------------------------------------------------- Long-term debt 14 2 344 3 678 Deferred income taxes 15 386 379 Other liabilities 16 1 537 1 688 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 7 362 7 722 - ---------------------------------------------------------------------------------------------------------------- MINORITY INTEREST 76 88 - ---------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY 17 Common stock(1) 649 721 Additional paid-in capital 4 186 3 957 Retained earnings 198 (74) Accumulated other comprehensive income (360) (240) Treasury stock, at cost(2) (319) (456) - ---------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 4 354 3 908 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 11 792 11 718 - ----------------------------------------------------------------------------------------------------------------
(1) Par value CHF 9 per share (December 31, 2001: CHF 10 per share), 82 130 117 shares authorized and 72 130 117 shares issued in 2002 and 2001. (2) December 31, 2002: 3 192 087 treasury shares; December 31, 2001: 5 987 947 treasury shares. See Notes to Consolidated Financial Statements F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions of Swiss francs, except share and per share data)
Year ended December 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME 406 382 452 Deduct net income from discontinued operations, net of tax 0 0 34 - ---------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 406 382 418 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 385 469 470 Deferred income taxes 50 87 179 Unremitted earnings of equity affiliates 0 0 (88) Restructuring and special charges 0 0 2 Restructuring payments (12) (46) (35) Loss (Gain) on sale/disposal of assets, net 2 (5) (15) Realized loss on available-for-sale securities 38 0 0 Minority interest and other non-cash items, net 144 71 38 Changes in operating assets and liabilities: Short-term investments 25 27 (10) Accounts receivable, net 4 53 37 Inventories (33) 117 (45) Accounts payable 90 (33) (8) Other operating assets and liabilities (61) (68) 87 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 1 038 1 054 1 030 Net cash provided by discontinued operations 0 0 1 - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1 038 1 054 1 031 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (250) (259) (249) Proceeds from sale of assets 22 34 39 Sale (Acquisition) of businesses, net of cash (116) (144) 1 566 Loans and other long-term assets (5) 35 (81) Discontinued operations 0 0 (4) - ---------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (349) (334) 1 271 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (Decrease) in short-term debt, net 22 (48) (844) Proceeds from long-term debt 1 6 4 Repayments of long-term debt (19) (110) (499) Dividends paid (134) (132) (133) Capital reduction paid (69) 0 0 Treasury stock transactions 344 9 (40) Other (1) 0 4 - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 144 (275) (1 508) - ---------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (74) (22) (28) - ---------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 759 423 766 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of year 1 602 1 179 413 Cash and cash equivalents, end of year 2 361 1 602 1 179 - ---------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest (177) (204) (260) Cash paid for income taxes (90) (49) (72) - ----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements F-6 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in millions of Swiss francs, except share and per share data)
ACCUMULATED TREASURY TREASURY ADDITIONAL OTHER COMPRE- STOCK: STOCK: COMMON PAID-IN RETAINED HENSIVE UNRESERVED RESERVED Notes STOCK CAPITAL EARNINGS INCOME SHARES SHARES TOTAL - --------------------------------------------------------------------------------------------------------------------- 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, 1 1 net of tax - --------------------------------------------------------------------------------------------------------------------- Comprehensive income 452 (176) 276 Cash dividends declared and paid(1) (133) (133) Treasury stock transactions 17 (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 19 (19) (19) - --------------------------------------------------------------------------------------------------------------------- Comprehensive income 382 (125) 257 Cash dividends declared and paid(1) (132) (132) Treasury stock transactions 17 (4) 6 19 21 Other 6 1 1 8 - --------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 721 3 957 (74) (240) (65) (391) 3 908 - --------------------------------------------------------------------------------------------------------------------- Net income 406 406 Currency translation adjustments (86) (86) Realization of previously unrealized loss on available-for-sale securities, net of tax of CHF 16 9 28 28 Unrealized loss on available-for-sale securities, (5) (5) net of tax of CHF 2 Unrealized gain on cash flow hedges, net of tax of CHF 0.7 1 1 Minimum pension liability adjustment, net of tax of CHF 37 19 (58) (58) Other 0 0 - --------------------------------------------------------------------------------------------------------------------- Comprehensive income 406 (120) 286 Cash dividends declared and paid(1) (134) (134) Capital reduction paid(2) (72) 3 (69) Treasury stock transactions 17 216 (13) 150 353 Other 10 10 - --------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 649 4 186 198 (360) (78) (241) 4 354 - ---------------------------------------------------------------------------------------------------------------------
(1) Cash dividends declared and paid were CHF 2.00 per share in 2002, 2001 and 2000. (2) Capital reduction paid was CHF 1.00 per share in 2002. See Notes to Consolidated Financial Statements F-7 BUSINESS SEGMENT DATA (in millions of Swiss francs, except share and per share data)
2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- NET SALES Plastic Additives 1 813 1 834 1 959 Coating Effects 1 920 1 944 2 118 Water & Paper Treatment 1 409 1 486 1 558 Textile Effects 1 544 1 673 1 841 Home & Personal Care 399 430 426 - ---------------------------------------------------------------------------------------------------------------- TOTAL NET SALES 7 085 7 367 7 902 - ---------------------------------------------------------------------------------------------------------------- OPERATING INCOME (EBIT) Plastic Additives 245 275 319 Coating Effects 341 312 371 Water & Paper Treatment 98 65 92 Textile Effects 142 181 204 Home & Personal Care 56 67 58 Corporate and other expenses (94) (78) (102) Restructuring and special charges 0 0 (2) - ---------------------------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL 788 822 940 - ---------------------------------------------------------------------------------------------------------------- Amortization of goodwill 0 (61) (64) - ---------------------------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME 788 761 876 - ---------------------------------------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION Plastic Additives 101 113 104 Coating Effects 99 99 104 Water & Paper Treatment 88 92 95 Textile Effects 66 67 71 Home & Personal Care 26 28 22 Corporate 5 9 10 - ---------------------------------------------------------------------------------------------------------------- TOTAL DEPRECIATION AND AMORTIZATION OF OTHER INTANGIBLE ASSETS 385 408 406 - ---------------------------------------------------------------------------------------------------------------- Amortization of goodwill 0 61 64 - ---------------------------------------------------------------------------------------------------------------- TOTAL DEPRECIATION AND AMORTIZATION 385 469 470 - ---------------------------------------------------------------------------------------------------------------- EBITDA(1) Plastic Additives 346 388 423 Coating Effects 440 411 475 Water & Paper Treatment 186 157 187 Textile Effects 208 248 275 Home & Personal Care 82 95 80 Corporate (89) (69) (92) - ---------------------------------------------------------------------------------------------------------------- TOTAL EBITDA, BEFORE RESTRUCTURING AND SPECIAL CHARGES 1 173 1 230 1 348 - ---------------------------------------------------------------------------------------------------------------- EBITDA MARGIN(2) Plastic Additives 19.1% 21.1% 21.6% Coating Effects 22.9% 21.1% 22.4% Water & Paper Treatment 13.2% 10.6% 12.0% Textile Effects 13.5% 14.8% 14.9% Home & Personal Care 20.6% 22.2% 18.8% Corporate - - - - ------------------------------------------------------------------------------------------------------------------- TOTAL EBITDA MARGIN, BEFORE RESTRUCTURING AND SPECIAL CHARGES 16.6% 16.7% 17.1% - ------------------------------------------------------------------------------------------------------------------- EBIT MARGIN Plastic Additives 13.5% 15.0% 16.3% Coating Effects 17.7% 16.1% 17.5% Water & Paper Treatment 7.0% 4.4% 5.9% Textile Effects 9.2% 10.8% 11.1% Home & Personal Care 14.0% 15.7% 13.5% Corporate - - - - ------------------------------------------------------------------------------------------------------------------- TOTAL EBIT MARGIN 11.1% 10.3% 11.1% - -------------------------------------------------------------------------------------------------------------------
F-8 BUSINESS SEGMENT DATA (in millions of Swiss francs, except share and per share data)
2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT EXPENDITURES Plastic Additives 81 73 82 Coating Effects 100 96 102 Water & Paper Treatment 29 34 36 Textile Effects 36 39 44 Home & Personal Care 30 24 21 Corporate 18 10 8 - ---------------------------------------------------------------------------------------------------------------- TOTAL RESEARCH AND DEVELOPMENT EXPENDITURES 294 276 293 - ---------------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES Plastic Additives 86 80 67 Coating Effects 74 66 65 Water & Paper Treatment 35 52 52 Textile Effects 34 32 37 Home & Personal Care 18 25 23 Corporate 3 4 5 - ---------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL EXPENDITURES 250 259 249 - ---------------------------------------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------- NET ASSETS Plastic Additives 1 236 1 403 Coating Effects 1 834 2 001 Water & Paper Treatment 2 429 2 596 Textile Effects 1 291 1 490 Home & Personal Care 294 340 Shared operating net assets not allocated to segments(3) (8) (170) Non-operating net assets(4) 2 875 2 154 - ---------------------------------------------------------------------------------------------------------------- INVESTED CAPITAL(5) 9 951 9 814 - ---------------------------------------------------------------------------------------------------------------- Other assets and liabilities not included in invested capital (5 597) (5 906) - ---------------------------------------------------------------------------------------------------------------- TOTAL NET ASSETS 4 354 3 908 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS Plastic Additives 1 493 1 623 Coating Effects 2 107 2 249 Water & Paper Treatment 2 606 2 790 Textile Effects 1 495 1 676 Home & Personal Care 356 401 Shared operating assets not allocated to segments(3) 426 385 Non-operating assets(4) 3 309 2 594 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 11 792 11 718 - ----------------------------------------------------------------------------------------------------------------
(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) Shared net operating assets not allocated to segments and shared operating assets not allocated to segments include certain net assets and shared assets of Group Service Units and Headquarters. Group Service Units provide services to the segments. (4) Non-operating net assets and non-operating assets include primarily cash and cash equivalents and certain financial investments. Also included in non-operating net assets are certain Group Service Units' current liabilities. (5) 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. See Notes to Consolidated Financial Statements F-9 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 are used by management to analyze the results of operations and the financial condition of the Company. Such non-U.S. GAAP financial indicators include EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), EBITDA margin and invested capital. The Company derives EBITDA, EBITDA margin and invested capital from financial measures prepared in accordance with U.S. GAAP. The way these financial indicators are derived is described in the glossary of financial terms at the end of this Financial Review. The way these financial indicators are derived is described in footnote (1) through (5) at the end of the Business Segment Data. Management is of the opinion that 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, total assets, EBIT margin 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. 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, headquarters costs, corporate related items, and certain other net expenses not allocated to reportable segments. Intersegment sales are eliminated on consolidation and, as a result, reportable net sales of the segments reflect only sales to third parties. In 2002, the Company implemented Statement of Financial Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets" (see Notes 1 and 7). As a result of adopting this standard, the Company reclassified certain goodwill and intangible assets to the segments that were previously reported as corporate items and not allocated to the segments. In addition, the Company reclassified the 2001 and 2000 goodwill amortization that was previously allocated to the segments to corporate and reclassified intangible amortization from corporate to the segments corresponding to the intangible asset reclassification. The amounts reported for 2001 and 2000 have been reclassified to conform to the 2002 presentation. 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. Amounts reported for 2000 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 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, pigments, as well as additive and pigment 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. The segment Water & Paper Treatment serves the paper and water treatment industries. The Segment offers products and services to the global paper and board industry focused on increasing mill productivity as well as `effect chemicals' which provides solutions for its customers in order to determine appearance, handling and performance of the paper or board. The Segment also offers products and services used to treat the water streams in industrial and municipal applications and to improve the efficiency of mineral and oil processing as well as soil additives and specialty monomers 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 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-user industries. Among its broad product offerings are whiteners for detergents, hygiene effects for a variety of home and personal care products, UV absorbers for sunscreens and innovative hair dyes. See Notes to Consolidated Financial Statements F-10 GEOGRAPHIC DATA (in millions of Swiss francs, except share and per share data)
NET SALES TO CUSTOMERS 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- EUROPE Germany 567 572 618 United Kingdom 334 373 394 Italy 343 351 366 France 298 311 325 Rest of European Union 841 846 899 Switzerland 86 75 84 Rest of Europe 252 227 227 - ---------------------------------------------------------------------------------------------------------------- TOTAL EUROPE 2 721 2 755 2 913 - ---------------------------------------------------------------------------------------------------------------- AMERICAS United States of America 1 703 1 819 2 025 Canada 223 243 276 Central America 209 227 247 South America 324 365 388 - ---------------------------------------------------------------------------------------------------------------- TOTAL AMERICAS 2 459 2 654 2 936 - ---------------------------------------------------------------------------------------------------------------- ASIA-PACIFIC Japan 384 431 528 Region China 439 424 413 Rest of Asia 677 686 689 Australia and New Zealand 155 154 158 Africa and Middle East 250 263 265 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASIA-PACIFIC 1 905 1 958 2 053 - ---------------------------------------------------------------------------------------------------------------- TOTAL NET SALES TO CUSTOMERS 7 085 7 367 7 902 - ---------------------------------------------------------------------------------------------------------------- Net sales to customers are based on the final destination of the sale. LONG-LIVED ASSETS 2002 2001 - ---------------------------------------------------------------------------------------------------------------- EUROPE Germany 361 380 United Kingdom 561 627 Italy 165 166 France 128 128 Rest of European Union 82 81 Switzerland 614 629 Rest of Europe 2 1 - ---------------------------------------------------------------------------------------------------------------- TOTAL EUROPE 1 913 2 012 - ---------------------------------------------------------------------------------------------------------------- AMERICAS United States of America 869 1 076 Canada 3 7 Central America 123 123 South America 17 30 - ---------------------------------------------------------------------------------------------------------------- TOTAL AMERICAS 1 012 1 236 - ---------------------------------------------------------------------------------------------------------------- ASIA-PACIFIC Japan 42 47 Region China 157 195 Rest of Asia 46 48 Australia and New Zealand 18 18 Africa and Middle East 8 9 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASIA-PACIFIC 271 317 - ---------------------------------------------------------------------------------------------------------------- TOTAL LONG-LIVED ASSETS 3 196 3 565 - ----------------------------------------------------------------------------------------------------------------
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 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, textile, paper, home and personal care and other products. The Company's products and services are also used to provide clean water and to treat the water streams in industrial and municipal applications. 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. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Change in accounting policy - In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets". The Company fully adopted SFAS No. 142 effective January 1, 2002. An initial impairment test of goodwill was required to be performed as of January 1, 2002. The Company completed the initial impairment test and determined that its reported goodwill was not impaired. SFAS No. 142 requires that goodwill acquired in a business combination be capitalized at acquisition cost and requires that goodwill no longer be amortized to earnings. On an annual basis, the Company is required to evaluate the book value of goodwill at the reporting unit level for F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) impairment using a two step impairment test. In the first step, the book value of the reporting unit's assets, including goodwill and other intangibles, and liabilities (the "net assets") is compared to the fair value of the reporting unit. If the fair value of the reporting unit exceeds the book value of its net assets, goodwill is deemed not impaired and the second step is not required to be performed. If, however, the fair value of the reporting unit is less than the book value of its net assets, the second step of the impairment test is required to be performed to measure the amount of impairment loss, if any. In the second step, an allocation is made of the fair value of the assets and liabilities of the reporting unit to all of its tangible assets, other intangible assets (including unrecognized intangible assets but excluding goodwill) and liabilities (the "assets and liabilities"). This fair value allocation to the assets and liabilities is made as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The fair value assigned to the reporting unit's assets and liabilities is compared to the total fair value of the reporting unit with the excess, if any, considered to be the implied goodwill value of the reporting unit. If the book value of the reporting unit's goodwill exceeds this implied goodwill value, that excess is recorded as an impairment loss as a component of operating income in the Consolidated Statement of Income. If the book value of the reporting unit's goodwill is less than the implied goodwill value, goodwill is deemed not to be impaired and no impairment is required to be recorded. During 2002, the Company completed the annual impairment test of goodwill and determined that its reported goodwill is not impaired. Goodwill that had been acquired on or before June 30, 2001 was amortized on a straight-line basis over the estimated periods to be benefited, which ranged from 5 to 33 years. Goodwill acquired after June 30, 2001, was not amortized. In 2001 and 2000, goodwill was assessed for impairment whenever events or changes in circumstances indicated that the book value might not be recoverable. If the sum of the expected future undiscounted cash flows was less than the book value of the goodwill, a loss would have been recognized for the difference between the fair value and the book value of the goodwill. The following is a reconciliation of previously reported financial information to the adjusted basis amounts excluding goodwill amortization, which is no longer required under SFAS No. 142:
2002 2001 ------------------------------------------------------------------- As Adjusted Goodwill As reported basis amortization reported - ----------------------------------------------------------------------------------------------------------------------- Operating income 788 822 61 761 Income from continuing operations, before taxes and minority interest 573 629 61 568 Income from continuing operations, before minority interest 419 451 61 390 Income from continuing operations 406 441 61 380 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME 406 443 61 382 - ----------------------------------------------------------------------------------------------------------------------- BASIC AND DILUTED EARNINGS PER SHARE Continuing operations 5.92 6.64 0.92 5.72 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE 5.92 6.68 0.92 5.76 - -----------------------------------------------------------------------------------------------------------------------
2000 -------------------------------------------------------- Adjusted Goodwill As basis amortization reported - -------------------------------------------------------------------------------------------------- Operating income 940 64 876 Income from continuing operations, before taxes and minority interest 717 64 653 Income from continuing operations, before minority interest 489 64 425 Income from continuing operations 482 64 418 Gain on sale of discontinued operations, net of tax 38 4 34 - -------------------------------------------------------------------------------------------------- NET INCOME 520 68 452 - -------------------------------------------------------------------------------------------------- BASIC AND DILUTED EARNINGS PER SHARE Continuing operations 7.27 0.96 6.31 Discontinued operations 0.56 0.06 0.50 - -------------------------------------------------------------------------------------------------- NET INCOME PER SHARE 7.83 1.02 6.81 - --------------------------------------------------------------------------------------------------
Other intangible assets In accordance with SFAS No. 142, purchased identifiable intangible assets are capitalized at acquisition cost. Other intangible assets with a finite life are amortized on a straight-line basis over the estimated periods to be benefited, which is the period that the intangible asset can contribute to the cash flow of the Company as determined at the date of acquisition of the intangible asset. Other intangible assets with indefinite lives are not amortized. Other intangible assets are amortized on a straight-line basis over a period ranging from 5 to 33 years, which are the estimated periods to be benefited. The Company assesses other intangible 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 book value of the other intangible asset, a loss is recognized for the difference between the fair value and book value of the other intangible asset. F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) FINANCIAL INVESTMENTS Financial investments comprise primarily investments in equity affiliates and investments in unconsolidated companies (less than 20 percent ownership). 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 as a component of shareholders' equity in "accumulated other comprehensive income". The company uses the specific identification method to determine the cost base of financial investments related to sales or reclassifications from other comprehensive income to earnings. DERIVATIVE FINANCIAL INSTRUMENTS Change in accounting policy - Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended, which replaced existing pronouncements and practices for derivatives and hedging activities with a single, integrated accounting framework. This statement, as amended, expands the previous accounting definition of derivatives to include embedded derivatives and many commodity contracts. Upon adoption of this statement, as amended, the Company, in 2001, 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 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. INCOME TAXES Provision for income taxes has been determined using the asset and liability approach 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. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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. NEW ACCOUNTING STANDARDS 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 results of operations and financial position in either 2002 or 2001. 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 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 August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived 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 as required adopted this standard as of January 1, 2002. The adoption did not have an effect on the Company's 2002 results of operations and financial position. Rescission of FASB Statements No. 4, 44, and 64, amendment of SFAS No. 13, and technical corrections In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". The rescission of SFAS No. 4 and SFAS No. 64 eliminates the requirement to report material gains and losses from the extinguishment of debt as an extraordinary item in the statement of income that are not unusual or infrequent in nature. The rescission of SFAS No. 44 does not impact the Company. The Company is required to adopt the provisions of these rescissions as of January 1, 2003 and does not expect the adoption to have a material effect on the results of its operations and financial position. The amendment to SFAS No. 13 "Accounting for Leases" eliminated an inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company is required to and has adopted these provisions for transactions occurring after May 15, 2002. There was no impact on the Company's results of operations and financial position upon adoption. Certain other existing authoritative pronouncements have been amended to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company is required to adopt these provisions as of January 1, 2003 and does not expect the adoption to have a material effect on the results of its operations and financial position. Accounting for costs associated with exit or disposal activities In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" which addresses the accounting for restructuring and similar costs. This standard supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This standard requires that a liability associated with an exit activity that does not involve a newly acquired company in a business combination, or a disposal activity covered by SFAS No. 144, be recognized when the liability is incurred instead of recognizing the liability at the date of a company's commitment to an exit plan, as was required under EITF Issue No. 94-3. The statement establishes that the fair value of the liability is the objective for initial measurement of the liability and requires that the liability be updated for any changes in its fair value each reporting period. With respect to one-time employee termination costs, SFAS No. 148 changed the accounting in situations where the employee to be terminated is required to render service between the notification date of their termination and the date the employee will be terminated in order to receive any termination benefits. For these situations when the required post-notification service period extends beyond the minimum retention period required by local law, the fair value liability will be amortized over the service period. The Company is required to adopt this new standard for any exit or disposal activities that are initiated after December 31, 2002. The impact of the adoption of SFAS No. 146 on the Company's future financial position or results of operations will depend upon the timing of and facts underlying any future exit or disposal activities. Accounting and disclosure for guarantees In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No.45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by it in issuing the guarantee. It also expands the disclosure requirements in the F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) financial statements of the guarantor with respect to its obligations under certain guarantees that it has issued. The Company is required to adopt the initial recognition and initial measurement accounting provisions of this interpretation on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not anticipate the adoption to have a material effect on the Company's financial position or results of operations. The disclosure requirements are required to and have been adopted by the Company as of December 31, 2002 (see Note 22). Stock based compensation Effective January 1, 2003, the Company will adopt the fair value method of accounting for stock option plans as defined in SFAS No. 123 "Accounting for Stock-Based Compensation." As a consequence, future employee stock option grants and other stock based compensation plans will be recorded as expense over the vesting period of the award based on their fair values at the date the stock based compensation is granted. The FASB has issued, in December 2002, SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment to FASB Statement No. 123" that allows companies adopting the fair value method permitted under SFAS No. 123 to choose from three alternative transition methods. The Company has elected to adopt the modified prospective method that recognizes stock based compensation expense from January 1, 2003 as if the fair value based accounting method had been used to account for all outstanding unvested employee awards granted, modified or settled in prior years. The ultimate impact on the future years' results of operations and financial position will depend upon the level of stock based compensation granted in future years. Assuming no additional stock based compensation grants are made in 2003 and no additional forfeitures of outstanding unvested grants, the Company estimates the additional compensation expense associated with its current outstanding awards will be CHF 5 million in 2003, CHF 3 million after tax, and CHF 1 million in 2004, CHF 0.6 million after tax. SFAS No. 148 also amends certain annual disclosure provisions of SFAS No. 123. The Company has adopted these disclosure requirements in 2002, as permitted in accordance with the statement. SFAS No. 148 also requires the disclosure in interim financial statements the pro forma net income and earnings per share determined as if the Company had used the fair value method of accounting for its stock based compensation plans in accordance with the fair value method for all periods for which it has not been applied. Previously this pro forma disclosure was only required for annual financial statements. For the pro forma net income and earnings per share of the Company for 2002, 2001 and 2000 determined as if the Company had used the fair value method of accounting for its stock based compensation plans, see Note 18. In 2002 and prior years, the Company has applied the disclosure-only provisions of SFAS No. 123 in accounting for its stock based compensation plans that permitted the application of the intrinsic value method, as defined in Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. Under APB Opinion No. 25, the Company recognized no compensation expense related to certain stock based compensation plans, as certain stock options have been granted at a price equal to the market price on the day of the grant and the discount offered under its employee share ownership plan was at a discount rate permitted without requiring compensation costs to be recorded. RECLASSIFICATIONS In accordance with the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets", effective January 1, 2002, the Company was required to present goodwill as a separate line item on the Consolidated Balance Sheet. Previously the Company had presented goodwill and other intangible assets together on a single line on the Consolidated Balance Sheet. In addition, certain reclassifications were made to separately report amortization of goodwill and amortization of other intangible assets in the Consolidated Statements of Income. The amounts reported for 2001 and 2000 have been reclassified to conform to the 2002 presentation. Beginning in 2002, minority interest is no longer reported as a component of "financial expense, net" and is reported separately on the Consolidated Statements of Income. On the Consolidated Balance Sheets, minority interest is no longer classified with liabilities, but rather presented as a separate line after total liabilities and before shareholders' equity. Reclassifications have been made to the 2001 Consolidated Balance Sheet and the 2001 and 2000 Consolidated Statements of Income to conform to the 2002 presentations. Certain other reclassifications to the 2001 and 2000 financial statements and related footnote amounts have been made to conform with the 2002 presentation. 2. EXCHANGE RATES OF PRINCIPAL CURRENCIES
- --------------------------------------------------------------------------------------------------------------- STATEMENT OF INCOME AVERAGE RATES BALANCE SHEET YEAR-END RATES ------------------------------------ ------------------------------- 2002 2001 2000 2002 2001 - ------------------------------------------------------------------------------ ------------------------------- 1 U.S. dollar (USD) 1.56 1.68 1.69 1.43 1.63 1 British pound (GBP) 2.34 2.43 2.56 2.28 2.37 1 Euro(1) (EUR) 1.47 1.51 1.56 1.46 1.47 100 German marks(1) (DEM) - - 79.62 - - 100 French francs(1) (FRF) - - 23.74 - - 1000 Italian lira(1) (ITL) - - 0.80 - - 100 Japanese yen (JPY) 1.24 1.39 1.57 1.18 1.28 - -------------------------------------------------------------------------------------------------------------------
(1) 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-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 3. ACQUISITIONS AND DIVESTITURES - ------------------------------------------------------------------------------ MINOR ACQUISITIONS AND DIVESTITURES In May 2002, the Company purchased Melapur B.V. ("Melapur") from DSM N.V. for a total purchase price of approximately CHF 22 million (euro 15 million). Melapur is a provider of halogen-free melamine-based flame retardants. If the Melapur business reaches certain sales milestones over the next three years, additional purchase consideration of up to CHF 5 million (euro 3.5 million) will be paid to DSM N.V. The resulting other intangible assets are being amortized over a weighted average of 12 years. The results of operations for Melapur have been included in the Company's statement of income from the date of acquisition. The business acquired will expand the range of flame retardants of the Plastic Additives Segment. In June 2001, the Company completed the acquisition of EFKA Additives B.V. ("EFKA"), 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 intangibles being amortized over a weighted average of 11 years. The results of operations for EFKA have been included in the Company's statement of income from the date of acquisition. 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 9 and 12). 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 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, up to December 31, 2001, after then goodwill is no longer amortized (see Note 1). 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. 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) - ----------------------------------------------------------------------------------------- NET SALES 774 - ----------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 57 Provision for income taxes 21 Minority interest 1 - ----------------------------------------------------------------------------------------- INCOME FROM OPERATIONS OF THE PERFORMANCE POLYMERS BUSINESS, NET OF TAX 37 - ----------------------------------------------------------------------------------------- Loss on sale of 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 on sale includes transaction related taxes of approximately CHF 160 million and costs associated with selling the business. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data)
4. ACCOUNTS RECEIVABLE 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Accounts receivable 1 110 1 186 Allowance for doubtful accounts (96) (120) - ---------------------------------------------------------------------------------------------------------------- TOTAL 1 014 1 066 - ----------------------------------------------------------------------------------------------------------------
The allowance for doubtful accounts decreased by CHF 24 million in 2002 compared to 2001. This decrease includes a CHF 23 million reclassification to accrued liabilities for provisions that did not relate to accounts receivable (see Note 23).
5. INVENTORIES 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Raw materials 180 180 Work in process and finished goods 1 324 1 412 Allowance for obsolete and slow moving inventory (58) (66) - ---------------------------------------------------------------------------------------------------------------- TOTAL 1 446 1 526 - ----------------------------------------------------------------------------------------------------------------
6. PROPERTY, PLANT AND EQUIPMENT - ----------------------------------------------------------------------------------------------------------------- MACHINERY AND CONSTRUCTION LAND BUILDINGS EQUIPMENT IN PROGRESS TOTAL TOTAL 2002 2002 2002 2002 2002 2001 - ----------------------------------------------------------------------------------------------------------------- Cost at January 1, 123 1 923 5 842 154 8 042 8 098 Additions 0 1 65 184 250 259 Retirements/disposals (1) (4) (92) (4) (101) (146) Changes in consolidation scope 0 0 1 0 1 44 Currency adjustments (7) (104) (348) (7) (466) (211) Other (1) 28 117 (170) (26) (2) - ----------------------------------------------------------------------------------------------------------------- COST AT DECEMBER 31, 114 1 844 5 585 157 7 700 8 042 - ----------------------------------------------------------------------------------------------------------------- Accumulated depreciation at January 1, (893) (3 584) (4 447) (4 311) Depreciation (55) (297) (352) (377) Accumulated depreciation on retirements/disposals 3 75 78 109 Changes in consolidation scope 0 0 0 0 Currency adjustments 38 196 234 111 Other 0 13 13 (9) - ----------------------------------------------------------------------------------------------------------------- ACCUMULATED DEPRECIATION AT DECEMBER 31, (907) (3 597) (4 504) (4 477) - ----------------------------------------------------------------------------------------------------------------- NET BOOK VALUE AT DECEMBER 31, 114 937 1 988 157 3 196 3 565 - -----------------------------------------------------------------------------------------------------------------
The insurance value of the property, plant and equipment was approximately CHF 10 325 million at December 31, 2002 and CHF 10 804 million at December 31, 2001. F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data)
7. GOODWILL - -------------------------------------------------------------------------------------------------------------- Changes in the carrying amount of goodwill by Segment from December 31, 2001 to December 31, 2002 were as follows: DECEMBER 31, DECEMBER 31, FOREIGN CURRENCY 2001 RECLASS TO 2001 TRANSLATION OTHER DECEMBER 31, AS REPORTED SEGMENTS RECLASSIFIED ADJUSTMENTS CHANGES(1) 2002 - ------------------------------------------------------------------------------------------------------------------------------ Plastic Additives 20 0 20 (3) 4 21 Coating Effects 70 128 198 (9) 0 189 Water & Paper Treatment 7 984 991 (34) 15 972 Textile Effects 0 166 166 (6) 0 160 Home & Personal Care 1 41 42 (2) 0 40 Corporate 1 319 (1 319) 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL 1 417 0 1 417 (54) 19 1 382 - ------------------------------------------------------------------------------------------------------------------------------
(1) Other changes represents a reclassification from other intangible assets and minor acquisitions.
8. OTHER INTANGIBLE ASSETS - -------------------------------------------------------------------------------------------------------------- Other intangible assets by major class consist of the following: GROSS NET CARRYING ACCUMULATED CARRYING DECEMBER 31, 2002 VALUE AMORTIZATION VALUE - ----------------------------------------------------------------------------------------------------------------- Developed technology and know-how 763 (125) 638 Patents 37 (6) 31 Trademarks and tradenames 3 0 3 Minimum pension liability - intangible asset 19 - 19 Other 4 ( 1) 3 - ----------------------------------------------------------------------------------------------------------------- TOTAL 826 (132) 694 - -----------------------------------------------------------------------------------------------------------------
GROSS NET CARRYING ACCUMULATED CARRYING DECEMBER 31, 2001 VALUE AMORTIZATION VALUE - ----------------------------------------------------------------------------------------------------------------- Developed technology and know-how 774 (103) 671 Patents 36 (3) 33 Trademarks and tradenames 2 0 2 Minimum pension liability - intangible asset 22 - 22 Other 2 0 2 - ----------------------------------------------------------------------------------------------------------------- TOTAL 836 (106) 730 - -----------------------------------------------------------------------------------------------------------------
For 2002, amortization of other intangible assets amounted to CHF 33 million (2001: CHF 31 million and 2000: CHF 30 million). Based on the other intangible assets values at December 31, 2002, the estimated future annual other intangible assets amortization expense is expected to be as follows: 2003: CHF 33 million, 2004: CHF 32 million, 2005: CHF 32 million, 2006: CHF 32 million, 2007: CHF 31 million, 2008 and thereafter CHF 515 million. 9. 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. F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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.
- ---------------------------------------------------------------------------------------------------------------- 2002 2001 ----------------------------- ----------------------------- BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE - ---------------------------------------------------------------------------------------------------------------- Long-term debt, including current portion 3 542 3 601 3 680 3 675 - ----------------------------------------------------------------------------------------------------------------
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, there are no quoted market prices available.
FINANCIAL INVESTMENTS - ---------------------------------------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Investments in equity affiliates 147 157 Investments in unconsolidated companies 25 36 - ---------------------------------------------------------------------------------------------------------------- TOTAL FINANCIAL INVESTMENTS 172 193 - ----------------------------------------------------------------------------------------------------------------
At December 31, 2002, the cumulative unrealized gain/(loss), before tax on investments in unconsolidated companies, which is recorded in accumulated other comprehensive income, was CHF 0 million and at December 31, 2001, was an unrealized loss of CHF 37 million (December, 31, 2000: CHF 0 million). The unrealized losses were the result of market weakness in the industry segments in which these companies participate. In management's opinion, this situation in 2001 was temporary. In 2002, the decline in the market values below the Company's cost basis in its financial investments in unconsolidated companies, primarily the Company's investment in Hexcel Corporation, was in management's opinion no longer deemed to be temporary. As a result, a loss was realized in the Consolidated Statement of Income of CHF 38 million (CHF 23 million, net of tax). 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 2002, 2001 and 2000. 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. 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 12). 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. 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, 2002, 2001 and 2000.
- --------------------------------------------------------------------------------------------------------------- 2000 ----------------------------------------- 2002 2001 TOTAL HEXCEL (1) OTHER - --------------------------------------------------------------------------------------------------------------- Sales 152 213 2 469 1 791 678 Income before taxes 21 16 207 141 66 Net income 16 11 141 97 44 - --------------------------------------------------------------------------------------------------------------- Total assets 136 161 937 0 937 Shareholders' equity 280 293 538 0 538 - ---------------------------------------------------------------------------------------------------------------
(1) The figures for the year 2000 for Hexcel have been shown separately due to its size. The income from earnings of equity affiliates of CHF 6 million (CHF 8 million in 2001 and CHF 113 million in 2000) 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 2 million (CHF 3 million in 2001 and CHF 32 million in 2000) 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, included in the line Income from earnings of equity affiliates, and a provision for income taxes of CHF 22 million 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. F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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. 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 with financial instruments and 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 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 2002, the Company recorded a net gain of CHF 1 million (2001: a net gain of CHF 6 million) for hedging ineffectiveness in "Other financial expense, net" in the Consolidated Statements of Income. Information with respect to cash flow hedges The Company has entered into natural gas forward contracts that are designated as cash flow hedges of price risk related to a portion of the Company's forecasted natural gas purchases in the United States. The Company used natural gas forward contracts to minimize its exposure to increases in natural gas prices in 2002 and in 2001. At December 31, 2002, the Company had open forward contracts with maturity dates ranging from January 2003 to September 2003. At December 31, 2002, the fair value of open natural gas forward contracts was an unrealized gain of CHF 1.7 million, before taxes (2001: CHF 0 million) recorded in other comprehensive income. If this amount were to be realized, all of it would be reclassified into cost of goods sold during the next twelve months. During 2002, both realized gains and losses recorded in cost of goods sold and hedge ineffectiveness were not significant. 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 F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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.
10. OTHER ASSETS 2002 2001 - --------------------------------------------------------------------------------------------------- Prepaid pension costs 699 640 Deferred taxes 183 168 Loans to third parties and equity affiliates 86 80 Other 66 98 - --------------------------------------------------------------------------------------------------- TOTAL 1 034 986 - ---------------------------------------------------------------------------------------------------
11. ACCRUALS AND OTHER CURRENT LIABILITIES 2002 2001 - --------------------------------------------------------------------------------------------------- Payroll and employee benefits 208 166 Environmental remediation and compliance 33 31 Restructuring 141 180 Retirement and postemployment benefits 27 33 Deferred income taxes 84 115 Other 449 565 - --------------------------------------------------------------------------------------------------- TOTAL 942 1 090 - ---------------------------------------------------------------------------------------------------
Restructuring includes CHF 141 million (2001: CHF 168 million) for accrued separation costs 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. In 2001, restructuring also included CHF 12 million for prior years' restructuring programs (see Note 12). 12. RESTRUCTURING AND SPECIAL CHARGES - ------------------------------------------------------------------------------ PRIOR YEAR PROGRAMS The restructuring accrual at January 1, 2002 relates to the 2000 restructuring projects, announced in the second half of 2000. These programs 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 full-time equivalents ("FTEs") in the United States and Southern Europe, principally in the administration, sales and marketing functions and, in addition, the manufacturing functions in the United States. The terminations and costs related to these restructuring programs were completed during 2002. 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 allows for a greater focus on providing not just products, but total integrated solutions. This program resulted in the establishment of five 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. In 2001, under the "Fit For Growth!" program, the Company 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 restructuring expenses of CHF 52 million related to the 2000 restructuring program discussed above. These restructuring expenses were offset by 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 9). Also included is a special charges expense of CHF 21 million which relates to an impairment loss on certain equity investments. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) The costs and activity associated with the prior year restructuring programs are summarized below:
- ---------------------------------------------------------------------------------------------------------------- SEVERANCE OTHER 2002 COSTS COSTS TOTAL - ---------------------------------------------------------------------------------------------------------------- January 1, 5 7 12 Amounts utilized(1) (5) (7) (12) - ---------------------------------------------------------------------------------------------------------------- DECEMBER 31, 0 0 0 - ----------------------------------------------------------------------------------------------------------------
(1) Includes currency adjustments.
- ---------------------------------------------------------------------------------------------------------------- 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.
- ---------------------------------------------------------------------------------------------------------------- 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.
13. SHORT-TERM DEBT 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Bank overdrafts 38 31 Loans 102 122 Commercial paper 5 4 Other 153 157 Current portion of long-term debt 1 198 2 - ---------------------------------------------------------------------------------------------------------------- TOTAL 1 496 316 - ----------------------------------------------------------------------------------------------------------------
The Company's principal commercial paper programs are in the United States and provide for short-term borrowings up to USD 1 000 million. At December 31, 2001 and 2002, no amounts were outstanding. The programs were secured by a USD 50 million standby credit facility through December 31, 2002, when the standby letter of credit expired. The Company maintained a multicurrency revolving loan facility. The facility expired on July 11, 2002. At December 31, 2001, the available commitments under this facility were CHF 400 million, all of which were unused. A commitment fee of 0.10% per annum was paid on the average unused facility. The facility bore interest at London Interbank Offered Rate (LIBOR) plus 21.5 basis points. The weighted average interest rate for short-term debt (excluding current portion of long-term debt) calculated at December 31, 2002 was 4.9 percent and at December 31, 2001 was 6.3 percent. Unused short-term credit lines totaled approximately CHF 753 million at December 31, 2002 and CHF 1 040 million at December 31, 2001. F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data)
14. LONG-TERM DEBT 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Bonds and Euro Medium-Term Notes 2 583 2 585 Convertible bonds 889 1 005 Amounts owed to credit institutions 5 11 Other long-term debt 65 79 - ---------------------------------------------------------------------------------------------------------------- Total 3 542 3 680 Less: current portion of long-term debt 1 198 2 - ---------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT 2 344 3 678 - ----------------------------------------------------------------------------------------------------------------
BONDS AND EURO MEDIUM-TERM NOTES 2002 2001 - ---------------------------------------------------------------------------------------------------------------- CHF 1000 3.25% Straight Bonds, principal due 2008 1 065 982 CHF 300 3.25% Straight Bonds, principal due 2009 303 303 USD 178 U.S. pollution control and industrial development bonds, principal due between 2008 and 2028 (weighted average interest rate of 3.03 %) 256 291 - ---------------------------------------------------------------------------------------------------------------- TOTAL BONDS 1 624 1 576 - ---------------------------------------------------------------------------------------------------------------- USD 175 6.125% Euro Medium-Term Note, principal due 2003 247 277 EUR 114(1) 4.875% Euro Medium-Term Note, principal due 2005 168 169 GBP 243 6.50% Euro Medium-Term Note, principal due 2013 544 563 - ---------------------------------------------------------------------------------------------------------------- TOTAL EURO MEDIUM-TERM NOTES 959 1 009 - ---------------------------------------------------------------------------------------------------------------- TOTAL BONDS AND EURO MEDIUM-TERM NOTES 2 583 2 585 - ----------------------------------------------------------------------------------------------------------------
(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 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 of treasury stock reserved for the potential conversion in 2001, and none in 2002. 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. The annual maturities of long-term debt outstanding at December 31, 2002 are as follows: 2003 CHF 1 208 million; 2004 CHF 1 million; 2005 CHF 168 million; 2006 CHF 1 million; 2007 CHF 1 million; 2008 and thereafter CHF 2 113 million.
15. INCOME TAXES - ---------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes and minority interest consists of the following: - ---------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Switzerland 258 319 405 Foreign 315 249 248 - ---------------------------------------------------------------------------------------------------------------- TOTAL INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 573 568 653 - ---------------------------------------------------------------------------------------------------------------- The provision for income taxes in 2002, 2001 and 2000 from continuing operations consists of the following: - --------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Switzerland 62 34 33 Foreign 42 57 16 - ---------------------------------------------------------------------------------------------------------------- TOTAL CURRENT PROVISION 104 91 49 - ---------------------------------------------------------------------------------------------------------------- Switzerland 3 35 26 Foreign 45 49 121 - ---------------------------------------------------------------------------------------------------------------- DEFERRED PROVISION 48 84 147 - ---------------------------------------------------------------------------------------------------------------- SHARE OF TAXES FROM EARNINGS OF EQUITY AFFILIATES. 2 3 32 - ---------------------------------------------------------------------------------------------------------------- TOTAL PROVISION FOR INCOME TAXES 154 178 228 - ----------------------------------------------------------------------------------------------------------------
F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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:
- ---------------------------------------------------------------------------------------------------------------- 2002 2001 2000 % % % - ---------------------------------------------------------------------------------------------------------------- Expected tax rate 30 30 30 Non-deductible items 2 7 14 Tax free income (2) (2) (1) Income taxed at reduced rates (3) (3) 0 Changes in valuation allowance 0 1 (11) Other 0 (1) 3 - ---------------------------------------------------------------------------------------------------------------- EFFECTIVE TAX RATE 27 32 35 - ----------------------------------------------------------------------------------------------------------------
"Non-deductible items" includes the tax effect of amortization of other intangible assets in 2002 and in 2001 and 2000 additionally the effect of amortization of goodwill. In 2000, also included is the tax effect of the impairment loss on certain of the Company's equity investments (see Note 12) and the effect of certain taxable income in one of the Company's subsidiaries that was not recognized for financial accounting purposes. In 2002, "Other" includes approximately 4 percent for tax adjustments, offset by (4) percent reflecting the effect of certain taxable expenses in certain of the Company's subsidiaries that were not recognized for financial reporting purposes. 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 2000, "Other " includes approximately 2 percent, reflecting the effect of the reduction in the German statutory tax rates on the year-end 2000 net deferred tax asset balances of the Company's German subsidiaries. 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 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. The significant components of activities that gave rise to deferred tax assets and liabilities on the balance sheet at December 31, 2002 and 2001, were as follows:
- -------------------------------------------------------------------------------------------------------------- 2002 2001 - -------------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Pensions and other employee compensation 120 104 Inventory 32 44 Restructuring and special charges 26 22 Environmental reserves 186 241 Tax loss carryforwards 181 170 Other 34 45 - -------------------------------------------------------------------------------------------------------------- Gross deferred tax assets 579 626 Valuation allowance (131) (146) - -------------------------------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS 448 480 - -------------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Property, plant and equipment (398) (429) Other (193) (186) - -------------------------------------------------------------------------------------------------------------- GROSS DEFERRED TAX LIABILITIES (591) (615) - -------------------------------------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITIES (143) (135) - -------------------------------------------------------------------------------------------------------------- INCLUDED IN Prepaid and other current assets 144 191 Other assets 183 168 Accruals and other current liabilities (84) (115) Deferred income taxes (386) (379) - -------------------------------------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITIES (143) (135) - --------------------------------------------------------------------------------------------------------------
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. F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) For tax return purposes, the Company has available tax loss carryforwards of approximately CHF 500 million, of which CHF 71 million will expire in the next five years and CHF 325 million will expire between five and twenty years. The remaining carryforwards do not expire. At December 31, 2002, unremitted earnings of subsidiaries outside of Switzerland of approximately CHF 340 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.
16. OTHER LIABILITIES 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Environmental remediation and compliance 581 717 Retirement and postemployment benefits 679 625 Other 277 346 - ---------------------------------------------------------------------------------------------------------------- TOTAL 1 537 1 688 - ----------------------------------------------------------------------------------------------------------------
The environmental remediation and compliance accrual, including the current portion, decreased by CHF 134 million as a result of a CHF 82 million usage of the accrual in 2002 (see Note 22) and a CHF 52 million reduction related to currency effects. 17. 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 9 per share (2001 and 2000: 10 CHF 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 March 22, 2004 without any restriction. According to the Swiss Code of Obligations, the Company may under certain conditions, as defined, acquire up to 10 percent of its own shares. Within this limit, the Company intends to acquire up to 5 percent of its shares to cover future demands under its various stock based compensation plans (see Note 18). At the Company's Annual General Meeting held on March 22, 2002, the shareholders voted in favor of the proposal made by the Board of Directors to pay to the Company's shareholders a dividend of CHF 2 per share, based on 2001 results and a capital reduction of CHF 1 per share. The capital reduction payment was in the form of a reduction in the nominal value of each common share from CHF 10 per share to CHF 9 per share. The Company paid the dividend on March 27, 2002, which totaled CHF 134 million (2001: CHF 132 million paid on March 28, 2001, based on 2000 results and 2000 CHF 133 million paid on April 18, 2000, based on 1999 results). The capital reduction was paid on June 28, 2002, which totaled CHF 69 million. The Company sold 4 970 437 shares in 2002 (1 929 453 shares in 2001 and 4 862 shares in 2000) of treasury stock at market prices. In addition, in 2002, the Company purchased 2 174 577 shares of treasury stock (2001: 1 855 966 shares of treasury stock and 391 177 in 2000) at market prices. At December 31, 2002, the Company held 3 192 087 of treasury shares (2001: 5 987 947 treasury shares). The Company designated a total of 1 978 567 shares in 2002 (5 278 224 shares in 2001 and 5 485 963 shares in 2000) of its treasury stock as reserved shares primarily for satisfaction of future share requirements under its various outstanding employee stock option plans and in 2001 also for the potential share issuance under its outstanding convertible bonds (see Notes 14 and 18). The remaining 1 213 520 shares in 2002 (709 723 shares in 2001 and 575 471 shares in 2000) of treasury stock have been designated as unreserved shares. The after-tax components of accumulated other comprehensive income are as follows:
- ---------------------------------------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Currency translation adjustment (285) (199) Unrealized loss on cash flow hedges, net of tax 1 0 Unrealized gains/(losses) on available-for-sale securities, net of tax 0 (23) Minimum pension liability, net of tax (77) (19) Other, net of tax 1 1 - ---------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (360) (240) - ----------------------------------------------------------------------------------------------------------------
The deferred tax effect on the unrealized gains/(losses) on available-for- sale securities is a benefit of CHF 0 million in 2002 (2001: CHF 14 million) and on cash flow hedges an expense of CHF 0.7 million (2001: CHF 0 million). The deferred tax effect on the minimum pension liability adjustment is a deferred tax benefit of CHF 49 million in 2002 (2001: CHF 12 million). The currency translation adjustment is not adjusted for income taxes as it relates primarily to indefinite investments in non-Swiss subsidiaries. F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 18. 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. Descriptions of the terms of the Company's plans are presented in the following paragraphs. In 2002, in connection with the capital reduction of CHF 1 per share (see note 17), the Company, in accordance with the terms of its stock option plans, reduced the exercise price of its outstanding stock options ("the capital reduction repricing"). No compensation expense was recorded as a result of the capital reduction repricing. For the Leveraged Executive Asset Plan, which is described below, the capital reduction repricing was set by the investment bank. All exercise prices disclosed herein have been accordingly adjusted. 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 (after the capital reduction repricing CHF 108.70 per share). 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 were 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 of December 31, 2002 a total of 50 468 share options have been exercised. As a result of terminations from the program, a total of 60 318 options (2001: 58 502 options; 2000: 55 776 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 for 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 was 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, also include grants of restricted shares of common stock of the Company to senior management, other key 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 2002, 2001 and 2000, no compensation expense was recorded for the options issued under this plan. The following table summarizes option activity under the LTIP during 2002, 2001 and 2000:
- ---------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE OUTSTANDING - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 132.57 857 908 Options granted 107.23 461 210 Options canceled/forfeited 117.21 (19 218) - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 123.81 1 299 900 - ---------------------------------------------------------------------------------------------------------------- Options granted 111.07 461 444 Options issued on conversion of stock appreciation rights 163.70 60 799 Options canceled/forfeited 114.61 (43 694) - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 122.09 1 778 449 - ---------------------------------------------------------------------------------------------------------------- Options granted 111.09 481 401 Options exercised 110.90 (32 098) Options canceled/forfeited 113.41 (32 413) - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 119.97 2 195 339 - ----------------------------------------------------------------------------------------------------------------
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, adjusted to CHF 163.70 after the capital reduction repricing. These rights entitle the F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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 163.70. In 2001 and 2000, 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, 2002:
- ---------------------------------------------------------------------------------------------------------------- STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE ----------------------------------- ----------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE NUMBER OF REMAINING NUMBER OF REMAINING EXERCISE PRICE - OUTSTANDING/ OUTSTANDING CONTRACTUAL LIFE OUTSTANDING CONTRACTUAL LIFE RANGE EXERCISABLE OPTIONS (IN YEARS) OPTIONS (IN YEARS) - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- 107.09 - 114.09 110.20/111.12 1 802 321 4.3 636 234 4.1 163.70 163.70/163.70 393 018 1.6 393 018 1.6 - ---------------------------------------------------------------------------------------------------------------- 2 195 339 1 029 252 - ----------------------------------------------------------------------------------------------------------------
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 4 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. In connection with the LTIP 2002, the Company granted 85 128 restricted shares of common stock, which are restricted for three years from the date of grant, to 683 participants. The market value of the common stock at date of grant was CHF 112 per share. Compensation expense of approximately CHF 10 million has been recognized in 2002 related to the grant of these shares. 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 equals to the market value of the shares of common stock at the date of the grant of CHF 183, adjusted to CHF 181.70 after the capital reduction repricing. These options vest after four years and expire after seven years from date of grant. As of December 31, 2002, 12 560 of the stock options have been forfeited. In 2002, 2001 and 2000, 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 2002, 1 660 employees (2001: 2 279 employees; 2000: 2 836 employees) purchased 29'499 shares (2001: 40 069 shares; 2000: 50 099 shares) for which approximately CHF 3 million (2001: CHF 4 million; 2000: CHF 5 million) was paid to the Company. In 2002, 2001 and 2000, no compensation expense was recorded under this plan. MAB - In 1998, the Company established a "Mitarbeiterbeteiligungsplan" (Employee Investment Plan) which grants annually to most employees in Switzerland (as an enhancement to their pension plan arrangements) the right to purchase 20 shares (beginning in 2003, 25 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 may be adjusted). The rights vest at the grant date and become exercisable at the date of the employees' retirement or termination. The following table summarizes rights activity under the MAB during 2002, 2001 and 2000:
- ---------------------------------------------------------------------------------------------------------------- RIGHTS EXERCISE PRICE OUTSTANDING - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 15 188 640 Rights granted 15 83 260 Rights exercised 15 (39 140) - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 15 232 760 - ---------------------------------------------------------------------------------------------------------------- Rights granted 15 86 240 Rights exercised 15 (16 260) - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 15 302 740 - ---------------------------------------------------------------------------------------------------------------- Rights granted 15 86 040 Rights exercised 15 (18 500) - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 15 370 280 - ----------------------------------------------------------------------------------------------------------------
Compensation expense is recorded in the year the rights are granted and, in 2002, CHF 8 million (2001: CHF 8 million; 2000: CHF 10 million) of compensation expense was recorded under this plan. F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) PSP - In 2001, the Company established a Performance Share Plan (PSP) for selected senior and 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 if 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 1 675 rights (2001: 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 2002 and 2001. CHANGE IN CONTROL AND RESERVE OF SHARES Upon a change in control of the Company (defined as 30 percent for LEAP, 33.33 percent other than 1998, which is 50 percent, for LTIP program, and 20 percent for PSP, such percentage, in each case, as being 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. At December 31, 2002, the Company had approximately 2.0 million shares (2001: 1.8 million shares; 2000: 1.7 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 2002, 2001 and 2000 have been determined as if the Company had used the fair value method of accounting for its stock option based compensation plans in accordance with the provisions of SFAS No. 123. No pro forma compensation expense was recorded as a result of the capital reduction repricing. The pro forma amounts presented below reflect the portion of the estimated fair value of awards granted in 2002, 2001 and 2000, based on the vesting or service period over which the awards are earned.
- ---------------------------------------------------------------------------------------------------------------- YEAR-ENDED DECEMBER 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Net income, as reported 406 382 452 Add: Stock based employee compensation expense included in reported net income, net of related tax effects 18 8 25 Deduct: Stock based employee compensation expense determined as if the fair value based method was used for all plans, net of related tax effects (29) (20) (33) - ---------------------------------------------------------------------------------------------------------------- PRO FORMA NET INCOME 395 370 444 - ---------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE - BASIC AND DILUTED: Basic and diluted - as reported 5.92 5.76 6.81 Basic and diluted - pro forma 5.76 5.57 6.69 - ---------------------------------------------------------------------------------------------------------------- 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, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Expected option lives in years 6.07 7.04 7.36 Expected volatility in percentage 23.00 29.93 32.36 Risk-free interest rate in percentage 3.23 3.60 3.94 Expected dividend yield in percentage 1.81 1.80 1.85 Weighted average fair value in CHF 24.05 33.13 36.14 - ---------------------------------------------------------------------------------------------------------------- 19. 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 16 million in 2002, CHF 19 million in 2001 and CHF 19 million in 2000. F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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 -------------------------- ---------------------------- 2002 2001 2000 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- MAJOR PLANS: Service cost 95 92 114 1 1 1 Interest cost 182 185 162 5 5 5 Expected return on plan assets (230) (252) (239) 0 0 0 Amortization of prior service cost 1 0 (3) (1) (1) (1) Other (gains), losses and amortization, net (26) (38) (36) (2) 0 (3) - ---------------------------------------------------------------------------------------------------------------- BENEFIT EXPENSE (INCOME) MAJOR PLANS 22 (13) (2) 3 5 2 Other plans 1 2 3 0 0 0 - ---------------------------------------------------------------------------------------------------------------- TOTAL BENEFIT EXPENSE (INCOME)(1) 23 (11) 1 3 5 2 - ---------------------------------------------------------------------------------------------------------------- (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 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, 2002 and 2001: - ---------------------------------------------------------------------------------------------------------------- PENSION BENEFITS POSTRETIREMENT BENEFITS -------------------------- ----------------------------- 2002 2001 2002 2001 -------------------------- ----------------------------- BENEFIT OBLIGATION, BEGINNING OF YEAR 3 532 3 340 67 66 Service cost 95 92 1 1 Interest cost 182 185 5 5 Participant contributions 22 20 2 2 Actuarial (gain) loss (114) 74 12 1 Plan amendments 2 7 0 0 Benefits paid (171) (157) (9) (7) Foreign currency translation (102) (65) (9) (1) Other (3) 36 1 0 - ---------------------------------------------------------------------------------------------------------------- BENEFIT OBLIGATION, END OF YEAR 3 443 3 532 70 67 - ---------------------------------------------------------------------------------------------------------------- PLAN ASSETS, BEGINNING OF YEAR 3 292 3 939 0 0 Actual return on plan assets (384) (505) 0 0 Employer contributions 104 60 6 5 Participant contributions 22 20 2 2 Benefits paid (171) (157) (9) (7) Foreign currency translation (77) (53) 0 0 Other 3 (12) 1 0 - ---------------------------------------------------------------------------------------------------------------- PLAN ASSETS, END OF YEAR 2 789 3 292 0 0 - ---------------------------------------------------------------------------------------------------------------- Funded status (654) (240) (70) (67) Unrecognized net (gain) loss 890 415 (7) (17) Unrecognized prior service cost 9 (9) (1) (8) - ---------------------------------------------------------------------------------------------------------------- NET AMOUNT RECOGNIZED, MAJOR PLANS 245 166 (78) (92) Other plans (14) (9) 0 0 - ---------------------------------------------------------------------------------------------------------------- TOTAL NET AMOUNT RECOGNIZED 231 157 (78) (92) - ----------------------------------------------------------------------------------------------------------------
Certain of the Company's pension plans have accumulated benefit obligations that exceed plan assets (the "unfunded accumulated benefit obligation") by CHF 553 million in 2002 (2001: CHF 501 million). The aggregate accumulated benefit obligations of those plans are CHF 871 million in 2002 (2001: CHF 882 million) and the plan assets of those plans are CHF 318 million in 2002 (2001: CHF 381 million). The aggregate benefit obligations of these plans are CHF 958 million in 2002 (2001: CHF 968 million). The Company is required to recognize an accrued pension liability at least equal to the unfunded accumulated benefit obligation. For pension plans where the accrued pension cost for the plan is less than the unfunded accumulated benefit obligation or a prepaid pension asset has been recognized for these plans, an additional minimum pension liability is required to be recorded. F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) In certain of the Company's plans, mainly in the United States, the unfunded accumulated benefit obligations, which amounted to CHF 126 million (2001: CHF 70 million), exceeded the accrued pension costs resulting in the recognition of an additional minimum pension liability of CHF 136 million (2001: CHF 53 million). This additional minimum pension liability has no impact on income as it was offset by recording an intangible asset of CHF 19 million (2001: CHF 22 million) and by reducing shareholders' equity by CHF 117 million, before taxes (2001: CHF 31 million, before taxes). The majority of the remaining unfunded plans are in Germany where, in line with local practices, the Company has not funded the pension plans of its German subsidiaries. This results in an accrued benefit liability of approximately CHF 445 million in 2002 (2001: CHF 435 million), which exceeds the unfunded accumulated benefit obligation by CHF 33 million (2001: CHF 35 million). The amounts recognized in the Consolidated Balance Sheets as of December 31, 2002 and 2001, related to retirement benefits consists of the following:
- -------------------------------------------------------------------------------------------------------------- PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------- ---------------------------- 2002 2001 2002 2001 ------------------------- ---------------------------- Prepaid benefit cost(1) 700 650 - - Accrued benefit liability(1) (605) (546) (78) (92) Minimum pension liability - intangible asset 19 22 - - Accumulated other comprehensive income, pre tax 126 31 - - Currency adjustments(2) (9) - - - - -------------------------------------------------------------------------------------------------------------- TOTAL NET AMOUNT RECOGNIZED 231 157 (78) (92) - -------------------------------------------------------------------------------------------------------------- (1) Current and long-term portion (2) Currency effect on the prior year additional minimum pension liability The weighted average key actuarial assumptions used to compute the benefit obligations were as follows:
- --------------------------------------------------------------------------------------------------------------- PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------------------------------------ 2002 2001 2000 2002 2001 2000 ------------------------------------------------------------ Discount (interest rate) 5.1% 5.3% 5.5% 6.9% 7.2% 7.7% Rate of increase in compensation levels 2.4% 2.9% 3.2% n.a. n.a. n.a. Expected long-term rate of return on plan assets 6.2% 6.5% 6.3% n.a. n.a. n.a. - ---------------------------------------------------------------------------------------------------------------
The weighted average healthcare cost trend rate is 10.0 percent for 2003 and is assumed to decrease to an ultimate trend rate of 5.0 percent in 2010. A one percent annual increase in the assumed healthcare cost trend rate would increase the 2002 accumulated postretirement benefit obligation by approximately CHF 4 million and the annual postretirement benefit cost by approximately CHF 0.4 million. A one percent annual decrease in the assumed healthcare cost trend rate would decrease the 2002 accumulated postretirement benefit obligation by approximately CHF 4 million and the annual postretirement benefit cost by approximately CHF 0.4 million. At December 31, 2002, the Company's various pension plans held 86 211 shares (2001: 500 000 shares) with a market value of approximately CHF 8 million (2001: CHF 52 million). NUMBER OF PERSONNEL AND PERSONNEL EXPENSES The Company employed in its continuing operations 19 007 employees at December 31, 2002, 19 683 at December 31, 2001, and 20 306 at December 31, 2000. The Company's salaries and wages, including social charges in its continuing operations, were CHF 1 752 million in 2002, CHF 1 796 million in 2001 and CHF 2 047 million in 2000. 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. 20. EARNINGS PER SHARE - ------------------------------------------------------------------------------ In 2002, 2001 and 2000 there was no difference in basic and diluted earnings per share. In 2002 the basic weighted average number of shares outstanding were 68 549 964 (2001: 66 419 147 and 2000: 66 311 879) and the diluted weighted average number of shares outstanding were 68 575 058 (2001: 66 419 147 and 2000: 66 311 879). In 2002, the difference of 25 094 in the weighted average number of shares outstanding (2001 and 2000: no difference) for the purposes of computing the diluted earnings per share was due to the inclusion of the dilutive effect of previously granted stock options with exercise prices between CHF 107.09 and CHF 111.09, as their exercise prices were less than the average market price of the Company's shares for 2002. For purposes of calculating the basic and diluted earnings per share in 2002, 2001 and 2000 there was no required adjustment to the reported income from continuing operations, discontinued operations or 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. F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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 2002, 2001 and 2000, 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, 2002, 2001 and 2000, 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. The calculation of diluted earnings per share in 2002 excluded 878 036 stock options outstanding with exercise prices between CHF 112.09 and CHF 181.70, in 2001 excluded 1 768 952 stock options outstanding with exercise prices between CHF 108 and CHF 183, and in 2000 excluded 1 297 543 stock options outstanding with exercise prices between CHF 108 and CHF 183, as their exercise prices were greater than the average market price of the Company's shares in the respective years. 21. RELATED PARTY TRANSACTIONS - ------------------------------------------------------------------------------ TRANSACTIONS WITH ASSOCIATED COMPANIES Investments in affiliates of CHF 147 million in 2002 and CHF 157 million in 2001 are included in financial investments and are described in Note 9. Loans receivable from equity affiliates of CHF 10 million in 2002 and CHF 10 million in 2001 are included in other assets. Included is a loan to CIMO Compagnie Industrielle de Monthey SA, of CHF 10 million in 2002 and 2001, which bears interest at 2 percent in 2002 (2001: 3 percent). In 2001, the variable interest rate loan from Hexcel Corporation of CHF 42 million (USD 25 million) was repaid. The Company had payables and accrued expenses to equity affiliates of CHF 12 million in 2002 and CHF 11 million in 2001. 22. COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------ LEASE COMMITMENTS The Company leases certain facilities under operating leases. The future minimum lease commitments required under fixed term leases are: 2003 CHF 44 million; 2004 CHF 30 million; 2005 CHF 16 million; 2006 CHF 9 million; 2007 CHF 7 million; 2008 and thereafter CHF 7 million. Rental expense amounted to CHF 67 million in 2002, CHF 74 million in 2001 and CHF 85 million in 2000. 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. The Company has the option to purchase two leased facilities, the first for CHF 29 million (USD 21 million) in 2003 and the second for CHF 97 million (USD 68 million) in 2005. Should the Company choose not to purchase these facilities it will be liable for any shortfall between the market value of the facilities and the settlement value at the respective lease termination date. The Company currently utilizes these facilities in its business operations and as a result does not anticipate any material losses relating to these purchase options. GUARANTEES In the normal course of business, the Company has provided guarantees to third parties. The Company estimates that the fair value of these guarantees is not material and does not expect to incur losses as a result of these guarantees. As of December 31, 2002, the Company has provided guarantees to third parties for indebtedness of others of approximately CHF 18 million of which CHF 6 million expire in 2003, CHF 10 million expire in 2004 and CHF 2 million expire in 2005. In connection with past divestments of businesses, the Company has issued certain indemnifications to the purchasers of those businesses related to the past actions of the Company in the area of compliance with environmental and tax regulations. At December 31, 2002, the Company had issued CHF 34 million of environmental indemnifications that decrease to CHF 22 million in 2008 and which expire in 2009. In addition, the Company has outstanding environmental indemnifications that were issued to the purchaser of its Performance Polymers business, which was sold in May 2000. These environmental indemnifications are further discussed in the `Environmental Matters' section below. The Company has issued certain tax indemnifications in connection with divestments of businesses and in connection with certain debt financing arrangements of the Company, that are unlimited in amount and, in certain instances, in time. As of December 31, 2002, the Company has recorded a liability related to the environmental indemnifications in the amount of CHF 13 million (2001: CHF 13 million) and for the tax indemnifications a liability has been recorded in the amount of CHF 1 million (2001: CHF 1 million). CONTINGENCIES The Company operates in countries where political, economic, social, legal and regulatory developments can 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, intellectual property, commercial, environmental, and health and safety matters. Although the outcome of any legal proceedings cannot be F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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, some third parties initiated arbitration proceedings against the Company. This dispute has been settled and will not have any material adverse effect on the financial position or results of operations of the Company. In connection with its Toms River, New Jersey site in the United States, the Company was named as a defendant in several actions, most of which were settled in 2002 (see "Environmental Matters" below). 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 were initiated by Novartis against the Company 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 overall trends in the results of operations of the Company. 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. In management's opinion, 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 614 million at December 31, 2002 and CHF 748 million at December 31, 2001 have been recorded in the accompanying Consolidated Balance Sheets. The decrease in the provision of CHF 134 million in 2002 compared to 2001 relates to usage of the provisions of CHF 82 million and to foreign currency exchange rate effects of CHF 52 million. The Company's environmental protection and improvement cash expenditures were approximately CHF 96 million in 2002 (CHF 43 million in 2001), including investments in construction, operations and maintenance and usage of the provision. 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 which business unit allegedly used the site before the Spin-off. 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. 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. 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 as described in the following paragraphs. At its Toms River, New Jersey remediation site, the Company began implementation of the of a large bio-remediation project which will take eight to ten years to complete. Based on management's current estimates, the Company's environmental provisions are adequate to cover the expected costs to complete this remediation plan. 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 Company settled all the medical monitoring and personal injury cases in 2002, the total amount of which was sufficiently provided for in the Company's environmental reserve. The case seeking property damages is still in litigation, but the Company does not believe the outcome of this case will have any material adverse impact on its financial position. Following the settlement of the above mentioned personal injury cases, the Company received three additional personal injury claims against its subsidiary in the United States in connection with the Toms River site. No lawsuits, however, have yet been filed with respect to these claims. The Company does not believe these additional claims have merit and does not believe that these additional claims will have any material adverse impact on its financial position. The planning for the total remediation of the waste disposal site in Bonfol, Switzerland, which was closed in 1976, is ongoing. The responsibility for the remediation lies with eight chemical enterprises including among others the Company. The responsible companies cooperate with the F-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data) 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. In the Basel region several landfills (Switzerland, France and Germany) contain chemical waste besides other industrial and household wastes. Presently eleven landfills are the subject of investigations carried out with the authorities by the 'Interessengemeinschaft Deponiesicherheit Regio Basel', an association of the involved pharmaceutical and chemical enterprises (including the Company). As of December 31, 2002, no remedial actions have been defined or required in a legally binding form. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Swiss francs, except share and per share data)
23. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES - --------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS For the year ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Balance at beginning of year 120 118 125 Additions (deductions) charged (credited) to cost and expenses, net 31 22 24 Other, net(1) (43) (20) (30) Currency adjustments (12) 0 (1) - --------------------------------------------------------------------------------------------------------------- BALANCE AT END OF YEAR 96 120 118 - --------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR OBSOLETE AND SLOW MOVING INVENTORY For the year ended December 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Balance at beginning of year 66 73 78 Additions (deductions) charged (credited) to cost and expenses, net 5 5 17 Other, net(1) (9) (13) (22) Currency adjustments (4) 1 0 - ---------------------------------------------------------------------------------------------------------------- BALANCE AT END OF YEAR 58 66 73 - ---------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAX VALUATION ALLOWANCE - ---------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Balance at beginning of year 146 143 217 Additions (deductions) charged (credited) to cost and expenses, net 1 3 ( 70) Other, net(1) 0 0 ( 8) Currency adjustments (16) 0 4 - ---------------------------------------------------------------------------------------------------------------- BALANCE AT END OF YEAR 131 146 143 - ---------------------------------------------------------------------------------------------------------------- (1) Other, net is primarily additions and deductions applicable to acquisitions and divestitures, amounts written-off and miscellaneous other adjustments and for allowance for doubtful accounts in 2002, also included is a reclassification to accrued liabilities for provisions that did not relate to accounts receivable.
F-34 EX-4.1 3 ex4-1.txt PROGRAM AGREEMENT IN RE A EURO MEDIUM TERM NOTE Exhibit 4.1 PROGRAM AGREEMENT in respect of a EURO MEDIUM TERM NOTE PROGRAM THIS AGREEMENT is made on 27th March, 2002 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 EUROFINANCE LTD. of Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda ("CSC Bermuda"); (5) CIBA SPECIALTY CHEMICALS HOLDING INC. of Klybeckstrasse 141, CH-4002 Basle, Switzerland (the "Guarantor"); (6) CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED of One Cabot Square, London E14 4QJ; (7) DEUTSCHE BANK AG LONDON of Winchester House, 1 Great Winchester Street, EC2N 2DB; (8) GOLDMAN SACHS INTERNATIONAL of Peterborough Court, 133 Fleet Street, London EC4A 2BB; (9) J.P. MORGAN SECURITIES LTD. of 125 London Wall, London EC2Y 5AJ; and (10) 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. 2 (B) CSC Bermuda is to be added to the Program as an Issuer. (C) 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. 1. Definitions and Interpretation (1) For the purposes of this Agreement, except where the context requires otherwise: "AGENCY 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 JPMorgan Chase 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 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; "DEALER" means each of Credit Suisse First Boston (Europe) Limited, Deutsche Bank AG London, Goldman Sachs Internatinoal, 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; 3 "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 Accessino Letter substantially in the form of Part I of Appendix C hereto; and (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; "FSMA" means the Financial Services and Markets Act 2000; "INITIAL DOCUMENTATION LIST" means the list of documents set out in Appendix A to this Agreement; "ISSUER" means any of CSC US, CSC UK, CSC Germany or CSC Bermuda 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, Dexia 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; 4 "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; "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 27th March, 2002 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 5 "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. (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, 6 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 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; 7 (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 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 8 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 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"; 9 (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 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 10 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 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; (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; and (i) that in relation to each Tranche of Notes for which a Dealer is named as a Stabilising Manager in the applicable Pricing Supplement, it has not issued and will not issue, without the prior written consent of that Dealer, any press or other public announcement referring to the proposed issue of Notes unless the announcement adequately discloses that stabilising action may take place in relation to the Notes to be issued. (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 11 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 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, 2002, and at the end of each annual period thereafter and in the event of a 12 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. (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 13 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, 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 14 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 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. (11) COMMERCIAL PAPER In respect of any Tranche of Notes which must be redeemed before the first anniversary of the date of its issue, the Issuer will issue such Notes only if the following conditions apply (or the Notes can otherwise be issued without contravention of Section 19 of the FSMA): (a) the relevant Dealer covenants in the terms set out in paragraph 2(ii) of Appendix B; and (b) the redemption value of each Note is not less than (pound)100,000 (or an amount of equivalent value denominated wholly or partly in a currency other than sterling), and no part of any Note may be transferred unless the redemption value of that part is not less than (pound)100,000 (or such an equivalent amount). 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 15 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 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 16 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, 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 17 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 (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; 18 (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 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: 19 (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 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 20 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. (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 21 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 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 (1) 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 22 which support the market price of Notes of the Series of which such Tranche forms a part at a level higher than that which might otherwise prevail, but in doing so such Dealer shall act as principal and not as agent of the relevant Issuer or the Guarantor. 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. (2) The Issuer confirms that it has been informed of the existence of the informational guidance published by the Financial Services Authority in relation to stabilisation. 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, CSC Bermuda 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. 23 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; (d) the Memorandum of Association and Bye-Laws of CSC Bermuda; and (e) 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 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. 24 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: (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) Appleby, Spurling & Kempe, legal advisers to CSC Bermuda as to Bermudan law; (d) Homburger, legal advisers to the Guarantor as to Swiss law; and (e) 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. 25 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 agrees that it will not deliver within the 26 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 to persons in the United Kingdom any Notes 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); 27 (ii) in relation to any Notes which must be redeemed before the first anniversary of the date of their issue, (a) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business and (b) it has not offered or sold and will not offer or sell any Notes other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the Notes would otherwise constitute a contravention of Section 19 of the FSMA by the Issuer; (iii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to the relevant Issuer or the Guarantor; and (iv) it has complied and will comply with all applicable provisions of the FSMA 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 pursuant to an exemption from the registration requirements of, and otherwise in compliance with the Securities and Exchange Law and any other applicable laws and 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 qualified investors (investisseurs qualifies) acting for their own account as defined in, and in accordance with, Article L.411-1 and L.411-2 of the Code Monetaire et Financier and decret no. 98-880 dated 1st October, 1998. 6. BERMUDA Each Dealer represents and agrees that it will not invite members of the public or at all in Bermuda to subscribe for Notes and that it has complied and will comply with all applicable 28 provisions of the Companies Act, 1981 (as amended) of Bermuda with respect to anything done by it in relation to the Notes in, from or otherwise involving Bermuda. 7. GERMANY Each Dealer represents and agrees that Notes have not been and will not be offered, sold, promoted or advertised by it in the Federal Republic of Germany other than in compliance with the German Securities Selling Prospectus Act (Wertpapierverkaufsprospektgesetz) of 13th December, 1990, as amended, or any other laws applicable in the Federal Republic of Germany governing the issue, offering and sale of securities. 8. 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 with a denomination of less than (euro)50,000 (or its foreign currency equivalent) 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) unless one of the other exemptions from or exceptions to the prohibition contained in article 3 of the Dutch Securities Transactions Supervision Act 1995 ("Wet toezicht effectenverkeer 1995") is applicable and the conditions attached to such exemption or exception are complied with. 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. 29 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 CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. (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 CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. U.S.$2,000,000,000 EURO MEDIUM TERM NOTE PROGRAM We refer to the amended and restated Program agreement dated 27th March, 2002 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. 30 For the purposes of the Program Agreement our Notice Details are as follows: (insert name, address, telephone, telex (+ answerback) and attention). 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: JPMorgan Chase Bank (Agent) [names of Dealers at the date of accession] 31 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 CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. U.S.$2,000,000,000 EURO MEDIUM TERM NOTE PROGRAM We refer to the amended and restated Program Agreement dated 27th March, 2002 (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: 32 For and on behalf of CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. By: For and on behalf of CIBA SPECIALTY CHEMICALS HOLDING INC. By: By: cc: JPMorgan Chase Bank (Agent) [names of other Dealers at the date of accession] 33 PART III FORM OF DEALER ACCESSION LETTER - NOTE ISSUE [DATE] To: CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. (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 CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. U.S.$2,000,000,000 EURO MEDIUM TERM NOTE PROGRAM We refer to the amended and restated Program Agreement dated 27th March, 2002 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: 34 (insert name, address, telephone, telex (+ answerback) and attention). 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: JPMorgan Chase Bank (Agent) [names of Dealers at the date of accession] 35 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 CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. U.S.$2,000,000,000 EURO MEDIUM TERM NOTE PROGRAM We refer to the amended and restated Program Agreement dated 27th March, 2002 (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: 36 CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. By: CIBA SPECIALTY CHEMICALS HOLDING INC. By: By: cc: JPMorgan Chase Bank (Agent) [names of Dealers at the date of accession] 37 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 27th March, 2002 as amended from time to time, (the "PROGRAM AGREEMENT")) Dear Sirs, CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPECIALTY CHEMICALS PLC CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. 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: For and on behalf of CIBA SPECIALTY CHEMICALS PLC By: 38 For and on behalf of CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH By: For and on behalf of CIBA SPECIALTY CHEMICALS EUROFINANCE PLC By: For and on behalf of CIBA SPECIALTY CHEMICALS HOLDING INC. By: By: cc: UBS Warburg (for distribution to the existing Dealers). JPMorgan Chase Bank (Agent) 39 APPENDIX E FORM OF SUBSCRIPTION AGREEMENT [CURRENCY AND AMOUNT] [CIBA SPECIALTY CHEMICALS CORPORATION] [CIBA SPECIALTY CHEMICALS PLC] [CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH] [CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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] [CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] (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 27th March, 2002 made between CIBA SPECIALTY CHEMICALS CORPORATION, CIBA SPECIALTY CHEMICALS PLC, CIBA SPECIALITY CHEMICALS EUROFINANCE LTD. 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: 40 * [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 _________________________ * Delete this paragraph for a Dealer-only syndicate. 41 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. 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/Appleby, Spurling & Kempe], the legal advisers to the Issuer as to [German/United States/Bermudan law,] from Homburger, 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 42 relation to 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 43 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 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: 44 Annexe A [Form of Pricing Supplement] 45 APPENDIX F FORM OF DEED OF COVENANT THIS DEED OF COVENANT is made on 27th March, 2002 by each of Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC, Ciba Spezialitatenchemie Holding Deutschland GmbH and Ciba Specialty Chemicals Eurofinance Ltd. (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 27th March, 2002 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, Ciba Specialty Chemicals Eurofinance Ltd., 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 27th March, 2002 between, inter alios, the Issuer and JPMorgan Chase 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. 46 (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 (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 27th March, 2002 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 and Ciba Spezialitatenchemie Holding Deutschland GmbH dated 30th March, 2001. 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 47 (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. 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"); 48 (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; (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 49 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 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. (d) Where the Issuer is Ciba Specialty Chemicals Eurofinance Ltd.: 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 Bermuda, 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 any person liable to such tax, duty or charge in respect of such underlying Note by reason of his having some connection with Bermuda other than the mere holding or ownership of such Underlying Note. 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. 50 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 JPMorgan Chase 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, Ciba Spezialitatenchemie Holding Deutschland GmbH and Ciba Specialty Chemicals Eurofinance Ltd. 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. 51 EXECUTED as a Deed by CIBA ) SPECIALTY CHEMICALS ) CORPORATION ) acting by ) and ) acting under the authority of that company ) in the presence of: ) Witness's Signature __________________________________ Name _________________________________ Address __________________________________ __________________________________ EXECUTED as a Deed by CIBA ) SPECIALTY CHEMICALS ) PLC ) acting by its attorney(s) ) ) in the presence of: ) Witness's Signature __________________________________ Name _________________________________ Address __________________________________ __________________________________ 52 EXECUTED as a Deed by CIBA ) SPEZIALITATENCHEMIE ) HOLDING DEUTSCHLAND GMBH ) acting by ) and ) acting under the authority of that company ) in the presence of: ) Witness's Signature __________________________________ Name _________________________________ Address __________________________________ __________________________________ EXECUTED as a Deed under ) Seal by CIBA SPECIALTY CHEMICALS ) EUROFINANCE LTD. ) and SIGNED and DELIVERED as ) a deed on its behalf by ) ) in the presence of: ) Witness's Signature __________________________________ Name _________________________________ Address __________________________________ __________________________________ 53 SIGNATORIES The Issuers CIBA SPECIALTY CHEMICALS CORPORATION 560 White Plains Road Tarrytown New York 10591-9005 Telephone: +1 914 785 2000 Telefax: +1 914 785 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: +49 620 6150 Telefax: +49 620 6151368 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING 54 CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. c/o Reid Management Limited 4th Floor Windsor Place 22 Queen Street PO Box HM1179 Hamilton HMEX Bermuda Telephone: +1 441 296 3695 Telefax: +1 441 295 3328 Attention: Tamara Lewis/Adrian Arnold By: OLIVER STRUB 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 By: OLIVER STRUB KIRK ERSTLING THE DEALERS CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED One Cabot Square London E14 4QJ Telephone: 020 7888 4021 Telefax 020 7905 6128 Attention: MTN Trading 55 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 J.P. MORGAN SECURITIES LTD. 125 London Wall London EC2Y 5AJ Telephone: 020 7779 3469 Telex: 8954804 MGLTD G Telefax: 020 7325 8225 Attention: Euro Medium Term Note Desk Each by its duly authorised signatory: KARIN FORSTER 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: KARIN FORSTER By: CAROLINE STEWART CONFORMED COPY 27TH MARCH, 2002 CIBA SPECIALTY CHEMICALS PLC CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. 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) -------------------------------------------- [ALLEN & OVERY LOGO] 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.......................11 6. Indemnity...........................................................14 7. Authority to Distribute Documents...................................16 8. Dealers' Undertakings...............................................16 9. Fees, Expenses and Stamp Duties.....................................17 10. Termination of Appointment of Dealers...............................18 11. Appointment of New Dealers..........................................18 12. Increase in the Aggregate Nominal Amount of the Program.............19 13. Status of the Arrangers.............................................19 14. Counterparts........................................................19 15. Communications......................................................19 16. Benefit of Agreement................................................20 17. Currency Indemnity..................................................20 18. Calculation Agent...................................................21 19. Stabilisation.......................................................21 20. Contracts (Rights of Third Parties) Act 1999........................21 21. Governing Law and Jurisdiction......................................21 APPENDICES A. Initial Documentation List..........................................23 B. Selling Restrictions................................................25 C. Part I - Form of Dealer Accession Letter - Program.................29 Part II - Form of Confirmation Letter - Program.....................31 Part III - Form of Dealer Accession Letter - Note Issue.............33 Part IV - Form of Confirmation Letter - Note Issue.................35 D. Letter Regarding Increase in the Nominal Amount of the Program......37 E. Form of Subscription Agreement......................................39 F. Form of Deed of Covenant............................................45 SIGNATORIES..............................................................53 EX-4.2 4 ex4-2.txt DEED OF COVENANT Exhibit 4.2 DEED OF COVENANT THIS DEED OF COVENANT is made on 27th March, 2002 by each of Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals PLC, Ciba Spezialitatenchemie Holding Deutschland GmbH and Ciba Specialty Chemicals Eurofinance Ltd. (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 27th March, 2002 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, Ciba Specialty Chemicals Eurofinance Ltd., 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 27th March, 2002 between, inter alios, the Issuer and JPMorgan Chase 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 2 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 27th March, 2002 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 and Ciba Spezialitatenchemie Holding Deutschland GmbH dated 30th March, 2001. 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 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 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 4 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 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. 5 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. (d) Where the Issuer is Ciba Specialty Chemicals Eurofinance Ltd.: 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 Bermuda, 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 any person liable to such tax, duty or charge in respect of such underlying Note by reason of his having some connection with Bermuda other than the mere holding or ownership of such Underlying Note. 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 JPMorgan Chase 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. 6 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, Ciba Spezialitatenchemie Holding Deutschland GmbH and Ciba Specialty Chemicals Eurofinance Ltd. 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. EXECUTED as a Deed by CIBA ) SPECIALTY CHEMICALS ) CORPORATION ) acting by ) OLIVER STRUB KIRK ERSTLING and ) acting under the authority of that company ) in the presence of: ) Witness's A. STEINER Signature---------------------------------------- A. STEINER Name ---------------------------------------- C/o CIBA SPECIALTY CHEMICALS INC. Address ---------------------------------------- CH-4002 BASEL ---------------------------------------- 7 EXECUTED as a Deed by CIBA ) SPECIALTY CHEMICALS ) PLC ) acting by its attorney(s) ) OLIVER STRUB KIRK ERSTLING ) in the presence of: ) Witness's A. STEINER Signature---------------------------------------- A. STEINER Name ---------------------------------------- C/o CIBA SPECIALTY CHEMICALS INC. Address ---------------------------------------- CH-4002 BASEL ---------------------------------------- EXECUTED as a Deed by CIBA ) SPEZIALITATENCHEMIE ) HOLDING DEUTSCHLAND GMBH ) acting by ) OLIVER STRUB KIRK ERSTLING and ) acting under the authority of that company ) in the presence of: ) Witness's A. STEINER Signature---------------------------------------- A. STEINER Name ---------------------------------------- C/o CIBA SPECIALTY CHEMICALS INC. Address ---------------------------------------- CH-4002 BASEL ---------------------------------------- EXECUTED as a Deed under ) Seal by CIBA SPECIALTY CHEMICALS ) EUROFINANCE LTD. ) and SIGNED and DELIVERED as ) a deed on its behalf by ) ) OLIVER STRUB KIRK ERSTLING in the presence of: ) Witness's A. STEINER Signature---------------------------------------- A. STEINER Name ---------------------------------------- C/o CIBA SPECIALTY CHEMICALS INC. Address ---------------------------------------- CH-4002 BASEL ---------------------------------------- CONFORMED COPY 27TH MARCH, 2002 CIBA SPECIALTY CHEMICALS PLC CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. AS ISSUERS --------------------------------------------- DEED OF COVENANT -------------------------------------------- [ALLEN & OVERY LOGO] London EX-4.3 5 ex4-3.txt DEED OF GUARANTEE Exhibit 4.3 DEED OF GUARANTEE THIS DEED OF GUARANTEE is made on 27th March, 2002 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, CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. (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 27th March, 2002 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 30th March, 2001 (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 27th March, 2002 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 30th March, 2001, 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 2 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 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 3 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 26th-27th November, 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. 4 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 ) OLIVER STRUB KIRK ERSTLING and ) ) acting under the authority of ) that Company in the presence of: ) Witness's A. STEINER Signature: ....................... A. STEINER Name: ....................... C/o CIBA SPECIALTY CHEMICALS INC. Address: ....................... CH-4002 BASEL ....................... Dated 27th March, 2002 CONFORMED COPY 27th March, 2002 CIBA SPECIALTY CHEMICALS HOLDING INC. as Guarantor --------------------------------------------- DEED OF GUARANTEE -------------------------------------------- [ALLEN & OVERY LOGO] London EX-4.4 6 ex4-4.txt AGENCY AGREEMENT IN RE A EURO MEDIUM TERM NOTE Exhibit 4.4 AGENCY AGREEMENT in respect of a EURO MEDIUM TERM NOTE PROGRAM THIS AGREEMENT is made on 27th March, 2002 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 EUROFINANCE LTD. of Cedar House, 41 Cedar Avenue, Hamilton HM12, Bermuda ("CIBA Bermuda"); (5) CIBA SPECIALTY CHEMICALS HOLDING INC. of Klybeckstrasse 141, CH-4002 Basle, Switzerland (the "Guarantor"); (6) JPMORGAN CHASE 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 (7) J.P. MORGAN 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, CIBA Bermuda (each an "Issuer" and together, the "Issuers") and the Guarantor have entered into an amended and restated program agreement dated 27th March, 2002 (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 30th March, 2001 with the Dealers named therein. (B) CIBA US, CIBA UK, CIBA Germany, the Guarantor, the Agent and the Paying Agents entered into an amended and restated Agency Agreement (the "Principal Agency Agreement") dated 30th March, 2001 in respect of U.S.$2,000,000,000 Euro Medium Term Note Program. 2 (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. (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; 3 "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 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; 4 "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; "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" means 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, Canadian dollars, Czech koruna, Danish kroner, euro, Hong Kong dollars, Japanese Yen, New Zealand dollars, Norwegian kroner, 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) 5 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 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, 6 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; "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, 7 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. (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. 8 (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; (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. 9 (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. 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 for 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 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 10 (b) a master Permanent Global Note 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. 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. 11 (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 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. 12 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 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. 13 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. 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 14 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 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) 15 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 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 16 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. (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 17 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 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 18 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. 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, 19 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. (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: 20 (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 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. 21 (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. 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 22 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. 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. 23 (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 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 24 (c) there will at all times be an Agent; and (d) 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 relevant Directive. 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 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. 25 (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 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, 26 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. (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 27 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 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. 28 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, CIBA Bermuda 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. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date first above written. 29 APPENDIX A FORM OF CALCULATION AGENCY AGREEMENT Dated [ ], 2[ ] [CIBA SPECIALTY CHEMICALS PLC/ CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] 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 LOGO] 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/CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. of Cedar House, 41 Cedar Avenue, Hamilton HM12, Bermuda] (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 27th March, 2002 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 27th March, 2002 and entered into between the Issuer, the Guarantor, such other subsidiaries, JPMorgan Chase 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 31 Relevant Notes (the "Conditions") including endorsing the Schedule hereto appropriately in relation to each Series of Relevant Notes. 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 32 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. (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. 33 (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. (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 34 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). 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 35 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. 36 SCHEDULE TO THE CALCULATION AGENCY AGREEMENT
Series number Issue Date Maturity Date Title and Nominal Annotation by Amount Calculation 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] [CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. c/o Reid Management Limited 4th Floor Windsor Place 22 Queen Street PO Box HM1179 Hamilton HMEX Bermuda Telephone: +441 296 3695 Telefax: +441 295 3328 Attention: Tamara Lewis/Adrian Arnold] By: 38 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: Calculation Agent [ ] Telephone: [ ] Telefax No: [ ] Attention: [ ] 39 SCHEDULE 1 TERMS AND CONDITIONS OF THE NOTES [21 blank pages to follow] 61 AGENT JPMORGAN CHASE BANK TRINITY TOWER 9 THOMAS MORE STREET LONDON E1W 1YT PAYING AGENT J.P. MORGAN 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. 62 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).]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 (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)/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. (a company incorporated with limited liability in Bermuda)] unconditionally and irrevocably guaranteed by - ------------------ 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. 63 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/Ciba Specialty Chemicals Eurofinance Ltd.] (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 27th March, 2002 and made between, inter alia, the Issuer, the Guarantor, JPMorgan Chase 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 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 64 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. 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 65 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 27th March, 2002 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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] By: --------------------------------- Authorised Signatory Authenticated without recourse, warranty or liability by JPMORGAN CHASE BANK By: -------------------------------- Authorised Signatory 66
Schedule One to the Temporary Global Note PART I INTEREST PAYMENTS Date made Total amount of interest Amount of interest paid Confirmation of payment on payable behalf of the Issuer --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ -----------------------------
67
Date made Total amount of interest Amount of interest paid Confirmation of payment on payable behalf of the Issuer --------- ------------------------ ------------------------ ----------------------------- --------- ------------------------ ------------------------ -----------------------------
68 PART II PAYMENT OF INSTALMENT AMOUNTS
Date made Total amount of Amount of Instalment Remaining nominal amount Confirmation of Instalment Amounts Amounts paid of this Global Note payment on behalf of payable following 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. 69
PART III REDEMPTIONS Date made Total amount of Amount of principal paid Remaining nominal Confirmation of principal payable amount of this Global redemption on behalf Note following such of the Issuer redemption* - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- --------------------- - --------- ------------------------ ------------------------ ----------------------------- ---------------------
* See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 70
PART IV PURCHASES AND CANCELLATIONS Date made Part of nominal amount of Remaining nominal amount of Confirmation of purchase and this Global Note purchased this Global Note following cancellation on behalf of the and cancelled such purchase and cancellation* Issuer - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- ----------------------------- - ---------- -------------------------- ------------------------------- -----------------------------
* See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 71
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: Date made Nominal amount of this Remaining nominal amount of Notation made on behalf of Global Note exchanged for this Global Note following the Issuer Definitive Notes or a such exchange* Permanent Global Note - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- ----------------------------- - ---------- -------------------------- --------------------------- -----------------------------
* See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 72 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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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. 73 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 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 74 CERTIFICATE "A" [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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. 75 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. 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. 76 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 [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)/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. (a company incorporated with limited liability in Bermuda)] unconditionally and irrevocably guaranteed by CIBA SPECIALTY CHEMICALS HOLDING INC. (a company incorporated with limited liability in Switzerland) - ------------------------ 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. 77 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/Ciba Specialty Chemicals Eurofinance Ltd.] (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 27th March, 2002 and made between, inter alia, the Issuer, the Guarantor, JPMorgan Chase 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. 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. 78 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 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. 79 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 27th March, 2002 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. 80 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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] By: ----------------------------- Authorised Signatory Authenticated without recourse, warranty or liability by JPMORGAN CHASE BANK By: ------------------------------ Authorised Signatory 81
Schedule One to the Permanent Global Note PART I INTEREST PAYMENTS Date made Total amount of interest Amount of interest paid Confirmation of payment on behalf payable of the Issuer - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- --------------------------------- - --------- ------------------------ ----------------------- ---------------------------------
82
PART II PAYMENT OF INSTALMENT AMOUNTS Date made Total amount of Amount of Instalment Remaining nominal Confirmation of Instalment Amounts Amounts paid amount of this Global payment on behalf payable Note following such of the Issuer payment* - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- ------------------- - --------- ------------------ ------------------- --------------------- -------------------
* See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 83
PART III REDEMPTIONS Date made Total amount of Amount of principal Remaining nominal Confirmation of principal payable paid amount of this redemption on behalf Global Note of the Issuer following such redemption* - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ---------------------- - --------- ----------------- -------------------- ----------------- ----------------------
- -------------------------- * See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 84
PART IV PURCHASES AND CANCELLATIONS Date made Part of nominal amount of Remaining nominal amount of Confirmation of purchase and this Global Note purchased this Global Note following cancellation on behalf of and cancelled such purchase and the Issuer cancellation* - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - --------- -------------------------- ---------------------------- ----------------------------- - ------------------- * See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount.
85
Schedule Two to the Permanent Global Note SCHEDULE OF EXCHANGES The following exchanges affecting the nominal amount of this Global Note have been made: Date made Nominal amount of Temporary Nominal amount of this Global Notation made on Global Note exchanged for this Note following exchange* behalf of the Issuer Global Note - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ---------------------- - ---------- ------------------------------ ----------------------------- ----------------------
* See most recent entry in Part II, III or IV of Schedule One or Schedule Two in order to determine this amount. 86 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 [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)/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. (a company incorporated with limited liability in Bermuda)] 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 AG more than 183 days 87 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/Ciba Specialty Chemicals Eurofinance Ltd.] (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 27th March, 2002 and made between, inter alia, the Issuer, the Guarantor, JPMorgan Chase 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. This Note shall not be validly issued unless authenticated by the Agent. 88 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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] By: ----------------------------- Authorised Signatory Authenticated without recourse, warranty or liability by JPMORGAN CHASE BANK By: ---------------------------- Authorised Signatory 89 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] 90 PART IV FORM OF COUPON (Face of Coupon) [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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 91 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 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. 92 (Reverse of Coupon) AGENT JPMorgan Chase Bank Trinity Tower 9 Thomas More Street London E1W 1YT PAYING AGENT J.P. Morgan 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. 93 (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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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 [ ]. ___________________________ 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. 94 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). 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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] By: ------------------------ Authorised Signatory 95 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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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 _______________________________ 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. 96 time to time be duly appointed and notified to the Noteholders) upon production and surrender of this Talon. 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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] By: ------------------------------ Authorised Signatory 97 (Reverse of Receipt and Talon) AGENT JPMorgan Chase Bank Trinity Tower 9 Thomas More Street London E1W 1YT PAYING AGENT J.P. Morgan 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. 98 SCHEDULE 3 FORM OF DEED OF GUARANTEE THIS DEED OF GUARANTEE is made on 27th March, 2002 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, CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. (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 27th March, 2002 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 30th March, 2001 (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 27th March, 2002 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 30th March, 2001, 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 99 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 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. 100 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: (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 26th-27th November, 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. 101 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 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 ) and ) ) acting under the authority of ) that Company in the presence of: ) 102 Witness's Signature: ................... Name: ................... Address: ................... ................... Dated 27th March, 2002 103 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 104 paragraph 17 hereof of the necessary amendment to the block voting instruction; (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 105 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 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; 106 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 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 107 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. 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. 108 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 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 109 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. 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. 110 SCHEDULE 5 FORM OF PUT NOTICE [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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: _________________________________ 111 Duly authorised on behalf of [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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. 112 SCHEDULE 6 Dated 27th March, 2002 CIBA SPECIALTY CHEMICALS PLC CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. 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 LOGO] London 113 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 27th March, 2002 (the "Offering Circular" as supplemented), or, as the case may be, the amended and restated Program Agreement dated 27th March, 2002 (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 114 determining the end of the Distribution Compliance Period in respect of any Tranche 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. 115 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 with than Issue one or more of the Dealers for the issue and Date minus 5 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 116 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 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 Pricing Supplement to the Agent. The details set out in 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 on a Issue Date Stock Exchange, the Agent also notifies, or the minus 3 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/or minus 2 Clearstream, Luxembourg to debit its account and Clearstream, 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 117 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 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 the Agent of the purchase price for the relevant 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 forthwith in to the Issue Date 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.
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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, subject to Issue Date the execution of the Subscription Agreement minus 10 (or referred to below, agree terms with a Dealer such other number (which expression in this Part 2 includes any of days agreed entity to be appointed as a dealer under the between the Subscription Agreement referred to below) (the Issuer, the Guarantor, the "Lead Manager") for the issue and purchase of Lead Manager and the Agent) 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.
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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 draft 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 Stock Exchange, Issue Date the Agent notifies or procure the notification to, the minus 3 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.
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Day Latest time Action No later than The Lead Manager instructs Euroclear and/or Clearstream, Issue Date Luxembourg to debit its account and pay the purchase price, minus 2 against delivery of the Notes as instructed by the Lead Manager to the account specified by the Issuer. Day Latest time Action Issue Date 3.00 p.m. In the case of Floating Rate Notes, the Agent minus 2 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 Temporary minus 1 (in the Global Note for each Tranche of Notes which is case of pre-closed to be purchased, and where required as specified issues) or Issue above, a Permanent Global Note in respect of the Date (in any other relevant Series. The conditions precedent in the case) (the "Payment Subscription Agreement and the Program Agreement are Instruction Date") 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.
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Day Latest time Action 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 notifies the Lead Issue Date Manager when the distribution of the Notes purchased by it has been completed. The Lead 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.
122 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. 123 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/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] and: CIBA SPECIALTY CHEMICALS HOLDING INC. c.c. JPMorgan Chase Bank [CIBA SPECIALTY CHEMICALS CORPORATION/ CIBA SPECIALTY CHEMICALS PLC/ CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH/ CIBA SPECIALTY CHEMICALS EUROFINANCE LTD.] [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 124 ANNEXE C FORM OF PRICING SUPPLEMENT [Date] [Ciba Specialty Chemicals Corporation/ Ciba Specialty Chemicals PLC/ Ciba Spezialitatenchemie Holding Deutschland GmbH/ Ciba Specialty Chemicals Eurofinance Ltd.] 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 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.] [If Notes issued by Ciba Specialty Chemicals PLC must be redeemed before the first anniversary of their date of issue, the minimum redemption amount must be (pound)100,000 or its equivalent in any other currency. If Notes issued by any other Issuer (including Notes denominated in sterling), in respect of which the issue proceeds are to be accepted in the United Kingdom or whose issue otherwise constitutes a contravention of section 19 of the Financial Services and Markets Act 2000, must be redeemed before the first anniversary of their date of issue, the minimum redemption amount must be (pound)100,000 or its equivalent in any other currency.]
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: [ ]
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4. Aggregate Nominal Amount: - Tranche: [ ] - Series: [ ] 5. Issue Price of Tranche: [ ] percent [Net proceeds] (required only for listed issues) 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 change of Notes Redemption/Payment Basis: into another Interest Basis or Redemption/Payment Basis] 12. Put/Call Options: [Investor Put] [Issuer Call] [(further particulars specified below)]
126 13. Listing: [Luxembourg/specify other/None] 14. Method of distribution: [Syndicated/Non-syndicated] 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 Notes: [None/Give details] 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: [ ]
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(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 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
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(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 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]
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(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: [ ] 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 Exchange: [give details] (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 [ ]
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(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) (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) or other special provisions relating to Payment Dates: [Not Applicable/give details] (Note that this item relates to the place of payment and not Interest Period end dates to which item 16(iii) relates)
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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 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 [Not Applicable/give details] to forfeit the Notes and interest due on 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 [TEFRA D/TEFRA not applicable] rules not applicable:
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35. Additional selling restrictions: [Not Applicable/give details] OPERATIONAL INFORMATION 36. Any clearing system(s) other than Euroclear and Clearstream, Luxembourg and [Not Applicable/give the relevant identification number(s): name(s) and number(s)] 37. Delivery: Delivery [against/free of] payment 38. Additional Paying Agent(s) (if any): [ ] SPECIFIC PROVISIONS FOR ISSUES OF NOTES BY CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. ONLY(1) 39. The following additional disclosure is required by Bermuda Law: SPECIFY, IF APPLICABLE: [The minimum subscription amount which must be raised from the issue of Notes by Ciba Specialty Chemicals Eurofinance Ltd. under this offer required for (a) the payment of expenses of the Issuer (b) working capital purposes for the Issuer and (c) the other matters referred to in Section 28 of the Bermuda Companies Act 1981 is US$[ ]/There is no minimum subscription amount which must be raised from the issue of Notes by Ciba Specialty Chemicals Eurofinance Ltd [has not] borrowed any money in respect of the foregoing matters. Ciba Specialty Chemicals Eurofinance Ltd. [is/is not] responsible for its own expenses in connection with the offer.
_______________________________________________________________________________ ISIN: [ ] Common Code: [ ] _______________________________________________________________________________ [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/Ciba Speciality Chemicals Eurofinance Ltd.] _________________________ (1) Offers of Notes issued by Ciba Specialty Chemicals Eurofinance Ltd. may be subject to additional disclosure requirements to satisfy Bermudian prospectus requirements. 133 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 134 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 1625 888 220 Telefax: +44 1625 888 380 Attention: Treasurer CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH Chemiestrasse D-68623 Lampertheim Germany Telephone: +49 6206 152810 Telefax: +49 6206 152816 Attention: Treasurer CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. c/o Reid Management Limited 4th Floor Windsor Place 22 Queen Street PO Box HM1179 Hamilton HMEX Bermuda Telephone: +1 441 296 3695 Telefax: +1 441 295 3328 Attention: Tamara Lewis/Adrian Arnold 135 By: 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 The Dealers CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED One Cabot Square London E14 4QJ Telephone: +44 20 7888 4021 Telefax +44 20 7905 6128 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 136 J.P. MORGAN SECURITIES LTD. 125 London Wall London EC2Y 5AJ 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 Attention: MTNs and Private Placements THE AGENT JPMorgan Chase 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 137 SIGNATORIES 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 By: OLIVER STRUB KIRK ERSTLING CIBA SPECIALTY CHEMICALS PLC Hulley Road Macclesfield Cheshire SK10 2NX Telephone: +44 1625 888 220 Telefax: +44 1625 888 380 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH Chemiestrasse D-68623 Lampertheim Germany Telephone: +49 6206 152 810 Telefax: +49 6206 152 816 Attention: Treasurer By: OLIVER STRUB KIRK ERSTLING 138 CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. c/o Reid Management Limited 4th Floor Windsor Place 22 Queen Street PO Box HM1179 Hamilton HMEX Bermuda Telephone: +1 441 296 3695 Telefax: +1 441 295 3328 Attention: Tamara Lewis/Adrian Arnold By: OLIVER STRUB 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 By: OLIVER STRUB KIRK ERSTLING The Agent JPMORGAN CHASE 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: ANDREW DELLOW 139 THE LUXEMBOURG PAYING AGENT J.P. MORGAN BANK LUXEMBOURG S.A. 5 rue Plaetis L-2338 Luxembourg All communications should be sent care of the Agent By: ANDREW DELLOW CONFORMED COPY Dated 27th March, 2002 CIBA SPECIALTY CHEMICALS PLC CIBA SPECIALTY CHEMICALS CORPORATION CIBA SPEZIALITATENCHEMIE HOLDING DEUTSCHLAND GMBH CIBA SPECIALTY CHEMICALS EUROFINANCE LTD. as Issuers - and - CIBA SPECIALTY CHEMICALS HOLDING INC. as Guarantor - and - JPMORGAN CHASE BANK as Agent - and - J.P. MORGAN 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 LOGO] London CONTENTS Clause Page 1. Definitions and interpretation..........................................2 2. Appointment of Agent and Paying Agents..................................7 3. Issue of Temporary Global Notes.........................................8 4. Determination of Exchange Date, issue of Permanent Global Notes and Definitive Notes and determination of end of Distribution Compliance Period.....................................................9 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....................17 13. Issue of replacement Notes, Receipts, Coupons and Talons...............18 14. Copies of documents available for inspection...........................20 15. Meetings of Noteholders................................................20 16. Commissions and expenses...............................................20 17. Indemnity..............................................................21 18. Repayment by the Agent.................................................21 19. Conditions of appointment..............................................21 20. Communication between the parties......................................22 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..................................................................28 Form of Calculation Agency Agreement........................................28 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..........................................96 4. Provisions for Meetings of Noteholders............................101 5. Form of Put Notice................................................108 6. Operating & Administrative Procedures Memorandum..................110 Signatories................................................................134 EX-8.1 7 ex8-1.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 8.1 SUBSIDIARIES OF THE COMPANY --------------------------- EUROPE AUSTRIA Ciba Spezialitaetenchemie GmbH, Hard BELGIUM Ciba Specialty Chemicals N.V., Groot-Bijgaarden FINLAND Ciba Specialty Chemicals Finland OY, Helsinki FRANCE Ciba Specialites Chimiques SA, Saint Fons Ciba Specialty Chemicals Masterbatch SA, Saint Jeoire en Faucigny GERMANY Ciba Spezialitaetenchemie Grenzach GmbH, Grenzach-Wyhlen Ciba Spezialitaetenchemie Holding Deutschland GmbH, Lampertheim Ciba Spezialitaetenchemie Lampertheim GmbH, Lampertheim Ciba Spezialitaetenchemie Pfersee GmbH, Langweid/Lech GREECE Ciba Specialty Chemicals Hellas ABEE, Thessaloniki HUNGARY Ciba Specialty Chemicals Magyarorszag, Kft., Budapest ITALY Ciba Specialty Chemicals S.p.A., Sasso Marconi (Bologna) Magenta Master Fibres, S.r.l.., Milano NETHERLANDS Ciba Specialty Chemicals International Nederland B.V., Maastricht Ciba Specialty Chemicals (Maastricht) B.V., Maastricht EFKA Additives B.V., Heerenveen Melapur B.V., Heerlen PORTUGAL Ciba Especialidades Quimicas Lda., Porto SPAIN Ciba Especialidades Quimicas S.L., Barcelona SWEDEN Ciba Specialty Chemicals Sweden AB, Goeteborg SWITZERLAND Ciba Specialites Chimiques Monthey SA, Monthey Ciba Spezialitaetenchemie AG, Basel Ciba Spezialitaetenchemie Finanz AG, Basel Ciba Spezialitaetenchemie International AG, Basel Ciba Spezialitaetenchemie Kaisten AG, Kaisten Ciba Spezialitaetenchemie Schweizerhalle AG, Muttenz Ciba Spezialitaetenchemie Services AG, Basel CIMO Compagnie Industrielle de Monthey SA, Monthey TURKEY Ciba Oezel Kimyevi Ueruenler Sanayi ve Ticaret Ltd., Istanbul UNITED KINGDOM Ciba Specialty Chemicals PLC, Macclesfield Ciba Specialty Chemicals Investment PLC, Macclesfield Ciba Specialty Chemicals Water Treatments Ltd., Bradford 1 AMERICAS ARGENTINA Ciba Especialidades Quimicas S.A., Buenos Aires BERMUDA Chemical Insurance Company Ltd., Hamilton Ciba Specialty Chemicals Eurofinance Ltd., Hamilton Ciba Specialty Chemicals International Finance Ltd., Hamilton Ciba Specialty Chemicals Investment Ltd., Hamilton BRAZIL Ciba Especialidades Quimicas Ltda., Sao Paulo CANADA Ciba Specialty Chemicals Canada Inc., Mississauga Ciba Specialty Chemicals Water Treatments Corp., Mississauga CHILE Ciba Especialidades Quimicas Ltd., Santiago de Chile Ciba Especialidades Quimicas Conosur S.A., Santiago de Chile COLOMBIA Ciba Especialidades Quimicas S.A., Bogota GUATEMALA Ciba Especialidades Quimicas, S.A. (ACC), Guatemala MEXICO Ciba Especialidades Quimicas Mexico S.A. de C.V., Mexico PANAMA Ciba Especialidades Quimicas Colon S.A., Colon UNITED STATES OF AMERICA Ciba Specialty Chemicals Corporation, Tarrytown, NY ASIA-PACIFIC AUSTRALIA Ciba Specialty Chemicals Pty. Ltd., Thomastown CHINA Ciba Specialty Chemicals (China) Ltd., Beijing Ciba Specialty Chemicals (Hong Kong) Ltd., Hong Kong Ciba Specialty Chemicals (Shanghai) Ltd., Shanghai Guangdong Ciba Specialty Chemicals Co. Ltd., Panyu, Guangdong Guangzhou Ciba Specialty Chemicals Co. Ltd., Guangzhou Qingdao Ciba Dyes Co. Ltd., Qingdao Qingdao Ciba Pigments Co. Ltd., Qingdao Shanghai Ciba Gao-Qiao Chemical Co. Ltd., Shanghai Shenzhen Ciba Specialty Chemicals Co. Ltd., Shenzhen Xiangtan Chemicals & Pigments Co. Ltd., Xiangtan INDIA Ciba India Private Ltd., Mumbai Ciba Specialty Chemicals (India) Ltd., Mumbai Diamond Dye-Chem Limited, Mumbai INDONESIA P.T. Ciba Specialty Chemicals Indonesia, Jakarta JAPAN Chemipro Fine Chemical Kaisha Ltd., Kobe Ciba Specialty Chemicals K.K., Osaka Musashino-Geigy Co. Ltd., Tokyo 2 Nippon Alkyl Phenol Co. Ltd., Tokyo REPUBLIC OF KOREA (SOUTH KOREA) Ciba Specialty Chemicals Korea Ltd., Seoul Daihan Swiss Chemical Corp., Seoul Doobon Fine Chemical Co., Ltd., Chongwon-kun MALAYSIA Ciba Specialty Chemicals (Malaysia) SDN. BHD., Klang NEW ZEALAND Ciba Specialty Chemicals N.Z. Ltd., Auckland SINGAPORE Ciba Specialty Chemicals (Singapore) Pte Ltd., Singapore SOUTH AFRICA Ciba Specialty Chemicals (Pty) Ltd., Spartan TAIWAN Ciba Specialty Chemicals (Taiwan) Ltd., Kaohsiung THAILAND Ciba Specialty Chemicals (Thailand) Ltd., Bangkok Ciba Specialty Chemicals Industries Ltd., Bangkok - ------------------------------------------------------------------------- 3 EX-10.1 8 ex10-1.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 10.1 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-82698 and 333-56040 pertaining to employee benefit plans of Ciba Specialty Chemicals Holding Inc.) of our report dated January 17, 2003 with respect to the consolidated financial statements of Ciba Specialty Chemicals Holding Inc. included in the Annual Report (Form 20-F) for the year ended December 31, 2002. Ernst & Young Ltd /s/ Eric Ohlund /s/ Martin Mattes Eric Ohlund Martin Mattes Zurich, February 3, 2003 -----END PRIVACY-ENHANCED MESSAGE-----