##### Table of Contents



As Filed with the Securities and Exchange Commission on February 1, 2005   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 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004 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. Name of each exchangeTitle of each class
    
    on which registeredAmerican Depositary shares,
Each representing one half of one ordinary share,
nominal value CHF 3 per share
    
    New York Stock ExchangeOrdinary shares, par value CHF 3 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 
  Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None 
  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, 2004. 70 826 617 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 þ                      No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o                      Item 18 þ




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IntroductionCurrency TranslationCautionary Statement Regarding Forward-Looking StatementsPART IItem 1. Identity of Directors, Senior Management and Advisors (N/A)Item 2. Offer Statistics and Expected Timetable (N/A)Item 3. Key InformationItem 4. Information on the CompanyItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description of Securities Other than Equity Securities (N/A)PART IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications to the Rights of Security Holders and Use of ProceedsItem 15. Controls and ProceduresItem 16. [Reserved]Item 16A. Audit Committee Financial ExpertItem 16B. Code of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions from the Listing Standards for Audit Committees (N/A)Item 16E  Purchases of Equity Securities by the CompanyPART IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsSignatureExhibit 4.1Exhibit 4.2Exhibit 4.3Exhibit 4.4EX-8.1EX-10.1EX-12.1EX-12.2EX-13.1




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##### Table of Contents



Introduction
This Annual Report on Form 20-F relates to the registered shares with a nominal value of 3 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,
2004, 2003, 2002, 2001 and 2000, and for each of the years in the five-year period ended December
31, 2004 (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, 2004, which was CHF
1.1412 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, 2004, 2003 and 2002, and for each of the years in the three year period ended December
31, 2004, 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 such
statements and information with respect to plans, objectives and market position of the Company are
based on the opinions and 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 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. For more information regarding some of these
factors, see Item 3. Key Information  Risk 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.




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##### Table of Contents



PART I 
 Item 1. Identity of Directors, Senior Management and Advisors Not applicable. 
 Item 2. Offer Statistics and Expected Timetable Not applicable. 
 Item 3. Key Information Selected Financial Data The tables below set forth selected consolidated financial data for the Company for the periods
indicated and are qualified by reference to, and should be read in conjunction with, the Companys
Consolidated Financial Statements and the Notes thereto, which are included elsewhere in this
Annual Report, and Item 5. Operating and Financial Review and Prospects. The selected
consolidated financial data as of December 31, 2004, 2003, 2002, 2001 and 2000, and for each of the
years in the five-year period ended December 31, 2004, 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. 2004
    
    
    
    2003
    
    
    
    2002
    
    
    
    2001
    
    
    
    2000Result of operationsNet sales
    
    
    
    7 027
    
    
    
    
    6 646
    
    
    
    
    7 085
    
    
    
    
    7 367
    
    
    
    
    7 902Operating income
    
    
    
    519
    
    
    
    
    571
    
    
    
    
    788
    
    
    
    
    761
    
    
    
    
    876Income from continuing operations, net of tax(1) (4) (5)
    
    
    
    283
    
    
    
    
    360
    
    
    
    
    406
    
    
    
    
    380
    
    
    
    
    418Income from discontinued operations, net of tax(5)
    
    
    
    28
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    34Cumulative effect of change in accounting principles, net of tax
    
    
    
    0
    
    
    
    
    (16
    )
    
    
    
    0
    
    
    
    
    2
    
    
    
    
    0Net income(1) (4)
    
    
    
    311
    
    
    
    
    344
    
    
    
    
    406
    
    
    
    
    382
    
    
    
    
    452Earnings per share, basic and diluted
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    0Continuing operations(1)(4)
    
    
    
    4.28
    
    
    
    
    5.26
    
    
    
    
    5.92
    
    
    
    
    5.72
    
    
    
    
    6.31Discontinued operations(5)
    
    
    
    0.43
    
    
    
    
    0.00
    
    
    
    
    0.00
    
    
    
    
    0.00
    
    
    
    
    0.50Cumulative effect of change in accounting principles
    
    
    
    0.00
    
    
    
    
    (0.23
    )
    
    
    
    0.00
    
    
    
    
    0.04
    
    
    
    
    0.00Net income per share(1) (4)
    
    
    
    4.71
    
    
    
    
    5.03
    
    
    
    
    5.92
    
    
    
    
    5.76
    
    
    
    
    6.81Equity per share
    
    
    
    62.76
    
    
    
    
    62.64
    
    
    
    
    63.16
    
    
    
    
    59.08
    
    
    
    
    56.82Dividend per share(6)
    
    
    
    1.00
    
    
    
    
    0.00
    
    
    
    
    0.00
    
    
    
    
    2.00
    
    
    
    
    2.00Capital reduction per share(6)
    
    
    
    2.00
    
    
    
    
    3.00
    
    
    
    
    3.00
    
    
    
    
    1.00
    
    
    
    
    0.00Weighted average number of shares outstandingBasic
    
    
    
    66 059 479
    
    
    
    
    68 361 123
    
    
    
    
    68 549 964
    
    
    
    
    66 419 147
    
    
    
    
    66 311 879Diluted
    
    
    
    66 059 479
    
    
    
    
    68 361 123
    
    
    
    
    68 575 058
    
    
    
    
    66 419 147
    
    
    
    
    66 311 879Other data -  continuing operationsNet sales development percentage
    
    
    
    6
    %
    
    
    
    (6
    )%
    
    
    
    (4
    )%
    
    
    
    (7
    )%
    
    
    
    9
    %Depreciation and amortization of other intangibles
    
    
    
    394
    
    
    
    
    366
    
    
    
    
    385
    
    
    
    
    408
    
    
    
    
    406Amortization of goodwill
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    61
    
    
    
    
    64Restructuring and special charges
    
    
    
    91
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    2EBITDA
    
    
    
    913
    
    
    
    
    937
    
    
    
    
    1 173
    
    
    
    
    1 230
    
    
    
    
    1 346Operating income margin
    
    
    
    7.4
    %
    
    
    
    8.6
    %
    
    
    
    11.1
    %
    
    
    
    10.3
    %
    
    
    
    11.1
    %EBITDA margin
    
    
    
    13.0
    %
    
    
    
    14.1
    %
    
    
    
    16.6
    %
    
    
    
    16.7
    %
    
    
    
    17.0
    %Capital expenditures
    
    
    
    294
    
    
    
    
    233
    
    
    
    
    250
    
    
    
    
    259
    
    
    
    
    249Research and development
    
    
    
    288
    
    
    
    
    281
    
    
    
    
    294
    
    
    
    
    276
    
    
    
    
    293Personnel costs
    
    
    
    1 762
    
    
    
    
    1 713
    
    
    
    
    1 752
    
    
    
    
    1 796
    
    
    
    
    2 047Number of employees at year end
    
    
    
    19 338
    
    
    
    
    18 658
    
    
    
    
    19 007
    
    
    
    
    19 683
    
    
    
    
    20 306Balance sheet dataCurrent assets
    
    
    
    4 382
    
    
    
    
    4 939
    
    
    
    
    5 314
    
    
    
    
    4 827
    
    
    
    
    4 797Property, plant and equipment, net
    
    
    
    3 015
    
    
    
    
    2 963
    
    
    
    
    3 196
    
    
    
    
    3 565
    
    
    
    
    3 787Total assets
    
    
    
    11 006
    
    
    
    
    11 098
    
    
    
    
    11 792
    
    
    
    
    11 718
    
    
    
    
    12 105Short-term debt
    
    
    
    559
    
    
    
    
    259
    
    
    
    
    1 496
    
    
    
    
    316
    
    
    
    
    371Long-term debt
    
    
    
    2 917
    
    
    
    
    3 187
    
    
    
    
    2 344
    
    
    
    
    3 678
    
    
    
    
    3 859Common stock
    
    
    
    212
    
    
    
    
    433
    
    
    
    
    649
    
    
    
    
    721
    
    
    
    
    721Shareholders equity
    
    
    
    4 151
    
    
    
    
    4 245
    
    
    
    
    4 354
    
    
    
    
    3 908
    
    
    
    
    3 754




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Business segment data(7)
    
    
    2004
    
    
    
    2003
    
    
    
    2002
    
    
    
    2001
    
    
    
    2000Plastic AdditivesNet sales
    
    
    
    1 895
    
    
    
    
    1 822
    
    
    
    
    1 903
    
    
    
    
    1 913
    
    
    
    
    2 023Operating income
    
    
    
    224
    
    
    
    
    165
    
    
    
    
    226
    
    
    
    
    256
    
    
    
    
    285Depreciation and amortization of other intangible assets
    
    
    
    95
    
    
    
    
    100
    
    
    
    
    106
    
    
    
    
    119
    
    
    
    
    108EBITDA
    
    
    
    319
    
    
    
    
    265
    
    
    
    
    332
    
    
    
    
    375
    
    
    
    
    393Operating income margin
    
    
    
    11.9
    %
    
    
    
    9.1
    %
    
    
    
    11.9
    %
    
    
    
    13.4
    %
    
    
    
    14.1
    %EBITDA margin
    
    
    
    16.8
    %
    
    
    
    14.6
    %
    
    
    
    17.5
    %
    
    
    
    19.6
    %
    
    
    
    19.4
    %Coating EffectsNet sales
    
    
    
    1 818
    
    
    
    
    1 807
    
    
    
    
    1 920
    
    
    
    
    1 944
    
    
    
    
    2 118Operating income
    
    
    
    291
    
    
    
    
    300
    
    
    
    
    341
    
    
    
    
    312
    
    
    
    
    371Depreciation and amortization of other intangible assets
    
    
    
    103
    
    
    
    
    97
    
    
    
    
    99
    
    
    
    
    99
    
    
    
    
    104EBITDA
    
    
    
    394
    
    
    
    
    397
    
    
    
    
    440
    
    
    
    
    411
    
    
    
    
    475Operating income margin
    
    
    
    16.0
    %
    
    
    
    16.6
    %
    
    
    
    17.7
    %
    
    
    
    16.1
    %
    
    
    
    17.5
    %EBITDA margin
    
    
    
    21.7
    %
    
    
    
    22.0
    %
    
    
    
    22.9
    %
    
    
    
    21.1
    %
    
    
    
    22.4
    %Water & Paper TreatmentNet sales
    
    
    
    2 014
    
    
    
    
    1 616
    
    
    
    
    1 718
    
    
    
    
    1 837
    
    
    
    
    1 920Operating income
    
    
    
    126
    
    
    
    
    130
    
    
    
    
    173
    
    
    
    
    151
    
    
    
    
    184Depreciation and amortization of other intangible assets
    
    
    
    131
    
    
    
    
    103
    
    
    
    
    109
    
    
    
    
    114
    
    
    
    
    113EBITDA
    
    
    
    257
    
    
    
    
    233
    
    
    
    
    282
    
    
    
    
    265
    
    
    
    
    297Operating income margin
    
    
    
    6.3
    %
    
    
    
    8.1
    %
    
    
    
    10.1
    %
    
    
    
    8.2
    %
    
    
    
    9.6
    %EBITDA margin
    
    
    
    12.7
    %
    
    
    
    14.4
    %
    
    
    
    16.4
    %
    
    
    
    14.5
    %
    
    
    
    15.5
    %Textile EffectsNet sales
    
    
    
    1 300
    
    
    
    
    1 401
    
    
    
    
    1 544
    
    
    
    
    1 673
    
    
    
    
    1 841Operating income
    
    
    
    61
    
    
    
    
    69
    
    
    
    
    142
    
    
    
    
    181
    
    
    
    
    204Depreciation and amortization of other intangible assets
    
    
    
    56
    
    
    
    
    60
    
    
    
    
    66
    
    
    
    
    67
    
    
    
    
    71EBITDA
    
    
    
    117
    
    
    
    
    129
    
    
    
    
    208
    
    
    
    
    248
    
    
    
    
    275Operating income margin
    
    
    
    4.7
    %
    
    
    
    4.9
    %
    
    
    
    9.2
    %
    
    
    
    10.8
    %
    
    
    
    11.1
    %EBITDA margin
    
    
    
    9.0
    %
    
    
    
    9.2
    %
    
    
    
    13.5
    %
    
    
    
    14.8
    %
    
    
    
    14.9
    %Discontinued operations(8)Net sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    774Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Gain on sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
 Restructuring and special charges are corporate items and are therefore not reflected in the
Companys segments. Accordingly, segment operating income and EBITDA, and related margins thereof,
are not impacted by restructuring and special charges. Trading prices on the Swiss Exchange(Price per share in CHF)Annual highs
    
    
    
    96.14
    
    
    
    
    101.50
    
    
    
    
    128.00
    
    
    
    
    115.75
    
    
    
    
    122.50Annual lows
    
    
    
    76.70
    
    
    
    
    74.75
    
    
    
    
    89.75
    
    
    
    
    75.00
    
    
    
    
    94.25Period End
    
    
    
    86.50
    
    
    
    
    92.37
    
    
    
    
    89.79
    
    
    
    
    95.81
    
    
    
    
    101.35
   (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 had SFAS No. 142 been applied retroactively for all periods presented, would have
been: income from continuing operations, net of tax - in 2001 CHF 441 million, in 2000 CHF
482 million; basic and diluted earnings per share for income from continuing operations - in
2001 CHF 6.64, in 2000 CHF 7.27; net income - in 2001 CHF 443 million, in 2000 CHF 520
million; basic and diluted earnings per share for net income - in 2001 CHF 6.68, in 2000
CHF 7.83. For the year 2000, net income as adjusted excludes goodwill amortization from
continuing operations and from discontinued operations.(2)
    
    The Company applied FASB Interpretation No. 46 to a previously unconsolidated trust
that leases an asset to the Company, resulting in the consolidation by the Company of the
trust in 2003.(3)
    
    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.(4)
    
    Effective January 1, 2003, the Company adopted Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No. 123, as amended. Had the Company
applied the fair value method for all periods prior to 2003, pro forma income from
continuing operations, net of tax would have been - in 2002 CHF 395 million, in 2001 CHF
368 million, in 2000 CHF 410 million; pro forma basic and diluted earnings per share for
income from continuing operations would have been - in 2002 CHF 5.76, in 2001 CHF 5.53, in
2000 CHF 6.19; pro forma net income would have been - in 2002 CHF 395 million, in 2001 CHF 370 million and in 2000 CHF 444 million; pro forma basic and
diluted earnings per share for net income would have been - in 2002 CHF 5.76, in 2001 CHF 5.57 and in 2000 CHF 6.69.(5)
    
    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 continuing
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 (8) below. The 2004
income from discontinued operations of CHF 28 million resulted from the release of
previously established reserves following the settlement in 2004 of a dispute and related
arbitration proceedings that had been initiated by Vantico, the purchaser of the
Performance Polymers business.(6)
    
    The Board of Directors proposes a cash payment to the Companys shareholders in 2005
totaling CHF 3 per share, based on 2004 results, consisting of a dividend of CHF 1 per
share and a capital reduction of CHF 2 per share, which is reflected in the 2004 column in
the table above. The dividend and capital reduction are subject to shareholder approval at
the Annual General Meeting to be held on March 3, 2005. If approved the capital reduction
will take the form of a reduction in the nominal value of each share from CHF 3 per share by CHF 2 per
share to CHF 1 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 18,
2005.The proposed dividend per share and capital reduction per share, based on the USD
exchange rate of December 31, 2004 is USD 0.88 and USD 1.76, respectively. Based on the
USD exchange rate at the payment date of May 14, 2004, the 2003 capital reduction per
share was USD 2.30, at the payment date of May 23, 2003, the 2002 capital reduction per
share was USD 2.32 and at the payment date of June 28, 2002, the 2001 capital reduction
per share was USD 0.67.Based on the USD exchange rate at the respective payment dates of the 2001 and 2000
dividends, the USD equivalent of the dividend per share was USD 1.19 and USD 1.23,
respectively.




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##### Table of Contents



(7)
    
    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. In addition, in 2004 the Company reorganized
from five into four reporting segments and restated all current and prior period segment
information to reflect the new structure.(8)
    
    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. Included in the Performance Polymers results is goodwill amortization of
CHF 4 million in 2000. 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. Year
    
    
    
    

Average(1)
    
    
    
    High
    
    
    
    Low
    
    
    
    Period End2000
    
    
    
    
    
    1.6930
    
    
    
    
    1.8250
    
    
    
    
    1.5526
    
    
    
    
    1.62022001
    
    
    
    
    
    1.6893
    
    
    
    
    1.8185
    
    
    
    
    1.5878
    
    
    
    
    1.65982002
    
    
    
    
    
    1.5566
    
    
    
    
    1.7190
    
    
    
    
    1.3833
    
    
    
    
    1.38332003
    
    
    
    
    
    1.3374
    
    
    
    
    1.4181
    
    
    
    
    1.2380
    
    
    
    
    1.23802004
    
    
    
    
    
    1.2426
    
    
    
    
    1.3202
    
    
    
    
    1.1338
    
    
    
    
    1.1412Months2004
    
    January
    
    
    
    
    
    
    
    
    1.2659
    
    
    
    
    1.2190
    
    
    
    
    1.2593February
    
    
    
    
    
    
    
    
    1.2680
    
    
    
    
    1.2269
    
    
    
    
    1.2680March
    
    
    
    
    
    
    
    
    1.3038
    
    
    
    
    1.2560
    
    
    
    
    1.2677April
    
    
    
    
    
    
    
    
    1.3202
    
    
    
    
    1.2627
    
    
    
    
    1.2984May
    
    
    
    
    
    
    
    
    1.3076
    
    
    
    
    1.2460
    
    
    
    
    1.2533June
    
    
    
    
    
    
    
    
    1.2678
    
    
    
    
    1.2371
    
    
    
    
    1.2520July
    
    
    
    
    
    
    
    
    1.2796
    
    
    
    
    1.2243
    
    
    
    
    1.2796August
    
    
    
    
    
    
    
    
    1.2830
    
    
    
    
    1.2405
    
    
    
    
    1.2641September
    
    
    
    
    
    
    
    
    1.2729
    
    
    
    
    1.2471
    
    
    
    
    1.2471October
    
    
    
    
    
    
    
    
    1.2663
    
    
    
    
    1.1962
    
    
    
    
    1.1988November
    
    
    
    
    
    
    
    
    1.2075
    
    
    
    
    1.1389
    
    
    
    
    1.1421December
    
    
    
    
    
    
    
    
    1.1613
    
    
    
    
    1.1338
    
    
    
    
    1.14122005
    
    January (through January 28)
    
    
    
    
    
    
    
    
    1.1960
    
    
    
    
    1.1466
    
    
    
    
    1.1876
   (1)
    
    Represents the average of the Noon Buying Rates on the last business day of each
month during the relevant year. Capitalization and Indebtedness (N/A) Reasons for the Offer and use of proceeds (N/A) 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 4. Information on the
Company and Item 5. Operating and Financial Review and Prospects. We cannot assure you 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 28 countries and sells its product in
more in more than 120 countries. This means the Company is faced with




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##### Table of Contents



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 many 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 2004 was, for example, characterized by a general improvement
in the economic environment. The recovery in the United States that began late 2003 was more
evident in 2004, with real GDP growth of 4 percent in 2004, although this was held back slightly by
rising energy and oil prices. The major European economies tended to stagnate in varying degrees
through 2004, with real GDP growth at below 2 percent as the impact of the strong euro hampered
exports. The recovering economies in Germany and France were contrasted by negative growth in the
United Kingdom. In the Asia-Pacific region, economic expansion continued in Japan, growing at 4
percent in GDP terms in 2004. The China Region continued to grow strongly, with real GDP growth
remaining between 9 to 10 percent. In most of the regions of the world, with the exception of
China, the industrial sector growth was below total GDP growth. The economic conditions in
NAFTA, Europe and parts of Asia-Pacific may worsen or not continue to
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. 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. 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 circum stances and governmental regulation in the United States and in
other 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.




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##### Table of Contents



The Company has in the past received and may continue to receive communications asserting that
certain of its products or their applications infringe on the proprietary rights of others. The
Company has continued to experience 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. The EU Chemicals Policy may result in significant additional costs for the Company. The EU Chemicals Policy, if adopted by the appropriate EU bodies and Member States in its current
draft form (as published on October 29, 2003) would require all companies to register with defined
data requirements, their substances manufactured or imported in the EU at levels above 1 ton per
year. Whilst presently, the Company cannot assess the complete impact of the EU Chemicals Policy,
it believes that the proposed regulatory system will be highly resource intensive and therefore
costly to industry and regulators alike. At present, the exact timing of the legislative process
and the resulting definitive regulations cannot be estimated. 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 third parties, 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.
Similarly, the Company may face adverse tax consequences 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.




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##### Table of Contents



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 twenty-five 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 and the 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 of operation 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. Other risks we face with respect to acquisitions or alliances include:  
    greater than expected costs and management time and effort involved in completing and
integrating acquisitions or alliances;  
    potential disruption of our ongoing business and difficulty in maintaining or
upgrading our standards, controls, information systems and procedures;  
    our inability to successfully integrate the services, products and personnel of any acquisition into its operations;  
    the potential incurrence of a significant amount of debt and contingent liabilities; and  
    realizing little, if any, return on the Companys investment. Integration or other acquisition or alliance difficulties could have a material adverse impact on
the Companys financial condition and results of operations.




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##### Table of Contents



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. In 1996, Ciba-Geigy and Sandoz merged to form Novartis (the Merger). As part of the Merger,
Ciba-Geigys specialty chemicals business was spun off to form Ciba Specialty Chemicals Holding
Inc. (the Spin Off), which on March 13, 1997, was listed on the Swiss Exchange. Recent acquisition and divestiture activities
To expand its flame retardant business and its offerings to combine flame retardancy with other
effect additives in customized solutions, the Company, in 2002, purchased Melapur BV (Melapur)
from DSM NV for approximately CHF 24 million, including additional purchase consideration paid or
payable after 2002 based on sales growth achieved in 2003 and 2004. Melapur markets and distributes
halogen-free melamine-based flame retardants. In 2003, the Company acquired additional equity interests in Diamond Dye-Chem Limited for
approximately CHF 11 million, increasing its holdings to 69 percent. Also in 2003, the Company
purchased additional shares in Shanghai Ciba Gao-Ciao Chemical Co. Ltd., for approximately CHF 12
million, increasing its holdings to 75 percent. In 2004, in order to establish a stronger world-wide presence in the paper chemicals business, the
Company completed three acquisitions: in June 2004 the Company acquired Raisio Chemicals from the
Raisio Group, headquartered in Raisio, Finland, for approximately CHF 662 million; in July 2004 the
Company acquired LPM Technologies Inc., a Canadian paper chemicals company, for approximately CHF
11 million; and in August 2004, Ciba Specialty Chemicals acquired AB CDM, a Swedish based supplier
of chemicals, from Imerys SA for approximately CHF 22 million. The AB CDM acquisition also provides
the Company with a direct presence in the Swedish water treatments market. In order to enhance its Expert Services program, which provides a wide range of specialty chemicals
services to customers, the Company in March 2004 acquired Pira International, based in the United
Kingdom, for approximately CHF 5 million. In December 2004, in order to expand access to Asian markets outside of Japan and build market
share in pigments, the Company increased its interest in the Daihan Swiss Chemical Corporation from
50% to 100%, for approximately CHF 31 million. Daihan Swiss Chemical Corporation is a Korean
manufacturer, marketer and distributor of pigments and preparations for the Korean coatings,
plastics and inks markets. Capital expenditures
Ciba Specialty Chemicals aggregate capital expenditures for property, plant and equipment were CHF
294 million in 2004, CHF 233 million in 2003 and CHF 250 million in 2002. In 2004, 2003 and 2002,
capital expenditures have been focused primarily on efficiency and safety improvement-related
items. Recent projects include investments in new production facilities for stabilizers and
pigments, upgrades to water and paper treatment production facilities, and investment in emerging
markets, particularly Asia. 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 28 countries and sales in more than 120 countries. In 2004, the Company had net sales from continuing operations of CHF 7 027 million, operating
income of CHF 519 million and net income of CHF 311 million. Net sales, by geographic region of the Company for the past three years were as follows: 2004
    
    
    
    2003
    
    
    
    2002Amounts in CHF millions, except percentages
    
    
    Sales
    
    
    
    in %
    
    
    
    Sales
    
    
    
    in %
    
    
    
    Sales
    
    
    
    in %Europe
    
    
    
    3 050
    
    
    
    
    44
    %
    
    
    
    2 731
    
    
    
    
    41
    %
    
    
    
    2 721
    
    
    
    
    38
    %Americas (i)
    
    
    
    2 046
    
    
    
    
    29
    %
    
    
    
    2 066
    
    
    
    
    31
    %
    
    
    
    2 459
    
    
    
    
    35
    %Asia Pacific (ii)
    
    
    
    1 931
    
    
    
    
    27
    %
    
    
    
    1 849
    
    
    
    
    28
    %
    
    
    
    1 905
    
    
    
    
    27
    %Total net sales
    
    
    
    7 027
    
    
    
    
    100
    %
    
    
    
    6 646
    
    
    
    
    100
    %
    
    
    
    7 085
    
    
    
    
    100
    %
   (i)
    
    The Americas are comprised of North, Central and South America.(ii)
    
    Asia Pacific is comprised of Asia, Africa, the Middle East, Australia and
New Zealand.




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##### Table of Contents



Organization
The Company is organized into four reporting segments (Segments) focused on specific customer
markets. The four Segments are Plastic Additives, Coating Effects, Water & Paper Treatment and
Textile Effects. Each Segment is responsible for marketing, research and development, technology,
production and sales. The mission of each Segment is to provide the best and most complete service
to its customers industries and strive for market leadership in its respective area. 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 business growth
(Water & Paper Treatment). From 2001 until 2004, the Company had been organized into five Segments. However, in August 2004,
the former Home and Personal Care Segment, which had not achieved a critical mass, was integrated
into the Plastic Additives and Water and Paper Treatment Segments. The Companys organizational structure also includes 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 a corporate technology office under the leadership of a
Chief Technology Officer. In 2004, a Chief Strategy Officer was appointed to oversee strategic
development and portfolio management for the Company. 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
Net sales, by Segment, of the Company for the each of the past three years were as follows: 2004
    
    
    
    2003
    
    
    
    2002Amounts in CHF millions, except percentages
    
    
    Sales
    
    
    
    in %
    
    
    
    Sales
    
    
    
    in %
    
    
    
    Sales
    
    
    
    in %Plastic Additives
    
    
    
    1 895
    
    
    
    
    26.9
    %
    
    
    
    1 822
    
    
    
    
    27.4
    %
    
    
    
    1 903
    
    
    
    
    26.9
    %Coating Effects
    
    
    
    1 818
    
    
    
    
    25.9
    %
    
    
    
    1 807
    
    
    
    
    27.2
    %
    
    
    
    1 920
    
    
    
    
    27.1
    %Water & Paper Treatment
    
    
    
    2 014
    
    
    
    
    28.7
    %
    
    
    
    1 616
    
    
    
    
    24.3
    %
    
    
    
    1 718
    
    
    
    
    24.2
    %Textile Effects
    
    
    
    1 300
    
    
    
    
    18.5
    %
    
    
    
    1 401
    
    
    
    
    21.1
    %
    
    
    
    1 544
    
    
    
    
    21.8
    %Total net sales
    
    
    
    7 027
    
    
    
    
    100.0
    %
    
    
    
    6 646
    
    
    
    
    100.0
    %
    
    
    
    7 085
    
    
    
    
    100.0
    %
 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 Segments service business
provides customers with product application solutions. Coating Effects is a leading global manufacturer of organic pigments and the leading supplier of
photoinitiators and light stabilizers 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. Water & Paper Treatment serves the paper and water treatment as well as the detergents and hygiene
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s research and development operations are designed to bring new and unique products and
services to the global paper industry. 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. Furthermore the Segment
provides whiteners for detergents and hygiene effects for a variety of personal care products. Textile Effects serves customers throughout the textile value chain, offering full, integrated
solutions for textile processing and value adding effects. The Segments products include dyes and
chemicals for preparation, dyeing, printing, whitening and finishing of all major textiles, as well
as sizing agents for fabric weaving. The Segment also provides comprehensive services to help
customers achieve their color, comfort and performance requirements.




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##### Table of Contents



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 overall costs as a consequence of increased
economies of scale. The functions of the Group Service Units of the Company are described in the
following paragraphs. The Supply Chain Services unit is responsible for the supply chain process from finished product
stage onwards, which includes order processing, warehousing and transportation of products. The
Supply Chain Services unit maintains shared order desks on a regional/country level that service
all Segments with regards to order taking, order processing, shipping and customer invoicing.
Different customer service solutions are actively explored and implemented with the goal of
increasing the ease with which customers are able to do business with the Company and minimizing
product distribution costs. The Company, through its Supply Chain Services unit, utilizes a global
network of both Company- and third-party-owned warehouses and distribution centers to ensure
adequate coverage of the Companys distribution requirements. The global and regional distribution
networks are actively and systemically reviewed to ensure an optimized relationship between
warehousing costs, distribution costs and customer service levels. The Company maintains Business Support Centers that provide finance and accounting services to
geographic 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. As part of its strategy to streamline
administrative operations and reduce costs, the Company in 2004 consolidated the functions of its
Central European and Central American Business Support Centers into other existing Business Support
Centers, thereby reducing the number of centers from 12 to 10. In addition, in connection with the
acquisition of Raisio Chemicals in June 2004, the Company created a new Business Support Center in
Finland to support business operations in the Nordic region. As a result of these actions, the
Company will operate in 2005 with 11 Business Support Centers. Beginning in 2005, the Company is consolidating responsibility for all information technology and
data processing and management functions under a newly appointed Chief Information Officer.
Included in these functions is the Global Infrastructure unit, which working with outsourcing
partners, has the principal objective of optimizing the Companys information technology
infrastructure including its wide area networks. 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 participations in entities to help achieve
strategic objectives. The Companys investments in equity affiliates resulted in total income from
earnings of equity affiliates of CHF 1 million in 2004, CHF 3 million in 2003 and CHF 6 million in
2002. The Company invests in equity affiliates to 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 investment in equity affiliates as of December 31, 2004 is a 50
percent interest in CIMO Compagnie Industrielle de Monthey SA, which is a joint venture with
Syngenta that provides infrastructure services and utilities to the partners manufacturing
facilities in Monthey, Switzerland. Company Strategy
The key components of the Companys strategy to drive profitable growth and to maximize value for
its shareholders are to place the customer first, offer leading edge innovation, aim for
best-in-class manufacturing, and attract, develop and retain the very best people. Placing the
customer first involves utilizing an industry-focused organization that is closely aligned with
customers industries. A focus on leading edge innovation enables the Company to make everyday
products better and makes breakthrough products possible. The Company offers its customers both
significant innovation as well as steady improvements by fostering a creative culture and by
sharing and leveraging its core competencies. In aiming for best-in-class manufacturing, the
Company seeks lowest-cost manufacturing coupled with focused capital expenditures, while
maintaining an overriding policy of safety first. A single, streamlined global supply system
supports both manufacturing and customer supply concerns, and increases efficiency across the
Company. Competition
The Company competes in the global specialty chemicals market. Its major competitors include BASF,
Bayer, Buckman, Clariant, Cognis, Croda, Crompton, Cytec, Degussa, Dow, DuPont, GE Water
Technologies, Great Lakes, Hercules, Johnson Polymer, Kemira, Lubrizol, Nalco, Rhodia, Rohm and
Haas, SNF Floerger, Songwon and Stockhausen. Plastic AdditivesOverview
Plastic Additives products provide, maintain and improve the desirable properties, or suppress the
adverse properties, of plastics, rubber, adhesives, lubricant materials and home and personal care
products. Additives increase the stability of a variety of materials during processing and use,
thereby facilitating or improving the efficiency of industrial processes or enhancing their value
for home and personal use. Additives can improve quality and provide long-term stability and
economical viability of final industrial and consumer products by, for example, protecting products
against aging, light degradation, corrosion or wear. Specialty colors for home and personal care
products deliver unique properties. 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, rubber and adhesive industries, and is a




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##### Table of Contents



leading supplier of ashless antioxidants and extreme pressure and antiwear agents to the lubricant
industry. In addition, the Segment delivers high value chemical ingredients for manufacturers of
non-durable home and personal care consumer goods. Plastic Additives is managed as an integrated global business and primarily focuses on four
Business Lines: (i) Polymer Products, (ii) Base Polymers, (iii) Process and Lubricant Additives and
(iv) Home & Personal Care. Plastic Additives also includes the small Business Unit Ciba® Expert
Services. The additives market is mainly related to the plastics industry, which has generally been
experiencing long-term growth. However, this growth is affected by shorter-term economic and
industrial cycles, particularly in the oil, 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 in contact with food and drinking water or for home and fabric
care and personal care. 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. The Segments Expert Services business unit provides knowledge-based services under the Companys
Ciba® Expert Services brand to customers seeking professional consulting, testing and information
support. Its global network of experts - providing environmental, regulatory, safety, testing and
educational services - helps customers in highly regulated industries get products to market
faster, increase productivity and improve product quality. In 2004, the Expert Services business
unit was strengthened with the acquisition of Pira International Ltd, a leading consultancy and
testing business with major conference and publications activities serving the packaging, paper,
printing and publishing industries and their value chains. 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, 2004, 2003 and 2002. Amounts in CHF millions, except percentages
    
    
    2004
    
    
    
    2003
    
    
    
    2002Total Segment net sales
    
    
    
    1 895
    
    
    
    
    1 822
    
    
    
    
    1 903Operating income
    
    
    
    224
    
    
    
    
    165
    
    
    
    
    226Capital expenditures
    
    
    
    76
    
    
    
    
    64
    
    
    
    
    94Research and development expenditures
    
    
    
    97
    
    
    
    
    107
    
    
    
    
    107Contribution to the consolidated Company net sales
from continuing operations, in %
    
    
    
    26.9
    %
    
    
    
    27.4
    %
    
    
    
    26.9
    %
 Products
Plastic Additives products add value to the polymer, rubber, adhesive, lubricant, and home and
personal care industries. The Segments product offerings include:  
    Polymer protection products such as antioxidants, non-staining antiozonants, processing
stabilizers, UV absorbers and hindered amine light stabilizers (HALS):  
    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:  
    Products for polymer recycling such as PET chain extenders, antioxidants and light stabilizer
systems:  
    Specialized product forms and multi-component product packages, which simplify the
incorporation process and improve worker hygiene and resin quality:  
    Products for polymer design such as polymerization regulators:
    Products for lubricants such as antioxidants, metal deactivators, and antiwear additives:
    Light absorbers for fabric and personal care, rheology modifiers, actives for skin protection,
carrier systems, conditioners, specialty colors
for home and personal care products, laundry additives for comfort enhancement, and stain removers.




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##### Table of Contents



The Segments leading product lines in the polymer protection category are Ciba®
IRGANOX® antioxidants, Ciba® IRGAFOS® processing stabilizers,
Ciba® CHIMASSORB® light stabilizers/UV absorbers, Ciba®
TINUVIN® light stabilizers/UV absorbers, Ciba® IRGAMOD® additives for
polyesters, Ciba® FIBERSTAB® L phenol-free processing stabilizers, Ciba®
IRGASTAB® FS phenol-free processing stabilizers and Ciba® IRGAZONE non-staining
antiozonants. The Ciba® IRGAFOS® processing stabilizer range ensures efficiency in processing
and maintenance of polymer properties across a broad range of processing conditions. Ciba® POLYAD®
customer-specific blends are multi-component additive packages in easy-to-handle forms. Ciba® TINUVIN® light stabilizers/UV absorbers constitute a complete range
providing light stability to polyolefins, engineering plastics, adhesives and rubbers. Examples of
new innovative products include Ciba® TINUVIN® 1577 as an innovative UV absorber
for glazing, thin films and laminates, Ciba® TINUVIN® XT 833 for improved light
stability and weather resistance and Ciba® TINUVIN® FR 2011/2021 providing flame
retardancy and light stability. In addition to the Segments traditional Ciba® IRGANOX® range, Ciba® IRGANOX® HP, Ciba® IRGANOX®
XP, Ciba® IRGASTAB® PUR, Ciba® IRGASTAB® PVC and Ciba® IRGASTAB® STYL are examples of how additives
support the polymer industry with new, innovative products and services. Both the Ciba® IRGANOX® HP
and Ciba® IRGANOX® XP ranges combine HP-136, the Companys innovative lactone technology, with
established high-performance phosphites for the stabilization and protection of polyolefins,
polyurethane foams and adhesives during processing. Ciba® IRGASTAB® PUR, Ciba® IRGASTAB® PVC and
Ciba® IRGASTAB® STYL are new liquid, environmentally friendly solutions for the polyurethane, vinyl
and styrenics markets, respectively. The Ciba® IRGAMOD® range comprises multifunctional PET additives reducing acetaldehyde and
oligomers, avoiding discoloration and acting as chain extenders by modifying the properties of PET
via reactive extrusion. Recent product launches are Ciba® IRGATEC® CR 76 and Ciba® IRGAMOD® RA 20. Ciba® FIBERSTAB® L and Ciba® IRGASTAB® FS phenol-free
processing stabilizers systems set with excellent gas-fade resistance a new standard in the
processing stabilization of polyolefin fibers. They also provide good long-term thermal stability
and enhanced light stability. Ciba® FIBERSTAB® L is particularly suited for PP
fiber applications such as carpets and hygienic non-wovens and Ciba® IRGASTAB®
PVC 11 EM is an environmentally friendly antioxidant for PVC. Ciba® IRGAZONE 997 non-staining antiozonant provides rubber products with very good protection
against ozone, heat, flex and fatigue. Opposite to classical rubber antiozonants, it is
non-staining, is not leaching from rubber vulcanizates and has various food contact approvals. The Segment is adding to its polymer product offerings by branching out from its core polymer
protection and stabilization business to take advantage of new market opportunities in the area of
property enhancement. With a 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 Segments leading
product lines in this special effects additives category are ATMER antifogging agents,
Ciba® IRGASTAT® and ATMER antistatic agents, ATMER SA - slip and antisticking
agents, Ciba® IRGAGUARD® antimicrobial line, including Ciba® IRGAGUARD® A  antialgae and
Ciba® IRGAGUARD® B - antibacterial, and Ciba® IRGACLEAR® F antifungi, Ciba® IRGACLEAR® - clarifying
agents, Ciba® SHELFPLUS® - shelf life extension,
Ciba® FLAMESTAB® NORTM and Ciba®
MELAPUR® - flame retardants, Ciba® TINUVIN® FR flame retardant/light stabilizer combinations and
Ciba® UVITEX® optical brighteners. Ciba® SHELFPLUS® UV 4100 blocks a broad spectrum of UV radiation
protecting package contents in food, home and pharmaceutical applications. The novel agricultural
growth promoter Ciba® SMARTLIGHTTM RL100 utilizes photo-selective properties of the product to
improve crop quality and productivity. Ciba® IRGASURF TM HL 560 delivers durable hydrophilicity for
polyolefin fibers and nonwovens. Ciba® IRGAZONETM 997, launched in 2003 for rubber applications,
represents a technology that offers protection against ozone, fatigue and oxygen, with non-staining
properties and extraction resistance. Ciba® IRGAMOD® 195 is an effective catalyst and stabilizer
for rosin esters and is an extraction resistant antioxidant for rubber applications, especially
ones based on NBR and ECO. 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 Segments products in, for example, the automotive industry where engineered plastics are
replacing traditional materials. In addition, in the area of base polymers the Segment is
continuously expanding its services business areas to provide customers with tailor-made additives
blends as part of a market approach that emphasizes customer contact and quick response times. To cope with the increased temperature stress in modern engine oils, two new high temperature
antioxidant systems, Ciba® IRGANOX® L 93 and Ciba® IRGANOX® L94
were introduced. For the lubricant industry, the Segment offers single components for engine oils and industrial
lubricants such as antioxidants, extreme pressure/antiwear additives, friction modifiers, corrosion
inhibitors and metal deactivators, and 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® IRGALUBE® 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. The home & personal care products market is served by five business platforms: UV Protection & Actives for the personal care industry: Ciba® TINOSORB® UV absorbers are used to provide protection against the harmful effects of UVA
(long wave-length) and UVB (short wave-length) radiation in a variety of products applied directly
to the skin, including sunscreens, lotions, and day creams. Growth prospects are particularly
strong in regions where concern for effective protection from sunlight is high. Ciba® TINODERM®
Actives Delivery Systems facilitate the transport of actives through the skin barrier to the site
of interaction. TINOCARE® GL, a Scleroglucan polysaccharide, retains skin moisture in a natural way
and improves the sensory characteristic of personal care formulations.




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##### Table of Contents



Polymer Systems for the personal care and home and fabric care industries: Rheology modifiers, conditioners, and gel thickeners allow customers to produce formulations to the
highest standards of quality and consistency. Ciba® RHEOVIS® and Ciba® GLASCOL® are for the home
care industry and Ciba® SALCARE® and Ciba® TINOVIS® are for the personal care industry. Colorants & Stabilizers for the personal care and home and fabric care industries: Ciba® TINOGARD® provides product stabilization against oxidation and UV induced degradation. Ciba®
VIBRACOLOR® products are hair dyes. Ciba® PURICOLOR® and Ciba® VIBRACOLOR® pigments and anionic,
water-soluble dyes are used in personal care as well as home and fabric care products. Fabric Appearance for the laundry care industry: Ciba® TINOFIX® dye fixatives maintain the color integrity of fabrics. Ciba® TINOTEX® Comfort & Easy
Care ingredients bring easy care properties to laundered fabrics. Ciba® TINOLUX® is a unique
photocatalytic system that uses sun rays to safely and effectively bleach stains. Ciba® TINOSORB®
UV absorbers are applied to clothing via the laundry washing process to clothing to convert cotton
fabrics into effective UV shields. Stain Removal for the laundry care industry: Ciba® TINOCAT oxidation catalysts enable efficient stain removal at lower wash temperatures and
with shorter wash cycles and as well provide an anti-graying effect on white fabrics. The Expert Services business unit delivers services for regulatory, environment, safety, materials
testing, and conducts training, and offers strategic and technical consulting. Customers and End-User Markets
In 2004, end-user markets such as the packaging industry accounted for approximately 26 percent of
the Segments sales, the construction industry for 19 percent, the durable goods industry for 9
percent, the automotive industry for 7 percent, the agricultural industry for 6 percent and the
lubricants industry for 10 percent. The top ten customers of the Segment accounted for
approximately 31 percent of the Segments 2004 sales. Research and Development
Plastic Additives spends approximately 5 percent of sales each year on research and development
activities (CHF 97 million in 2004). The primary objective of these research and development
activities is to achieve and maintain a high level of the Segments sales of innovative products.
Innovative products are defined as patent protected products or products and applications younger
than five years. Management is of the opinion that Plastic Additives has a growing product
pipeline. The goal is to further improve sales with new and innovative products, and to protect
product and application innovations by appropriate patents. Products currently being developed
include new classes of light stabilizers, anti-static additives, process stabilizers for plastics,
non-staining antiozonants for rubbers, flame retardants, process chemicals for reactive monomers,
new UV absorbers for sunscreens, a new photobleach agent for laundry detergents, a new class of
oxidation catalysts for use in home and fabric care applications and new nanocolloid encapsulated
active ingredients for skin care products. Research and development activities focus on new product development as well as process
improvements that aim to lower costs and increase 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. Coating EffectsOverview
Coating Effects develops, manufactures and markets additives, pigments, pigment and additive
concentrates for the coatings, printing, imaging, plastics, synthetic fibers, electronics and
information storage 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, destruction or wear. 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, the Company believes the Segment is well placed to take
advantage of these trends. There also is a need for products that make processing easier and more
cost effective for customers in all traditionally 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.




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##### Table of Contents



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. 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, 2004, 2003 and 2002. Amounts in CHF millions, except percentages
    
    
    2004
    
    
    
    2003
    
    
    
    2002Total Segment net sales
    
    
    
    1 818
    
    
    
    
    1 807
    
    
    
    
    1 920Operating income
    
    
    
    291
    
    
    
    
    300
    
    
    
    
    341Capital expenditures
    
    
    
    82
    
    
    
    
    79
    
    
    
    
    74Research and development expenditures
    
    
    
    101
    
    
    
    
    95
    
    
    
    
    100Contribution to the consolidated Company net sales
from continuing operations, in %
    
    
    
    25.9
    %
    
    
    
    27.2
    %
    
    
    
    27.1
    %
 Products
The Segments leading colorant product lines include the high performance pigments, Ciba®
IRGAZIN®, Ciba® CINQUASIA® and Ciba® CROMOPHTAL®, used in
coatings, inks, plastics and synthetic fibers, the IRGAPHOR®, functional dye products used
for optical information storage (CD-R and DVDR) and Ciba® IRGALITE® 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® TINUVIN® light
stabilizers for coatings, inks and photographic applications, Ciba® IRGACURE®
photoinitiators and photoinitiators blends for ultraviolet curing of coatings, paints, inks and
electronic materials and the environmental friendly polymer specialty rheology agents and
dispersants for coatings. The Segment also offers, 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 2004, 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 27 percent of
the Segments 2004 sales. In 2004, the end-user markets such as the automotive industry accounted for approximately 24
percent of the Segments sales, the imaging and publication industry for 12 percent, the packaging
industry for 19 percent, the electronics industry for 9 percent and the construction industry for
19 percent of the Segments sales. Consolidation and globalization have occurred in certain of the customer industries served by the
Segment, particularly in the coatings and printing ink industries. The effect of such consolidation
and globalization is that pricing pressure is exerted on suppliers. Research and Development
Coating Effects spends approximately 5 percent of sales each year on research projects (CHF 101
million in 2004). 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. 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. One of the photoinitiator patents for ink applications expired in 2003. Management is of the
opinion that expiration of this patent will only have a limited effect on its result of operations
because of the Companys level of customer service associated with the related products and
processes. Although patent protection for part of the DPP product range expired in 2003, the
Company has newer patents covering more recently launched or yet to be launched products.




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##### Table of Contents



Water & Paper Treatment
Water & Paper Treatment is one of the leading global suppliers to the paper industry, the municipal
and industrial water treatment industries and the detergents and hygiene industries, and is managed
as an integrated global business. The markets in which the Segment is present have been affected by
increasing environmental and safety regulations that govern the industries of the Companys
customers. These regulations have resulted in an increased demand for more innovative products with
lower environmental impact. Water & Paper Treatment products and services for the paper and board industry increase the speed,
run-ability and quality of the paper making process (retention and drainage aids, deposit control
aids). Furthermore, they improve the visual appearance, optical properties and printability of the
paper (paper whiteners, paper coloration, starch and latex binders, coating additives and surface
modifiers), impart water, oil and grease resistance (barrier effects and sizing), and provide
stable images on carbonless and thermal papers. The Segments newly acquired Technical Centers in
Finland further enhance our position as a total solution provider to the paper industry. The products and services offered in the area of water treatment improve the separation of solids
from liquids, purify water, dewater sludge for disposal and enhance dredging applications. In
extractive and process technologies, the Segments products improve the efficiency of all
extraction and mineral processing. The Segment also serves a number of niche markets
including soil additives where products improve plant nutrition and soil fertility, and performance
intermediates where high purity specialty monomers are supplied by the Segment for various
applications (e.g. rubbers and adhesives). The Segments activities in industrial water management
aim to bring a service oriented approach by providing customers with complete solutions that meet
all their industrial water treatment needs. Strong, local support is available through a network of
partners, each providing expertise and industry leading Ciba® IRGATREATTM
product technology, equipment and services. In the area of detergents and hygiene, the Segments products and services are used in the home and
fabric care industries as well as the personal care market. Whiteners, used in detergents, enhance
the whiteness and brightness of textiles while antimicrobial solutions are used in personal care
products and promote good health, prevent infections and contribute to the personal well being. 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, 2004, 2003 and 2002. Amounts in CHF millions, except percentages
    
    
    2004
    
    
    
    2003
    
    
    
    2002Total Segment net sales
    
    
    
    2 014
    
    
    
    
    1 616
    
    
    
    
    1 718Operating income
    
    
    
    126
    
    
    
    
    130
    
    
    
    
    173Capital expenditures
    
    
    
    81
    
    
    
    
    55
    
    
    
    
    45Research and development expenditures
    
    
    
    42
    
    
    
    
    33
    
    
    
    
    33Contribution to the consolidated Company net sales
from continuing operations, in %
    
    
    
    28.7
    %
    
    
    
    24.3
    %
    
    
    
    24.2
    %
 Products
In the paper industry, there is an ongoing demand for more efficient production processes and this
is where
Ciba
patented technologies such as the
Ciba®
TELIOFORM® retention and
drainage aid system and
Ciba® PERGAFASTTM Color Developer for the Color Former
market bring value to customer. At the same time, consumers are demanding more innovative paper
products and here the Companys range of effect chemicals  whiteners, colors, color formers,
barrier effects and coating and surface solutions - 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 to that of the paper and board
industry. The Segment develops, produces and sells the following products to the water treatments market
segment:
Ciba®
ZETAG®,
Ciba®
MAGNAFLOC®
and
Ciba®
MAGNASOL® polyacrylamide polymers, organic coagulants, and poly acrylic acid polymers. The
main usage of these products is as flocculants for the separation of solid particles from water.
The recently launched
Ciba®
KRYSALIS® products for the dredging industry enhance
solid liquid separation and the separation of contaminants from the
dredging sediment.
Ciba®
RHEOMAXTM tailings management products for the mining industry allow minimalization of
water consumption and maximization of water recovery, thereby reducing disposal areas and hence
generating cost savings in waste disposal. The water treatments product range also includes
Ciba®
IRGATREATTM specialty formulations for the full range of water purification
and conditioning applications, dispersants to reduce the viscosity and to increase the performance
of inorganic pigments and fillers in water systems, monomers as building blocks used in water
treatment, adhesives, synthetic fibers and antistatic finishes as
well as
Ciba®
LIBFER® iron chelate to correct deficiencies in crops grown intensively. The leading product lines in detergents and hygiene include Ciba® TINOPAL® whiteners for detergents
and Ciba® IRGASAN®, Ciba® IRGACARE® and Ciba® TINOSAN® antimicrobials providing hygiene effects for
personal care products. 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 and 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 continue to be recognized as the industry standard for efficiency, performance and safety
by key customers.




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##### Table of Contents



Customers and End-User Markets In 2004 Water & Paper Treatment supplied products and services to the paper and board, municipal
and industrial water treatment as well as detergents and hygiene industries. The top ten customers
of the Segment accounted for approximately 23 percent of the Segments 2004 sales. In 2004, end-user markets such as the paper and board industry accounted for approximately 54
percent, the detergents and hygiene industries accounted for 12 percent, the water and wastewater
services industry accounted for 15 percent, the extractives and process technologies industry
accounted for 8 percent and the agricultural industry accounted for 2 percent. Research and Development
Water & Paper Treatment spends approximately 2 percent of sales each year on research and
development activities
(CHF 42 million in 2004). The Segments integrated research and development philosophy is aimed
at driving process/production technology improvements, development of novel targeted offerings to
the industry and expansion to novel markets using existing and emerging technologies. Textile EffectsOverview
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 2004 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 one of the leading suppliers of textile
chemicals to the textile industry. Other major product offerings to these industries are whiteners,
disperse dyes for polyester, antimicrobials, ultraviolet (UV) 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. 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 continues to shift 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). 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, 2004, 2003 and 2002. Amounts in CHF millions, except percentages
    
    
    2004
    
    
    
    2003
    
    
    
    2002Total Segment net sales
    
    
    
    1 300
    
    
    
    
    1 401
    
    
    
    
    1 544Operating income
    
    
    
    61
    
    
    
    
    69
    
    
    
    
    142Capital expenditures
    
    
    
    35
    
    
    
    
    29
    
    
    
    
    34Research and development expenditures
    
    
    
    29
    
    
    
    
    32
    
    
    
    
    36Contribution to the consolidated Company net sales
from continuing operations, in %
    
    
    
    18.5
    %
    
    
    
    21.1
    %
    
    
    
    21.8
    %
 Products
The Segments leading dyestuffs product lines include
CIBACRON® reactive dyes for
cellulose,
Ciba®
LANASET®
and
Ciba®
NEOLAN® dyes for wool,
Ciba®
TECTILON®
acid dyes for carpet and
Ciba®
TERASIL® and
Ciba®
TERATOP® 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® UVITEX® whiteners for textiles,
CIBATEX® UV absorbers for the protection of textiles against ultraviolet radiation;
Ciba®
PYROVATEX®
flame retardants and
Ciba®
ALCOPRINT® print
thickeners. In February 2002, a global cooperation agreement between Ciba and Invista 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®
OLEOPHOBOL® fabric protector products for protection against stains
as well as access to DuPonts
TEFLON® 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
Textile Effects supplies the clothing/apparel, home furnishing and industrial textile industries
(including automotive textiles). In 2004, the top ten customers of the Segment accounted for
approximately 9 percent of the Segments sales. The customer base of the textile dyes and chemicals
market is highly fragmented. In 2004, the end-user markets of the textile, fiber and carpet
industries accounted for most of the Segments sales with the automotive industry accounting for a
small percentage. While the clothing/apparel industry is predominant in Asia, the automotive
textiles and the carpet industry is focused primarily in North America and Europe. Research and Development
Textile Effects spends approximately 2 percent of sales each year on research projects (CHF 29
million in 2004). 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 technical and
economical performance, a range of disperse dyes with new




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##### Table of Contents



state-of-the-art wetfast performance, metal free dyes for polyamide with unmatched wetfast and
lightfast performance, alternatives to sulphur and naphthol dyes. Textile chemicals currently being
developed by the Segment include ecologically improved flame retardants, more efficient 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. The Segments research and development focus also includes technologies
geared towards new effects, such as microencapsulation, application of nanoparticles and use of
biotechnological processes. Manufacturing
The Company has 85 manufacturing sites in 28 countries in important regions of the world.
Currently, 55 of these sites are used primarily for chemical synthesis and the others are used for
physical operations and to manufacture formulations that meet customer specific requirements.
Europe and North America account for over 80 percent of the fixed asset base of the Company, with
approximately 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, all in Asia. The Companys production costs, excluding raw materials, amounted to approximately 22 percent of
sales in 2004, 23 percent of sales in 2003 and 23 percent in 2002. 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.
The Companys manufacturing facilities generally operate within a range of sixty to eighty percent
of capacity. Management is of the opinion that capacity utilization 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. In 2004, the Company announced a program entitled Shape, which will
result in the closure of certain sites and the movement of production activities to other sites in
China and in Europe. 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 all Segments plan to dedicate
considerable capital expenditure on capacity, product and process improvements spending yearly more
than CHF 100 million in the next 5 years. For example, Textile Effects is spending CHF 15 million
to streamline their dyestuff production facilities at Basel and Water & Paper Treatment CHF 15
million to streamline its stilbenics production facilities at Grenzach, Germany and McIntosh, USA. Plastic Additives has invested in the Hindered Amine Stabilizer area, primarily in the NAFTA
region. These projects were completed in 2004 at a total estimated total cost of approximately CHF
70 million. Plastic Additives plans to invest CHF 6 million in a new flame retardent production
unit at Lampertheim, Germany and another CHF 7 million in a new GMP approved plant for a UV
absorber for skin protection at Kaohsiung, Taiwan. Coating Effects is investing CHF 30 million in a new production unit for DPP pigments at Monthey,
Switzerland and plans to invest another CHF 15 million in a new DPP plant in China. Coating Effects
is also investing CHF 10 million to increase its Benzotriazol capacities at McIntosh, USA and
Lampertheim, Germany and CHF 30 million for the expansion of its ink production facility at
Maastricht, Netherlands. During the period from 2002 to 2004, Water & Paper Treatment has invested more than CHF 40 million
to upgrade its production sites at Bradford United Kingdom and West Memphis Arkansas, United
States. Water & Paper Treatment plans to invest CHF 10 million in a new acrylamide plant at
Kwinana, Australia. Textile Effects is investing CHF 7 million to increase the capacity for textile dyes at Mahachai,
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. In 2003
another CHF 3 million have been spent at Panyu for a new solid softener plant. The Company is further strengthening its position in emerging markets, particularly Asia, by
expanding its facilities in these areas. For example, Coating Effects invested CHF 5 million from 2002
to 2003 to increase the capacity for classical pigments at Qingdao, China. Plastic Additives
started in 2003 the production of UV absorbers at their Goa site in India and is investing CHF 10
million for the expansion of its antioxidants production facility at Shanghai, China. 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 unit 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




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##### Table of Contents



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 for all intercontinental
transports. 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 that lets customers place and track orders from all Segments. In addition, various
complementary services are offered to customers such as on-line access to material safety data
sheets, certificates of analysis and technical data sheets. Both current and potential customers
also have the ability to locate the Companys products based on their
industry/sub-industry/application and desired effect using a comprehensive product finder
application covering all Segments products. mybusiness@cibasc is available in 12
languages and has over 15,000 active users in 140 countries. In addition, the Company participates
in Elemica, a specialized business-to-business exchange that 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 and desirable. Throughout the first half of 2004, the Company was generally able to maintain raw material costs at
the same level as 2003, but the second half of the year saw significant cost increases driven by
the continued high price of crude oil and its derivatives and also by increasing demand, especially
in Asia. The Company expects this trend to continue in the near future. To offset some of these
cost increases, the Segments continue to source more raw materials and intermediates from newly
established suppliers in Asia. The Company adjusts its currency portfolio to mitigate exchange rate
fluctuations. 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 protects its new products and processes by obtaining patents and
registering trademarks in selected regional markets. The Company has over 19 000 granted patents
and pending applications world-wide and has trademark protection for approximately 400 product
names. The Company continues to experience a constant 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 to develop and maintain its market
position. Management is of the opinion that intellectual property rights as a 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 processes 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 internally developed 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 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 also entered an Agreement Regarding Use of Ciba as a Corporate Name.
Pursuant to such agreement, the Company and its subsidiaries and affiliates may use Ciba Specialty
Chemicals as part of their registered corporate names, while Novartis may continue to use the name
Ciba in connection with the Ciba Vision Group and in some other special cases. The Company and
its subsidiaries and affiliates are entitled to use the Ciba trademarks and trade names outside
of the core business of Novartis (defined as 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 were used at the of
the agreement 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. Regulatory Affairs
National and international laws regulate production, marketing and use of chemical substances.
Although almost every country has its own legal procedure for control 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. Some facets of the regulations in these regions are continuously being
revised but probably none more so than the control for production and import within the European
Union where a complete overhaul of the requirements is being undertaken. The Company has been
actively involved in the development of the regulations and does not expect significant concerns
from the final changes. Within the U.S., the Environmental Protection Agency (EPA), have revised
the High Production Volume program and




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##### Table of Contents



this has been evaluated by the Company. EPA and other U.S. agencies have also become
increasingly active in the area of global chemical control and are taking the lead on many issues
of global concern within the OECD. The Company actively supports these initiatives for more
globally harmonized requirements and the effort being applied to minimize resource and cost for
both industry and government. The Company continues to actively seek approvals for their products within certain specially
controlled applications. Within the U.S., the Food and Drug Administration (FDA), oversee the
approval of specialty chemicals that will come in contact with food. For many years, the Company
has been a leader in this area and is diligent in maintaining its expertise. The EPAs Federal
Insecticide, Fungicide and Rodenticide Act (FIFRA) controls the use of such applications as
material preservation and microbial control for the manufacture of polymeric, plastics and textile
products together with the protection of the finished article itself. The Company, through its
expertise, regularly gains approval for its products in the area and is also supporting other
companies in achieving approval for these exacting requirements. Agreements with Novartis in Connection with the Spin-off Novartis and the Company entered into a Master Spin-off Agreement (MSA) 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 MSA, Novartis and the Company provide each other with chemical products and
intermediates and certain services, such as provision of utilities, waste handling and security at
shared production sites. Such products and intermediates are provided at market prices or, in the
absence of market prices, at full cost, and such services are provided at the lower of market price
or full cost. In addition, pursuant to the MSA, 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 Agreement Regarding Use of Ciba as Corporate Name, 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).




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##### Table of Contents



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 CompanySelling
    
    
    Manufacturing
    
    
    Research
    
    
    Service, FinanceAMERICASArgentinaCiba Especialidades Químicas S.A.,
Buenos Aires
    
    
    
    100
    
    
    
    BermudaChemical Insurance Company Ltd.,
Hamilton
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals Eurofinance Ltd.,
Hamilton
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals International Finance Ltd.,
Hamilton
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals Investment Ltd.,
Hamilton
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    BrazilCiba Especialidades Químicas Ltda.,
São Paulo
    
    
    
    100
    
    
    
    
    
    
    Latexia Brazil Ltda., São Paulo
    
    
    
    100
    
    
    
    
    
    
    CanadaCiba Specialty Chemicals Canada Inc.,
Mississauga
    
    
    
    100
    
    
    
    ChileCiba Especialidades Químicas Ltda.,
Santiago de Chile
    
    
    
    100
    
    
    
    
    
    
    ColombiaCiba Especialidades Químicas S.A.,
Bogotà
    
    
    
    100
    
    
    
    
    
    
    Raisio Química Andina S.A.,
Medellin
    
    
    
    96
    
    
    
    
    
    
    GuatemalaCiba Especialidades Químicas, S.A. (ACC),
Guatemala
    
    
    
    100
    
    
    
    
    
    
    MexicoCiba Especialidades Químicas Mexico S.A. de C.V.,
Mexico
    
    
    
    100
    
    
    
    
    
    
    PanamaCiba Especialidades Químicas Colon S.A.,
Colon
    
    
    
    100
    
    
    
    United States of AmericaCiba Specialty Chemicals Corporation,
Tarrytown, NY
    
    
    
    100
    
    
    
    
    
    
    
    
    
    ASIA PACIFICAustraliaCiba Specialty Chemicals Pty. Ltd., Thomastown
    
    
    
    100
    
    
    
    
    
    
    BahrainCiba Specialty Chemicals Middle East W.L.L.,
Manama (Al Seef District)
    
    
    
    100
    
    
    
    ChinaCiba Specialty Chemicals (China) Ltd., Shanghai
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals (Hong Kong) Ltd.,
Hong Kong
    
    
    
    100
    
    
    
    Ciba Specialty Chemicals (Shanghai) Ltd.,
Shanghai
    
    
    
    100
    
    
    
    Guangdong Ciba Specialty Chemicals Co. Ltd.,
Panyu, Guangdong
    
    
    
    95
    
    
    
    
    
    
    Guangzhou Ciba Specialty Chemicals Co. Ltd.,
Guangzhou
    
    
    
    80
    
    
    
    
    
    
    Qingdao Ciba Dyes Co. Ltd., Qingdao
    
    
    
    94
    
    
    
    
    
    
    Qingdao Ciba Pigments Co. Ltd., Qingdao
    
    
    
    91
    
    
    
    
    
    
    Raisio Chemicals (Shanghai) Co. Ltd., Shanghai
    
    
    
    100
    
    
    
    Raisio Tianma Chemicals (Suzhou) Co. Ltd.,
Suzhou, Jiangsu
    
    
    
    100
    
    
    
    
    
    
    Shanghai Ciba Gao-Qiao Chemical Co. Ltd.,
Shanghai
    
    
    
    75
    
    
    
    
    
    
    Shenzhen Ciba Specialty Chemicals Co. Ltd.,
Shenzhen
    
    
    
    85
    
    
    
    
    
    
    Xiangtan Chemicals & Pigments Co. Ltd.,
Xiangtan
    
    
    
    49
    
    
    
    
    
    
    IndiaCiba India Private Ltd., Mumbai
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals (India) Ltd., Mumbai (1)
    
    
    
    69
    
    
    
    
    
    
    Diamond Dye-Chem Ltd., Mumbai (2)
    
    
    
    69
    
    
    
    
    
    
    IndonesiaP.T. Ciba Specialty Chemicals Indonesia, Jakarta
    
    
    
    80
    
    
    
    
    
    
    PT Intercipta Kimia Pratama, Jakarta
    
    
    
    60
    
    
    
    
    
    
    PT Latexia Indonesia, Jakarta
    
    
    
    100
    
    
    
    
    
    
    JapanChemipro Fine Chemical Kaisha Ltd., Kobe
    
    
    
    51
    
    
    
    
    
    
    Ciba Specialty Chemicals K.K., Osaka
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Musashino-Geigy Company Ltd.,
Kitaibaraki (Ibaraki)
    
    
    
    60
    
    
    
    
    
    
    Nippon Alkyl Phenol Co. Ltd., Tokyo
    
    
    
    46
    
    
    
    
    
    
    Republic of Korea (South Korea)Ciba Specialty Chemicals Korea Ltd., Seoul
    
    
    
    100
    
    
    
    Daihan Swiss Chemical Corporation, Seoul
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Doobon Fine Chemical Co., Ltd., Chongwon-kun
    
    
    
    63
    
    
    
    
    
    
    Raisio Chemicals Korea Inc., Chonan
    
    
    
    51
    
    
    
    
    
    
    MalaysiaCiba Specialty Chemicals (Malaysia) SDN BHD,
Klang
    
    
    
    70
    
    
    
    
    
    
    New ZealandCiba Specialty Chemicals N.Z. Ltd., Auckland
    
    
    
    100
    
    
    
    
    
    
    SingaporeCiba Specialty Chemicals (Singapore) Pte. Ltd.,
Singapore
    
    
    
    100
    
    
    
    South AfricaCiba Specialty Chemicals (Pty) Ltd., Spartan
    
    
    
    100
    
    
    
    TaiwanCiba Specialty Chemicals (Taiwan) Ltd., Kaohsiung
    
    
    
    100
    
    
    
    
    
    
    ThailandCiba Specialty Chemicals (Thailand) Ltd., Bangkok
    
    
    
    100
    
    
    
    
    
    
    




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##### Table of Contents



Group Holdings in %
    
    

Principal
Function of CompanySelling
    
    
    Manufacturing
    
    
    Research
    
    
    Service, FinanceEUROPEAustriaCiba Spezialitätenchemie GmbH, Hard
    
    
    
    100
    
    
    
    Latexia Österreich GmbH, Pischelsdorf/Zwentendorf
    
    
    
    100
    
    
    
    
    
    
    BelgiumCiba Specialty Chemicals N.V., Groot-Bijgaarden
    
    
    
    100
    
    
    
    Latexia S.A., Veurne
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Raisio Belgium N.V., Veurne
    
    
    
    100
    
    
    
    
    
    
    FinlandCiba Specialty Chemicals Finland OY, Helsinki
    
    
    
    100
    
    
    
    Ciba Specialty Chemicals Oy, Raisio
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Finnamyl Oy, Raisio
    
    
    
    100
    
    
    
    
    
    
    Latexia SB Oy, Raisio
    
    
    
    100
    
    
    
    
    
    
    Latexia Suomi Oy, Raisio
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Oy Kationi Ab, Raisio
    
    
    
    100
    
    
    
    
    
    
    FranceCiba Spécialités Chimiques SA, Saint Fons
    
    
    
    100
    
    
    
    
    
    
    Ciba Specialty Chemicals Masterbatch SA, Saint Jeoire en Faucigny
    
    
    
    100
    
    
    
    
    
    
    
    
    
    GermanyCiba Spezialitätenchemie Grenzach GmbH, Grenzach-Wyhlen
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Ciba Spezialitätenchemie Holding Deutschland GmbH, Lampertheim
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Spezialitätenchemie Lampertheim GmbH, Lampertheim
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Ciba Spezialitätenchemie Pfersee GmbH, Langweid/Lech
    
    
    
    100
    
    
    
    
    
    
    
    
    
    GreeceCiba Specialty Chemicals Hellas ABEE, Thessaloniki
    
    
    
    100
    
    
    
    HungaryCiba Specialty Chemicals Magyarorszag Kft., Budapest
    
    
    
    100
    
    
    
    ItalyCiba Specialty Chemicals S.p.A., Sasso Marconi (Bologna)
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Magenta Master Fibers S.r.l., Milano
    
    
    
    60
    
    
    
    
    
    
    
    
    
    LuxembourgCiba Specialty Chemicals Finance
Luxembourg S.A., Luxembourg
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    NetherlandsCiba Specialty Chemicals International
Nederland B.V., Maastricht
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals (Maastricht) B.V.,
Maastricht
    
    
    
    100
    
    
    
    
    
    
    
    
    
    EFKA Additives B.V., Heerenveen
    
    
    
    100
    
    
    
    
    
    
    
    
    
    PortugalCiba Especialidades Químicas Lda., Porto
    
    
    
    100
    
    
    
    Raisio Portugal-Produtos Químicos, Lda.,
Nogueira Maia
    
    
    
    51
    
    
    
    SpainCiba Especialidades Químicas S.L., Barcelona
    
    
    
    100
    
    
    
    Latexia Iberia, S.L., Madrid
    
    
    
    100
    
    
    
    
    
    
    Raisio Echeveste, S.A., Tolosa
    
    
    
    51
    
    
    
    
    
    
    SwedenCiba Specialty Chemicals Sweden AB, Göteborg
    
    
    
    100
    
    
    
    AB CDM, Västra Frölunda
    
    
    
    100
    
    
    
    Raisio Svenska AB, Gothenburg
    
    
    
    100
    
    
    
    SwitzerlandCiba Specialty Chemicals Holding Inc., Basel (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Spécialités Chimiques Monthey SA,
Monthey
    
    
    
    100
    
    
    
    
    
    
    Ciba Spezialitätenchemie AG,
Basel
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Ciba Spezialitätenchemie Finanz AG,
Basel
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Spezialitätenchemie International AG,
Basel
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Spezialitätenchemie Kaisten AG,
Kaisten
    
    
    
    100
    
    
    
    
    
    
    Ciba Spezialitätenchemie Schweizerhalle AG,
Muttenz
    
    
    
    100
    
    
    
    
    
    
    Ciba Spezialitätenchemie Services AG,
Basel
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    CIMO Compagnie Industrielle de Monthey SA,
Monthey
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    TurkeyCiba Özel Kimyevi Ürünler Sanayi ve Ticaret Ltd.,
Istanbul
    
    
    
    100
    
    
    
    United KingdomCiba Specialty Chemicals PLC,
Macclesfield
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals Investment PLC,
Macclesfield
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals Water Treatments Ltd.,
Bradford
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Pira International Limited, Leatherhead
    
    
    
    100
    
    
    
    
    
    
    
    
    
    Raisio Chemicals UK Limited, Blackburn
    
    
    
    100
    
    
    
    
    
    
    
 To enhance the readability of this report and because of
being less relevant, the share or quota capitals of Ciba
group companies are not indicated herein, with the
exception of Ciba Specialty Chemicals Holding Inc. and of
Ciba Specialty Chemicals (India) Ltd., two publicly
listed companies.   (1)
    
    The shares of Ciba Specialty
Chemicals (India) Ltd., Mumbai, (CSCIL) are listed on
the Mumbai Stock Exchange (www.bseindia.com) under the
scrip name CIBA SPE
CH; the scrip code is 532184. The total market value of
the 13 280 819 outstanding shares of CSCIL as of
December 31, 2004 was approximately CHF 107 million (INR
4 060 million). As of December 31, 2004 the Company held
9 200 887 Equity Shares, representing 69.28 percent of
the paid-up share capital of CSCIL.(2)
    
    Diamond Dye-Chem Limited is a wholly owned subsidiary of CSCIL.(3)
    
    Ciba Specialty Chemicals Holding Inc. is
the ultimate holding company of Ciba Specialty Chemicals
Group. Its Shares are listed on the Swiss Exchange and,
since August 2, 2000, the Companys American Depository
Shares (ADSs) are listed on the
New York Stock Exchange. Two ADSs represent one Share of
the Companys common stock.


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 principal responsibility for the
management and production at the site and the major product lines that each facility is designed to
manufacture.

Size inLocation
    
    hectares (1)
    
    Major Product LinesEUROPEBasel, 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
    
    
    Water & Paper Treatment (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)Guturrybay, Spain
    
    
    2
    
    
    Water & Paper Treatment (latex production)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)Kaipiainen, Finland
    
    
    -
    
    
    Water & Paper Treatment (latex production)Kaisten, Switzerland
    
    
    59
    
    
    Plastic Additives (polymer additives)Kokemaeki, Finland
    
    
    10
    
    
    Water & Paper Treatment (starch production)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)Lapua, Finland
    
    
    23
    
    
    Water & Paper Treatment (starch production)Maastricht, Netherlands
    
    
    11
    
    
    Coating Effects (dispersions and inorganic pigments)Mietoinen, Finland
    
    
    8
    
    
    Water & Paper Treatment (starch production)Monthey, Switzerland (2)
    
    
    11
    
    
    Water & Paper Treatment (whiteners)
Coating Effects (high performance pigments)Mortara & Trivolzio, Italy
    
    
    17
    
    
    Coating Effects (imaging and coating additives)Paisley, United Kingdom
    
    
    17
    
    
    Coating Effects (classical pigments)Pischelsdorf, Austria
    
    
    -
    
    
    Water & Paper Treatment (latex production)Pontecchio Marconi, Italy
    
    
    12
    
    
    Plastic Additives (polymer additives and production of insecticides for a
third party)Raisio, Finland
    
    
    1
    
    
    Water & Paper Treatment (sizing agents and additives for the paper industry)Ribecourt, France
    
    
    -
    
    
    Water & Paper Treatment (latex production)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)Toulouse, France
    
    
    1
    
    
    Water & Paper Treatment (sizing agents and additives for the paper industry)Veurne, Belgium
    
    
    1
    
    
    Water & Paper Treatment (starch production)






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##### Table of Contents



Size inLocation
    
    hectares (1)
    
    Major Product LinesAMERICASAtotonilquillo, Mexico
    
    
    43
    
    
    Textile Effects (disperse, basic and acid dyes, textile chemicals)
Water & Paper Treatment (whiteners, photobleach)Berwick, USA
    
    
    10
    
    
    Water & Paper Treatment (sizing agents and additives for the paper industry)Camaçari, Brazil
    
    
    14
    
    
    Plastic Additives (polymer additives)Charlotte, North Carolina USA
    
    
    6
    
    
    Textile Effects (dyeing and printing auxiliaries)Estrada do Colégio, Brazil
    
    
    4
    
    
    Water & Paper Treatment (whiteners, fabric finishing)McIntosh, Alabama, USA
    
    
    637
    
    
    Plastic Additives (polymer additives and imaging and coating additives)
Water & Paper Treatment (whiteners)Medellin, Colombia
    
    
    4
    
    
    Water & Paper Treatment (sizing agents and additives for the paper industry)Newport, Delaware USA
    
    
    15
    
    
    Coating Effects (high performance pigments)Paulinia, Brazil
    
    
    -
    
    
    Water & Paper Treatment (latex production)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)ASIA-PACIFICAi-oi, Japan (3)
    
    
    -
    
    
    Plastic Additives (polymer additives and imaging and coating additives)Ankleshwar, India
    
    
    2
    
    
    Water & Paper Treatment (whiteners)Candra Sari, Indonesia
    
    
    5
    
    
    Textile Effects (textile chemicals)Chiba, Japan (4)
    
    
    -
    
    
    Plastic Additives (polymer additives)Goa, India
    
    
    14
    
    
    Plastic Additives (polymer additives)Isohara, Japan (5)
    
    
    8
    
    
    Plastic Additives (polymer additives)Kaohsiung, Taiwan
    
    
    4
    
    
    Plastic Additives (polymer additives)Mahachai, Thailand
    
    
    4
    
    
    Textile Effects (reactive dyes for cellulose)Merak, Indonesia
    
    
    6
    
    
    Water & Paper Treatment (latex production)Panyu, China (6)
    
    
    5
    
    
    Textile Effects (textile chemicals)Perth, Australia
    
    
    2
    
    
    Water & Paper Treatment (water treatment chemicals)Qingdao, China (7)
    
    
    1
    
    
    Coating Effects (classical pigments)Qingdao, China (8)
    
    
    1
    
    
    Textile Effects (wool and disperse dyes)Serang, Indonesia
    
    
    -
    
    
    Water & Paper Treatment (sizing agents and additives for the paper industry)Shanghai, China (9)
    
    
    6
    
    
    Plastic Additives (polymer additives)Ulsan, South Korea
    
    
    7
    
    
    Coating Effects (classical pigments)Zhenjiang, China
    
    
    10
    
    
    Water & Paper Treatment (latex production)
   (1)
    One hectare is equal to 2.471 United States acres.  (2)
    Most of the infrastructure facilities are shared with Syngenta and Huntsman through a
joint venture in which the Company holds a 50 percent interest.  (3)
    Joint venture with Chemipro Kasai Kaisha, Ltd., in which the Company holds a 51 percent
interest.  (4)
    Joint venture with Mitsui Petrochemical and Musashino-Geigy, in which the Company holds
a 40 percent interest.  (5)
    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.  (6)
    Venture with Panyu City Shilou Town Economical Development Company Limited, in which
the Company holds a 95 percent interest.  (7)
    Venture with Qingdao Double Peach, in which the Company holds a 91.4 percent interest.(8)
    Venture with Qingdao Double Peach, in which the Company holds a 94 percent interest.  (9)
    Joint venture with Shanghai Gao-Qiao Petrochemical Company, in which the Company holds
a 75 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 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 509 million as of December 31, 2004 and CHF 557 million as of
December 31, 2003 have been recorded in the accompanying Consolidated Balance Sheets. The decrease
in the provision of CHF 48 million in 2004 compared to 2003 relates to usage of the provisions of CHF 43 million and a CHF 18 million reduction related mainly to currency effects, offset in
2004 by additional reserves established in connection with the acquisition of Raisio Chemicals. The
Companys environmental protection and improvement cash expenditures were approximately CHF 54
million in 2004 (CHF 31 million in 2003), including investments in construction, operations and
maintenance and usage of the provision.




---



##### Table of Contents



Under the Companys agreement with 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 based, environmental liabilities are
allocated between Novartis and the Company based on the ownership of the site or, if environmental
liabilities do not relate to production sites or these are not owned by either entity, according to
the polluter pays principle. If causation between the parties cannot be determined, costs are
shared equally. The agreement with Novartis is not subject to any time or amount limits but could
terminate for certain liabilities in the United States (i) upon a sale of substantially all of the
Companys assets, (ii) upon a change in control of the Company, or (iii) for individual facilities,
upon the sale of the facility (unless the Company retains responsibility for any clean-up at such
site). 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 and/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s subsidiary in the United States
is engaged in a large bio-remediation project that is expected to take up to eight 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 October 2003, the Companys subsidiary in the United States received a letter from the New
Jersey Department of Environmental Protection (NJDEP) seeking to begin discussions on natural
resource damage liability issues (NRDs) at the Toms River site for alleged injury to groundwater.
The subsidiary is engaged in on-going settlement discussions with the State to see if it can reach
a mutually beneficial settlement to avoid litigation. If a mutual agreement cannot be reached and
NJDEP decides to initiate litigation, the Company believes that it has significant defenses to
these potential NRD claims. 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 planning and 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, 2004, 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.




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##### Table of Contents



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 in Item 18  Financial Statements. 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). Year in review  2004 compared to 2003 Results of operations
    
    
    2004
    
    
    
    2003Net sales
    
    
    
    7 027
    
    
    
    
    6 646Gross profit
    
    
    
    2 171
    
    
    
    
    2 067Operating income
    
    
    
    519
    
    
    
    
    571Income from continuing operations
    
    
    
    283
    
    
    
    
    360Income from discontinued operations, net of tax
    
    
    
    28
    
    
    
    
    0Cumulative effect of change in accounting principles
    
    
    
    0
    
    
    
    
    (16
    )Net income
    
    
    
    311
    
    
    
    
    344Earnings per share, basic and dilutedContinuing operations
    
    
    
    4.28
    
    
    
    
    5.26Discontinued operations
    
    
    
    0.43
    
    
    
    
    0.00Cumulative effect of change in accounting principles
    
    
    
    0.00
    
    
    
    
    (0.23
    )Net income per share
    
    
    
    4.71
    
    
    
    
    5.03Other dataDepreciation and amortization of other intangible assets
    
    
    
    394
    
    
    
    
    366Restructuring and special charges
    
    
    
    91
    
    
    
    
    0EBITDA (1)
    
    
    
    913
    
    
    
    
    937Net cash provided by operating activities
    
    
    
    631
    
    
    
    
    1 033Free cash flow (1)
    
    
    
    270
    
    
    
    
    728Net debt (1)
    
    
    
    1 840
    
    
    
    
    1 049Shareholders equity at year end
    
    
    
    4 151
    
    
    
    
    4 245Dividend per share (2)
    
    
    
    1.00
    
    
    
    
    0.00Capital reduction per share (2)
    
    
    
    2.00
    
    
    
    
    3.00Key performance ratiosNet sales development
    
    
    
    6
    %
    
    
    
    (6
    )%Net sales development in local currencies
    
    
    
    8
    %
    
    
    
    0
    %Expressed as a percentage of sales:Gross profit
    
    
    
    30.9
    %
    
    
    
    31.1
    %Operating income
    
    
    
    7.4
    %
    
    
    
    8.6
    %Income from continuing operations
    
    
    
    4.0
    %
    
    
    
    5.4
    %Net income
    
    
    
    4.4
    %
    
    
    
    5.2
    %EBITDA
    
    
    
    13.0
    %
    
    
    
    14.1
    %
   (1)
    EBITDA, free cash flow and net debt are non-U.S. GAAP financial measures. See Use of
Certain Supplementary Financial Indicators in this Managements Discussion and Analysis for
further discussion of the use of these measures.  (2)
    The Board of Directors proposes a cash payment to the Companys shareholders in 2005
totaling CHF 3 per share, based on 2004 results, consisting of a dividend of CHF 1 per share
and a capital reduction of CHF 2 per share, which is reflected in the table above. The per
share amounts presented above for 2003 reflect that no dividend was paid in 2004, based on
2003 results, as well as the capital reduction approved by the Companys shareholders in 2004,
based on 2003 results. For further information see the Operational Review section of this
Managements Discussion and Analysis and Item 6. Directors, Senior Management and Employees -
Dividends and Dividend Policy.




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##### Table of Contents



Executive summary Highlights Ciba Specialty Chemicals (the Company) experienced in 2004 generally favorable market conditions,
particularly in certain areas of the world, and unfavorable currency effects from the continued
weakening of the U.S. dollar against the Swiss franc and the euro. Organic growth during 2004
resulted in net sales, excluding those of businesses acquired during the year, matching 2003 levels
in Swiss francs despite negative currency effects and increasing by 2 percent in local currencies. During 2004, the Company completed the acquisition of Raisio Chemicals Oy in addition to a number
of other minor acquisitions. Comments relating to acquisition effects throughout this Managements
Discussion and Analysis refer to these acquisitions in totality, other than where specifically
indicated. Acquisitions contributed 6 percent to sales growth in 2004, mainly from Raisio
Chemicals. Including acquisitions, net sales in 2004 of CHF 7 027 million increased over 2003
levels by 8 percent in local currencies and by 6 percent in Swiss francs. The Company implemented in 2004 Project Shape, a restructuring program to assure that synergies
resulting from the integration of Raisio Chemicals are achieved and to address the continuing shift
in the textiles market to Asia. Project Shape will take until 2007 to complete and is expected to
result in after tax charges totaling CHF 125 million, the reduction of approximately 950 positions
worldwide and annualized after tax earnings improvement of approximately CHF 90 million, once fully
implemented. Operational review The global economy regained momentum to varying degrees during 2004, therefore providing the
Company with opportunities for further growth in certain markets. Geographically, solid sales
growth was achieved in Asia, particularly in China and Japan. In the Americas, sales benefited from
stronger demand, particularly for specialty applications in market sectors such as polymers,
industrial and decorative coatings and transportation. Sales in European markets were mixed, with
Continental European sales flat to slightly improved and U.K. sales declining from prior year
levels. Additional sales from acquired companies, mainly Raisio Chemicals, contributed strongly to
sales growth in 2004. The acquisition of Raisio Chemicals enables the Segment Water and Paper
Treatment to expand its already broad product range into its existing core markets and strengthen
its presence in the Nordic regions and in Asia. Gross profit increased in absolute terms in 2004 to CHF 2 171 million from CHF 2 067 million last
year, benefiting from higher sales volumes and productivity improvements resulting from higher
capacity utilization. Despite higher volumes, underlying production costs, excluding acquisition
effects, were stable. Gross profit margin for 2004 was 31 percent, the same as prior year. Selling,
general and administrative expenses, while higher than 2003 levels due to acquisition effects,
decreased as a percentage of net sales due to continued cost control efforts. Under Project Shape, the Company will close its Clayton manufacturing facility in the U.K. in a
phased shutdown until 2007 and transfer production capacity mostly to Asia. The program also
involves the closure of several smaller production and administrative facilities, primarily from
the former Raisio Chemicals, and various other rightsizing initiatives across the Companys global
production base. This will enable the Company to optimize regional productive capacities within
growing markets, particularly in textile effects, and to further balance the currency impact
between the location of sales and cost generation. Operating income decreased to CHF 519 million from CHF 571 million in 2003. Operating income margin
was also lower in 2004 at 7.4 percent of sales compared to 8.6 percent in 2003. These decreases
were primarily attributable to the CHF 80 million of restructuring expenses incurred in 2004 in
connection with Project Shape, in addition to the expensing of acquired in-process research and
development costs of CHF 11 million resulting from the Raisio Chemicals acquisition. Cash flow and balance sheet review Cash flows from operating activities in 2004 were, as expected, substantially lower than 2003,
which had benefited by CHF 229 million from reductions in inventories and receivables. During 2004,
approximately CHF 46 million of cash outflows were attributable directly to specific events at
Raisio Chemicals, consisting of the build up of current assets for two new plants in China, higher
receivables following the cessation of factoring and seasonal cash flow patterns in the starch
business. In addition, the Company had higher payments for taxes, interest and contributions to
certain of its pension plans. These factors, together with a combined CHF 107 million of higher
capital expenditures and lower proceeds from sales of assets, resulted in lower free cash flow of
CHF 270 million compared to CHF 728 million in 2003.




---



##### Table of Contents



Net cash flows from investing activities was an outflow of CHF 1 051 million in 2004, an increase
in outflow of CHF 812 million from CHF 239 million last year. The increase primarily consisted of
the cash paid for the acquisition of Raisio Chemicals. Capital expenditures increased by CHF 61
million to CHF 294 million in 2004 from CHF 233 million last year. Such expenditures remain focused
primarily on productivity improvement projects and maintenance of existing capacity. Net cash flows used in financing activities were CHF 304 million in 2004 primarily consisting of a
further capital reduction payment to shareholders totaling CHF 197 million and treasury stock
purchases, net of sales, of CHF 162 million. Net debt increased by CHF 791 million to CHF 1 840 million in 2004, due primarily to the reduction
in cash used for the Raisio Chemicals acquisition, the capital reduction payment to shareholders
and treasury stock purchases. Of the Companys
CHF 3.5 billion of total debt, more than 80 percent has long-term maturity dates. In addition, the
Company continues to maintain a strong cash balance in excess of CHF 1.6 billion. The Board of Directors will propose at the Annual General Meeting of shareholders on March 3, 2005
that the 1.8 million shares that were purchased in 2004 in connection with the share buy-back
program initiated in 2003, be cancelled; this proposal is subject to shareholder approval. In 2003
under this program, the Company purchased 1.3 million treasury shares. The shareholders approved
the cancellation of these shares in 2004; consequently, the shares were cancelled. Significant other events As a result of a dispute, Vantico International SA (now owned by the Huntsman Group) had initiated
arbitration proceedings against the Company. The dispute and related arbitration proceedings were
settled during 2004 resulting in the release of previously established reserves totaling CHF 28
million, net of tax. During 2004, the Company released CHF 15 million of previously established
reserves following the settlement of certain outstanding tax matters. To streamline the Group structure, the Company in 2004 integrated the Home & Personal Care Segment
into two other existing segments. In recent years, the Company has evaluated numerous potential
acquisitions in the home and personal care market, however none met the Companys strict criteria
for strategic fit and return on investment. This left the segment with a lack of critical mass and
the Company therefore decided to save the cost of the segment support structure. The segment
information presented herein reflects the new segment structure and all current and prior period
segment information has been restated accordingly. To further streamline processes, the Company plans over the next few years to harmonize business
processes and implement a company-wide, unified system structure with new software. The project is
expected to take up to 4 years. 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 Item 18  Financial Statements 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 testing of property, plant and equipment, goodwill and other intangible assets As discussed in Note 1, Summary of Significant Accounting Policies, in the Companys Consolidated
Financial Statements in Item 18  Financial Statements, the Company periodically evaluates
property, plant and equipment, goodwill and other intangible assets for potential impairment. If
such assets are considered to be impaired, they are written down to fair value as appropriate. The impairment review process requires management to make significant estimates and judgments
regarding the future cash flows expected to result from the use and, if applicable, the eventual
disposition of the respective assets as well as other factors to determine the fair value of the
respective assets. The key variables that management must estimate in determining these expected
future cash flows and fair values include sales volumes, sales 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.




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##### Table of Contents



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 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 amounts if management used different assumptions or if
different conditions occur in future accounting periods. For further discussion related to environmental matters, see Note 21 to Consolidated Financial
Statements in Item 18  Financial Statements and
Item 4  Information on the Company  Environmental Matters. Pension and other postretirement benefits Many of 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, rates 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 markets 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, changes in labor market conditions; and (iv) for health care cost trend
rates, 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 Companys pension and postretirement
benefit obligations for 2004 and 2003, as well as the U.S. GAAP requirements for accounting for the
differences between actual results that differ from the assumptions used in calculating the annual
retirement benefit liabilities and costs, are disclosed in Note 18 to the Consolidated Financial
Statements in Item 18  Financial Statements. 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 temporary
differences between the book and tax bases of assets and liabilities, as well as the effects of tax
losses carried forward in certain tax jurisdictions in which the Company operates that may be
utilized to offset future taxable income and similar tax credits carried forward that may be
utilized to reduce future taxes payable. The Company records valuation allowances on deferred tax
assets when appropriate to reflect the expected future tax benefits to be realized. In determining
the appropriate valuation allowances, certain judgments are made by management relating to
recoverability of deferred tax assets, use of tax loss and tax credit carryforwards, levels of
expected future taxable income and available tax planning strategies. The assumptions involved in making these judgments are updated periodically by management based on
current business conditions that affect the Company and overall economic conditions. These
management judgments are therefore subject to change based on factors that include, but are not
limited to (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 or 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 or
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,
delays in product availability or 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 have been made for any additional taxes that may result from any tax audits of
historical periods that are currently ongoing or that may occur.




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##### Table of Contents



Financial review Total sales higher, comparable sales also higher in local currencies and stable in Swiss francs Sales increased by 6 percent overall to CHF 7 027 million including acquisition effects. Comparable
sales excluding acquisition effects increased by 2 percent in local currencies and were stable in
Swiss francs. Sales development in 2004 compared to 2003 resulted from the following factors : Consolidated sales development
    
    
    2004 compared to 2003Volume/product mix
    
    
    
    5
    %Price
    
    
    
    (3
    )%Currency
    
    
    
    (2
    )%Total in Swiss francs excluding acquisitions
    
    
    
    0
    %Acquisitions
    
    
    
    6
    %Total in Swiss francs
    
    
    
    6
    %
 Market conditions mostly improved in 2004 across the majority of the Companys core businesses,
as an overall more favorable economic environment led to a pick-up in industry activity and
underlying demand levels. Consequently, higher sales volumes resulted in most segments reporting
higher sales in local currencies. The ongoing impact of a strongly competitive sales environment
particularly in the first half of the year resulted in further downward pressure on selling prices.
However, the Company was successful in abating this trend in the second semester. These factors, in
addition to adverse currency development and a slightly weakening sales trend in the last quarter
resulted in stable sales in Swiss francs, excluding acquisition effects. In Europe, the major economies failed to gain momentum in 2004, particularly in the second half of
the year, which was characterized by generally weak business months towards the year-end.
Conditions were more favorable across the NAFTA regions, where good sales development in the U.S.
was generally in keeping with an improved economic environment. Consequently sales increased in
local currency. Further economic growth in Asia enabled another good performance in the region. Sales levels were adversely impacted by the continued appreciation of the Swiss franc against the
U.S. dollar in particular. This was partially offset by the strengthening of the euro and the
British pound against the Swiss franc. Volume gains compensated for further price erosion resulting
from the strongly competitive sales environment. As a result, comparable sales were 2 percent
higher in local currencies and were stable in Swiss francs. Sales including acquisition effects
were 6 percent higher than prior year in Swiss francs. Sales in local currencies excluding acquisition effects were lower in Europe. However the
appreciation of the euro resulted in slightly higher sales in Swiss francs. Most major sales
territories experienced slow market conditions to varying degrees, although both Germany and France
posted slight increases in local currencies. Sales including acquisition effects were higher in all
major territories, with the exception of the U.K., where sales declined after a difficult year
across the major businesses. In the Americas, sales in the U.S. increased in local currency but
were lower in Swiss francs, both excluding and including acquisition effects. Sales in South
America were well ahead in local currencies and to a lesser extent in Swiss francs. In Asia
Pacific, sales again increased in local currencies and to a lesser extent also in Swiss francs.
Region China again achieved double-digit growth in local currencies, and Japan also reported strong
sales increases in both local currency and in Swiss francs. Geographic sales distribution
    
    
    2004
    
    
    
    2003Europe
    
    
    
    44
    %
    
    
    
    41
    %Americas(1)
    
    
    
    29
    %
    
    
    
    31
    %Asia Pacific(2)
    
    
    
    27
    %
    
    
    
    28
    %
   (1)
    The Americas are comprised of North, Central and South America.  (2)
    Asia Pacific is comprised of Asia, Africa, the Middle East, Australia and New Zealand. Gross profit benefits from sales growth and acquisition effects In absolute terms gross profit levels increased by 5 percent to CHF 2 171 million but decreased to
30.9 percent of sales compared to 31.1 percent in prior year. The increase in absolute terms
resulted from sales volume gains and positive acquisition effects that offset both selling price
reductions and adverse currency impact. Higher sales volumes in turn generated productivity
improvements leading to lower levels of unabsorbed fixed costs that combined with further savings
in base production costs to positively affect margins. Raw material costs were relatively stable
overall but showed an increasing trend towards year-end. Gross margins however decreased slightly as
a percentage of sales, mainly due to the effect of relatively higher variable to total cost ratio
of Raisio Chemicals that was partially offset in operating income.




---



##### Table of Contents



Selling, general and administrative costs increase; lower in sales terms Selling, general and administrative expenses in Swiss francs increased by CHF 42 million to CHF 1
227 million in 2004, an increase of 3 percent from CHF 1 185 million last year. This was mainly due
to acquisition effects. However as a percentage of sales selling, general and administrative
expenses decreased to 17.4 percent of sales in 2004 from 17.8 percent in 2003, partially due to the
relatively lower fixed to total cost structure of Raisio Chemicals. Underlying costs on a
comparable basis were stable. Investment in research and development sustained Research and development expenses as a percentage of sales were 4.1 percent in 2004, a slight
decrease from 4.2 percent last year. In absolute terms, research and development expenses increased
slightly by CHF 7 million to CHF 288 million in 2004 from CHF 281 million in 2003. The Company has historically invested and plans to continue to invest approximately 4 percent of
sales in research and development activities. In addition, pursuant to its commitment to
innovation, the Company maintains a Research Fund for high risk/high reward projects, allowing up
to CHF 15 million additional research and development expenses annually for such projects. Operating income and EBITDA lower due to acquisition and restructuring effects 2004
    
    
    
    2003Operating income
    
    
    
    519
    
    
    
    
    571EBITDA
    
    
    
    913
    
    
    
    
    937Operating income margin
    
    
    
    7.4
    %
    
    
    
    8.6
    %EBITDA margin
    
    
    
    13.0
    %
    
    
    
    14.1
    %2004 compared to 2003Operating income
    
    
    
    (9
    )%
    
    
    
    (28
    )%EBITDA
    
    
    
    (3
    )%
    
    
    
    (20
    )%
 Operating income decreased by 9 percent to CHF 519 million in 2004 from CHF 571 million in 2003.
Expressed as a percentage of sales, operating income fell to 7.4 percent in 2004 from 8.6 percent
in the prior year. Despite higher sales volumes and positive acquisition effects that helped offset
price erosion and adverse currency development, operating income decreased due to restructuring
charges totaling CHF 80 million incurred in connection with Project Shape and special charges
totaling CHF 11 million consisting of the expensing of the fair value of acquired in-process
research and development activities in connection with the acquisition of Raisio Chemicals. Without
these items, in 2004 operating income would have been CHF 610 million, or 8.7 percent of sales. See
Note 23 to Consolidated Financial Statements in Item 18  Financial Statements. As a result of the decline in operating income as described above, EBITDA in 2004 decreased to CHF
913 million, a decrease of CHF 24 million from CHF 937 million in the prior year. Currency adjusted
EBITDA increased by CHF 29 million from 2003. EBITDA margin decreased to 13.0 percent of sales in
2004 from 14.1 percent in 2003. Segments results Plastic Additives results Sales increased to CHF 1 895 million in 2004 or by 4 percent in Swiss francs and by 7 percent in
local currencies. Sales development in 2004 compared to 2003 resulted from the following factors: Sales development
    
    
    2004 compared to 2003Volume/product mix
    
    
    
    9
    %Price
    
    
    
    (2
    )%Currency
    
    
    
    (3
    )%Total in Swiss francs
    
    
    
    4
    %
 Sales development across the Segment was generally positive both in local currencies and to a
lesser extent in Swiss francs. In base polymers an upturn in the final quarter of the year helped
to offset an intentional reduction in low-margin businesses.




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##### Table of Contents



Strong sales growth was achieved in
polymer products, with all core markets performing well. Process and lubricant additives sales were
well above prior year levels, with good market conditions evident across all major territories.
Home and personal care sales were significantly higher, with new product launches in colors and
stabilization applications and further gains in UV absorbers as the main growth drivers. The effect
on sales of ongoing downward pressure on selling prices was fully offset by increased sales volume. Geographically, sales in Europeincreased in Swiss francs and to a lesser extent in local
currencies. Sales performance was mixed, with a good result in Germany contrasting more sluggish
conditions elsewhere across the region. In the Americas, sales levels increased in both Swiss
francs and in local currencies. Sales levels rebounded in the U.S. benefiting from the gradual
economic recovery there, and were much higher in local currency and to a lesser extent in Swiss
francs. Sales in South America were higher in both local currencies and Swiss francs. Further sales
growth was also achieved in Asia Pacific, with China and Japan again achieving excellent results in
both local currencies and in Swiss francs. Sales development in local currencies was generally
positive across the remainder of the region, and to a lesser extent also in Swiss francs. Operating income and EBITDA
    
    
    2004

    
    
    2003Operating Income:Absolute in CHF
    
    
    
    224
    
    
    
    
    165As a percentage of sales (operating income margin)
    
    
    
    11.9
    %
    
    
    
    9.1
    %EBITDA:Absolute in CHF
    
    
    
    319
    
    
    
    
    265As a percentage of sales (EBITDA margin)
    
    
    
    16.8
    %
    
    
    
    14.6
    %
 Operating income and EBITDA increased both in absolute terms and as a percentage of sales.
Despite an increase in raw material costs in the latter part of the year, gross margins improved
due to the combined effects of positive sales volume mix development and also productivity gains
that resulted from higher plant utilization levels. Selling, general and administration expenses
were higher, both in local currencies and to a lesser extent in Swiss francs. The Segment
maintained its investment level in research and development activities at approximately 5 percent
of sales. Asset management
    
    
    2004
    
    
    
    2003Net current operating assets:Absolute in CHF
    
    
    
    393
    
    
    
    
    362As a percentage of sales
    
    
    
    21
    %
    
    
    
    20
    %Capital expenditures in CHF
    
    
    
    76
    
    
    
    
    64Invested capital in CHF
    
    
    
    1 322
    
    
    
    
    1 247Total assets in CHF
    
    
    
    1 604
    
    
    
    
    1 514
 Net operating assets increased from 2003 levels. This was due to higher levels of receivables
and inventories, both in absolute terms and as a percentage of sales. Payable levels were higher
than prior year levels. Capital expenditures were mainly focused on debottlenecking and
productivity improvement programs, and were well below the level of depreciation. Both invested
capital and total assets increased slightly over prior year. Coating Effects results Sales in Swiss francs increased to CHF 1 818 million in 2004 or by 1 percent and increased by 3
percent in local currencies. Sales development in 2004 compared to 2003 resulted from the following
factors: Sales development
    
    
    2004 compared to 2003Volume/product mix
    
    
    
    6
    %Price
    
    
    
    (3
    )%Currency
    
    
    
    (2
    )%Total in Swiss francs
    
    
    
    1
    %




---



##### Table of Contents



Strong volume gains across most of the Segments key businesses contributed to overall sales
growth in both Swiss francs and in local currencies. In the coatings business, sales increased in
both Swiss francs and in local currencies, benefiting from strong demand for new product
applications in the industrial and decorative coating markets, coupled with higher sales in the
transportation market despite downward pressure on automobile sales. The Segment again managed to
increase sales into the highly competitive plastics market and also posted higher sales in
electronic materials due to further gains in the fast-growing displays sector, although demand
slowed in the latter part of the year. Sales of Optical Information Storage products deteriorated
throughout the year due principally to overcapacity in the CD-R market. The imaging and inks
business continued to experience tougher conditions particularly in the publications market,
although this was partially offset by a positive mix effect resulting from sales of higher margin
pigments in packaging. Geographically, in Europesales levels were stable in Swiss francs and were slightly lower in local
currencies. Of the major sales regions, France and Italy delivered positive sales growth both in
local currencies and in Swiss francs, as did Germany to a lesser extent. This was contrasted by a
difficult year in the U.K. where sales decreased markedly both in Swiss francs and in local
currency. In the Americasin general and in the USA in particular, sales levels increased in local
currencies but were lower in Swiss francs. Sales in Central and South America increased both in
local currencies and in Swiss francs. Asia Pacificsales grew in local currencies and to a lesser
extent in Swiss francs, enabled by an excellent result in Japan. Sales in Region China were stable
in local currencies, but decreased in Swiss francs. Of the remaining sales territories in the
region, growth was generally positive in local currencies and to a lesser extent in Swiss francs. Operating income and EBITDA
    
    
    2004

    
    
    2003Operating Income:Absolute in CHF
    
    
    
    291
    
    
    
    
    300As a percentage of sales (operating income margin)
    
    
    
    16.0
    %
    
    
    
    16.6
    %EBITDA:Absolute in CHF
    
    
    
    394
    
    
    
    
    397As a percentage of sales (EBITDA margin)
    
    
    
    21.7
    %
    
    
    
    22.0
    %
 Operating income and EBITDA decreased both in absolute terms and as a percentage of sales.
Margins deteriorated due to sales price erosion, higher production costs that resulted mainly from
higher personnel costs, and adverse currency development. These were partially offset by positive
volume mix gains and lower residual capacity costs resulting from increased capacity utilization.
Selling, general and administrative costs increased due to higher personnel costs. Investment in
research and development was approximately 6 percent of sales. Asset management
    
    
    2004
    
    
    
    2003Net current operating assets:Absolute in CHF
    
    
    
    501
    
    
    
    
    520As a percentage of sales
    
    
    
    28
    %
    
    
    
    29
    %Capital expenditures in CHF
    
    
    
    82
    
    
    
    
    79Invested capital in CHF
    
    
    
    1 853
    
    
    
    
    1 773Total assets in CHF
    
    
    
    2 100
    
    
    
    
    2 020
 Net operating assets decreased from prior year levels. Both receivables and inventory levels
were lower, in absolute terms as well as in percentage of sales. Payable levels were higher than in
prior year. Capital expenditures increased slightly; these remain focused primarily on enhancement
of existing capacity and were below the level of depreciation. Both invested capital and total
assets increased slightly. Water & Paper Treatment results Sales increased to CHF 2 014 million in 2004 or by 25 percent in Swiss francs and by 27 percent in
local currencies. Sales development in 2004 compared to 2003 resulted from the following factors:




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##### Table of Contents



Sales development
    
    
    2004 compared to 2003Volume/product mix
    
    
    
    6
    %Price
    
    
    
    (4
    )%Currency
    
    
    
    (2
    )%Total in Swiss francs before acquisitions
    
    
    
    0
    %Acquisitions
    
    
    
    25
    %Total in Swiss francs
    
    
    
    25
    %
 The acquisition effect of Raisio Chemicals is included from June 1, 2004; all comments
regarding sales that follow are on a comparable basis with 2003 thereby excluding acquisition
effects other than where specifically indicated. Sales in water treatments exceeded prior year levels both in Swiss francs and in local currencies,
driven by good performances across most major markets despite further competitive downward pressure
on selling prices in the sector. Business line paper reported sales growth in local currencies with
most markets outperforming the prior year, although sales remained stable in Swiss francs. Sales in
detergents and hygiene suffered from the adverse competitive impact of the weak U.S. dollar,
especially in whiteners, resulting in sales decreases both in local currencies and in Swiss francs. Geographically, sales in Europeincreased in Swiss francs and were stable in local currencies.
Germany achieved sales growth in both Swiss francs and local currency, benefiting from slightly
improved economic conditions. Performance was more muted across the remainder of the region amid
tighter markets. In the Americas, sales increases in local currencies were achieved in all regions
to varying degrees. Sales in the U.S. were slightly higher than prior year in local currency, but
were much lower in Swiss francs. Canada posted growth in both local currency and in Swiss francs,
while Central America delivered sales growth in local currencies but sales were stable in Swiss
francs. Sales increased in Asia Pacific, particularly in Region China where sales were once again
well ahead in both Swiss francs and in local currency, augmented by another good performance in
Africa and Middle East where sales increased in both local currency and in Swiss francs. Including acquisition effects, sales development was positive across all regions in both local
currencies and to a lesser extent in Swiss francs. Operating income and EBITDA
    
    
    2004

    
    
    2003Operating Income:Absolute in CHF
    
    
    
    126
    
    
    
    
    130As a percentage of sales (operating income margin)
    
    
    
    6.3
    %
    
    
    
    8.1
    %EBITDA:Absolute in CHF
    
    
    
    257
    
    
    
    
    233As a percentage of sales (EBITDA margin)
    
    
    
    12.7
    %
    
    
    
    14.4
    %
 Operating income decreased both in absolute terms and as a percentage of sales. EBITDA
increased in absolute terms but decreased as a percentage of sales. Gross profit was higher in
absolute terms, benefiting from higher capacity utilization levels in addition to favorable
acquisition and volume mix gains that compensated for sales price reductions and higher costs for
raw materials. Gross margins overall however decreased as a percentage of sales due to relatively
higher variable to total cost ratio of Raisio Chemicals sales. Selling, general and administrative
costs were much higher in both Swiss francs and in local currencies, chiefly due to acquisition
effects, leading to a further reduction in net margins. Investments in research and development
remained at the prior year level of approximately 2 percent of sales. Asset management
    
    
    2004
    
    
    
    

2003Net current operating assets:Absolute in CHF
    
    
    
    458
    
    
    
    
    346As a percentage of sales
    
    
    
    23
    %
    
    
    
    21
    %Capital expenditures in CHF
    
    
    
    81
    
    
    
    
    55Invested capital in CHF
    
    
    
    3 184
    
    
    
    
    2 432Total assets in CHF
    
    
    
    3 528
    
    
    
    
    2 661
 The Segments operating assets were higher than prior year levels both in absolute and
intensity terms. Both inventories and receivables increased in both absolute and intensity terms.
The increase in intensities was mostly due to acquisition effects that did not include a full
years sales. Payables were higher than in prior year. Capital expenditures increased from prior
year but




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##### Table of Contents



were well below depreciation expense and were again targeted primarily on productivity
improvement projects. These factors led to an overall increase in both invested capital and total
assets. Textile Effects results Sales decreased to CHF 1 300 million in 2004 or by 7 percent in Swiss francs and by 5 percent in
local currencies. Sales development in 2004 compared to 2003 resulted from the following factors: Sales development
    
    
    2004 compared to 2003Volume/product mix
    
    
    
    (2
    )%Price
    
    
    
    (3
    )%Currency
    
    
    
    (2
    )%Total in Swiss francs
    
    
    
    (7
    )%
 The textiles market remained difficult in 2004 and continues to present the Segment with many
challenges. Textile dyes sales were lower both in local currencies and in Swiss francs,
characterized by heavy competitive pressures and slow core markets. Sales in textile chemicals were
stable in local currencies, where most key markets held up reasonably well, notably sizing and
pretreatments. Geographically, sales in Europedecreased from prior year levels both in Swiss francs and in local
currencies. All major sales territories suffered sales declines in local currencies, particularly
in the second half of the year, with the exception of Turkey where sales increased both in local
currencies and in Swiss francs. In the Americas, sales declined in Swiss francs and in local
currencies across all regions. In the Asia Pacificregion, sales remained stable in local
currencies but were lower in Swiss francs. A strong result in both China and in India in local
currencies and to a lesser extent in Swiss francs helped to offset sales declines across the
remainder of the region. Operating income and EBITDA
    
    
    2004

    
    
    2003Operating Income:Absolute in CHF
    
    
    
    61
    
    
    
    
    69As a percentage of sales (operating income margin)
    
    
    
    4.7
    %
    
    
    
    4.9
    %EBITDA:Absolute in CHF
    
    
    
    117
    
    
    
    
    129As a percentage of sales (EBITDA margin)
    
    
    
    9.0
    %
    
    
    
    9.2
    %
 Operating income and EBITDA decreased in both absolute terms and as a percentage of sales,
mainly due to the difficult sales environment. The Segment again managed to partially mitigate this
effect through further cost reductions in the production area combined with lower raw material
costs. Selling, general and administrative costs were also lower in Swiss francs and in local
currencies compared to the prior year. Investment in research and development remained stable at
approximately 2 percent of sales. Asset management
    
    
    2004
    
    
    
    2003Net current operating assets:Absolute in CHF
    
    
    
    393
    
    
    
    
    439As a percentage of sales
    
    
    
    30
    %
    
    
    
    31
    %Capital expenditures in CHF
    
    
    
    35
    
    
    
    
    29Invested capital in CHF
    
    
    
    1 162
    
    
    
    
    1 115Total assets in CHF
    
    
    
    1 365
    
    
    
    
    1 304
 The Segment managed to reduce net operating assets below prior year levels. Both receivables
and inventory levels decreased in absolute terms and were stable in intensity terms compared to
prior year. Payable levels were higher than last year. Capital expenditures increased slightly from
last year, but remain well below depreciation expense for the period. Both invested capital and
total assets increased slightly.




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##### Table of Contents



Consolidated balance sheets Selected balance sheet data as of December 31,
    
    
    2004
    
    
    
    2003Cash and cash equivalents and short-term investments
    
    
    
    1 636
    
    
    
    
    2 397Total assets
    
    
    
    11 006
    
    
    
    
    11 098Total shareholders equity
    
    
    
    4 151
    
    
    
    
    4 245
 Cash and cash equivalents and short-term investments decreased by CHF 761 million from 2003 to
2004 primarily due to cash used for acquisitions. Totals assets were slightly lower than prior year
levels. The Company continues to target further reductions in its operating assets base but the
same levels of reductions as in 2003 could not be achieved, which was partially due to higher sales
and resulting production activities. 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. The remaining asset reduction resulted from the change between December 31, 2003 and 2004 in
year-end currency exchange rates, which are used to translate the Companys various non-Swiss franc
denominated balance sheet items located around the world into Swiss francs. During 2004, the U.S.
dollar depreciated by a further 8 percent and the Chinese renminbi by 8 percent from prior year
against the Swiss franc. Liquidity and capital resources In recent years, the Companys sources of liquidity have primarily been provided by operations and
funds from capital markets. 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. Treasury management The international financial markets remained volatile in 2004. The major trends in the markets,
which were the focus of the Companys treasury management initiatives, included movements in
interest rates as well as the continued weakening of the U.S. dollar against the Swiss franc, and
the further strengthening of the euro against the U.S. dollar. As a consequence of the improving economic recovery especially in the U.S. and receding political
instability in 2004, global interest rates started to rise during 2004. Through the effective
anticipation of market conditions and the use of financial instruments available in the financial
markets, the Company was able to keep the average cost of its total borrowings almost constant at
4.03 percent in 2004 compared to 3.84 percent in 2003. The Companys net interest cost, which is
interest expense less interest income, was stable at CHF 108 million in 2004 as for 2003. During 2004, the U.S. dollar fluctuated against the Swiss franc from a high of approximately CHF
1.32 to a low of approximately CHF 1.13. The Swiss franc balance sheet year-end rate was at CHF
1.15 against the U.S. dollar in 2004 versus CHF 1.25 at the end of 2003. During 2004, the euro
fluctuated against the Swiss franc from a high of approximately CHF 1.59 to a low of approximately
CHF 1.50. At the end of 2004, the Swiss franc was at a level of CHF 1.54 against the euro versus
CHF 1.56 at the end of 2003. 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, when considered cost effective, to protect the cash flows of its operating companies
against unfavorable foreign currency movements. In 2004, other financial expense, net which includes foreign currency exchange gains and losses,
net hedging expenses, and losses on financial investments, was CHF 39 million, an increase of CHF
15 million from CHF 24 million in 2003. The increase in 2004 is mainly due to the fact that in
2003, the Company sold its remaining shares in Hexcel Corporation realizing a CHF 16 million gain.
Otherwise, other financial expenses, net were relatively stable between the two periods. 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.




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##### Table of Contents



For further information see Note 9 to Consolidated Financial Statements and Item 11 -
Quantitative and Qualitative Disclosures About Market Risks. Throughout 2004, the Company continued to maintain its long-term debt ratings of A from Standard
& Poors 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. Consequently,
management believes that the Company will continue to be able to access global capital markets to
meet its capital requirements as required. 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 that
individually is material to the Company. For further information on capital resources available to the Company, see Notes 12 and 13 to
Consolidated Financial Statements in Item 18  Financial Statements. Net debt The table below shows the components of net debt at December 31, 2004 and 2003: Net debt
    
    
    2004
    
    
    
    2003Short-term debt
    
    
    
    559
    
    
    
    
    259Long-term debt
    
    
    
    2 917
    
    
    
    
    3 187Total debt
    
    
    
    3 476
    
    
    
    
    3 446Less: cash and cash equivalents
    
    
    
    (1 614
    )
    
    
    
    (2 386
    )Less: short-term investments
    
    
    
    (22
    )
    
    
    
    (11
    )Net debt
    
    
    
    1 840
    
    
    
    
    1 049
 The Company maintains short-term debt facilities, including commercial paper programs and bank
overdraft and credit line facilities to finance its working capital requirements, which are
described in Note 12 to the Consolidated Financial Statements in Item 18  Financial Statements. The Companys long-term debt in 2004 and 2003 consisted primarily of Euro Medium-Term Notes (EMTN
Program) and straight bonds, which are described in Note 13 to the Consolidated Financial
Statements in Item 18  Financial Statements. The current portion of long-term debt totaled CHF 258
million at December 31, 2004 and CHF 1 million at December 31, 2003. Net debt levels increased by CHF 791 million in 2004 due to a number of factors, being mainly the
cash used to fund the acquisition of Raisio Chemicals, totaling CHF 662 million. Also, the Company
made a capital reduction payment of CHF 197 million in 2004. The Company also used a total of CHF
162 million to purchase treasury stock. These uses of cash were partially offset by cash flows from
operating activities totaling CHF 631 million. Long-term debt levels, including current portion, were similar to prior year levels. See Note 13 to
Consolidated Financial Statements in Item 18  Financial Statements. The Companys commercial paper program is uncommitted and the availability of future funds
thereunder depends to a large extent on market conditions. The Company may, if and when it is
economically advantageous, issue new debt. Cash flows The net decrease in cash and cash equivalents of CHF 772 million from December 31, 2003 to December
31, 2004 resulted from cash flows provided by or used in the Companys operating, investing and
financing activities. Cash flows from operating activities
    
    
    2004

    
    
    2003Net income
    
    
    
    311
    
    
    
    
    344Deduct net income form discontinued operatons, net of tax
    
    
    
    (28
    )
    
    
    
    0Depreciation and amortization
    
    
    
    394
    
    
    
    
    366Net change in operating assets and liabilities
    
    
    
    (226
    )
    
    
    
    302Other, net
    
    
    
    180
    
    
    
    
    21Net cash provided by operating activities
    
    
    
    631
    
    
    
    
    1 033




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##### Table of Contents



Cash flows provided by operating activities of CHF 631 million did not reach the same high
levels of recent years, which was partially due to higher working capital requirements necessary to
fund higher sales volumes. Also in 2004, the Company had higher cash payments for interest, taxes
and pensions that together resulted in an adverse development of CHF 144 million compared to the
prior year. Together, these factors contributed to the decline in operating cash flows. The Company continues to prioritize cash flow generation and is satisfied that operating cash flow
levels are sufficient to satisfy both short-term and mid-term funding requirements. Cash flows from investing activities
    
    
    2004
    
    
    
    2003Capital expenditures
    
    
    
    (294
    )
    
    
    
    (233
    )Sale (acquisition) of businesses, net of cash
    
    
    
    (810
    )
    
    
    
    (71
    )Proceeds from sale of assets and changes in loans and other long-
term assets
    
    
    
    53
    
    
    
    
    65Cash flows used in investing activities, discontinued operations
    
    
    
    0
    
    
    
    
    0Net cash used in investing activities
    
    
    
    (1 051
    )
    
    
    
    (239
    )
 Net cash used in acquisition and divestment activities in 2004 consisted primarily of the cash
used for the acquisition of Raisio Chemicals, of CHF 662 million. In addition, the Company
completed a number of other minor acquisitions during 2004 for an aggregate consideration of CHF 91
million. Also included in cash flows from investing activities in 2004 was the receipt of a
long-term note receivable of CHF 42 million in connection with the sale in 2000 of the Companys
investment in Hexcel Corporation. Net cash used in acquisition and divestment activities in 2003 consisted primarily of a CHF 71
million payment for separation costs attributable to the past divestment of the Performance
Polymers business. Also included is an aggregate CHF 23 million for the acquisition of additional
interests in two equity affiliates in Asia, where the Company is experiencing significant sales
growth. These cash outflows were partially offset by proceeds of CHF 21 million from the sale of
the Companys remaining Hexcel shares. Cash flows from financing activities
    
    
    2004
    
    
    
    2003Increase (decrease) in short-term and long-term debt, net
    
    
    
    55
    
    
    
    
    (394
    )Dividends paid
    
    
    
    0
    
    
    
    
    0Capital reduction paid
    
    
    
    (197
    )
    
    
    
    (206
    )Treasury stock transactions and other
    
    
    
    (162
    )
    
    
    
    (142
    )Net cash flows (used in) provided by financing activities
    
    
    
    (304
    )
    
    
    
    (742
    )
 For discussion of cash flows from short-term and long-term debt, see the Net Debt section of
this Managements Discussion and Analysis and Notes 12 and 13 to Consolidated Financial Statements
in Item 18  Financial Statements. At the Companys Annual General Meeting on February 26, 2004, the shareholders approved the Board
of Directors proposal for a payment to the shareholders in the form of a capital reduction of CHF
3 per share. The capital reduction was in the form of a reduction in the nominal value of each
common share from CHF 6 per share to CHF 3 per share. The Company paid the capital reduction on May
14, 2004, which totaled CHF 197 million. At the Companys Annual General Meeting on March 6, 2003, the shareholders approved the Board of
Directors proposal for a payment to the shareholders in the form of a capital reduction of CHF 3
per share. The capital reduction was in the form of a reduction in the nominal value of each common
share from CHF 9 per share to CHF 6 per share. The Company paid the capital reduction on May 23,
2003, which totaled CHF 206 million. In connection with its share buy-back program initiated in 2004, the Company purchased 1.8 million
treasury shares in 2004 for CHF 157 million. The Board of Directors will propose at the Annual
General Meeting of shareholders on March 3, 2005 that these shares be cancelled; this proposal is
subject to shareholder approval. In 2003 in connection with the share buy-back




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##### Table of Contents



program, the Company purchased 1.3 million treasury shares for CHF 117 million. The shareholders approved the
cancellation of these shares at the Companys Annual General Meeting on February 26, 2004;
consequently, the shares were cancelled on May 7, 2004. For further details, refer to Note 16 to
Consolidated Financial Statements in Item 18  Financial Statements. Free cash flow
    
    
    2004
    
    
    
    2003Net cash from continuing operations
    
    
    
    631
    
    
    
    
    1 033Add: restructuring payments
    
    
    
    11
    
    
    
    
    0Less: net cash used in investing activities
    
    
    

(1 051
    )
    
    
    
    (239
    )Add: (sale) acquisition of businesses, net of cash
    
    
    
    810
    
    
    
    
    71Less: dividends(1)
    
    
    
    (131
    )
    
    
    
    (137
    )Free cash flow
    
    
    
    270
    
    
    
    
    728
   (1)
    The Company considers CHF 2 per share to be the normal annual per share dividend amount
expected by its shareholders. As a result, this amount is used in the Companys calculation of
free cash flow. Actual per share dividends or other distributions to shareholders may differ
from this per share amount (see the Operational Review section of this Managements Discussion
and Analysis above). The Company historically has utilized free cash flow to maintain short-term debt at stable
levels, to repay long-term debt according to payment terms or earlier when economically
advantageous to the Company, for acquisitions of businesses or treasury shares, and to pay
distributions to shareholders. Free cash flow was lower by CHF 458 million in 2004 compared to prior year. This was mainly due to
lower cash from operating activities in 2004, as the Companys investment in working capital
increased due to sales growth. 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. Management believes that these commitments
are not in excess of current market prices and reflect normal business operations. The Company had
outstanding at December 31, 2004, various long-term obligations that will become due in 2005 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, 2004, the Companys current
estimate of their annual maturities. Payments by year, as from December 31, 2004 Total
    
    
    
    Less than 1 year
    
    
    
    1 to 3 years
    
    
    
    3 to 5 years
    
    
    
    More than 5 yearsLong-term debt, including current(i)
    
    
    
    3 129
    
    
    
    258
    
    
    
    8
    
    
    
    1 311
    
    
    
    1 552Long-term
obligations, including current portion(ii)
    
    
    
    1 366
    
    
    
    87
    
    
    
    158
    
    
    
    159
    
    
    
    962Raw
material purchase commitments
    
    
    
    402
    
    
    
    226
    
    
    
    176
    
    
    
    
    
    
    
    Fixed
assets and other purchase commitments
    
    
    
    375
    
    
    
    156
    
    
    
    161
    
    
    
    48
    
    
    
    10Lease
commitments
    
    
    
    128
    
    
    
    41
    
    
    
    41
    
    
    
    21
    
    
    
    25Total
    
    
    
    5 400
    
    
    
    768
    
    
    
    544
    
    
    
    1 539
    
    
    
    2 549
   (i)
    Long-term debt shown is the face amount of the debt obligations. The amounts reported
on the Consolidated Balance Sheets and in Note 13 to Consolidated Financial Statements in Item
18  Financial Statements are net of discounts and premiums, in accordance with U.S. GAAP.  (ii)
    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, 2004. 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
are liabilities related to environmental matters, which are further discussed in Note 21 to
Consolidated Financial Statements in Item 18  Financial Statements. 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 material losses as a
result of these guarantees. As of December 31, 2004, the Company has provided guarantees to third
parties for indebtedness of others of approximately CHF 17 million of which CHF 12 million expire
in 2005 and CHF 5 million thereafter.




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##### Table of Contents



Effective income tax rate The Company reported an effective income tax rate of 23 percent in 2004, an increase of 6 percent
compared to 17 percent reported in 2003. The 2004 rate is reduced by 4 percent due to a
non-recurring release of previously established tax reserves following the settlement during 2004
of certain outstanding tax matters. The 2003 effective income tax rate of 17 percent had been
reduced by 10 percent from different non-recurring releases of previously established tax reserves,
consisting principally of 9 percent resulting from the settlement in 2003 of a dispute with
Novartis. Excluding the effects of these different non-recurring events, the Companys 2004 and
2003 effective income tax rates would have each been 27 percent. See Note 14 to Consolidated
Financial Statements in Item 18  Financial Statements. Year in review  2003 compared to 2002 Results of operations
    
    
    2003
    
    
    
    2002Net sales
    
    
    
    6 646
    
    
    
    
    7 085Gross profit
    
    
    
    2 067
    
    
    
    
    2 356Operating income
    
    
    
    571
    
    
    
    
    788Income from continuing operations
    
    
    
    360
    
    
    
    
    406Income from discontinued operations, net of tax
    
    
    
    0
    
    
    
    
    0Cumulative effect of change in accounting principles
    
    
    
    (16
    )
    
    
    
    0Net income
    
    
    
    344
    
    
    
    
    406Earnings per share, basic and dilutedContinuing operations
    
    
    
    5.26
    
    
    
    
    5.92Discontinued operations
    
    
    
    0.00
    
    
    
    
    0.00Cumulative effect of change in accounting principles
    
    
    
    (0.23
    )
    
    
    
    0.00Net income per share
    
    
    
    5.03
    
    
    
    
    5.92Other dataDepreciation and amortization of other intangible assets
    
    
    
    366
    
    
    
    
    385EBITDA (1)
    
    
    
    937
    
    
    
    
    1 173Net cash provided by operating activities
    
    
    
    1 033
    
    
    
    
    1 038Free cash flow (1)
    
    
    
    728
    
    
    
    
    683Net debt (1)
    
    
    
    1 049
    
    
    
    
    1 463Shareholders equity at year end
    
    
    
    4 245
    
    
    
    
    4 354Dividend per share (2)
    
    
    
    0.00
    
    
    
    
    0.00Capital reduction per share (2)
    
    
    
    3.00
    
    
    
    
    3.00Key performance ratiosNet sales development
    
    
    
    (6
    )%
    
    
    
    (4
    )%Net sales development in local currencies
    
    
    
    0
    %
    
    
    
    3
    %Expressed as a percentage of sales:Gross profit
    
    
    
    31.1
    %
    
    
    
    33.3
    %Operating income
    
    
    
    8.6
    %
    
    
    
    11.1
    %Income from continuing operations
    
    
    
    5.4
    %
    
    
    
    5.7
    %Net income
    
    
    
    5.2
    %
    
    
    
    5.7
    %EBITDA
    
    
    
    14.1
    %
    
    
    
    16.6
    %
   (1)
    EBITDA, free cash flow and net debt are non-U.S. GAAP financial measures. See Use of
Certain Supplementary Financial Indicators in this Managements Discussion and Analysis for
further discussion of the use of these measures.  (2)
    The per share amounts presented above reflect that no dividends were paid in 2004,
based on 2003 results, nor in 2003, based on 2002 results, as well as the capital reductions
approved by the Companys shareholders in 2004, based on 2003 results, and in 2003, based on
2002 results.




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##### Table of Contents



Executive summary The global economic environment continued to present the Company with significant challenges during
2003. Strongly competitive conditions in mature markets such as textile dyes and inks were
contrasted by excellent growth in electronic materials and personal care specialties, where the
Company was able to benefit from its strong portfolio of effects products. A similar contrast was
evident on a geographical basis. The difficult economic environment heavily impacted traditional
sales territories. In particular, the delayed effect of the second half recovery in the U.S. did
not provide the Company with a respective upturn in 2003. The European markets performed slightly
better and although sluggish in certain areas were generally stable. Asia, on the other hand, again
confirmed its potential as the platform for growth, driven especially by another excellent year in
China. Operational review - Sales stable in local currencies despite adverse environment, profitability
declines Net sales at CHF 6 646 million were stable in local currencies. Sales in Swiss francs were again
adversely impacted by unfavorable currency developments. Consequently, sales decreased by 6 percent
in Swiss francs. Stable sales in local currencies were achieved in spite of a fiercely competitive
sales environment, with Asian competitors benefiting from the weak U.S. dollar. The Company was
able to defend volumes through effective marketing strategies and continued focus on higher margin
specialty applications, and at the same time exploit new and emerging market areas with stronger
demand levels. In response to difficult competitive conditions, the Company continued to prioritize cash flow
generation by further reducing receivable levels, and in the fourth quarter, selectively scaling
back certain production operations. This was highly effective in reducing inventory levels with
significant positive cash flow being generated as a result. However, this had an adverse impact on
profit levels due to higher unabsorbed capacity costs arising from the lower volumes produced
during this period. Profitability was heavily impacted by adverse currency developments during the year. With the
exception of the euro, the Swiss franc appreciated against most major trading currencies, notably
the U.S. dollar, and to a lesser extent the British pound and the Japanese yen. Further, price
concessions of 3 percent were necessary to maintain competitive position. Raw material costs were
relatively stable in 2003. The Company continued to focus on efficiency and productivity improvements, ensuring that operating
expenses were stable in local currencies supported by further headcount reductions in low-growth
regions. The manufacturing infrastructure was successfully realigned in key areas ensuring that the
Company remains well positioned to balance future growth potential with production capabilities. In
connection with its Managing for Growth initiative in 2003, the Company further expanded its
presence in China, where an additional 80 positions have been filled in order to support growing
activities in the region. Gross profit in absolute terms declined from CHF 2 356 million in 2002 to CHF 2 067 million in
2003. Operating income decreased by CHF 217 million to CHF 571 million compared to CHF 788 million in
2002. Operating income margin was also lower in 2003 at 8.6 percent compared to 11.1 percent in
2002. Income from continuing operations was CHF 360 million or CHF 5.26 per share in 2003, compared to
CHF 406 million or CHF 5.92 per share in the prior year. Net income was CHF 344 million or CHF 5.03
per share in 2003 compared to CHF 406 million or CHF 5.92 per share in the prior year. The Companys EBITDA and EBITDA margin, respectively, were CHF 937 million and 14.1 percent in 2003
compared to CHF 1 173 million and 16.6 percent in 2002. Cash flow review  Strong operating cash flow enables further strengthening of balance sheet The Company continued its trend of generating net cash from operating activities in excess of CHF 1
billion and increased free cash flow by 7 percent over prior year to CHF 728 million by offsetting
the impact of lower operating performance described above with a successful program in the fourth
quarter to substantially reduce its net current operating assets. Every segment succeeded in
reducing its working capital requirements. Overall inventories and receivables were reduced
significantly resulting in the ratio of net current operating assets to sales decreasing
significantly to 24.7 percent. The ratio of inventories to sales dropped from 20.4 percent in 2002
to 18.5 percent in 2003 and the ratio of receivables to sales dropped from 14.3 percent in 2002 to
14.1 percent in 2003. Net cash flows used in financing activities totaled CHF 742 million in 2003 as the result of the
Company using its cash flows from operations to further strengthen its balance sheet by reducing
debt, to pay a high CHF 3 per share distribution to shareholders and to purchase treasury shares
under the share buy-back program initiated in 2003. Net debt as of year-end 2003 was lowered by CHF
414 million, or 28 percent, from year-end 2002. During 2003, the Company repaid CHF 1 084 million
of long-term debt at its scheduled maturity, which was partially offset by CHF 715 million proceeds
from the issuance of EUR 500 million fixed rate unsecured notes maturing 2018. Throughout 2003, the Company maintained strong liquidity and at year-end 2003 had a sizeable cash
position of CHF 2.4 billion, maintaining its flexibility for future acquisitions. In connection with a share buy-back program initiated in 2003, the Company purchased 1.3 million
treasury shares for CHF 117 million.




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##### Table of Contents



Significant other events During 2003, the Company settled a tax-related dispute with Novartis that resulted in an additional
CHF 39 million of net income from the release of previously established provisions related to the
dispute. In addition, the Company capitalized on the recovery in 2003 of the market value of its
investment in Hexcel Corporation by selling its remaining Hexcel Corporation shares, which resulted
in a CHF 16 million pre-tax gain on sale. The positive income impact of the above two items were
partially offset by the recording of an after-tax charge of CHF 16 million for the cumulative
effect of the change in accounting that resulted from the adoption in 2003 of a new accounting
standard. Each of the above three items are more fully described elsewhere in this Managements
Discussion and Analysis or in the Companys Consolidated Financial Statements and Notes thereto. Financial review Sales stable in local currencies, down in Swiss francs Net sales in local currencies were similar to those of prior year. In Swiss francs, sales decreased
by 6 percent to CHF 6 646 million. Sales development in 2003 compared to 2002 resulted from the
following factors: Consolidated sales development
    
    
    2003 compared to 2002Volume/product mix
    
    
    
    3
    %Price
    
    
    
    (3
    )%Currency
    
    
    
    (6
    )%Total in Swiss francs
    
    
    
    (6
    )%
 In local currencies, sales levels at the start of the year recovered from the low levels of late
2002, reflective of more upbeat customer expectations at that time as to the level of economic
recovery. However, as economic development continued to be sluggish, this optimism receded and the
Companys sales levels likewise began to recede during the second quarter, ending the year at
similar levels to 2002 in local currencies. In Europe, sales levels during the first half of the
year were slightly higher than the prior year period in local currencies, but deteriorated in the
latter part of the year, ending the year slightly below prior year levels in local currencies. The
NAFTA region showed signs of improvement during the first half of the year, with recovery well
underway in the U.S. by the end of the year. However, the positive effect of the upturn was not yet
fully reflected throughout all industry sectors, including those served by the Company. Asia
continues to be the global growth engine, with excellent performances in most of the region,
notably China. Contributing to the sales decline in Swiss francs was the strengthening of the Swiss franc compared
to most major trading currencies, particularly against the U.S. dollar, and to a lesser extent the
British pound and Japanese yen, partially offset by the appreciation of the euro. This resulted in
a reduction in sales in Swiss francs of 6 percent compared to 2002. The Company
continued to experience a difficult competitive environment resulting in price erosion of 3
percent. The negative impact of lower prices, however, was offset by volume/product mix gains of 3
percent. Sales in Swiss francs increased in most of the major markets in Europe, with the exception of the
U. K. and Italy. The performance in Swiss francs was partially attributable to the stronger euro.
In local currencies, sales declined in varying degrees across most major markets. In the Americas,
sales in the U.S. decreased both in local currency and in Swiss francs. Sales in South America grew
in local currencies but declined in Swiss francs. In Asia Pacific, sales increased in local
currencies fuelled by the strong result in China. Japan also achieved positive growth in local
currency. However, sales in the region overall were lower in Swiss francs. Geographic sales distribution
    
    
    2003
    
    
    
    2002Europe
    
    
    
    41
    %
    
    
    
    38
    %Americas(1)
    
    
    
    31
    %
    
    
    
    35
    %Asia Pacific(2)
    
    
    
    28
    %
    
    
    
    27
    %
   (1)
    
    The Americas are comprised of North, Central and South America.(2)
    
    Asia Pacific is comprised of Asia, Africa, the Middle East, Australia and New Zealand.




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##### Table of Contents



Profit margins deteriorate in adverse sales climate Gross profit margin in 2003 decreased to 31.1 percent of sales from 33.3 percent in the prior year.
Margins were adversely impacted by currency exchange rate developments. Sales volume gains of 3
percent were completely offset by price erosion as the Company faced stiff competition particularly
in mature markets. Production expenses were lower in Swiss francs and were stable in local
currencies. Higher levels of unabsorbed costs occurred in 2003 that were mainly due to temporary
production shutdowns in the fourth quarter, improving cash flow due to lower purchasing activities,
but adversely impacting profitability. Raw material costs increased in the early part of the year
and peaked in the second quarter; by the end of the year raw material prices decreased and overall
were similar to prior year levels. Selling, general and administrative expenses stable Selling, general and administrative expenses in Swiss francs decreased by CHF 62 million, from CHF
1 247 million in 2002 to CHF 1 185 million in 2003. In local currencies, these costs remained
stable. Selling, general and administrative expenses expressed as a percentage of sales were 17.8
percent in 2003 compared to 17.6 percent in the prior year. Higher costs for pensions and insurance
were incurred in 2003. Further headcount reductions were made in order to align the Companys cost
structure with its business needs. Investment in research and development sustained Research and development expenses as a percentage of sales remained at 4.2 percent in 2003 as for
2002. In absolute terms, research and development expenses decreased slightly by CHF 13 million to
CHF 281 million in 2003 from CHF 294 million in 2002. This was mainly due to currency effects. The Company has historically invested approximately 4 percent of sales in research and development
activities. Operating income and EBITDA adversely affected by lower sales levels and unfavorable currency
developments 2003
    
    
    
    2002Operating income
    
    
    
    571
    
    
    
    
    788EBITDA
    
    
    
    937
    
    
    
    
    1 173Operating income margin
    
    
    
    8.6
    %
    
    
    
    11.1
    %EBITDA margin
    
    
    
    14.1
    %
    
    
    
    16.6
    %2003 compared to 2002Operating income
    
    
    
    (28
    )%
    
    
    
    4
    %EBITDA
    
    
    
    (20
    )%
    
    
    
    (5
    )%
 Operating income fell by CHF 217 million in 2003, and operating income margin deteriorated to 8.6
percent of sales in 2003 from 11.1 percent in the prior year. Contributing to this result was the
combined effect of adverse currency development, sales price reductions that were partially offset
by volume increases, and a stable cost base achieved through tight expense control during the year.
The strengthening of the Swiss franc against the U.S. dollar, and to a lesser extent, against most
other major currencies negatively impacted operating income by approximately CHF 111 million in
2003. EBITDA decreased to CHF 937 million in 2003 compared to CHF 1 173 million in the prior year, of
which approximately CHF 134 million was due to unfavorable currency developments. EBITDA margin
decreased to 14.1 percent of sales in 2003 from 16.6 percent in 2002. Segments results During 2004, the Company
integrated the Home & Personal Care Segment into two other
existing segments. Accordingly, the following 2003 compared to 2002
segment information has been restated to reflect the new segment structure. Plastic Additives results Sales decreased to CHF 1 822 million in 2003 or by 4 percent in Swiss francs and increased by 2
percent in local currencies. Sales development in 2003 compared to 2002 resulted from the following
factors: Sales development
    
    
    2003 compared to 2002Volume/product mix
    
    
    
    4
    %Price
    
    
    
    (2
    )%Currency
    
    
    
    (6
    )%Total in Swiss francs
    
    
    
    (4
    )%




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##### Table of Contents



Sales increased slightly in local currencies driven by a solid performance in Polymer products,
despite ongoing competitive price pressures as a result of the weak U.S. dollar. Base polymers
sales decreased marginally in local currencies with the major market areas generally sluggish.
Sales in process and lubricant additives increased slightly in local currencies despite customer
inventory reductions affecting sales in the fourth quarter. Sales decreased, however, in Swiss
francs. Sales in home and personal care were boosted by strong sales of UV absorbers. The Segment
continues to experience strong price pressures, and price concessions were necessary to maintain
the Segments competitive position. The Segment was successful, however, in slowing this trend
during the second half of 2003. Geographically, sales in Europe increased in both Swiss francs and in local currencies. Growth was
generally positive across the region, driven by a solid performance in Germany in particular. In
the Americas, sales levels were below those of prior year both in Swiss francs and in local
currencies. In the United States, sales levels did not recover from a slow start, remaining
sluggish throughout the year resulting in lower sales levels in local currency. Sales in South
America increased in local currencies. In Asia Pacific, sales increased in local currencies but
decreased in Swiss francs. The major territories posted strong sales development in local
currencies, buoyed by an excellent result in China and continued recovery in Japan where sales
levels were also higher in Swiss francs. Operating income and EBITDA
    
    
    2003

    
    
    2002Operating Income:Absolute in CHF
    
    
    
    165
    
    
    
    
    226As a percentage of sales (operating income margin)
    
    
    
    9.1
    %
    
    
    
    11.9
    %EBITDA:Absolute in CHF
    
    
    
    265
    
    
    
    
    332As a percentage of sales (EBITDA margin)
    
    
    
    14.6
    %
    
    
    
    17.5
    %
 Operating income and EBITDA decreased primarily due to lower sales and a strongly adverse currency
impact. Operating expenses remained at prior year levels in local currencies and were lower in
Swiss francs, although idle capacity costs increased due to both start-ups of additional capacity
and temporary plant shutdowns for inventory reduction purposes. These higher idle capacity costs
coupled with raw material price increases and adverse sales price development resulted in lower
gross profit levels. Selling, general and administration expenses were lower both in Swiss francs
and in local currencies. The Segment maintained its investment level in research and development
activities at approximately 6 percent of sales. Asset management
    
    
    2003
    
    
    2002Net current operating assets:Absolute in CHF
    
    
    
    362
    
    
    
    
    409As a percentage of sales
    
    
    
    20
    %
    
    
    
    22
    %Capital expenditures in CHF
    
    
    
    64
    
    
    
    
    94Invested capital in CHF
    
    
    
    1 247
    
    
    
    
    1 352Total assets in CHF
    
    
    
    1 514
    
    
    
    
    1 626
 The Segment was successful in reducing its asset base in 2003. Despite higher sales volumes,
inventory levels decreased in both absolute and intensity terms. Receivable levels were also lower
in absolute terms but increased slightly in intensity. Payable levels decreased slightly from prior
year levels. Capital expenditures were mainly focused on efficiency and improvements programs at
production facilities and were well below the level of depreciation. The combined effects of the
reduction in net current assets, lower capital investment than depreciation expense and currency
effects led to both total assets and invested capital being slightly lower than prior year levels. Coating Effects results Sales decreased to CHF 1 807 million in 2003 or by 6 percent in Swiss francs and were stable in
local currencies. Sales development in 2003 compared to 2002 resulted from the following factors: Sales development
    
    
    2003 compared to 2002Volume/product mix
    
    
    
    4
    %Price
    
    
    
    (4
    )%Currency
    
    
    
    (6
    )%Total in Swiss francs
    
    
    
    (6
    )%




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##### Table of Contents



Sales performance across the Segment was mixed. Positive sales growth in local currencies was
achieved in the electronic materials market driven by demand for flat-panel monitors and
televisions in the displays sector, in addition to strong growth in the optical information storage
market for CD-R products. Sales in the coatings business were higher in local currencies fuelled by
solid results in both the transportation and the industrial and decorative coating markets. The
Segment continues to leverage its wide range of targeted product applications into the plastics
market and delivered positive growth in local currencies despite intense competition. Demand
remained weak in the traditional printing inks market, although digital printing products continued
to grow strongly in 2003. Geographically, in Europe sales decreased both in local currencies and in Swiss francs. Sales
declines were evident across most major countries with the exception of Germany, where sales were
stable in local currency and increased in Swiss francs. In the Americas, sales levels decreased
slightly in local currencies and more so in Swiss francs. Sales levels in the U.S. were mainly
stagnant and ended the year below prior period levels in local currency. Asia Pacific sales grew in
local currencies and decreased slightly in Swiss francs. The positive result in local currencies
was fuelled by strong performances in both China and Japan. This was augmented by positive growth
levels in local currencies throughout the remainder of the region. Operating income and EBITDA
    
    
    2003

    
    
    2002Operating Income:Absolute in CHF
    
    
    
    300
    
    
    
    
    341As a percentage of sales (operating income margin)
    
    
    
    16.6
    %
    
    
    
    17.7
    %EBITDA:Absolute in CHF
    
    
    
    397
    
    
    
    
    440As a percentage of sales (EBITDA margin)
    
    
    
    22.0
    %
    
    
    
    22.9
    %
 Operating income and EBITDA decreased both in absolute terms and as a percentage of sales, mainly
due to lower sales and unfavorable currency development. Production expenses were lower in Swiss
francs despite increases in utility costs. Lower raw material and production expenses could not
fully offset the effects of sales price declines and adverse currency developments, resulting in
gross profit deterioration in both absolute and intensity terms. Selling, general and
administrative costs were lower in Swiss francs and were stable in local currencies. Investment in
research and development continued at the previous high level of approximately 5 percent of sales. Asset management
    
    
    2003
    
    
    2002Net current operating assets:Absolute in CHF
    
    
    
    520
    
    
    
    
    575As a percentage of sales
    
    
    
    29
    %
    
    
    
    30
    %Capital expenditures in CHF
    
    
    
    79
    
    
    
    
    74Invested capital in CHF
    
    
    
    1 773
    
    
    
    
    1 834Total assets in CHF
    
    
    
    2 020
    
    
    
    
    2 107
 The Segment maintained its focus on effective management of its operating 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 decreased from 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 1 616 million in 2003 or by 6 percent in Swiss francs, but increased by 1
percent in local currencies. Sales development in 2003 compared to 2002 resulted from the following
factors: Sales development
    
    
    2003 compared to 2002Volume/product mix
    
    
    
    3
    %Price
    
    
    
    (2
    )%Currency
    
    
    
    (7
    )%Total in Swiss francs
    
    
    
    (6
    )%




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##### Table of Contents



Water Treatment sales increased in local currencies, but were lower in Swiss francs. Solid
performances in local currencies were achieved across the Segments main market sectors, although
the impact of competitive pricing pressure continues to negatively affect sales performance. Sales
levels in the paper business overall were below prior year levels in local currencies and in Swiss
francs, although good results were achieved in the paper coloration and water management sectors.
Sales levels in detergents and hygiene were below prior year in both Swiss francs and in local
currency. Geographically, sales in Europe increased in both Swiss francs and in local currencies. Positive
sales development was evident across much of the region with France and the U.K. leading the way,
delivering solid growth levels in local currencies. Germany posted a slight increase in Swiss
francs helped by the stronger euro. Sales declined in the Americas both in local currencies and in
Swiss francs. Sales in the U.S. remained below prior year levels throughout the year both in local
currency and in Swiss francs. South America posted sales growth in local currencies, but sales were
lower in Swiss francs. Asia Pacific again demonstrated excellent growth levels in local currencies
overall, particularly in China and Japan, augmented by robust performances in Africa/Middle East,
where sales increased both in local currencies and in Swiss francs. Operating income and EBITDA
    
    
    2003

    
    
    2002Operating Income:Absolute in CHF
    
    
    
    130
    
    
    
    
    173As a percentage of sales (operating income margin)
    
    
    
    8.1
    %
    
    
    
    10.1
    %EBITDA:Absolute in CHF
    
    
    
    233
    
    
    
    
    282As a percentage of sales (EBITDA margin)
    
    
    
    14.4
    %
    
    
    
    16.4
    %
 Operating income and EBITDA decreased both in absolute terms and as a percentage of sales. These
decreases were due to sales price reductions and higher raw materials costs that could only be
partially offset by lower production costs in Swiss francs, although these increased slightly in
local currencies. Positive sales volume gains only partially offset the above negative effects.
Selling, general and administrative costs were lower in Swiss francs and slightly lower in local
currencies. Investments in research and development remained at the prior year level of
approximately 2 percent of sales. Asset management
    
    
    2003
    
    
    2002Net current operating assets:Absolute in CHF
    
    
    
    346
    
    
    
    
    397As a percentage of sales
    
    
    
    21
    %
    
    
    
    23
    %Capital expenditures in CHF
    
    
    
    55
    
    
    
    
    45Invested capital in CHF
    
    
    
    2 432
    
    
    
    
    2 607Total assets in CHF
    
    
    
    2 661
    
    
    
    
    2 829
 The Segment managed to reduce its asset base below prior year levels. Inventories decreased both in
absolute and intensity terms. Receivable also decreased in absolute terms, but increased slightly
in intensity terms. Capital expenditures were higher due partially to certain expenditures deferred
from prior year. Investments continued to be focused mainly on small-scale debottlenecking and
productivity improvement 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. Textile Effects results Sales decreased to CHF 1 401 million in 2003 or by 9 percent in Swiss francs and by 3 percent in
local currencies. Sales development in 2003 compared to 2002 resulted from the following factors: Sales development
    
    
    2003 compared to 2002Volume/product mix
    
    
    
    0
    %Price
    
    
    
    (3
    )%Currency
    
    
    
    (6
    )%Total in Swiss francs
    
    
    
    (9
    )%




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##### Table of Contents



The Segment continued to experience a weak textile dyes market subject to fierce competitive
activity from both traditional and non-traditional suppliers. Sales levels were well below prior
year both in local currencies and in Swiss francs. In the pad and printing dyes sector, gains in
the ink jet and printing businesses were offset by lower sales in reactive dyes where market
conditions remain sluggish. In the textile chemicals markets, sales levels were higher in local
currencies, but were lower in Swiss francs. Continuing the trend of prior year, the Segment again
posted a strong result in effects chemicals, where demand for its innovative oil and water
repellant products remains strong. Geographically, sales in Europe were below prior year levels in both Swiss francs and in local
currencies. Sales declines were evident across the main European markets, with the exception of
Turkey, where sales developed positively both in Swiss francs and in local currency. In the
Americas, sales declined in Swiss francs and in local currencies. In the U.S., sales were well
below prior year levels in both Swiss francs and in local currency. In the Asia Pacific region,
sales increased slightly in local currencies, particularly in the China and South Asia regions, but
declined overall in Swiss francs. Operating income and EBITDA
    
    
    2003

    
    
    2002Operating Income:Absolute in CHF
    
    
    
    69
    
    
    
    
    142As a percentage of sales (operating income margin)
    
    
    
    4.9
    %
    
    
    
    9.2
    %EBITDA:Absolute in CHF
    
    
    
    129
    
    
    
    
    208As a percentage of sales (EBITDA margin)
    
    
    
    9.2
    %
    
    
    
    13.5
    %
 Operating income and EBITDA decreased in both absolute terms and as a percentage of sales,
reflective of the overall weak sales performance. The Segment successfully realigned certain key
components of its productive infrastructure, with the result that operating expenses were below
prior year levels in both Swiss francs and, to a lesser extent, local currencies. Selling, general
and administrative costs were lower in Swiss francs compared to the prior year, due to the lower
cost base achieved primarily from further headcount reductions. Investment in research and
development remained stable at approximately 2 percent of sales. Asset management
    
    
    2003
    
    
    2002Net current operating assets:Absolute in CHF
    
    
    
    439
    
    
    
    
    532As a percentage of sales
    
    
    
    31
    %
    
    
    
    34
    %Capital expenditures in CHF
    
    
    
    29
    
    
    
    
    34Invested capital in CHF
    
    
    
    1 115
    
    
    
    
    1 291Total assets in CHF
    
    
    
    1 304
    
    
    
    
    1 495
 The Segment was successful in reducing its net current operating assets. Inventory levels were
significantly lower than prior year levels both in absolute and intensity terms. Receivable levels
were also lower in absolute and intensity terms, benefiting from effective credit management.
Payable levels decreased from prior year levels partially due to lower purchasing activity in the
fourth quarter. Capital expenditures were well below both prior year levels and depreciation
expense for the period. The combination of effective management of current assets and 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 2003 remained volatile. The major trends in the markets,
which were the focus of the Companys treasury management initiatives, included movements in
interest rates as well as the continued weakening of the U.S. dollar against the Swiss franc, and
during the latter part of the year, the strengthening of the euro against the U.S. dollar. As a consequence of the slow economic recovery and political instability experienced in 2003,
global interest rates fell below 2002 levels reaching a trough at approximately mid-year 2003,
before rising slightly from mid-year 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 from 4.02 percent in 2002 to 3.84
percent in 2003. As a consequence of this interest cost reduction as well as lower overall debt
levels, the Companys net interest cost, which is




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##### Table of Contents



interest expense less interest income, decreased
by CHF 2 million to CHF 108 million in 2003 compared to CHF 110 million in 2002. During 2003, the U.S. dollar fluctuated against the Swiss franc from a high of approximately CHF
1.42 to a low of approximately CHF 1.24. The Swiss franc balance sheet year-end rate was at CHF
1.25 against the U.S. dollar in 2003 versus CHF 1.43 at the end of 2002. During 2003, the euro
fluctuated against the Swiss franc from a high of approximately CHF 1.57 to a low of approximately
CHF 1.46. At the end of 2003, the Swiss franc was at a level of CHF 1.56 against the euro versus
CHF 1.46 at the end of 2002. In 2003, other financial expense, net which includes foreign currency exchange gains and losses,
net hedging expenses, and losses on financial investments, was CHF 24 million, a decrease of CHF 81
million, compared CHF 105 million in 2002. Of this decrease, CHF 59 million resulted from the
Companys investment in Hexcel Corporation (Hexcel). In 2002, the Company recorded a CHF 38
million expense for the unrealized loss on this investment that was deemed to be other than
temporary. In 2003, however, the market value of Hexcel improved significantly and the Company sold
its remaining shares in Hexcel, realizing a CHF 16 million gain. Cash flows Cash flows from operating activities
    
    
    2003

    
    
    2002Net income
    
    
    
    344
    
    
    
    
    406Depreciation and amortization
    
    
    
    366
    
    
    
    
    385Net change in operating assets and liabilities
    
    
    
    302
    
    
    
    
    8Other, net
    
    
    
    21
    
    
    
    
    239Net cash provided by operating activities
    
    
    
    1 033
    
    
    
    
    1 038
 During 2003, the Companys focus on operating asset management enabled it to continue to generate
cash from operating activities in excess of CHF 1 billion despite having lower net income and
depreciation and amortization during 2003 than in 2002. This was accomplished by offsetting the
impact of lower operating performance with a successful program in the fourth quarter of 2003 to
substantially reduce net current operating assets. Cash flows from investing activities
    
    
    2003
    
    
    2002Capital expenditures
    
    
    
    (233
    )
    
    
    
    (250
    )Sale (acquisition) of businesses, net of cash
    
    
    
    (71
    )
    
    
    
    (116
    )Proceeds from sale of assets and changes in loans and other long-term assets
    
    
    
    65
    
    
    
    
    17Net cash used in investing activities
    
    
    
    (239
    )
    
    
    
    (349
    )
 Net cash used in acquisition and divestment activities in 2003 consisted primarily of a CHF 71
million payment for separation costs attributable to the past divestment of the Performance
Polymers business. Also included is an aggregate CHF 23 million for the acquisition of additional
interests in two equity affiliates in Asia, where the Company is experiencing significant sales
growth. These cash outflows were partially offset by proceeds of CHF 21 million from the sale of
the Companys remaining Hexcel shares. 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. 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. Cash flows from financing activities
    
    
    2003

    
    
    2002Increase (decrease) in short-term and long-term debt, net
    
    
    
    (394
    )
    
    
    
    4Dividends paid
    
    
    
    0
    
    
    
    
    (134
    )Capital reduction paid
    
    
    
    (206
    )
    
    
    
    (69
    )Treasury stock transactions and other
    
    
    
    (142
    )
    
    
    
    343Net cash flows provided by (used in) financing activities
    
    
    
    (742
    )
    
    
    
    144




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##### Table of Contents



Short-term debt, excluding the current portion of long-term debt, was reduced by CHF 40 million in
2003. This was achieved through the Companys ability to finance its working capital needs through
cash flows generated from its operating activities. Long-term debt, including current portion,
decreased by a net CHF 354 million as the result of repayments of existing debt that matured during
2003, partially offset by the issuance of new debt during 2003 (see Note 13 to Consolidated
Financial Statements). At the Companys Annual General Meeting on March 6, 2003, the shareholders approved the Board of
Directors proposal for a payment to the shareholders in the form of a capital reduction of CHF 3
per share. The capital reduction was in the form of a reduction in the nominal value of each common
share from CHF 9 per share to CHF 6 per share. The Company paid the capital reduction on May 23,
2003, which totaled CHF 206 million. 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. In connection with its share buy-back program initiated in 2003, the Company purchased 1.3 million
treasury shares for CHF 117 million. Free cash flow
    
    
    2003
    
    
    
    2002Net cash from continuing operations
    
    
    
    1 033
    
    
    
    
    1 038Add: restructuring payments
    
    
    
    0
    
    
    
    
    12Less: net cash used in investing activities
    
    
    
    (239
    )
    
    
    
    (349
    )Add: (sale) acquisition of businesses, net of cash
    
    
    
    71
    
    
    
    
    116Less: dividends(1)
    
    
    
    (137
    )
    
    
    
    (134
    )Free cash flow
    
    
    
    728
    
    
    
    
    683
   (1)
    
    The Company considers CHF 2 per share to be the normal annual per share dividend amount
expected by its shareholders. As a result, this amount is used in the Companys calculation of
free cash flow. Actual per share dividends or other distributions to shareholders may differ
from this per share amount. Free cash flow generation in 2003 remained strong, growing by CHF 45 million over the amount
generated in 2002. The Company was able to accomplish this despite the difficult economic
environment during 2003 primarily as a result of being able to maintain the consistent level of net
cash from operations discussed above combined with having spent in 2003 less on investment-related
activities, excluding acquisitions, than in each of the two prior years. Free cash flow generated
in 2003 was used for debt repayment and for small strategic acquisitions. Effective income tax rate The Company reported an effective income tax rate of 17 percent in 2003, a reduction of 10 percent
compared to 27 percent reported in 2002. Substantially all of this reduction in the effective tax
rate is due to the occurrence in 2003 of a non-recurring event. In their past tax audit of the
Companys operations in Grenzach, Germany, the German tax authorities had made a substantial tax
adjustment. In accordance with the Master Spin-off Agreement with Novartis and with Swiss
commercial law, management was of the opinion that the total liability owed resulting from this
adjustment was the responsibility of Novartis. This opinion was disputed by Novartis and, in 2001,
it initiated arbitration proceedings against the Company in relation to this matter. This dispute
was settled in 2003, resulting in the release by the Company of CHF 39 million of previously
established tax reserves. This event reduced the Companys effective income tax rate by 9 percent;
10 percent when combined with another reserve release. Consequently, for comparability with 2002,
the Companys effective income tax rate in 2003 without these events would have been 27 percent
instead of the 17 percent effective tax rate reported. Change in accounting policy and new accounting standards There were no new accounting standards issued by the Financial Accounting Standards Board (FASB) or
other authoritative standard setters that became effective during 2004 and that had a material
effect on the Companys financial statements. In addition, several other new accounting standards
were issued by the FASB as of December 31, 2004 that were not required to be adopted during 2004,
but will require adoption in 2005 or later. None of these issued but not yet adopted new accounting




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##### Table of Contents



standards is expected to have a material effect on the Companys results of operations or financial
position when adopted in the future. See Note 1 to Consolidated Financial Statements in Item 18 
Financial Statements. 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 21 to Consolidated Financial Statements in Item 18 
Financial Statements and Item 4.  Information on the Company  Property, Plant and Equipment;
Manufacturing  Environmental Matters. Use of certain supplementary financial indicators The key financial indicators used by the Companys management to monitor overall performance and
liquidity, including the performance of reportable segments, as well as to provide incentives for
employees to produce high-quality results with a goal of enhancing shareholder value include
certain non-U.S. GAAP financial measures. Such non-U.S. GAAP financial measures are derived from
financial measures prepared in accordance with U.S. GAAP and include EBITDA, free cash flow and net
debt. The way these non-U.S. GAAP financial measures 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. The Company uses EBITDA margin (EBITDA divided by net sales) and free cash flow as two of the three
components of its annual incentive compensation program. The third component of the program is net
sales growth. Under the Companys annual incentive compensation program, employees receive annual
payments if target net sales growth, EBITDA margin or free cash flow levels are achieved. The
combination of these three indicators focuses management and employees on the profitable (EBITDA
margin) growth (sales growth) of the Company without the utilization of unnecessary capital (free
cash flow). In addition, the Company uses net debt as an indicator of the strength of its capital
structure, as well as certain currency adjusted figures that permit it to evaluate its performance
from period to period without such comparisons being impacted by the effects of currency exchange
rate movements during these periods. For the same reasons, management believes investors may find
the non-U.S. GAAP measures useful. As with any supplementary financial indicator, these supplementary financial indicators should be
considered in addition to, not as a substitute for, operating income, net income, cash flows from
operating, investing and financing activities, total assets, total debt, operating income margin
and other measures of financial performance and liquidity reported in accordance with U.S. GAAP. EBITDA As described in the Business Segment Data section of the Consolidated Financial Statements, the
Company evaluates the performance of its reportable segments based on operating income as well as
EBITDA. EBITDA, and EBITDA margin
derived therefrom, provide management with additional quantitative measures of the quality of sales
growth as well as the results of past and current actions taken to manage costs. More importantly, the Company operates in a multinational environment and competes with companies
in different countries. In some of these countries, very significant differences in accounting
exist with regard to depreciation as some companies with which the Company competes calculate and
report their depreciation expense based on tax considerations. As a result, it is very difficult to
meaningfully compare operating income data of such competitors in other countries with that of the
Company. In order to adequately evaluate the Companys performance in the markets as well as to
compare and benchmark performance with that of the Companys competitors, EBITDA was determined to
be a key performance measure because it eliminates the above-described major differences. The material limitation associated with using EBITDA as a performance measure as compared to net
income is that EBITDA provides a measure of the Companys current performance without consideration
of the amount of capital that has been historically invested in order to produce the Companys
results. Management believes it compensates for this limitation by including free cash flow as
another of its key financial indicators, as discussed above. The reconciliation of EBITDA to net income is included in the Business Segment Data section of the
Consolidated Financial Statements. Free cash flow Free cash flow as defined by the Company provides the amount of net cash flow produced that is
available for required or discretionary debt principle payments, reinvestment in the Companys
businesses, or the excess of distributions to shareholders over CHF 2 per share and, as such, is
limited to being used for this consideration only. The reconciliation of free cash flow to net cash provided by operating activities is included in
the Liquidity and Capital Resources section of this Managements Discussion and Analysis. Net debt The reconciliation of net debt to the Companys total debt is included in the Liquidity and Capital
Resources section of this Managements Discussion and Analysis.




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##### Table of Contents



Invested capital The reconciliation of invested capital to total shareholders equity is included in the Business
Segment Data section of the Consolidated Financial Statements. Currency exchange rates Amounts in local currencies or currency adjusted are determined by adjusting current period
amounts reported in Swiss francs, which is the Companys reporting currency under U.S. GAAP, using
prior period exchange rates to remove the effects of fluctuations in foreign currency rates against
the Swiss franc that occurred from the prior period to the current period. The exchange rates of
principle currencies to the Swiss franc, which form the basis of the Companys disclosures of
currency adjusted figures, are presented in Note 2 to Consolidated Financial Statements. Glossary of financial terms Basic Earnings per Shareis defined as net income divided by the weighted average number of common
shares outstanding during the reporting period. Cash Flows from Operating Activitiesis the net cash provided from the principal revenue-producing
activities of the business. It excludes financing and investing activities. Cash Flow Hedgesare hedges of the exposure to variability in expected future cash flows that is
attributable to a particular risk associated with a recognized asset or liability or a forecasted
transaction. Commercial Paperare 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 Incomeis the change in equity of the Company during the year from transactions 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 derivative financial instruments fair value, net of tax, that
qualify and that are designated as cash flow hedges and (v) the change in the minimum pension
liability, less the corresponding intangible asset, net of tax. Convertible Bondsare debt instruments that may be converted into shares based on predefined
conditions as stipulated in the debt agreement. Defined Benefit Pension Planis a pension plan that provides employees at their date of retirement,
a predefined payment. The payment is, depending on the benefit plan, a function of one or more
factors such as age, years of service or compensation level of the employee. Defined Contribution Pension Planis a pension plan for employees that provides the employees, at
the date of their retirement, benefits based on the amount of capital paid-in by the participant or
the Company, plus returns earned on the investment of those contributions. Derivatives, Derivative Financial Instrumentsare 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 used by the Company include
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. Diluted Earnings per Shareis 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. EBITDAis calculated as operating income plus depreciation and amortization, and is reconciled to
net income in the Business Segment Data section of the Consolidated Financial Statements. EBITDA Marginis EBITDA expressed as a percentage of net sales. Equity per Shareis calculated by dividing total shareholders equity by the number of outstanding
common shares (total common shares issued less treasury shares) at the balance sheet date. Fair Value Hedgesare hedges of the exposure to changes in the fair value of a recognized asset or
liability, or an identified portion of such asset or liability, (the hedged item) that is
attributable to a particular risk. Free Cash Flowis 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 of CHF 2 per share. Goodwillis 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.




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##### Table of Contents



Gross Profit Marginis gross profit expressed as a percentage of net sales. A Hedgeis 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 Itemis specifically identified as either all or a specific portion of a recognized asset,
a liability, a forecasted transaction or of an unrecognized firm commitment. Hedge Effectivenessis the portion of the derivative financial instruments change in fair value
that offsets the change in the fair value or cash flows of the hedged item. Hedge Ineffectivenessis the amount by which the derivative financial instruments change in fair
value does not equal the change in fair value or cash flows of the hedged item. Intensityis an amount expressed as a percentage of net sales. Intensity of inventories is equal to
the inventories divided by net sales. Intensities of accounts receivables and accounts payable are
calculated correspondingly. Invested Capitalis calculated as total assets less non-interest bearing current liabilities (i.e.
accounts payable, income taxes payable, accruals and other current liabilities, except the current
portion of deferred tax liabilities) and less deferred tax assets. Net Cash Provided by Operating Activitieshas the same meaning as Cash Flows from Operating
Activities. Net Current Operating Assetsis the sum of inventories and accounts receivable less accounts
payable. Net Debtis the sum of short-term debt and long-term debt less cash and cash equivalents and
short-term investments. Net Sales Developmentpercentage is the change in the current periods net sales in Swiss francs
over the previous periods sales in Swiss francs expressed as a percentage. Net Sales Development percentage, in local currenciesis 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 Income Marginis operating income expressed as a percentage of net sales Other Intangible Assetsare 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.




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##### Table of Contents



Item 6. Directors, Senior Management and Employees Corporate Governance Numbers in square brackets refer to the Directive on Information Relating to Corporate Governance
(DCG) of SWX Swiss Exchange. An overview of major differences between the Swiss and the U.S.
corporate governance practices can be found at:
http://www.cibasc.com/investors The Board of Directors and its Committees
The Board of Directors of Ciba Specialty Chemicals (Board) 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 [DCG 3.6]. 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 to allow for a staggered board [DCG 3.4.1]; a re-election is possible [DCG
3.4.1]. For an overview of the individual election terms, see the table on the next page [DCG
3.4.2]. 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 and Board Committee charters reflect
recent developments in corporate governance principles including the Swiss Code of Best Practice
and the Sarbanes-Oxley Act of 2002. The Board believes that it is in compliance with well
recognized corporate governance standards, in particular with regard to:  -
    a Lead Director (to complement the Chairman of the Board) entitled to convene on his own and chair meetings of the
Board; in addition the Lead Director chairs the Compensation Committee; based on interviews with other Board members,
he prepares a review of the Chairman. He may act as a liaison between the Board and the Chairman in delicate matters  -
    broad supervisory and reviewing powers for the Board, directly supported by Internal Audit  -
    independence of Board Members who are all non-executives of the Company, with the exception of the Chairman  -
    independence of Board Committee Members who are equally all non-executives, with one exception being the Chairman
serving on the Human Resources and Nomination and the Finance Committees  -
    having Audit Committee Members who are all non-executives with significant expertise particularly in the area of finance  -
    having Compensation Committee Members who are non-executives with broad practical experience in the area of employee
and executive compensation  -
    an annual self-assessment of the Board  -
    receiving and providing continuous and comprehensive information including periodic and yearly reports prepared by
management on finances, strategies, research and development, production planning and risk management [DCG 3.7]. Topics of the Board in 2004
Apart from the ongoing overall supervision of the Companys affairs, corporate governance and the
preparation of the annual accounts and the Annual General Meeting of the Shareholders, the Board
put particular emphasis for the financial year 2004 on the following topics: group business
strategy, M&A, IT and ERP strategy, and an assessment of Internal Audit. Board Committees [DCG 3.5]
Four standing Board Committees in the areas of audit, finance, compensation and human
resources/nomination provide guidance and support to the full Board: Audit Committee
Mission: Evaluates the independence, objectivity and effectiveness of external and internal
auditors, approves and pre-approves auditing and other services to be provided by the external
auditors, evaluates business risk assessment, 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. In addition, the
Audit Committee proposes the nomination of the external auditors to the full Board. The Audit
Committee reviews complaints regarding accounting, internal accounting controls or auditing
matters. To facilitate the submission of such complaints, the Company has set up webpages both in
its intranet (under: Corporate Governance) and on its
internet site (http://www.cibasc.com/ -
About Us  Corporate Governance). The Board has determined that the chairman of the Audit
Committee, Erwin W. Heri, is the Audit Committees financial expert as per the requirements of Item
16A of Form 20-F. Finance Committee
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. Compensation Committee
Mission: Develops, recommends and reviews the group compensation principles in accordance with the
overall Company objectives. Proposes compensation of the Members of the Board and of the Executive
Committee to the full Board for approval [DCG 5.1]. The Lead Director is the chairman of the
Compensation Committee. Human Resources and Nomination Committee
Mission: Develops the principles for the selection of candidates for election or re-election to the
Board by the AGM and prepares a selection of candidates in accordance with these criteria. In
addition, the Human Resources and Nomination Committee recommends and reviews the objectives and
principles of the human resource policy and its implementation. The Chairman of the Board is the
chairman of the Human Resources and Nomination Committee.




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##### Table of Contents



Members of the Board [DCG 3, 3.1, 3.2, 3.4.2]
The Members of the Board are as follows: YearDate of
    
    
    
    
    
    appointed
    
    
    Year term
    
    
    Significant positions and political mandatesName
    
    
    Birth
    
    
    Nationality
    
    
    to Board
    
    
    expires
    
    
    outside the Company [DCG 3.2.a/b/c]Armin MeyerChairman and CEO
    
    
    July 25,
1949
    
    
    Swiss
    
    
    
    1997
    
    
    
    
    2008
    
    
    

Member of the Board of Directors, Zurich Financial Services, Zurich
Member of the Board, CEFIC (European
Chemical Industry Council), Brussels
Member Foundation Board IMD  International
Institute for Management Development, LausanneKurt FellerVice Chairman,
Lead Director
    
    
    August 31, 1937
    
    
    Swiss
    
    
    
    1999
    
    
    
    
    2007
    
    
    

Chairman
of the Board of Directors,
Rieter 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, Büro-Fürrer
Ltd., ZurichErwin W. Heri
    
    
    March 6,
1954
    
    
    Swiss
    
    
    
    1997
    
    
    
    
    2007
    
    
    
    Chairman of the Board of Directors, OZ Bankers
AG, Pfäffikon
Member of the Board of Directors, Losinger AG,
Berne
Member of the Board of Directors, Hilti AG,
Schaan/FL
Chairman of the Investment Committee of State
Pension (Publica), BerneGertrud Höhler
    
    
    January 10, 1941
    
    
    German
    
    
    
    1997
    
    
    
    
    2008
    
    
    
    Management Consultant
Member of the Board of Directors, Bâloise-Holding, Basel
Member of the Board of Directors, Georg
Fischer
Ltd., SchaffhausenJean-Marie Pierre
Lehn
    
    
    September
30, 1939
    
    
    French
    
    
    
    1997
    
    
    
    
    2006
    
    
    
    Professor of Chemistry, Nobel Prize Winner
Member of the Scientific Board of the Novartis
Venture Fund, BaselPeter Littmann
    
    
    December
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, MassachusettsUli Sigg
    
    
    April 29,
1946
    
    
    Swiss
    
    
    
    1999
    
    
    
    
    2007
    
    
    
    Vice-Chairman of the Board of Directors,
Ringier
GroupThomas KochSecretary (not
member of the
Board)
    
    
    November
21, 1954
    
    
    German
    
    
    
    2004
    
    
    
    
 The Chairman of the Board and CEO [DCG 3.5.1]
The Chairman of the Board is elected by the Board from its Members. As such, Armin Meyer is
responsible for the invitation to and the agenda of the Board meetings. He is responsible for the
implementation of the Group strategy as defined by the Board, for optimizing shareholder value and
for safeguarding the interests of other stakeholders. He represents the overall interests of the
Company, ensures close cooperation between the Board and the Executive Committee and supervises the
implementation of the resolutions adopted by the Board. The Company has opted to combine the functions of Chairman and CEO. In the Boards view the
advantages of having fast decision making processes as well as the timely, complete and accurate
information flow between the Board and the management of the Company, complemented by a strong Lead
Director outweigh the potential risk the combination of the functions may have. The CEO is appointed by the Board. In this function, Armin Meyer is responsible for the operational
management and the overall financial results of the Group. He chairs the meetings of the Executive
Committee and ensures the information flow inside and outside the Company. The Vice-Chairman and Lead Director [DCG 3.5.1]
As Vice-Chairman, Kurt Feller represents the Chairman in the latters absence. As Lead Director,
Kurt Fellers primary function is to provide for effective checks and balances in the governance of
the Company. He may convene and chair meetings without the Chairman being present. In addition he
is, together with the Compensation Committee, responsible for the performance review of the
Chairman and CEO and may act as a liaison between the Board and the Chairman in delicate matters.




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##### Table of Contents



Additional Information
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 [DCG 3.1.b]. The term
independent used herein satisfies the criteria of the Swiss Code of Best Practice and of Section
303(A)(6) of the NYSE Listed Company Manual, as approved by the SEC on November 4, 2003. None of
the non-executive Members of the Board 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 [DCG 3.1.c]. More biographical details of the Board Members are available at the Companys website
(http://www.cibasc.com/bod-cv) [DCG 3.1.a]. There is no cross-involvement among the Board Members and the boards of directors of other listed
Swiss companies [DCG 3.3]. Other than as disclosed under Change of Control Provisions hereunder,
there is no service contract between any Member of the Board and the Company providing for benefits
upon termination of employment. Board Committee Memberships [DCG 3.5.2] Human Resources and
    
    
    CompensationName
    
    
    Audit Committee
    
    
    Finance Committee
    
    
    Nomination Committee
    
    
    CommitteeA. Meyer
    
    
    
    
    
    Δ
    
    
    ΔK. Feller
    
    
    l
    
    
    l
    
    
    l
    
    
    ΔE.W. Heri
    
    
    Δ
    
    
    lG. Höhler
    
    
    
    
    
    
    
    
    l
    
    
    lJ.-M. P. LehnP. Littmann
    
    
    
    
    
    
    
    
    l
    
    
    lU. Sigg
    
    
    l
   l
 All Board Committees meet four to six times per year, usually immediately before the full Board
meets. The duration of such meetings generally is between two and four hours. The full Board meets
at least 5 times per year. Normally, the duration of these meetings ranges between four and eight
hours. In addition, in 2004, the Board held a two consecutive days retreat [DCG 3.5.3]. 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 or any of its
Committees to pass resolutions, at least half of their Members must be personally present, which
may be deemed satisfied if simultaneous communication is ensured, such as by telephone or video
conference. The Executive Committee [DCG 4, 4.1, 4.2] Date of
    
    
    
    
    
    
    
    
    Significant positions and political mandatesName
    
    
    Birth
    
    
    Nationality
    
    
    Function
    
    
    outside the Company [DCG 4.2.a/b/c]Armin Meyer
    
    
    July 25, 1949
    
    
    Swiss
    
    
    Chief Executive Officer
    
    
    Member of the Board of Directors, 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, LausanneMichael Jacobi
    
    
    January 30,
1953
    
    
    German
    
    
    Chief Financial Officer
    
    
    Chairman of the Board of Industrie-Holding,
Berne
Member of the Board of Phonak Holding AG, StäfaChristoph Biedermann
    
    
    March 19, 1957
    
    
    Swiss
    
    
    Executive Vice
President International
Coordination and
Human Resources
    
    
    Member of the Board of SGCI (Schweiz.
Gesellschaft für Chemische Industrie),
ZurichMartin Riediker
    
    
    June 28, 1952
    
    
    Swiss
    
    
    Chief Technology
Officer
    
    
    Member of the Board, American Chemistry
Council, Arlington
Member of the Board, CIIT Centers for Health
ResearchHermann Angerer
    
    
    December 23,
1947
    
    
    Swiss
    
    
    Head Segment Coating
Effects
    
    
    NoneEric Marohn
    
    
    June 3, 1959
    
    
    American
    
    
    Head Segment Textile
Effects
    
    
    None




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##### Table of Contents



Date of
    
    
    
    
    
    
    
    
    Significant positions and political mandatesName
    
    
    Birth
    
    
    Nationality
    
    
    Function
    
    
    outside the Company [DCG 4.2.a/b/c]Mark Garrett
    
    
    May 11, 1962
    
    
    Australian
    
    
    Head Segment Water &
Paper Treatment
    
    
    Member of the Board of TEGEWA Industry
Association, Frankfurt am MainBrendan
Cummins
    
    
    May 18, 1951
    
    
    Irish
    
    
    Head Segment Plastic
Additives
    
    
    None
 Armin Meyerbecame 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 and 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 Jacobijoined 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, Switzerland in 1987
as Head of Management Accounting. He became Group Controller of Ciba-Geigy in 1990,
and is responsible for
the Companys overall corporate financial accounting and reporting. In 1997, he was appointed Chief
Financial Officer for Ciba Specialty Chemicals, and is responsible for Treasury, Mergers and Acquisitions,
Investor Relations and Control. Michael Jacobi served on the Council of the Foundation for
Accounting and Reporting Recommendations and played a significant role in setting Swiss guidelines
for accounting and disclosure. He has a Doctorate in Economics from the University of St. Gallen. Christoph Biedermannwas appointed Head of International Coordination and Human Resources effective
as of April 1, 2004. In 2001, Christoph Biedermann joined Ciba Specialty Chemicals as Member of the
Executive Committee. He was global Head, Textile Effects Segment from 2001 to 2004. 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. From 1999 until he joined Ciba
Specialty Chemicals, 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. Martin Riedikerwas 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 U.S. Polymers Division in 1994. Mr. 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
became a 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 Angererwas appointed Head of the 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 of the 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 (ETH) in Zurich. Eric Marohnwas appointed Head of the Textile Effects Segment effective as of April 1, 2004. He
joined Ciba-Geigy in 1988 in the United States. He held a number of positions in the U.S. and in
Basel, Switzerland, as Manager of Production Cost Accounting, Manager of Planning and Reporting and
as Controller. In 1997, he took on the role of Global Marketing Head of the Business Segment
Whiteners in the Consumer Care Division at Ciba Specialty Chemicals headquarters in Basel. In
2000, he returned to the U.S. where he was responsible for the Business Unit Textile Chemicals for
North and Central America. Starting in 2001, he was Regional Head for the Business Line Paper and
the Segment Representative for Water & Paper Treatment in NAFTA. From 2003 until becoming Head of
the Textile Effects Segment, he




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##### Table of Contents



headed Marketing and Sales for the Textile Effects Segment in North and South America. Eric Marohn
has a B.S.B.A. degree from Appalachian State University and holds an MBA from the University of
North Carolina at Greensboro. Mark Garrettwas 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, Mark Garrett became Global Head
of the Textile Chemicals business unit where he successfully integrated three textile chemical
businesses into one business unit that became a worldwide leader in its field. Mark Garrett joined
DuPont from Ciba Specialty Chemicals in 2000, initially as Director Corporate Plans before becoming
the Global Business Director Tyvek/Typar. He rejoined Ciba in 2001. Mark Garrett holds the
following degrees: Bachelor of Arts, Economics, University of Melbourne, Melbourne, Australia and
Master of Applied Information Systems, Royal Melbourne Institute of Technology, Melbourne. Brendan Cumminswas appointed Head of the Plastic Additives Segment effective as of April
1, 2004. 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 the Philippines as Head of
Pharmaceutical Division and later that year was appointed, in combination, Group Company Head. In
1994, he transferred to the U.K. 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. In December
2001, he joined Ciba Specialty Chemicals as a Member of the Executive Committee. From 2001 to 2004,
he was Executive Vice-President, International Coordination and Human Resources. He has a degree in
accounting and is a Fellow of The Association of International Accountants. There are no management agreements or other agreements between the Company or its management bodies
and any third parties [DCG 4.3] providing for any persons referred to above to be elected a Member
of the Companys Executive Committee. Changes since December 31, 2003
Felix Meyer, Head of the Plastic Additives Segment, resigned from the Company at the end of March,
2004. With effect from April 1, 2004, Brendan Cummins took over Felix Meyers position and was
succeeded by Christoph Biedermann as Head of International Coordination and Human Resources. At the
same date, Eric Marohn took over as Head of the Textile Effects Segment. Tim Schlange was Head of the Home
& Personal Care Segment until the end of August, 2004, when the integration of the Segments
businesses in two other of the Companys segments began. Tim Schlange then became Cibas Chief
Strategy Officer. Business behavior
So as to promote honest and ethical conduct, legal compliance, prompt internal reporting,
accountability, and full, fair, accurate, timely and understandable disclosure in public reports,
the Company relies on its Code of Conduct, which can be downloaded
(http://www.cibasc.com/code-of-conduct-revised-2003_en.pdf). In 2004, the Company did not grant
any waiver, whether implicit or explicit, from any provision of its Code of Conduct to the CEO, the
CFO, or the Group Controller. CompensationPrinciples of allocation [DCG 5.1]
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 short term bonuses are based on corporate financial performance, i.e. on free
cash flow, EBITDA and sales growth measured against relevant targets which are established at the
beginning of the year. Long term incentives are awarded primarily based on how individual and
personal performances contribute to the overall success of the Company. The allocation of these
compensatory elements is discussed in the Compensation Committee of the Board of Directors, which
makes its recommendations to the full Board. The latter takes the ultimate decision with respect to
such allocation. For a more detailed description of the Share and option based compensation plans,
see note 17 to Consolidated Financial Statements. Deviation from accrual principle [DCG 5]
The official commentary to the Directive on Information Relating to Corporate Governance requires
the disclosure of management compensation according to the accrual principle. Adherence to this
principle would entail that payments received and payments made are not to be accounted for at the
time of their receipt or transfer, but rather allocated to the specific periods to which they are
attributable in economic terms. As the Company reports its financial results in early February and
holds its AGM in early March, there is not enough time for all the performance reviews to be
conducted with the Companys top executives. These reviews are a pre-condition for the
determination of the incentive payments. The Company therefore reports amounts effectively paid in
the reporting period, irrespective of the period to which they are economically attributable. Non-executive Members of the Board [DCG 5.2.2.b]
In 2004, the non-executive Members of the Board in the aggregate received as gross remuneration,
bonuses and other benefits a total of CHF 702,549 [DCG 5.2.1]. In addition, they were granted 6,740
Shares by the Company [DCG 5.4.b] and held a total of 23,292 Shares as at December 31, 2004
(including those allocated in 2004) [DCG 5.5.b].




---



##### Table of Contents



In addition, these persons were granted the following options by the Company [DCG 5.6.b]: Strike priceYear
    
    
    Term of allocation (years)
    
    
    
    Subscription ratio
    
    
    
    Number
    
    
    
    (CHF)1997
    
    
    
    8
    
    
    
    
    1:1
    
    
    
    
    23632
    
    
    
    
    107.161998
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    3284
    
    
    
    
    163.701999
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    4108
    
    
    
    
    110.602000
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    2562
    
    
    
    
    105.402001
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    6892
    
    
    
    
    109.202002
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    9280
    
    
    
    
    109.00
 The Company did not grant any options to non-executive Members of the Board in 2003 or in 2004. Executive Member of the Board and Members of the Executive Committee [DCG 5.2.2.a]
In 2004, the executive Member of the Board and the Members of the Companys Executive Committee in
the aggregate received as gross salaries, bonuses and other benefits, inclusive of any voluntary
Company pension contributions, a total of CHF 8,199,355 [DCG 5.2.1]. In addition, they were granted
56,593 Shares by the Company (of which most are restricted) [DCG 5.4.a] and held a total of 133,859
Shares as at December 31, 2004 (including those allocated in 2004) [DCG 5.5.a]. In addition, these persons were granted the following options by the Company [DCG 5.6.a]: Strike priceYear
    
    
    Term of allocation (years)
    
    
    
    Subscription ratio
    
    
    
    Number
    
    
    
    (CHF)1997
    
    
    
    8
    
    
    
    
    1:1
    
    
    
    
    63624
    
    
    
    
    107.161998
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    18613
    
    
    
    
    163.701999
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    28970
    
    
    
    
    110.602000
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    23549
    
    
    
    
    105.402001
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    65672
    
    
    
    
    109.202001 Supplementary
grant
    
    
    4y and 10.5 months
    
    
    
    1:1
    
    
    
    
    19572
    
    
    
    
    109.202002
    
    
    
    5
    
    
    
    
    1:1
    
    
    
    
    135640
    
    
    
    
    109.00
 The Company did not grant any options to the executive Member of the Board nor to the Members of
the Companys Executive Committee in 2003 or in 2004. Highest total compensation [DCG 5.9]
In 2004, the Member of the Board with the highest total compensation received as salary, bonus and
other benefits inclusive of any voluntary Company pension contributions a total of gross CHF
2,407,477. In addition, in 2004, this person was allocated 13,641 restricted Shares and 2,623
unrestricted Shares. Additional fees and loans
None of the above mentioned persons has received any fees or any compensation for services rendered
to the Company during 2004 other than as disclosed in this report [DCG 5.7], nor have they been
extended any loans [DCG 5.8]. Former Members [DCG 5.3]
In 2004, one former Member of the Executive Committee has received total compensation of gross CHF
292,063 [DCG 5.3.2.a]. This amount includes voluntary Company pension contributions. In 2004, the
Company did not make any payments to former non-executive Members of the Board [DCG 5.3.2.b]. In
the reporting period, Felix Meyer, Member of the Executive Committee, left the Company. In the same
period, no Member of the Board left the Company [DCG 5.2.3]. Closely Linked Persons
The Company has not made any share [DCG 5.4], option [DCG 5.6] or any cash contribution [DCG 5.2]
to any Closely Linked Person, i.e. to a third party that is closely linked to Members of the Board
or to Members of the Companys Executive Committee. However, they may have acquired Shares of the
Company or options on their own. Also, the Company has not paid any fees [DCG 5.7] to such persons
nor has it granted them any loans [DCG 5.8]. Shareholdings of Closely Linked Persons, if any, are included in the figures reported above [DCG
5.5]. 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
are 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




---



##### Table of Contents



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 European work councils of activities
that 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 other 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. Employees
The Company employees worldwide totaled 19 337 in 2004, 18 658 in 2003 and 19 007 in 2002. The following
table shows the number of employees at the end of December 31, 2004, 2003 and 2002. 2004
    
    
    Europe
    
    
    
    Americas
    
    
    
    Asia-Pacific
    
    
    
    TotalPlastic Additives
    
    
    
    1 927
    
    
    
    
    1 127
    
    
    
    
    655
    
    
    
    
    3 709Coatings Effects
    
    
    
    2 956
    
    
    
    
    409
    
    
    
    
    543
    
    
    
    
    3 908Water & Paper Treatment
    
    
    
    2 569
    
    
    
    
    995
    
    
    
    
    626
    
    
    
    
    4 190Textile Effects
    
    
    
    2 007
    
    
    
    
    586
    
    
    
    
    935
    
    
    
    
    3 528Non-Segment
    
    
    
    2 274
    
    
    
    
    930
    
    
    
    
    798
    
    
    
    
    4 002Total Company
    
    
    
    11 733
    
    
    
    
    4 047
    
    
    
    
    3 557
    
    
    
    
    19 337
 2003
    
    
    Europe
    
    
    
    Americas
    
    
    
    Asia-Pacific
    
    
    
    TotalPlastic Additives
    
    
    
    1 821
    
    
    
    
    1 179
    
    
    
    
    639
    
    
    
    
    3 639Coatings Effects
    
    
    
    3 000
    
    
    
    
    407
    
    
    
    
    511
    
    
    
    
    3 918Water & Paper Treatment
    
    
    
    2 136
    
    
    
    
    1 019
    
    
    
    
    474
    
    
    
    
    3 629Textile Effects
    
    
    
    2 087
    
    
    
    
    550
    
    
    
    
    899
    
    
    
    
    3 536Non-Segment
    
    
    
    2 235
    
    
    
    
    923
    
    
    
    
    778
    
    
    
    
    3 936Total Company
    
    
    
    11 279
    
    
    
    
    4 078
    
    
    
    
    3 301
    
    
    
    
    18 658
 2002
    
    
    Europe
    
    
    
    Americas
    
    
    
    Asia-Pacific
    
    
    
    TotalPlastic Additives
    
    
    
    1 806
    
    
    
    
    1 236
    
    
    
    
    583
    
    
    
    
    3 625Coatings Effects
    
    
    
    3 023
    
    
    
    
    396
    
    
    
    
    491
    
    
    
    
    3 910Water & Paper Treatment
    
    
    
    2 209
    
    
    
    
    1 060
    
    
    
    
    472
    
    
    
    
    3 741Textile Effects
    
    
    
    2 202
    
    
    
    
    611
    
    
    
    
    848
    
    
    
    
    3 661Non-Segment
    
    
    
    2 248
    
    
    
    
    969
    
    
    
    
    853
    
    
    
    
    4 070Total Company
    
    
    
    11 488
    
    
    
    
    4 272
    
    
    
    
    3 247
    
    
    
    
    19 007




---



##### Table of Contents



Organizational and capital 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 American
Depositary Shares (ADSs) trade on the New York Stock Exchange See Item 9  The Offer and Listing.
As at December 31, 2004, the Companys market capitalization amounted to CHF 5 721 139 843 (66 140
345 shares at a price of CHF 86.50 each).  Security
    
    Stock exchange
    
    Ticker symbol
    
    Security number
    
    ISIN codeShare with CHF 3 nominal value
    
    SWX/virt-x
    
    CIBN
    
    581 972
    
    CH 000 581972 4ADS
    
    NYSE
    
    CSB
    
    CUSIP: 17162 W206
    
    N/A
 The Companys nominal Share capital amounts to CHF 212 459 871 and is divided in 70 826 617 Shares
with a nominal value of CHF 3 each. On June 28, 2002, the nominal value per Share had been reduced
from CHF 10 to CHF 9. On May 23, 2003, the nominal value per Share was again reduced, this time to
CHF 6 per Share, giving effect to a resolution of the Companys shareholders taken on March 6,
2003. On May 7, 2004, the nominal value per Share was reduced for a third time, to CHF 3 per Share,
giving effect to a resolution of the Companys shareholders taken on February 26, 2004 [DCG
2.1/2.3]. The Board of Directors proposes to the shareholders of the Company to further reduce the Companys
Share capital from CHF 3 per Share to CHF 1 per Share and by making a corresponding cash payment to
the Companys shareholders of CHF 2 per Share. The shareholders will vote on this proposal at the
Companys AGM on March 3, 2005. In addition, the Board will propose to the Companys shareholders
to reduce the Companys share capital by the cancellation of 1 762 000 Shares it acquired over the
second trading line in connection with its share buy-back program. The Company only has one class of Shares and has no bonus certificates [DCG 2.4/2.5]. 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 Shares do not have any preferential rights attached
to them. The Company had and has the following ordinary, authorized and conditional capitals [DCG
2.2/2.3]: Nominal
    
    
    
    OrdinaryDate of Articles of
    
    
    value of
    
    
    
    share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conditional capital forAssociation
    
    
    Shares
    
    
    
    capital
    
    
    
    Authorized capital
    
    
    
    Conditional capital
    
    
    
    employee participationArticle in Articlesof Association
    
    
    4 para. 1
    
    
    
    4 para. 3
    
    
    
    4 para. 4
    
    
    
    4 para. 5number
    
    
    nominal
    
    
    number of
    
    
    nominal
    
    
    number of
    
    
    nominalof Shares
    
    
    value
    
    
    Shares
    
    
    value
    
    
    Shares
    
    
    value(million)
    
    
    (CHF)
    
    
    (million)
    
    
    (CHF)
    
    
    (million)
    
    
    (CHF)(CHF)
    
    
    (CHF)
    
    
    
    
    
    (million)
    
    
    
    
    
    (million)
    
    
    
    
    
    
    (million)April 20, 1998
    
    
    
    10
    
    
    
    
    721 301 170
    
    
    
    4
    
    
    40
    
    
    4
    
    
    40
    
    
    2
    
    
    20March 22, 2002
    
    
    
    9
    
    
    
    
    649 171 053
    
    
    
    4
    
    
    36
    
    
    4
    
    
    36
    
    
    2
    
    
    18March 6, 2003
    
    
    
    6
    
    
    
    
    432 780 702
    
    
    
    4
    
    
    24
    
    
    4
    
    
    24
    
    
    2
    
    
    12February 26, 2004
    
    
    
    3
    
    
    
    
    212 479 851
    
    
    
    4
    
    
    12
    
    
    4
    
    
    12
    
    
    2
    
    
    6Proposal to AGM 2005
    
    
    
    1
    
    
    
    
    69 064 617
    (i)
    
    
    4
    
    
    4
    
    
    4
    
    
    4
    
    
    2
    
    
    2
   (i)
    
    Reflects both the proposed cancellation of 1 762 000 Shares and the reduction of the
nominal value of each Share to CHF 1. Should the shareholders approve the above mentioned Share capital reduction at the Companys
2005 AGM through a repayment of CHF 2 per Share, the nominal value for ordinary, authorized and
conditional capital would be reduced accordingly. For additional information please refer to
article 4 of the Companys Articles of Association (Articles), which can be downloaded
(http://www.cibasc.com/index/cmp-index/cmp-about/cmp-abo-corporategovernance.htm). The German
version, which is legally binding, can be downloaded from the same internet address. For information about the Companys major shareholders see Item 7  Major Shareholder and Related
Party Transactions in the Annual Report. Updated information can be retrieved from the SWX Swiss
Exchange
(http://www.swx.com/admission/being_public/disclosure_en.html). The Company has no cross
holdings [DCG 1.3] nor has it executed any pooling or management agreements [DCG 4.3]. Group structure [DCG 1.1]
For the Companys major subsidiaries, including listed companies and group structure, see Item 4 -
Information on the Company [DCG 1.1.2 and 1.1.3]. For the description of the operational structure
of the Company, see Description of Segments in Business Segment Data [DCG 1.1.1].




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##### Table of Contents



Voting cap and registration restrictions, nominees [DCG 2.6] 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 2004, the Board granted no such exception and
currently no shareholder has the benefit of any such exception [DCG 2.6.2]. For purposes of the 2
percent rule, individuals and/or legal entities acting in concert are considered to be one
shareholder [DCG 2.6.1]. 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 [DCG 2.6.3]. For information about the Companys treasury stock, see Note 16 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 [DCG 6.1.1]. In 2004, the Board granted no exception with regard to voting cap
restrictions [DCG 6.1.2]. In addition to those proxies, a shareholder may also be represented by
another individual at a general meeting, but this individual is required to be a shareholder of the
Company [DCG 6.1.4]. A resolution on the restriction to vote and on the removal of such a
restriction is subject to the approval of two-thirds of the Shares represented at a shareholders
meeting [DCG 6.1.3]. Annual General Meeting and extraordinary shareholders meetings Any shareholder may demand that an item be put on the agenda of the AGM if she or he holds Shares
representing a nominal value of at least CHF 300 000. If, at the Companys AGM to be held on March
3, 2005, the shareholders approve the motion of the Board to reduce the nominal value of each Share
from CHF 3 to CHF 1, the amount required to have an item put on the agenda will be proposed to be
reduced accordingly from CHF 300 000 to CHF 100 000. A demand to have an item put on the agenda must be made in writing at least 60 days before the AGM
[DCG 6.4]. For the AGM to be held on March 3, 2005, the Company published the deadline date
(January 3, 2005) on its web-site on December 10, 2004. The record date for participation at the
AGM is usually fifteen days before the AGM 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 [DCG 6.5]. The Articles
do not contain any provisions with regard to calling the AGM that differ from the provisions of the
Swiss Code of Obligations [DCG 6.3]. 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 [DCG 6.2]:  (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 [DCG 2.6.4],(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
(Kapitalerhöhung 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 a 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. Since its inception in 1997, the Company has paid or proposed to pay the following amounts per
Share: dividend payment
    
    
    
    capital reduction
paymentAGM Year
    
    
    (CHF)
    
    
    
    (CHF)1998
    
    
    
    2
    
    
    
    
    01999
    
    
    
    2
    
    
    
    
    02000
    
    
    
    2
    
    
    
    
    02001
    
    
    
    2
    
    
    
    
    0




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##### Table of Contents



dividend payment
    
    
    
    capital reduction
paymentAGM Year
    
    
    (CHF)
    
    
    
    (CHF)2002
    
    
    
    2
    
    
    
    
    12003
    
    
    
    0
    
    
    
    
    32004
    
    
    
    0
    
    
    
    
    32005(i)
    
    
    
    1
    
    
    
    
    2
   (i)
    For the financial year 2004, the Board proposes to the shareholders to pay a dividend
of CHF 1 per Share and to make an additional cash payment of CHF 2 per Share from a capital
reduction. The shareholders will vote on these proposals at the Companys AGM of shareholders
on March 3, 2005. If the shareholders approve these proposals, the dividend payment is
expected to be made on March 8, 2005, while the payment stemming from the capital reduction is
expected to be made on May 18, 2005. Equity linked instruments [DCG 2.7] With the exception of the Companys employee participation programs, the Company had no equity
linked debt outstanding. Additional Information Change of control provisions [DCG 7.1] 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, the
Company has no opting out or opting up provisions [DCG 7.1]. According to employee retention agreements with the Company, all members of the Executive Committee
plus three senior managers are entitled to payments for severance resulting from a change of
control. For ten executives, such payments would on average amount to less than twice that of a
total annual compensation. One member of the Executive Committee has a contractual provision
according to which he would be entitled to receive somewhat less than two and a half times that of
his total annual compensation. [DCG 7.2]. Auditors [DCG 8] The Companys auditors are Ernst & Young Ltd, Zurich. They have been elected by the shareholders at
the 2004 AGM until the AGM 2005 [DCG 8.1.1]. The Board, which bases its proposal upon a
recommendation made to it by the Audit Committee, will propose that Ernst & Young Ltd be re-elected
for another year. At the Companys AGM to be held on March 3, 2005, the shareholders will vote on
this proposal. Ernst & Young Ltds lead audit partner, Cherrie Chiomento, has supervised the Companys audit since
2004 [DCG 8.1.2]. Fees paid by the Company in 2004 and 2003 to its auditors were as follows [DCG 8.2/8.3]: 2004
    
    

    2003thousand
    
    
    
    in % of
    
    
    
    thousand
    
    
    
    in % ofCHF
    
    
    
    total fees
    
    
    
    CHF
    
    
    
    total feesAudit fees
    
    
    
    5 704
    
    
    
    
    93
    
    
    
    
    3 927
    
    
    
    
    76Audit-related fees
    
    
    
    2
    
    
    
    
    0
    
    
    
    
    237
    
    
    
    
    5Tax fees
    
    
    
    381
    
    
    
    
    6
    
    
    
    
    827
    
    
    
    
    16All other fees
    
    
    
    44
    
    
    
    
    1
    
    
    
    
    165
    
    
    
    
    3Total fees
    
    
    
    6 131
    
    
    
    
    100
    
    
    
    
    5 156
    
    
    
    
    100
 Audit related work includes services in connection with the Companys pension plans. Tax services
include tax filings, transfer pricing studies and tax advice, including with regard to VAT. Other
services included assistance with translation and credit agency matters. The Audit Committee has
introduced a policy for the pre-approval of audit and of non-audit services. A copy of this policy
can be downloaded (http://www.cibasc.com/investors). The Audit Committee has not approved a single
service pursuant to the de minimis exception according to paragraph (c)(7)(i)(C) of rule 2-01 of
regulation S-X. 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 AGM of the shareholders of the Company
are decided upon. They are also present at one of the Companys Disclosure Committee meetings and
at the meetings of the Audit Committee where audit mandate and audit planning are discussed. Any




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##### Table of Contents



other participation is as required. In such meetings, the Board and the Audit Committee also assess
and discuss the findings of the auditors and evaluate the quality of their services [DCG 8.4]. Information policy [DCG 9] The Companys policy is to openly, clearly and regularly inform its stakeholders of all relevant
developments. As a primary tool, the Company communicates through its internet site
(http://www.cibasc.com) and by email. The Investor Relations homepage
(http://www.cibasc.com/investors) contains comprehensive information on the Company, including
Corporate Governance, its Code of Conduct and Social Policy. As the Company is listed on
the SWX Swiss Exchange (http://www.swx.com); ticker symbol = CIBN and
on the New York Stock Exchange (http://www.nyse.com); ticker symbol = CSB, it regularly files news
and reports with these exchanges. The reports furnished or filed by the Company with the U.S. stock
exchange supervision authority, the Securities and Exchange Commission (SEC), can be downloaded
(http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001035497&owner=include). The Companys official means of communication is the Swiss Official Gazette of Commerce
(http://www.shab.ch), while the invitation to the Companys AGM is also sent to the registered
shareholders by mail. In addition, the Company publishes the AGM meeting notice in several
newspapers in Switzerland. The site http://www.cibasc.com/agm contains all AGM relevant
information, including the AGM minutes. For publication dates of the Companys financial reports, please consult the Investor Relations
sub-page (http://www.cibasc.com/view.asp?id=192). Enquiries by telephone may also be made to: Investor Relations +41 61 636 5081 and to Group
Communications +41 61 636 4444. Share Ownership The Company applies the fair value method of accounting as defined in SFAS No. 123 Accounting for
Stock-Based Compensation as amended, for its stock-based compensation plans. Descriptions of the
terms of the Companys plans are presented in the following paragraphs. In connection with the capital reduction of CHF 3 per share in 2003 (CHF 1 per share in 2002) (see
note 16), the Company reduced the exercise price of its then outstanding stock options (the
capital reduction repricing). No compensation expense was recorded as a result of those capital
reduction repricings. For the Leveraged Executive Asset Plan, which is described below, the capital
reduction repricing in 2003 was set by the investment bank. All exercise prices disclosed herein
have been adjusted to reflect the capital reduction repricings. In connection with the capital
reduction of CHF 3 per share in 2004, the exercise price of outstanding stock options was not
changed. LEAP  As of December 31, 2004, a total of 1 042 782 share options that were granted in connection
with one-time Leveraged Executive Asset Plan (LEAP) were outstanding. The options were granted in
1997 to the Companys then key executives and non-executive Board members (participants), have an
expiration date of March 15, 2005, and permit the holder thereof to purchase shares of the
Companys common stock at a price per share of CHF 107.16. Because the Company, upon establishment
of the LEAP in 1997, paid a fee to a major investment bank to assume all of the Companys
obligations to the participants in the LEAP, the Company has no obligation to issue shares of its
common stock nor any other obligation to the participants in connection with the LEAP. As of January 28, 2005, no additional share options have been exercised or returned to the Company,
as compared to December 31, 2004. LTIP   The Company has a Long-Term Incentive Plan (LTIP), which grants options and restricted
shares of common stock of the Company to senior management, other key employees and, in 2002, to
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 occur over three years. The options expire either five years or
ten years after the date of grant. In 2002, no compensation expense was recorded for the options
issued under this plan as the options granted had an exercise price equal to the market value of
the underlying common stock on the date of grant. As a result of the adoption by the Company in
2003 of SFAS No. 123 as amended, compensation expense of approximately CHF 3 million in 2004 (CHF 5
million in 2003) was recorded comprising of both current year awards and the unvested portion of
prior year awards.




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##### Table of Contents



The following table summarizes option activity under the LTIP for the three year period ended
December 31, 2004 and from January 1, 2005 through January 28, 2005: Weighted average
    
    
    Stock optionsexercise price
    
    
    outstandingBalance at December 31, 2001
    
    
    119.63
    
    
    
    1 778 449Options granted
    
    
    108.80
    
    
    
    481 401Options exercised
    
    
    108.99
    
    
    
    (32 098
    )Options canceled/forfeited
    
    
    111.07
    
    
    
    (32 413
    )Balance at December 31, 2002
    
    
    117.53
    
    
    
    2 195 339Options granted
    
    
    82.60
    
    
    
    176 627Options exercised
    
    
    0
    
    
    
    0Options canceled/forfeited
    
    
    105.02
    
    
    
    (26 989
    )Options expired
    
    
    160.00
    
    
    
    (264 355
    )Balance at December 31, 2003
    
    
    109.34
    
    
    
    2 080 622Options granted
    
    
    95.30
    
    
    
    81 024Options exercised
    
    
    82.60
    
    
    
    (2 762
    )Options canceled/forfeited
    
    
    114.48
    
    
    
    (72 239
    )Options expired
    
    
    109.60
    
    
    
    (314 888
    )Balance at December 31, 2004
    
    
    108.32
    
    
    
    1 771 757Options granted
    
    
    0
    
    
    
    0Options exercised
    
    
    0
    
    
    
    0Options canceled/forfeited
    
    
    0
    
    
    
    0Options expired
    
    
    111.40
    
    
    
    (3 792)Balance at January 28, 2005
    
    
    108.31
    
    
    
    1 767 965
 The following table summarizes the status of stock options outstanding and exercisable at January
28, 2005: Stock options outstanding
    
    
    Stock options exercisableWeighted average
    
    
    
    
    
    
    Weighted average
    
    
    
    
    
    
    Weighted averageexercise price
    
    
    Number of
    
    
    remaining
    
    
    Number of
    
    
    remainingExercise price
    
    - outstanding/
    
    
    outstanding
    
    
    contractual life
    
    
    outstanding
    
    
    contractual liferange
    
    exercisable
    
    
    options
    
    
    (in years)
    
    
    options
    
    
    (in years)82.60-111.40
    
    
    104.76/106.09
    
    
    
    1 654 233
    
    
    
    3.6
    
    
    
    1 062 287
    
    
    
    3.2160.00
    
    
    160.00/160.00
    
    
    
    113 732
    
    
    
    2.9
    
    
    
    113 732
    
    
    
    2.91 767 965
    
    
    
    
    
    
    
    1 176 019
 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. In connection with the LTIP 2003, the Company granted 186 503 restricted shares of common stock,
which are restricted for three years from the date of grant, to 720 participants. The market value
of the common stock at date of grant was CHF 85.30 per share. Compensation expense of approximately
CHF 16 million has been recognized in 2003 related to the grant of these shares. In connection with the LTIP 2004, the Company granted 154 996 restricted shares of common stock,
which are restricted for three years from the date of grant, to 705 participants. The market value
of the common stock at date of grant was CHF 95.30 per share. Compensation expense of approximately
CHF 15 million has been recognized in 2004 related to the grant of these shares. ESOP   The Company has an Employee Stock Ownership Plan (ESOP) that enables substantially all
employees to purchase annually up to 20 shares of common stock at a price equal to 85 percent of
the average market price, 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. These shares are restricted from
resale for a period of three years from the date of purchase. During 2004, 1 590 employees (2003:
1 768 employees; 2002: 1 660 employees) purchased 28 715 shares (2003: 32 221 shares; 2002: 29 499
shares) for which approximately CHF 2 million (2003: CHF 2 million; 2002: CHF 3 million) was paid
to the Company. In 2002, no compensation expense was recorded under this plan. In 2004, CHF 0.4
million (2003: CHF 0.4 million) compensation expense was recorded in connection with the
application of SFAS No. 123. In the period from January 1, 2005 through January 28, 2005, no shares have been purchased under
the plan.




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##### Table of Contents



MAB   The Company has 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 25 shares (prior to 2003, 20 shares) of common stock at CHF 15 per share (as
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
for the three year period ended December 31, 2004 and from January 1, 2005 through January 28,
2005: Exercise price
    
    
    Rights outstandingBalance at December 31, 2001
    
    
    15
    
    
    
    302 740Rights granted
    
    
    15
    
    
    
    86 040Rights exercised
    
    
    15
    
    
    
    (18 500
    )Balance at December 31, 2002
    
    
    15
    
    
    
    370 280Rights granted
    
    
    15
    
    
    
    105 275Rights exercised
    
    
    15
    
    
    
    (20 005
    )Balance at December 31, 2003
    
    
    15
    
    
    
    455 550Rights granted
    
    
    15
    
    
    
    104 200Rights exercised
    
    
    15
    
    
    
    (22 955
    )Balance at December 31, 2004
    
    
    15
    
    
    
    536 795Rights granted
    
    
    15
    
    
    
    102 475Rights exercised
    
    
    15
    
    
    
    (2 750)Balance at January 28, 2005
    
    
    15
    
    
    
    636 520
 Compensation expense is recorded in the year the rights are granted and, in 2004, CHF 9 million
(2003: CHF 9 million; 2002: CHF 8 million) of compensation expense was recorded under this plan. PSP  The Companys Performance Share Plan (PSP) expired in 2004. The PSP in 2001 had granted
selected senior and key management and non-executive Board members the right to receive up to an
aggregate 346 800 shares of common stock of the Company if certain future conditions were met. As
these conditions were not met, no shares were issued under the PSP. In 2003, in accordance with the
adoption of
SFAS No. 123, as amended, the Company recorded CHF 1 million compensation expense for the fair
value of the rights that vested during 2003. Change in control and reserve of shares Upon a change in control of the Company (defined as 30 percent for LEAP and 33.33 percent for LTIP,
each such amount being a percentage of total voting rights), the vesting and restriction periods
for the plans stated above 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, 2004, the Company had approximately 2.0 million shares (2003: 2.2 million shares;
2002: 2.0 million shares) of treasury stock reserved for issuance under the various stock based
compensation plans. For further information see Item 18  Financial Statements and pages F-1 through F-47




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions.
Major Shareholders According to the Share Registrar of the Company and other publicly available information (Database
on Disclosure of Shareholdings maintained by SWX Swiss Exchange). As of January 28, 2005 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
    
    
    
    January 30,
    
    
    
    January 31,28, 2005
    
    
    
    2004
    
    
    
    2003Artisan Partners Limited, USA-Wisconsin
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.0
    %Chase Nominees Ltd, London*
    
    
    
    4.8
    %
    
    
    
    5.6
    %
    
    
    
    5.3
    %Mellon Bank N.A., Everett*
    
    

    


    
    
    
    2.6
    %
    
    
    
    Putnam
Group, Boston
    
    
    
    2.0
    %
    
    
    
    
    
    
    
    
    5.2
    %
  (*)
    Registered as nominees. As of January 28, 2005, according to the Share Register, there were 182 registered holders
of ordinary shares in the United States. These ordinary shareholders in the United States
collectively held 1 357 492 ordinary shares, or approximately
1.92 percent of the Companys total
issued and outstanding Shares as of that date. Also as of January 28, 2005, there were
269 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
923 122 ADRs, or approximately 0.65 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 Item 18  Financial Statements and pages F-1 through F-47. The Company has a number of joint ventures with, and other equity investments in other companies.
It has relationships with many of these entities in the ordinary course of business whereby it buys
and sells a wide variety of products and services.




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##### Table of Contents



Item 8. Financial Information.
Consolidated Financial Statements See Item 18  Financial Statements and pages F-1 through F-47 Other Financial
InformationExport Sales The Companys products and services are primarily sold outside of its home market, Switzerland. In
2004, approximately  98 percent of the Companys sales of products and services produced in Switzerland were exported to
other countries. Legal, Administrative and Arbitration Proceedings The Company operates in countries where political, economic, social, and regulatory developments
could have a significant impact on its 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 such proceedings cannot be predicted, 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. 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 by the end of 2002. See Item 4  Information on the Company  Environmental Matters. 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 factors. The Board has adopted a policy
on the proposal of dividends, which is to 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. For 2001, the shareholders approved the Boards proposal to pay a dividend of CHF 2 per share at
the Companys Annual General Meeting held on March 22, 2002. 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 proposed to carry forward the entire retained earnings of Ciba
Specialty Chemicals Holding Inc. and not to pay a dividend. The Board of Directors, however,
proposed a cash payment to its shareholders resulting from a capital reduction of CHF 3 per share.
The capital reduction found shareholder approval at the Annual General Meeting on March 6, 2003.
The capital reduction was effected by 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 made the payment of the capital reduction
on May 23, 2003. For 2003 the Board of Directors proposed to carry forward the entire retained earnings of Ciba
Specialty Chemicals Holding Inc. and not to pay a dividend. The Board of Directors, however,
proposed a cash payment to its shareholders resulting from a capital reduction of CHF 3 per share.
The capital reduction found shareholder approval at the Annual General Meeting on February 26,
2003. The capital reduction was effected by a reduction in the nominal value of each share from
CHF 6 per share by CHF 3 per share to CHF 3 per share. The Company made the payment of the capital
reduction on May 14, 2004. For 2004 the Board of Directors proposes to pay a dividend of CHF 1 per share and to make an
additional cash payment to its shareholders resulting from a capital reduction of CHF 2 per Share.
Both dividend payment and capital reduction are subject to shareholder approval at the Annual
General Meeting to be held on March 3, 2004. If approved, the capital reduction will take the form
of a reduction in the nominal value of each share from CHF 3 per Share by CHF 2 per Share to CHF 1
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 18, 2005. Dividend payment is expected to
be made on March 8, 2005. For additional information on dividends, see Item 6  Directors, Senior Management and Employees. Significant Changes Except as otherwise disclosed in this Annual Report, no significant change has occurred since the
date of the Consolidated Financial Statements included in this Annual Report.




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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 International Retail Service, the London Stock Exchanges automated quotation
system for non-U.K. equity securities. The prices for Shares as quoted in the official list of the
Swiss Exchange are expressed in Swiss francs. As of August 2, 2000, the ADRs, each representing
one-half of one ordinary share of the Companys common stock, have been listed on the New York
Stock Exchange. The information presented in the table below represents, for the periods indicated, (i) the
reported high and low closing sales prices quoted in Swiss francs for the Shares on the Swiss
Exchange and (ii) the U.S. dollar equivalent of the price per Share based on the Noon Buying Rate
on the last trading day of the periods presented. The Shares began trading on the Swiss Exchange on
March 13, 1997, at a price of CHF 116.25 per share.  Trading Prices on the Swiss Exchange
    
    Price per ShareHigh
    
    
    Low
    
    
    High
    
    
    LowAnnual highs and lows
    
    in CHF
    
    
    in USD2000
    
    
    122.50
    
    
    
    94.25
    
    
    
    75.61
    
    
    
    58.172001
    
    
    115.75
    
    
    
    75.00
    
    
    
    69.74
    
    
    
    45.192002
    
    
    128.00
    
    
    
    89.75
    
    
    
    92.53
    
    
    
    64.882003
    
    
    101.50
    
    
    
    74.75
    
    
    
    81.99
    
    
    
    60.382004
    
    
    96.14
    
    
    
    76.70
    
    
    
    81.81
    
    
    
    59.77Quarterly highs and lows2003First Quarter
    
    
    101.50
    
    
    
    74.75
    
    
    
    74.18
    
    
    
    55.21Second Quarter
    
    
    94.00
    
    
    
    79.85
    
    
    
    70.17
    
    
    
    60.66Third Quarter
    
    
    98.65
    
    
    
    80.25
    
    
    
    74.69
    
    
    
    58.42Fourth Quarter
    
    
    98.20
    
    
    
    84.50
    
    
    
    79.32
    
    
    
    65.422004First Quarter
    
    
    96.14
    
    
    
    82.24
    
    
    
    75.84
    
    
    
    64.87Second Quarter
    
    
    90.70
    
    
    
    82.05
    
    
    
    72.44
    
    
    
    65.54Third Quarter
    
    
    89.70
    
    
    
    76.70
    
    
    
    71.93
    
    
    
    61.50Fourth Quarter
    
    
    86.50
    
    
    
    78.00
    
    
    
    75.80
    
    
    
    68.35Monthly highs and lows2004July
    
    
    89.50
    
    
    
    85.55
    
    
    
    69.94
    
    
    
    66.86August
    
    
    89.65
    
    
    
    76.90
    
    
    
    70.92
    
    
    
    60.83September
    
    
    79.75
    
    
    
    76.70
    
    
    
    63.95
    
    
    
    61.50October
    
    
    82.95
    
    
    
    78.00
    
    
    
    69.19
    
    
    
    65.07November
    
    
    83.95
    
    
    
    82.25
    
    
    
    73.50
    
    
    
    72.02December
    
    
    86.50
    
    
    
    82.60
    
    
    
    75.80
    
    
    
    72.382005January (through January 28)
    
    
    86.55
    
    
    
    83.40
    
    
    
    72.88
    
    
    
    70.23




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##### Table of Contents



The information presented in the table below represents, for the periods indicated, the reported
high and low closing sales prices quoted in USD on the New York Stock Exchange. The Shares began
trading on the New York Stock Exchange on August 2, 2000 at a price of USD 29.50 per ADR.  Trading Prices on the New York Stock Exchange
    
    Price per ADR(1)High
    
    
    Lowin USDAnnual highs and lows2000 (from August 2, 2000)
    
    
    33.25
    
    
    
    26.882001
    
    
    35.44
    
    
    
    24.002002
    
    
    40.60
    
    
    
    30.832003
    
    
    38.75
    
    
    
    28.252004
    
    
    40.61
    
    
    
    30.10Quarterly highs and lows2003First Quarter
    
    
    36.60
    
    
    
    28.25Second Quarter
    
    
    35.31
    
    
    
    30.29Third Quarter
    
    
    35.57
    
    
    
    30.05Fourth Quarter
    
    
    38.75
    
    
    
    31.502004First Quarter
    
    
    40.61
    
    
    
    33.80Second Quarter
    
    
    36.35
    
    
    
    31.92Third Quarter
    
    
    36.58
    
    
    
    30.10Fourth Quarter
    
    
    38.23
    
    
    
    31.25Monthly highs and lows2004July
    
    
    36.58
    
    
    
    34.19August
    
    
    35.20
    
    
    
    30.10September
    
    
    31.41
    
    
    
    30.45October
    
    
    34.54
    
    
    
    31.25November
    
    
    36.39
    
    
    
    34.21December
    
    
    38.23
    
    
    
    35.882005January (through January 28)
    
    
    37.73
    
    
    
    35.45
   (1)
    One ADR represents one half of one share of the Company. On January 28, 2005, the
last reported sale price was for Shares on the Swiss Exchange
CHF 85.05 and for ADRs on the New York Stock Exchange USD 35.86. According to the Share Registrar
of the Company, as of December 31, 2004, there were 180 United States resident shareholders holding
1 315 011 Shares, representing approximately 1.86 percent of the issued and outstanding Shares as
of such date, and there were 269 registered United States resident holders of American Depositary
Receipts holding 923 122 ADRs, representing approximately 0.65 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 Quarter
    
    
    
    Second Quarter
    
    
    
    Third Quarter
    
    
    
    Fourth Quarter2004
    
    
    
    380 762
    
    
    
    
    342 204
    
    
    
    
    287 579
    
    
    
    
    289 8242003
    
    
    
    419 000
    
    
    
    
    316 000
    
    
    
    
    343 000
    
    
    
    
    496 000
 The information presented in the table below represents, for the periods indicated, the average
approximate daily volumes of the ADRs traded on the New York Stock Exchange: First Quarter
    
    
    
    Second Quarter
    
    
    
    Third Quarter
    
    
    
    Fourth Quarter2004
    
    
    
    4 287
    
    
    
    
    2 511
    
    
    
    
    5 353
    
    
    
    
    3 0732003
    
    
    
    5 150
    
    
    
    
    3 140
    
    
    
    
    2 930
    
    
    
    
    3 680
 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, which is supervised by the Swiss Federal
Banking Commission. Securities traded on the Swiss Exchange include
shares (374), investment funds (20), exchange traded funds (26),
bonds (1 268) and derivatives (4 527). In 2004, the
exchange turnover achieved in a total of 14.7 million
transactions amounted to CHF 766.5 billion. The Company is included in
the SMI®, the Swiss Market Index, an index that as at
December 31, 2004, comprised shares of the 27 largest most
liquid stocks in the Swiss equity market. At the same date, the
market capitalization of the SMI® issuers amounted to
CHF 697 billion. With the creation of virt-x in London in 2001, the SWX Group put in place a securities exchange
approved by the UK authorities and based on existing SWX technology. The value-added chain already
established in Switzerland was thus extended to cross border trading. The virt-x market is based on
an integrated trading, clearing and settlement model, which not only simplifies the process of
trading pan- European blue chips but also significantly reduces the
costs associated with trading cross border at every stage of the
process. The volume of trades in Swiss blue chips has been expanded
since virt-x was opened.




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##### Table of Contents



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 may result in personal liability for the directors and
officers towards the Company or its shareholders. 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 that 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 that are not reserved to the authority of the General Meeting of Shareholders, by
law or by the Articles. 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 70th 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. Shares and Transfer of Shares For information on the Shares, see also Item 6  Directors, Senior Management and Employees. The transfer of shares (for as long as they are book-entry shares) is effected 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 Euroclear Bank S.A./N.V. as operator of
the Euroclear System (Euroclear), Clearstream Banking, société anonyme (Clearstream
Luxembourg), and the Depositary, and may exercise their voting rights by giving instructions to
such nominee to vote on their behalf. However, the Company has agreed to exempt the Depositary and
the custodian and their respective nominees, if any (but no individual Holder or Beneficial Owner
of ADSs), from the 2 percent limitation in respect of Deposited Securities held in connection with
the ADR facility created by the Deposit Agreement (as defined therein) to the extent that (a) the
Depositary requires each Holder who provides voting instructions to the Depositary upon the terms
of the Deposit Agreement to certify (the Voter Certification) that (i) such Holder does not
beneficially own, directly or indirectly, more than 2 percent of the share capital of the Company
in the form of Shares or ADSs and (ii) neither such Holder nor any of its affiliates has filed, or
is under any obligation to file, a Schedule 13D or 13G under the Exchange Act in respect of the
Shares or the ADSs (if any such Holder fails to provide such Voter Certification to the Depositary,
the Depositary will disregard any voting instructions received from such Holder unless otherwise
instructed by the Company), and (b) the Deposited Securities held in the ADR facility do not exceed
the 5 percent limitation. Annual General Meetings For information on annual general meetings, see also Item 6  Directors, Senior Management and
Employees. 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 (Sonderprüfung).




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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 Shares and 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. 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 that 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. 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. Mandatory Bid Rule For information on the mandatory bid rule, see Item 6  Directors, Senior Management and
Employees. 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 each Annual General Meeting held on April 13, 2000, March 22, 2002,
and February 26, 2004, the shareholders consented to extend this authorization for another two
years. 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 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 Shares and Transfer of Shares. Disclosure of shareholders
owning more than 2 percent but less




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##### Table of Contents



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. Material Contracts
ADR Deposit Agreement Pursuant to the 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 are deposited to an
account maintained by Citibank, N.A., Zürich 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 are
treated by the Depositary and the Company as the absolute owners of such ADRs. 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 Spezialitätenchemie 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. As of December 31, 2004, approximately CHF 705 million
(USD 613 million) of indebtedness was outstanding under the program. The Company currently has no
plans to utilize this program in the future. Exchange Controls There are no legislative or other legal provisions currently in force in Switzerland or arising
under 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, as described above under Memorandum and Articles of Incorporation
(Articles). Taxation Swiss Taxation
Swiss Tax Consequences of Holding Shares or ADSs The following is a summary of the material Swiss tax consequences of the ownership of Shares or
ADSs, in particular by United States holders (as defined below; see United States Taxation). The
summary does not purport to be a comprehensive description of all of the tax considerations that
may be relevant to a decision to purchase Shares or ADSs, and prospective investors should consult
their professional advisors as to the tax consequences of their purchase, ownership and disposition
of shares and ADSs. In particular, the summary does not address the tax treatment of holders
subject to special tax rules, such as banks, insurance companies and dealers in securities,
investors liable for alternative minimum tax or investors who hold shares or ADSs as part of a
straddle or hedging or a conversion transaction, some of which may be subject to special rules.
This summary should not be read as extending by implication to matters not specifically discussed
herein. Additional rules may apply to holders of 10 percent or more in voting power or value of the
Shares and ADSs. With respect to United States holders, this discussion generally applies only to
such holders who hold Shares or ADSs as a Portfolio investment. The description of the Swiss and United States tax laws and practices set forth below is based on
the statutes, regulations, rulings, judicial decisions and other authorities as in force and as
applied in practice on the date of this Annual Report and is subject to changes to those laws and
practices, subsequent to that date, which changes could be made on a retroactive basis. It is assumed for purpose of this summary that a United States holder is entitled to the benefits
of the Swiss-American Treaty on Double Taxation (the Treaty). A United States holder would
generally be eligible for the benefits of the Treaty. However, certain exceptions apply, including
(a) United States citizens or residents that do not have a substantial presence, permanent home or
habitual abode in the United States, and (b) United States corporations that fail to satisfy the
limitations on benefits provisions of Article 22 of the Treaty because of the nature of their
activities in the United States and the nature of their shareholders. Swiss Withholding Tax on Dividends and Distributions Dividends paid and similar cash or in kind distributions made by the Company to a holder of Shares
or ADSs (including dividends on liquidation proceeds and stock dividends) are subject to a Swiss
federal withholding tax (the withholding tax) at a rate of 35 percent. The withholding tax must
be withheld by the Company from the gross distribution and be paid to the Swiss Federal Tax
Administration. The withholding tax is refundable in full to a Swiss resident who receives a
distribution if such resident is the beneficial owner of the payment and duly reports the gross
distribution received on his tax return. However, the Company might be entitled to settle its
withholding tax obligations by simply notifying the Swiss Federal Tax administration if the
distribution is paid to a Swiss resident company holding at least 20 percent of the Companys
equity. 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 an 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




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##### Table of Contents



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 82 E
for other United States citizens, and Form 829 for Swiss citizens resident in the United States,
which may be obtained from any Swiss Consulate General in the United States or from the Swiss
Federal Tax Administration at the address above. The form must be filled out in triplicate with
each copy duly completed and signed before a notary public in the United States. The form may be
filed no earlier than July 1 or January 1 following the dividend date but no later than December 31
of the third year following the calendar year that includes the dividend date. The form must be
accompanied by evidence of the deduction of withholding tax withheld at the source. Stamp Duties upon Transfer of Securities (Umsatzabgabe) The sale of Shares may be subject to a Swiss securities transfer stamp duty of 0.15 percent
calculated on the sale proceeds if it occurs through or with a Swiss bank or other Swiss securities
dealer as defined in the Swiss Federal Stamp Tax Act. Summary of Swiss Tax Consequences A non-resident holder of Swiss Shares will not be liable for any Swiss taxes other than the
withholding tax described above and the Swiss Securities transfer stamp duty if the transfer occurs
through or with a Swiss securities dealer. If, however, the Shares can be attributed to a permanent
establishment or fixed place of business maintained by such person within Switzerland, the Shares
may be subject to Swiss taxes generally. United States Taxation The following is a general summary of certain United States federal income tax consequences of the
purchase, ownership, and disposition of Shares and ADSs. 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. 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:  
    is not also resident of, or ordinarily resident in Switzerland for Swiss tax purposes;
    is not engaged in a trade or business in Switzerland through a permanent establishment; and
    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, 2004. 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. 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




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##### Table of Contents



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 28 percent for payments made after 2002, 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 documents referred to herein can be obtained from the Company at its registered
office at Klybeckstrasse 141, 4002 Basel, Switzerland.




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##### Table of Contents



Item 11. Quantitative and Qualitative Disclosures About Market Risk  Market risk due to
fluctuating foreign currency exchange rates and interest
rates
   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 2004, 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, 2004, 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 60 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 81 million as of December 31, 2004. 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, 2004, a
hypothetical one percentage point increase in interest rates for a one-year period would have
reduced net income by CHF 3 million. The assumption is that the floating rate debt would be
impacted by this hypothetical one percentage point increase but not fixed rate agreements.




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##### Table of Contents



Item 12. Description of Securities Other than Equity Securities Not applicable. 
 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 Based on managements evaluation (with the participation of the Chief Executive Officer and Chief
Financial Officer), the Chief Executive Officer and Chief Financial Officer have concluded that as
of December 31, 2004, the disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, (the Exchange Act)) are
effective to provide reasonable assurance that information required to be disclosed in this Annual
Report on Form 20-F is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. 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 16A. Audit Committee Financial Expert For information related to the Audit Committee Financial Expert see Item 6  Directors, Senior
Management and Employees. 
 Item 16B. Code of Ethics For information related to the Companys Code of Ethics see Item 6  Directors, Senior Management and
Employees. 
 Item 16C. Principal Accountant Fees and Services For information related to the Audit Committee Financial Expert see Item 6  Directors, Senior
Management and Employees. For information with regard to pre-approval procedures and fees paid to
the Company's auditors, see Item 6  Directors, Senior Management and
Employees  Auditors. 
 Item 16D. Exemptions from the Listing Standards for Audit Committees Not applicable




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##### Table of Contents



Item 16E. Purchases of Equity Securities by the Company Number of shares purchasedPurchases outside
    
    
    Purchases under
    
    
    
    
    
    
    Percentage of theshare buy-back
    
    
    share buy-back
    
    
    
    
    
    
    monthly trading
    
    
    Monthly trading
    
    
    Average price paidPeriod
    
    program
    
    
    program
    
    
    Total purchases
    
    
    volume
    
    
    volume
    
    
    (CHF)January
    
    
    25 000
    
    
    
    0
    
    
    
    25 000
    
    
    
    0.35
    
    
    
    7 149 141
    
    
    
    96.54February
    
    
    169 439
    
    
    
    1 068 000
    
    
    
    1 237 439
    
    
    
    9.90
    
    
    
    12 502 878
    
    
    
    94.37March
    
    
    298 265
    
    
    
    694 000
    
    
    
    992 265
    
    
    
    9.56
    
    
    
    10 382 276
    
    
    
    88.72April
    
    
    95 325
    
    
    
    0
    
    
    
    95 325
    
    
    
    0.90
    
    
    
    10 646 944
    
    
    
    86.70May
    
    
    294 158
    
    
    
    0
    
    
    
    294 158
    
    
    
    3.15
    
    
    
    9 335 232
    
    
    
    88.14June
    
    
    64 343
    
    
    
    0
    
    
    
    64 343
    
    
    
    0.66
    
    
    
    9 798 848
    
    
    
    86.28July
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0.00
    
    
    
    5 529 864
    
    
    
    0.00August
    
    
    381 536
    
    
    
    0
    
    
    
    381 536
    
    
    
    2.98
    
    
    
    12 795 714
    
    
    
    79.44September
    
    
    440 527
    
    
    
    0
    
    
    
    440 527
    
    
    
    5.53
    
    
    
    7 972 302
    
    
    
    77.67October
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0.00
    
    
    
    13 780 748
    
    
    
    0.00November
    
    
    49 648
    
    
    
    0
    
    
    
    49 648
    
    
    
    0.60
    
    
    
    8 211 086
    
    
    
    80.84December
    
    
    9 221
    
    
    
    0
    
    
    
    9 221
    
    
    
    0.11
    
    
    
    8 393 362
    
    
    
    81.70Average
    
    
    152 289
    
    
    
    146 833
    
    
    
    299 122
    
    
    
    
    
    
    
    9 708 200
    
    
    
    88.11Total
    
    
    1 827 462
    
    
    
    1 762 000
    
    
    
    3 589 462
    
    
    
    3.08
    
    
    
    116 498 395
 The Companys Share buy-back program over the second trading line began on August 27, 2003 and
ended on August 26, 2004. Until the end of 2003, the Company had
repurchased 1 303 500 shares. Its
Annual General Meeting approved the cancellation of these Shares. From January 1, 2004 until the
end of the Share buy-back program, the Company purchased another
1 762 000 Shares, which are
proposed to be cancelled. The shareholders will vote on this proposal at the Companys Annual
General Meeting on March 3, 2005. Under Swiss law (art. 659 para. 1 Swiss Code of Obligations), a company is allowed to purchase and
to hold a maximum of 10 percent  of its own shares, subject to certain exceptions. Before May 7, 2004,
these 10 percent corresponded to a maximum of 7 213 011 Shares the Company could have acquired; as a
consequence of the cancellation of 1 303 500, the maximum number of Shares the Company would have
been allowed to acquire after the said amounted to 7 082 662. Shares purchased but not cancelled are held as treasury stock and may be sold back to the market. 
 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-47




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##### Table of Contents



Item 19. Exhibits (a) The following consolidated financial statements, together with the auditors reports of Ernst
& Young Ltd, are filed as part of this Annual Report: Index to Consolidated Financial Statements
    
    PageReport of Independent Auditors  Ernst & Young Ltd
    
    
    F-2Consolidated Statements of Income for the Years ended December 31, 2004, 2003 and 2002
    
    
    F-3Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    F-4Consolidated Statements of Cash Flows for the Years ended December 31, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Shareholders Equity for the Years ended December 31, 2004, 2003 and 2002
    
    
    F-6Business Segment Data
    
    
    F-7Geographic Data
    
    
    F-10Notes to Consolidated Financial Statements
    
    
    F-11
 All schedules are omitted because they are not applicable or because the required information is
contained in the Consolidated Financial Statements or Notes thereto.  (b)
    Documents filed as exhibits to this registration statement: +1.1
    
    Articles of Association of Ciba Specialty Chemicals Holding Inc. dated February 26, 2004.**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, 2003, among Ciba Specialty Chemicals PLC, Ciba Specialty
Chemicals Corporation, Ciba Specialty Chemicals Eurofinance Ltd., Ciba
Spezialitätenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals Holding Inc.,
Credit Suisse First Boston (Europe) Limited 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, 2003, by each of Ciba Specialty Chemicals Corporation, Ciba
Specialty Chemicals Eurofinance Ltd., Ciba Specialty Chemicals PLC, Ciba
Spezialitätenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals Holding Inc.,
in favor of the account holders of Clearstream Banking, société anonyme and the
additional beneficiaries named therein.4.3
    
    EMTN Deed of Guarantee in respect of a USD 2 billion Euro Medium Term Note
Programme dated March 27, 2003, 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, 2003, among Ciba Specialty Chemicals PLC, Ciba Specialty
Chemicals Corporation, Ciba Specialty Chemicals Eurofinance Ltd., Ciba
Spezialitätenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals Holding Inc.,
The JP Morgan Chase Bank and J.P. Morgan Bank Luxembourg S.A.
The total amount of long-term debt securities of the Company or of its subsidiaries
authorized under any other instrument does not exceed 10 percent of the total assets
of the Company on a consolidated basis. The Company hereby agrees to furnish to the
Commission, upon its request, a copy of any instruments defining the rights of holders
of long-term debt of the Company or of its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed.**4.8
    
    Master Spin-off Agreement dated December 20, 1996, between Novartis AG and
Ciba Specialty Chemicals Holding Inc.**4.9
    
    Transaction Agreement re: Sale of the Performance Polymers division to Morgan
Grenfell Private Equity dated December 14, 1999, by and between Ciba Specialty
Chemicals Holding Inc. and Avanti N03.8.1
    
    List of Certain Subsidiaries.10.1
    
    Consent of Ernst & Young Ltd.12.1
    
    Certification Pursuant to Rule 13a-14(A)/15d-14(A)




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##### Table of Contents



12.2
    
    Certification Pursuant to Rule 13a-14(A)/15d-14(A)13.1
    
    Certification Pursuant to 18 U.S.C. Section 1350+
    
    Incorporated by reference from the Form 6-K of Ciba Specialty Chemicals
Holding Inc., filed May 14, 2004. (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
 
 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 JacobiName: Michael JacobiTitle: Chief Financial OfficerDate: February 1, 2005




---



Index to Consolidated Financial Statements
    
    PageReport
of Independent Auditors   Ernst & Young Ltd
    
    
    F-2Consolidated
Statements of Income for the Years ended December 31, 2004, 2003
and 2002
    
    
    F-3Consolidated
Balance Sheets at December 31, 2004 and 2003
    
    
    F-4Consolidated
Statements of Cash Flows for the Years ended December 31, 2004,
2003 and 2002
    
    
    F-5Consolidated
Statements of Shareholders Equity for the Years ended
December 31, 2004, 2003 and 2002
    
    
    F-6Business
Segment Data
    
    
    F-7Geographic
Data
    
    
    F-10Notes
to Consolidated Financial Statements
    
    
    F-11
  F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the
Board of Directors and Shareholders of Ciba Specialty Chemicals
Holding Inc. We have audited the accompanying consolidated balance sheets of Ciba Specialty Chemicals Holding
Inc. (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of
income, shareholders equity, and cash flows for each of the three years in the period ended
December 31, 2004, appearing on pages F-3 to F- 47 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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 consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. 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, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. As discussed in Note 1 to the consolidated financial statements, in 2003 the Company adopted
Financial Accounting Standards Board Interpretation No. 46 Consolidation of Variable Interest
Entities. The Company also changed its method of accounting for stock-based employee compensation
in 2003. Ernst & Young Ltd/s/ Cherrie Chiomento
    
    /s/ Martin MattesCherrie Chiomento
    
    Martin MattesZürich, Switzerland, January 21, 2005
 F-2




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##### Table of Contents



Consolidated Statements of Income   Year ended December 31,
    
    
    Notes
    
    
    2004
    
    
    2003
    
    
    2002Net sales
    
    
    
    
    
    
    
    
    7 027
    
    
    
    
    6 646
    
    
    
    
    7 085Cost of goods sold
    
    
    
    
    
    
    
    
    (4 856
    )
    
    
    
    (4 579
    )
    
    
    
    (4 729
    )Gross profit
    
    
    
    
    
    
    
    
    2 171
    
    
    
    
    2 067
    
    
    
    
    2 356Selling, general and administrative
    
    
    
    
    
    
    
    
    (1 227
    )
    
    
    
    (1 185
    )
    
    
    
    (1 247
    )Research and development
    
    
    
    
    
    
    
    
    (288
    )
    
    
    
    (281
    )
    
    
    
    (294
    )Amortization of other intangible assets
    
    
    
    8
    
    
    
    
    (47
    )
    
    
    
    (33
    )
    
    
    
    (33
    )Income from earnings of equity affiliates
    
    
    
    9
    
    
    
    
    1
    
    
    
    
    3
    
    
    
    
    6Restructuring and special charges
    
    
    
    23
    
    
    
    
    (91
    )
    
    
    
    0
    
    
    
    
    0Operating income
    
    
    
    
    
    
    
    
    519
    
    
    
    
    571
    
    
    
    
    788Interest expense
    
    
    
    
    
    
    
    
    (141
    )
    
    
    
    (142
    )
    
    
    
    (159
    )Interest income
    
    
    
    
    
    
    
    
    33
    
    
    
    
    34
    
    
    
    
    49Other financial expense, net
    
    
    
    
    
    
    
    
    (39
    )
    
    
    
    (24
    )
    
    
    
    (105
    )Income from continuing operations before income taxesand minority interest
    
    
    
    
    
    
    
    
    372
    
    
    
    

    439
    
    
    
    
    573Provision for income taxes
    
    
    
    14
    
    
    
    
    (85
    )
    
    
    
    (74
    )
    
    
    
    (154
    )Minority interest
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    (5
    )
    
    
    
    (13
    )Income from continuing operations(i)
    
    
    
    
    
    
    
    
    283
    
    
    
    
    360
    
    
    
    
    406Income from discontinued operations, net of tax
    
    
    
    21
    
    
    
    
    28
    
    
    
    
    0
    
    
    
    
    0Income before cumulative effect of change in accounting
principles
    
    
    
    
    
    
    
    
    311
    
    
    
    
    360
    
    
    
    
    406Cumulative effect of change in accounting principles, net of tax
    
    
    
    1
    
    
    
    
    0
    
    
    
    
    (16
    )
    
    
    
    0Net income(i)
    
    
    
    
    
    
    
    
    311
    
    
    
    
    344
    
    
    
    
    406Earnings per share, basic and diluted
    
    
    
    19Continuing operations (i)
    
    
    
    
    
    
    
    
    4.28
    
    
    
    
    5.26
    
    
    
    
    5.92Discontinued operations
    
    
    
    
    
    
    
    
    0.43
    
    
    
    
    0.00
    
    
    
    
    0.00Cumulative effect of change in accounting principles
    
    
    
    
    
    
    
    
    0.00
    
    
    
    
    (0.23
    )
    
    
    
    0.00Net income per share(i)
    
    
    
    
    
    
    
    
    4.71
    
    
    
    
    5.03
    
    
    
    
    5.92Weighted average shares outstandingBasic
    
    
    
    
    
    
    
    
    66 059 479
    
    
    
    
    68 361 123
    
    
    
    
    68 549 964Diluted
    
    
    
    
    
    
    
    
    66 059 479
    
    
    
    
    68 361 123
    
    
    
    
    68 575 058
   (i)
    Effective January 1, 2003, the Company adopted Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No. 123, as amended. Had the Company
applied the fair value method for all periods prior to 2003, the pro forma income from
continuing operations would have been in 2002 CHF 395 million; pro forma basic and diluted
earnings per share for income from continuing operations would have been in 2002 CHF 5.76;
pro forma net income would have been in 2002 CHF 395 million; pro forma basic and diluted
earnings per share for net income would have been in 2002 CHF 5.76. See note 17. See notes to consolidated financial statements 
 F-3




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##### Table of Contents



Consolidated Balance Sheets   December 31,
    
    
    Notes
    
    
    
    2004
    
    
    
    2003AssetsCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    
    
    1 614
    
    
    
    
    2 386Short-term investments
    
    
    
    
    
    
    
    
    22
    
    
    
    
    11Accounts receivable, net
    
    
    
    4
    
    
    
    
    1 064
    
    
    
    
    940Inventories
    
    
    
    5
    
    
    
    
    1 292
    
    
    
    
    1 231Prepaid and other current assets
    
    
    
    
    
    
    
    
    390
    
    
    
    
    371Total current assets
    
    
    
    
    
    
    
    
    4 382
    
    
    
    
    4 939Property, plant and equipment, net
    
    
    
    6
    
    
    
    
    3 015
    
    
    
    
    2 963Goodwill
    
    
    
    7
    
    
    
    
    1 561
    
    
    
    
    1 358Other intangible assets, net
    
    
    
    8
    
    
    
    
    823
    
    
    
    
    647Financial investments
    
    
    
    9
    
    
    
    
    180
    
    
    
    
    147Other assets
    
    
    
    10
    
    
    
    
    1 045
    
    
    
    
    1 044Total assets
    
    
    
    
    
    
    
    

11 006
    
    
    
    
    11 098Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    
    
    
    
    
    
    
    634
    
    
    
    
    528Short-term debt
    
    
    
    12
    
    
    
    
    559
    
    
    
    
    259Income taxes payable
    
    
    
    
    
    
    
    
    116
    
    
    
    
    152Accruals and other current liabilities
    
    
    
    11
    
    
    
    
    831
    
    
    
    
    841Total current liabilities
    
    
    
    
    
    
    
    
    2 140
    
    
    
    
    1 780Long-term debt
    
    
    
    13
    
    
    
    
    2 917
    
    
    
    
    3 187Deferred income taxes
    
    
    
    14
    
    
    
    
    424
    
    
    
    
    407Other liabilities
    
    
    
    15
    
    
    
    
    1 306
    
    
    
    
    1 417Total liabilities
    
    
    
    
    
    
    
    
    6 787
    
    
    
    
    6 791Minority interest
    
    
    
    
    
    
    
    
    68
    
    
    
    
    62Shareholders equity
    
    
    
    16Common stock (i)
    
    
    
    
    
    
    
    
    212
    
    
    
    
    433Additional paid-in capital
    
    
    
    
    
    
    
    
    4 127
    
    
    
    
    4 210Retained earnings
    
    
    
    
    
    
    
    
    853
    
    
    
    
    541Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    (567
    )
    
    
    
    (493
    )Treasury stock, at cost (ii)
    
    
    
    
    
    
    
    
    (474
    )
    
    
    
    (446
    )Total shareholders equity
    
    
    
    
    
    
    
    
    4 151
    
    
    
    
    4 245Total liabilities and shareholders equity
    
    
    
    
    
    
    
    

11 006
    
    
    
    
    11 098
   (i)
    Par value CHF 3 per share (December 31, 2003: CHF 6 per share), 80 826 617 shares
authorized and 70 826 617 shares issued as of December 31, 2004 (82 130 117 shares
authorized and 72 130 117 shares issued as of December 31, 2003).  (ii)
    December 31, 2004: 4 686 272 treasury shares; December 31, 2003: 4 363 901
treasury shares. See notes to consolidated financial statements F-4




---



##### Table of Contents



Consolidated Statements of Cash Flows   Year ended December 31,
    
    
    2004
    
    
    2003
    
    
    2002Cash flows from operating activitiesNet income
    
    
    
    311
    
    
    
    
    344
    
    
    
    
    406Deduct income from discontinued operations, net of tax
    
    
    
    (28
    )
    
    
    
    0
    
    
    
    
    0Income from continuing operations
    
    
    
    283
    
    
    
    
    344
    
    
    
    
    406Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:Depreciation and amortization
    
    
    
    394
    
    
    
    
    366
    
    
    
    
    385Deferred income taxes
    
    
    
    18
    
    
    
    
    24
    
    
    
    
    50Restructuring and special charges
    
    
    
    91
    
    
    
    
    0
    
    
    
    
    0Restructuring payments
    
    
    
    (11
    )
    
    
    
    0
    
    
    
    
    (12
    )Loss (gain) on sale/disposal of assets, net
    
    
    
    (2
    )
    
    
    
    (7
    )
    
    
    
    2Realized (gain) loss on available-for-sale securities
    
    
    
    0
    
    
    
    
    (12
    )
    
    
    
    38Minority interest and other non-cash items, net
    
    
    
    84
    
    
    
    
    16
    
    
    
    
    161Changes
in operating assets and liabilities:Short-term investments
    
    
    
    (8
    )
    
    
    
    5
    
    
    
    
    25Accounts receivable, net
    
    
    
    (60
    )
    
    
    
    56
    
    
    
    
    4Inventories
    
    
    
    (45
    )
    
    
    
    173
    
    
    
    
    (11
    )Accounts payable
    
    
    
    34
    
    
    
    
    (9
    )
    
    
    
    90Other operating assets and liabilities
    
    
    
    (147
    )
    
    
    
    77
    
    
    
    
    (100
    )Net cash provided by operating activities
    
    
    
    631
    
    
    
    
    1 033
    
    
    
    
    1 038Cash flows from investing activitiesCapital expenditures
    
    
    
    (294
    )
    
    
    
    (233
    )
    
    
    
    (250
    )Proceeds from sale of assets
    
    
    
    21
    
    
    
    
    67
    
    
    
    
    22Sale (acquisition) of businesses, net of cash (i)
    
    
    
    (810
    )
    
    
    
    (71
    )
    
    
    
    (116
    )Loans and other long-term assets
    
    
    
    32
    
    
    
    
    (2
    )
    
    
    
    (5
    )Net cash used in investing activities
    
    
    

(1 051
    )
    
    
    
    (239
    )
    
    
    
    (349
    )Cash flows from financing activitiesIncrease (decrease) in short-term debt, net
    
    
    
    51
    
    
    
    
    (25
    )
    
    
    
    22Proceeds from long-term debt
    
    
    
    31
    
    
    
    
    715
    
    
    
    
    1Repayments of long-term debt
    
    
    
    (27
    )
    
    
    
    (1 084
    )
    
    
    
    (19
    )Dividends paid
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    (134
    )Capital reduction paid
    
    
    
    (197
    )
    
    
    
    (206
    )
    
    
    
    (69
    )Treasury stock transactions
    
    
    
    (162
    )
    
    
    
    (142
    )
    
    
    
    344Other
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    (1
    )Net cash provided by (used in) financing activities
    
    
    
    (304
    )
    
    
    
    (742
    )
    
    
    
    144Effect of exchange rate changes on cash and cash equivalents
    
    
    
    (48
    )
    
    
    
    (27
    )
    
    
    
    (74
    )Net (decrease) increase in cash and cash equivalents
    
    
    
    (772
    )
    
    
    
    25
    
    
    
    
    759Cash and cash equivalents, beginning of year
    
    
    
    2 386
    
    
    
    
    2 361
    
    
    
    
    1 602Cash and cash equivalents, end of year
    
    
    
    1 614
    
    
    
    
    2 386
    
    
    
    
    2 361Supplemental cash flow informationCash paid for interest
    
    
    
    (144
    )
    
    
    
    (103
    )
    
    
    
    (177
    )Cash paid for income taxes
    
    
    
    (108
    )
    
    
    
    (60
    )
    
    
    
    (90
    )
   (i)
    Sale (acquisition) of businesses, net of cash, includes cash paid for acquisitions and
cash payments attributable to the divestment in 2000 of the Performance Polymers business.
See note 21. See notes to consolidated financial statements F-5




---



##### Table of Contents



Consolidated Statements of Shareholders Equity   Accumulated
    
    
    Treasury
    
    
    TreasuryAdditional
    
    
    
    
    
    
    
    other compre-
    
    
    stocks:
    
    
    stocks:Common
    
    
    paid-in
    
    
    Retained
    
    
    hensive
    
    
    Unreserved
    
    
    ReservedNotes
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    shares
    
    
    shares
    
    
    TotalBalance at December 31, 2001
    
    
    
    
    
    
    
    
    721
    
    
    
    

    3 957
    
    
    
    
    (74
    )
    
    
    
    (240
    )
    
    
    
    (65
    )
    
    
    
    (391
    )
    
    
    
    3 908Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86
    )Realization of previously unrealized loss on
available-for-sale securities, net of tax of CHF 16
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Unrealized loss on available-for-sale securities,
net of tax of CHF 2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Unrealized gain on cash flow hedges, net of tax
of CHF 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Minimum pension liability adjustment, net of tax
of CHF 37
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    
    (120
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    286Cash dividends declared and paid (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )Capital reduction paid (ii)
    
    
    
    
    
    
    
    
    (72
    )
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69
    )Treasury stock transactions
    
    
    
    16
    
    
    
    
    
    
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    150
    
    
    
    
    353Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balance at December 31, 2002
    
    
    
    
    
    
    
    
    649
    
    
    
    
    4 186
    
    
    
    
    198
    
    
    
    
    (360
    )
    
    
    
    (78
    )
    
    
    
    (241
    )
    
    
    
    4 354Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131
    )Realization of previously unrealized gain on
available-for-sale securities, net of tax of CHF 4
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Unrealized gain on available-for-sale securities,
net of tax of CHF 4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Minimum pension liability adjustment, net of tax
of CHF 1
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    
    (133
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    211Capital reduction paid (ii)
    
    
    
    
    
    
    
    
    (216
    )
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (206
    )Treasury stock transactions
    
    
    
    16
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    (138
    )
    
    
    
    (124
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balance at December 31, 2003
    
    
    
    
    
    
    
    
    433
    
    
    
    
    4 210
    
    
    
    
    541
    
    
    
    
    (493
    )
    
    
    
    (67
    )
    
    
    
    (379
    )
    
    
    
    4 245Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73
    )Other (iii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    
    (74
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    237Capital reduction paid (ii)
    
    
    
    
    
    
    
    
    (213
    )
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (197
    )Share cancellation
    
    
    
    16
    
    
    
    
    (8
    )
    
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    
    0Treasury stock transactions
    
    
    
    16
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    (143
    )
    
    
    
    (144
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balance at December 31, 2004
    
    
    
    
    
    
    
    
    212
    
    
    
    
    4 127
    
    
    
    
    853
    
    
    
    
    (567
    )
    
    
    
    (70
    )
    
    
    
    (404
    )
    
    
    
    4 151
   (i)
    Cash dividend declared and paid in 2002 was CHF 2.00 per share.  (ii)
    Capital reduction paid in 2004 and 2003 was CHF 3.00 per share (2002: CHF 1.00 per
share).  (iii)
    In 2004, other includes CHF 1 million for the movement in minimum pension liability,
net of tax. See note 16. See notes to consolidated financial statements F-6




---



##### Table of Contents



Business Segment Data(in
millions of Swiss francs except percentages)
 Plastic
    
    
    
    Coating
    
    
    
    Water & Paper
    
    
    
    Textile
    
    
    
    
    
    
    
    
    TotalAdditives
    
    
    
    Effects
    
    
    
    Treatment
    
    
    
    Effects
    
    
    
    Corporate
    
    
    
    Consolidated2004Net sales
    
    
    
    1 895
    
    
    
    
    1 818
    
    
    
    
    2 014
    
    
    
    
    1 300
    
    
    
    
    
    
    
    
    
    7 027EBITDA
    
    
    
    319
    
    
    
    
    394
    
    
    
    
    257
    
    
    
    
    117
    
    
    
    
    (174
    )
    
    
    
    913Depreciation & amortization
    
    
    
    (95
    )
    
    
    
    (103
    )
    
    
    
    (131
    )
    
    
    
    (56
    )
    
    
    
    (9
    )
    
    
    
    (394
    )Operating income
    
    
    
    224
    
    
    
    
    291
    
    
    
    
    126
    
    
    
    
    61
    
    
    
    
    (183
    )
    
    
    
    519Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141
    )
    
    
    
    (141
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    33Other financial expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    
    (39
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )
    
    
    
    (85
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    (4
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    28Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311EBITDA margin
    
    
    
    16.8
    %
    
    
    
    21.7
    %
    
    
    
    12.7
    %
    
    
    
    9.0
    %
    
    
    
    
    
    
    
    
    13.0
    %Operating income margin
    
    
    
    11.9
    %
    
    
    
    16.0
    %
    
    
    
    6.3
    %
    
    
    
    4.7
    %
    
    
    
    
    
    
    
    
    7.4
    %Research and development expenditures
    
    
    
    97
    
    
    
    
    101
    
    
    
    
    42
    
    
    
    
    29
    
    
    
    
    19
    
    
    
    
    288Capital expenditures
    
    
    
    76
    
    
    
    
    82
    
    
    
    
    81
    
    
    
    
    35
    
    
    
    
    20
    
    
    
    
    2942003Net sales
    
    
    
    1 822
    
    
    
    
    1 807
    
    
    
    
    1 616
    
    
    
    
    1 401
    
    
    
    
    
    
    
    
    
    6 646EBITDA
    
    
    
    265
    
    
    
    
    397
    
    
    
    
    233
    
    
    
    
    129
    
    
    
    
    (87
    )
    
    
    
    937Depreciation & amortization
    
    
    
    (100
    )
    
    
    
    (97
    )
    
    
    
    (103
    )
    
    
    
    (60
    )
    
    
    
    (6
    )
    
    
    
    (366
    )Operating income
    
    
    
    165
    
    
    
    
    300
    
    
    
    
    130
    
    
    
    
    69
    
    
    
    
    (93
    )
    
    
    
    571Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142
    )
    
    
    
    (142
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    
    34Other financial expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    
    (24
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    
    (74
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    (5
    )Cumulative effect of change in accounting principles, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    
    (16
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344EBITDA margin
    
    
    
    14.6
    %
    
    
    
    22.0
    %
    
    
    
    14.4
    %
    
    
    
    9.2
    %
    
    
    
    
    
    
    
    
    14.1
    %Operating income margin
    
    
    
    9.1
    %
    
    
    
    16.6
    %
    
    
    
    8.1
    %
    
    
    
    4.9
    %
    
    
    
    
    
    
    
    
    8.6
    %Research and development expenditures
    
    
    
    107
    
    
    
    
    95
    
    
    
    
    33
    
    
    
    
    32
    
    
    
    
    14
    
    
    
    
    281Capital expenditures
    
    
    
    64
    
    
    
    
    79
    
    
    
    
    55
    
    
    
    
    29
    
    
    
    
    6
    
    
    
    
    2332002Net sales
    
    
    
    1 903
    
    
    
    
    1 920
    
    
    
    
    1 718
    
    
    
    
    1 544
    
    
    
    
    
    
    
    
    
    7 085EBITDA
    
    
    
    332
    
    
    
    
    440
    
    
    
    
    282
    
    
    
    
    208
    
    
    
    
    (89
    )
    
    
    
    1 173Depreciation & amortization
    
    
    
    (106
    )
    
    
    
    (99
    )
    
    
    
    (109
    )
    
    
    
    (66
    )
    
    
    
    (5
    )
    
    
    
    (385
    )Operating income
    
    
    
    226
    
    
    
    
    341
    

    
    
    
    173
    
    
    
    
    142
    
    
    
    
    (94
    )
    
    
    
    788Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159
    )
    
    
    
    (159
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    49Other financial expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    
    (105
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    
    (154
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    (13
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406EBITDA margin
    
    
    
    17.5
    %
    
    
    
    22.9
    %
    
    
    
    16.4
    %
    
    
    
    13.5
    %
    
    
    
    
    
    
    
    
    16.6
    %Operating income margin
    
    
    
    11.9
    %
    
    
    
    17.7
    %
    
    
    
    10.1
    %
    
    
    
    9.2
    %
    
    
    
    
    
    
    
    
    11.1
    %Research and development expenditures
    
    
    
    107
    
    
    
    
    100
    
    
    
    
    33
    
    
    
    
    36
    
    
    
    
    18
    
    
    
    
    294Capital expenditures
    
    
    
    94
    
    
    
    
    74
    
    
    
    
    45
    
    
    
    
    34
    
    
    
    
    3
    
    
    
    
    250
  F-7




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##### Table of Contents



Business Segment Data(in
millions of Swiss francs)
 Net assets
    
    
    2004
    
    
    
    2003Plastic Additives
    
    
    
    1 322
    
    
    
    
    1 247Coating Effects
    
    
    
    1 853
    
    
    
    
    1 773Water & Paper Treatment
    
    
    
    3 184
    
    
    
    
    2 432Textile Effects
    
    
    
    1 162
    
    
    
    
    1 115Shared operating net assets not allocated to segments (i)
    
    
    
    37
    
    
    
    
    (79
    )Non-operating net assets (ii)
    
    
    
    1 636
    
    
    
    
    2 852Invested capital (iii)
    
    
    
    9 194
    
    
    
    
    9 340Items not included in invested capital
    
    
    
    (5 043
    )
    
    
    
    (5 095
    )Total shareholders equity (total net assets)
    
    
    
    4 151
    
    
    
    
    4 245 Components of items not included in invested capital
    
    
    2004
    
    
    
    2003Net deferred tax liabilities
    
    
    
    (193
    )
    
    
    
    (170
    )Short-term debt
    
    
    
    (559
    )
    
    
    
    (259
    )Long-term debt
    
    
    
    (2 917
    )
    
    
    
    (3 187
    )Other liabilities
    
    
    
    (1 306
    )
    
    
    
    (1 417
    )Minority interest
    
    
    
    (68
    )
    
    
    
    (62
    )Total items not included in invested capital
    
    
    
    (5 043
    )
    
    
    
    (5 095
    )
 Total assets
    
    
    2004
    
    
    
    2003Plastic Additives
    
    
    
    1 604
    
    
    
    
    1 514Coating Effects
    
    
    
    2 100
    
    
    
    
    2 020Water & Paper Treatment
    
    
    
    3 528
    
    
    
    
    2 661Textile Effects
    
    
    
    1 365
    
    
    
    
    1 304Shared operating assets not allocated to segments (i)
    
    
    
    357
    
    
    
    
    290Non-operating assets (ii)
    
    
    
    2 052
    
    
    
    
    3 309Total assets
    
    
    
    11 006
    
    
    
    
    11 098
   (i)
    Shared operating net 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.(ii)
    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.(iii)
    Invested capital equals 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-8




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##### Table of Contents



Business
Segment Data(in
millions of Swiss francs)
 During 2004, the Company reorganized from five into four reporting segments and restated
all current and prior period segment information to reflect the new segment structure. The
Companys four segments are: Plastic Additives, Coating Effects, Water & Paper Treatment and
Textile Effects. The Companys reporting 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. The same accounting
policies are consistently applied to reportable segments across the Company and all segments
generate revenue in the same manner. Reported sales reflect only sales to third parties.
Intersegment sales are not material. The Company evaluates the performance of its reportable segments based on operating income as
well as Earnings Before Interest, Taxes, Depreciation, Amortization and Minority Interest (EBITDA).
Segment operating income includes all operating items relating to the segments and excludes
restructuring and special charges and other items that principally apply to the Company as a whole.
Segment EBITDA and EBITDA margin together provide management with additional quantitative measures
of the quality of sales growth as well as the results of past and current actions taken to manage
costs. In addition, as the Company operates in a multinational environment and competes with
companies in different countries, the use of EBITDA as a performance measure provides improved
comparability of the reportable segments results with those of their competitors, some of which
employ significantly different methods of depreciation. Management is therefore of the opinion that
these financial indicators are an important measure of comparative operating performance for the
businesses of the Company. EBITDA, EBITDA margin derived therefrom and invested capital are non-United States Generally
Accepted Accounting Principles (U.S. GAAP) supplementary financial indicators. As with any
supplementary financial indicator these supplementary financial indicators should be considered in
addition to, not as a substitute for, operating income, net income, cash flow from operating
activities, total assets, operating income margin and other measures of financial performance and
liquidity reported in accordance with U.S. GAAP. The Company derives EBITDA, EBITDA margin and
invested capital from financial measures prepared in accordance with U.S. GAAP. Description of Segments The segment Plastic Additives develops, manufactures and markets products and provides
services to the plastic, rubber, adhesives lubricant, home and personal care 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, elastomers and engineering plastics as well as adhesives,
high-performance motor oils and industrial lubricants. The Segments service business provides
customers with product application solutions. The segment Coating Effects is a leading global manufacturer of organic pigments and the
leading supplier of photoinitiators and light stabilizers 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 as well as the
detergents and hygiene 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. Furthermore the Segment provides whiteners for
detergents and hygiene effects for a variety of personal care products. The segment Textile Effects serves customers throughout the textile value chain, offering
full, integrated solutions for textile processing and value adding effects. The Segments products
include dyes and chemicals for preparation, dyeing, printing, whitening and finishing of all major
textiles, as well as sizing agents for fabric weaving. The Segment also provides comprehensive
services to help customers achieve their color, comfort and performance requirements. See notes to consolidated financial statements 
 F-9




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##### Table of Contents



Geographic Data 
  Net sales to customers
    
    
    2004
    
    
    
    2003
    
    
    
    2002EuropeGermany
    
    
    
    635
    
    
    
    
    584
    
    
    
    
    567United Kingdom
    
    
    
    297
    
    
    
    
    293
    
    
    
    
    334Italy
    
    
    
    355
    
    
    
    
    340
    
    
    
    
    343France
    
    
    
    353
    
    
    
    
    304
    
    
    
    
    298Rest of European Union (i)
    
    
    
    1 140
    
    
    
    
    933
    
    
    
    
    933Switzerland
    
    
    
    80
    
    
    
    
    99
    
    
    
    
    86Rest of Europe (i)
    
    
    
    190
    
    
    
    
    178
    
    
    
    
    160Total Europe
    
    
    
    3 050
    
    
    
    
    2 731
    
    
    
    
    2 721AmericasUnited States of America
    
    
    
    1 366
    
    
    
    
    1 415
    
    
    
    
    1 703Canada
    
    
    
    212
    
    
    
    
    199
    
    
    
    
    223Central America
    
    
    
    154
    
    
    
    
    167
    
    
    
    
    209South America
    
    
    
    314
    
    
    
    
    285
    
    
    
    
    324Total Americas
    
    
    
    2 046
    
    
    
    
    2 066
    
    
    
    
    2 459Asia PacificJapan
    
    
    
    406
    
    
    
    
    381
    
    
    
    
    384Region China
    
    
    
    482
    
    
    
    
    440
    
    
    
    
    439Rest of Asia
    
    
    
    641
    
    
    
    
    627
    
    
    
    
    677Australia and New Zealand
    
    
    
    158
    
    
    
    
    159
    
    
    
    
    155Africa and Middle East
    
    
    
    244
    
    
    
    
    242
    
    
    
    
    250Total Asia Pacific
    
    
    
    1 931
    
    
    
    
    1 849
    
    
    
    
    1 905Total net sales to customers
    
    
    
    7 027
    
    
    
    
    6 646
    
    
    
    
    7 085
 Net sales to customers are based on the final destination of the sale. Long-lived assets
    
    
    2004
    
    
    
    2003EuropeGermany
    
    
    
    366
    
    
    
    
    378United Kingdom
    
    
    
    453
    
    
    
    
    519Italy
    
    
    
    171
    
    
    
    
    176France
    
    
    
    161
    
    
    
    
    134Rest of European Union (i)
    
    
    
    232
    
    
    
    
    88Switzerland
    
    
    
    593
    
    
    
    
    588Rest of Europe (i)
    
    
    
    1
    
    
    
    
    1Total Europe
    
    
    
    1 977
    
    
    
    
    1 884AmericasUnited States of America
    
    
    
    663
    
    
    
    
    743Canada
    
    
    
    3
    
    
    
    
    3Central America
    
    
    
    86
    
    
    
    
    94South America
    
    
    
    24
    
    
    
    
    18Total Americas
    
    
    
    776
    
    
    
    
    858Asia PacificJapan
    
    
    
    20
    
    
    
    
    23Region China
    
    
    
    165
    
    
    
    
    132Rest of Asia
    
    
    
    52
    
    
    
    
    40Australia and New Zealand
    
    
    
    18
    
    
    
    
    19Africa and Middle East
    
    
    
    7
    
    
    
    
    7Total Asia Pacific
    
    
    
    262
    
    
    
    
    221Total long-lived assets
    
    
    
    3 015
    
    
    
    
    2 963
 Long-lived assets represent property, plant and equipment, net and are shown by the location of
the assets.   (i)
    Rest of European Union includes all other European Union member countries as of December
31, 2004, that are not specifically listed. Amounts for 2003 and 2002 have been adjusted to
include the same member countries. See notes to consolidated financial statements 
 F-10




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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 consolidated 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 and other products. The
Companys products and services are also used to provide clean water and to treat 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 financial
interest have been consolidated. Investments in which the Company exercises significant influence
(generally 20-50 percent ownership interest), but does not control, are accounted for under the
equity 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 millions of 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. For foreign currency transactions, changes in exchange
rates that arise between transaction, reporting and settlement dates result in both realized and
unrealized exchange gains and losses. These amounts are included in net income for the period. 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. Because
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. The fair value of short-term
investments is estimated using quoted market prices. Gains and losses thereon are recorded as a
component of other financial expense, net 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 incurred losses. 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, 5 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. In such cases, if the sum of the assets expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the
excess of the assets carrying amount over its fair value. F-11




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Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) Property, plant and equipment acquired through finance lease arrangements are recorded as assets at
the lesser of the present value of the minimum future lease payments or their fair value at the
date of acquisition and depreciated over the useful life of the asset or, if the lease does not
provide for the transfer of ownership of the assets to the Company, the lease term if it is shorter
than the useful life of the asset. The corresponding obligation is recorded as a liability in the
Consolidated Balance Sheets. Goodwill and other intangible assets Goodwill Goodwill acquired in business combinations is capitalized at acquisition cost and annually
evaluated at the reporting unit level for 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. If, however, the fair value of the reporting unit is
less than the book value of its net assets, the second step is required to measure the amount of
impairment loss, if any. In the second step, the current fair value of the reporting unit is allocated 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 as of the
impairment testing date in a business combination and the fair value of the reporting unit was the
price that would have been paid to acquire the reporting unit. The excess, if any, of the total
current fair value of the reporting unit over the sum of the individual fair values assigned to its
assets and liabilities is considered to be the current 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 an impairment loss, which is recorded as a component of operating income in the
Consolidated Statements of Income. If the book value of the reporting units goodwill is less than
the implied goodwill value, goodwill is not impaired. During 2004, 2003 and 2002, the Company completed the annual impairment test of goodwill and
determined that its reported goodwill is not impaired. Other intangible assets Purchased identifiable intangible assets (other intangible assets) are capitalized at
acquisition cost. Other intangible assets with finite lives are amortized on a straight-line basis
over the estimated periods that such assets are expected to contribute to the cash flows of the
Company (5 to 37 years). Other intangible assets with indefinite lives are not amortized. The Company assesses other intangible assets with finite lives for impairment whenever events
or changes in circumstances indicate that the carrying amounts may not be recoverable. Other
intangible assets with indefinite lives are reviewed at least annually for impairment, or on an
interim basis if certain circumstances are present. For all other intangible assets that are tested
for impairment, if the sum of the assets expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the excess of the assets carrying amount
over its fair value. Financial investments Financial investments comprise primarily investments in equity affiliates that are not
controlled by the Company, but in which the Company maintains a significant equity ownership or
other interest, and investments in unconsolidated companies (less than 20 percent ownership and not
otherwise controlled by the Company). Investments in equity affiliates are accounted for using the equity method under which the
Company originally records these at cost and subsequently adjusts the carrying amount to reflect
its share of earnings less any dividends received. Investments in unconsolidated companies are designated as available-for-sale securities and,
where quoted market prices are available, are recorded at fair value. Unrealized gains and losses
on these securities, net of tax, are included as a component of shareholders equity in
accumulated other comprehensive income (loss). Where quoted market prices do not exist and where
it is not cost beneficial to estimate fair value, such investments are accounted for at cost. For
financial investments where the Company deems a loss in value to be other than temporary, such loss
is recorded in the Consolidated Statements of Income. Derivative financial instruments For derivative financial instruments designated and that qualify as fair value hedges, changes
in the fair values 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 adjustments 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 had been recorded as adjustments 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 F-12




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Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 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
instrument is immediately recognized in the income statement as a component of financial
income/expense. If the hedged item is a forecasted transaction that later is not expected to or
will not occur, then the derivative financial instrument no longer qualifies 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 other financial expense, net. Revenue recognition Revenue is recognized upon shipment of goods to customers. Provisions for discounts and
rebates to customers, product returns and other adjustments are provided for in the same period the
related sales are recorded. Income taxes The provision for income taxes has been determined using the asset and liability approach and
consists of income taxes currently paid or payable to taxing authorities in the jurisdictions in
which the Company operates 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 future tax benefit will not be realized. Provision has also been made for taxes that would be levied upon the remittance to the parent
company of currently unremitted earnings of foreign operations. However, no such provision is made
for unremitted earnings of foreign 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. Actual costs to be incurred at identified
sites in future periods may vary from the estimates given the inherent uncertainties in evaluating
environmental exposures. Earnings per share Basic earnings per share is computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is similar to basic
earnings per share except that it reflects the potential dilution that could occur if dilutive
securities, such as stock options and convertible debt, were exercised or converted into common
shares or resulted in the issuance of common shares that then shared in the earnings of the
Company. Restructuring Costs associated with exit or disposal activities that do not involve discontinued operations
are included in Restructuring and special charges in the Companys Consolidated Statements of
Income. Liabilities for costs associated with exit or disposal activities are initially recognized
and measured at fair value in the period in which the liability is incurred. Liabilities for
one-time termination benefits provided to employees that are involuntarily terminated are
recognized and measured at their fair value at the communication date unless the employees are
required to render service beyond a minimum retention period in order to receive the termination
benefits. If employees are required to render service beyond a minimum retention period,
liabilities for the termination benefits are measured initially at the communication date based on
the fair value of the liabilities as of the termination date and recognized ratably over the future
service period. Liabilities for costs to terminate contracts before the end of their term are recognized and
measured at their fair value when the contracts are terminated. Liabilities for costs that continue
to be incurred under contracts for their remaining term without economic benefit to the Company are
recognized and measured at their fair value when the Company ceases using the rights conveyed by
the contracts. Liabilities for other costs associated with exit or disposal activities are
recognized and measured at their fair value in the periods in which the liabilities are incurred. F-13




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) New accounting standards Stock based
compensation Effective January 1, 2003, the Company adopted the fair value method of accounting for stock option
plans as defined in SFAS No. 123 Accounting for Stock-Based Compensation as amended. As a
consequence, employee stock option grants and other stock based compensation plans are recorded as
expense over the vesting period of the award based on their fair values at the date the stock based
compensation is granted. In December 2002 the FASB issued 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 under SFAS No. 123 to choose from three alternative transition methods. The Company 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. In 2002 and prior years, the Company 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. Pro forma disclosure Pro forma net income and earnings per share determined as if the Company had used the fair
value method of accounting for its stock option based compensation plans for 2002 are as follows.
These pro forma amounts reflect the portion of the estimated fair value of awards granted in 2002
based on the vesting or service period over which the awards are earned. Year ended December 31,
    
    2002Net income, as reported
    
    
    406Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects
    
    
    12Deduct: Stock-based employee compensation expense determined as if
the fair value based method was used for all plans, net of related
tax effects
    
    
    (23
    )Pro forma net income
    
    
    395Earnings per share  basic and diluted:Basic and diluted  as reported
    
    
    5.92Basic and diluted  pro forma
    
    
    5.76
 Consolidation of Variable Interest Entities In 2003, the FASB issued Interpretation No. 46, as revised (FIN No. 46) Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
introduced a variable interests model to determine control and consolidation of variable interest
entities (VIE). A VIE is an entity that, by design, lacks sufficient equity or is structured such
that the decision-making ability of its equity holders is limited. FIN No. 46 generally requires
consolidation of a VIE by its primary beneficiary. A VIEs primary beneficiary is the enterprise
that, as a result of its interest in the VIE, absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected residual
returns, or both. FIN No. 46 became fully applicable for financial statement reporting periods
ending after March 15, 2004. The Company participates in a leasing arrangement with a trust that is a VIE where the Company
is the primary beneficiary. Prior to the implementation of FIN No. 46, the trust was appropriately
not consolidated consistent with then existing requirements. The leasing arrangement was entered
into in 1995 by Ciba-Geigy, a predecessor of the Company and had been accounted for as an operating
lease. The trust was created to issue debt and interest-bearing equity to fund the acquisition of
land and construction of a facility thereon that it leased to the Company. The Company has not
modified the leasing arrangement since its inception and currently utilizes the facility in its
business operations. The lease provides the Company the option to purchase the facility in 2005 for
a termination value of CHF 91 million (USD 68 million), which the trust would use to repay its
debt. Should the Company choose not to purchase the facility, it will be liable for any shortfall
between the market value of the facility and the termination value. Conversely, any excess market
value of the facility above the termination value would be retained by the Company. The Company applied the provisions of FIN 46 to the trust effective July 1, 2003 resulting in
the consolidation of the trust in the Companys consolidated financial statements and the recording
of a charge to 2003 net income of CHF 16 million (CHF 26 million pre-tax less CHF 10 million income
taxes) for the cumulative effect of the change in accounting principle. The Companys consolidated
balance sheet as of December 31, F-14




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 2004 includes fixed assets, net of accumulated depreciation,
totaling CHF 53 million that are pledged as collateral on the obligations of the trust. The Company is not involved with any other significant entities in which it has ownership or
other financial interests and that it currently does not consolidate, that are considered to be
VIEs under FIN No. 46. Therefore, except as described above, the adoption of FIN No. 46 has not had
a material effect on the Companys results of operations or financial position. Disclosures about pensions and other postretirement benefits In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits, which requires additional disclosures to those in the
original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement plans. The Company fully
adopted the revised standard in 2003 (see Note 18). Other There were no new accounting standards issued by the Financial Accounting Standards Board
(FASB) or other authoritative standard setters that became effective during 2004 and that had a
material effect on the Companys financial statements. In addition, several other new accounting
standards were issued by the FASB as of December 31, 2004 that were not required to be adopted
during 2004, but will require adoption in 2005 or later. None of these issued but not yet adopted
new accounting standards is expected to have a material effect on the Companys results of
operations or financial position when adopted in the future. Reclassifications Certain other minor reclassifications to the 2003 and 2002 financial statements and related
footnotes amounts have been made to conform to the 2004 presentation. F-15




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 2. Exchange rates of principal currencies  Statement of income
    
    
    
    Balance sheetaverage rates
    
    
    
    year-end rates2004
    
    
    
    2003
    
    
    
    2002
    
    
    
    2004
    
    
    
    20031
    
    
    U.S. dollar
    
    
    (USD)
    
    
    
    1.24
    
    
    
    
    1.35
    
    
    
    
    1.56
    
    
    
    
    1.15
    
    
    
    
    1.251
    
    
    British pound
    
    
    (GBP)
    
    
    
    2.27
    
    
    
    
    2.20
    
    
    
    
    2.34
    
    
    
    
    2.21
    
    
    
    
    2.211
    
    
    Euro
    
    
    (EUR)
    
    
    
    1.54
    
    
    
    
    1.52
    
    
    
    
    1.47
    
    
    
    
    1.54
    
    
    
    
    1.56100
    
    
    Japanese yen
    
    
    (JPY)
    
    
    
    1.15
    
    
    
    
    1.16
    
    
    
    
    1.24
    
    
    
    
    1.11
    
    
    
    
    1.17
 F-16




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 3. Acquisitions  Effective May 31, 2004, the Company completed the acquisition of Raisio Chemicals Oy, from Raisio
Group Oy, for a gross purchase price of approximately CHF 755 million comprising primarily of cash
paid of CHF 662 million (EUR 436 million) and debt assumed of CHF 62 million. Raisio Chemicals, headquartered in Raisio, Finland supplies functional paper chemicals to the
global paper and board industry. The acquisition strengthens the Segment Water and Paper
Treatments position as a top-tier supplier in the global paper industry and provides further
one-stop-shop solutions for the Segments customer base, while also establishing a solid presence
for the Company in Nordic and Russian markets. The acquisition has been accounted for under the purchase method. The other intangible assets
acquired, being principally customer relationships, patents and developed technologies, are being
amortized over a weighted average useful life of 22 years. F-17




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 4. Accounts receivable  2004
    
    
    
    2003Accounts receivable
    
    
    
    1 145
    
    
    
    
    1 025Allowance for doubtful accounts
    
    
    
    (81
    )
    
    
    
    (85
    )Total
    
    
    
    1 064
    
    
    
    
    940
 F-18




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 5. Inventories  2004
    
    
    
    2003Raw materials
    
    
    
    196
    
    
    
    
    159Work in process and finished goods
    
    
    
    1 096
    
    
    
    
    1 072Total
    
    
    
    1 292
    
    
    
    
    1 231
 Work in process and finished goods are shown after deducting allowances for obsolete,
slow-moving and lower of cost or market adjustments of CHF 46 million as of December 31, 2004 and
CHF 50 million as of December 31, 2003. F-19




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 6. Property, plant and equipment  Changes in the components of property, plant and equipment and accumulated depreciation for the
years ended December 31, 2004 and 2003 were as follows: 2004
    
    
    
    2003Machineryand
    
    
    
    ConstructionLand
    
    
    
    Buildings
    
    
    
    equipment
    
    
    
    in progress
    
    
    
    Total
    
    
    
    TotalCost at January 1,
    
    
    
    99
    
    
    
    
    1 855
    
    
    
    
    5 447
    
    
    
    
    152
    
    
    
    
    7 553
    
    
    
    
    7 700Additions
    
    
    
    0
    
    
    
    
    5
    
    
    
    
    43
    
    
    
    
    246
    
    
    
    
    294
    
    
    
    
    233Retirements/disposals
    
    
    
    (1
    )
    
    
    
    (45
    )
    
    
    
    (86
    )
    
    
    
    (2
    )
    
    
    
    (134
    )
    
    
    
    (157
    )Changes in consolidation scope(i)
    
    
    
    6
    
    
    
    
    94
    
    
    
    
    160
    
    
    
    
    4
    
    
    
    
    264
    
    
    
    
    90Currency adjustments
    
    
    
    (3
    )
    
    
    
    (50
    )
    
    
    
    (149
    )
    
    
    
    (5
    )
    
    
    
    (207
    )
    
    
    
    (213
    )Other
    
    
    
    11
    
    
    
    
    22
    
    
    
    
    75
    
    
    
    
    (200
    )
    
    
    
    (92
    )
    
    
    
    (100
    )Cost at December 31,
    
    
    
    112
    
    
    
    
    1 881
    
    
    
    
    5 490
    
    
    
    
    195
    
    
    
    
    7 678
    
    
    
    
    7 553Accumulated depreciation at January 1,
    
    
    
    
    
    
    
    
    (939
    )
    
    
    
    (3 651
    )
    
    
    
    
    
    
    
    
    (4 590
    )
    
    
    
    (4 504
    )Depreciation
    
    
    
    
    
    
    
    
    (59
    )
    
    
    
    (288
    )
    
    
    
    
    
    
    
    
    (347
    )
    
    
    
    (333
    )Accumulated depreciation on
retirements/disposals
    
    
    
    
    
    
    
    
    17
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    98Changes in consolidation scope
    
    
    
    
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    (21
    )Currency adjustments
    
    
    
    
    
    
    
    
    21
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    91Other
    
    
    
    
    
    
    
    
    14
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    61
    
    
    
    
    79Accumulated depreciation at December 31,
    
    
    
    
    
    
    
    
    (946
    )
    
    
    
    (3 717
    )
    
    
    
    
    
    
    
    
    (4 663
    )
    
    
    
    (4 590
    )Net book value at December 31,
    
    
    
    112
    
    
    
    
    935
    
    
    
    
    1 773
    
    
    
    
    195
    
    
    
    
    3 015
    
    
    
    
    2 963
  (i)
    In 2004, changes in consolidation scope result primarily from the acquisition of Raisio
Chemicals. In 2003, with the adoption of FIN No. 46, the Company began
consolidating an entity from which it has leased a facility. The insurance value of the property, plant and equipment was approximately CHF 10 452 million
at December 31, 2004 and CHF 10 485 million at December 31, 2003. F-20




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##### Table of Contents



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, 2003 to December 31, 2004
were as follows: ForeigncurrencyDecember 31,
    
    
    
    
    
    
    
    
    translation
    
    
    
    December 31,2003
    
    
    
    Acquisitions
    
    
    
    adjustments
    
    
    
    2004Plastic Additives
    
    
    
    62
    
    
    
    
    2
    
    
    
    
    (2
    )
    
    
    
    62Coating Effects
    
    
    
    189
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    189Water & Paper Treatment
    
    
    
    951
    
    
    
    
    206
    
    
    
    
    (3
    )
    
    
    
    1 154Textile Effects
    
    
    
    156
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    156Total
    
    
    
    1 358
    
    
    
    
    208
    
    
    
    
    (5
    )
    
    
    
    1 561
 Acquisitions in 2004 result mainly from the Raisio Chemicals acquisition in Segment Water &
Paper Treatment. F-21




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 8. Other intangible assets  Other intangible assets by major class consist of the following: Gross
    
    
    
    
    
    
    
    
    Netcarrying
    
    
    
    Accumulated
    
    
    
    carryingDecember 31, 2004
    
    
    amount
    
    
    
    amortization
    
    
    
    valueDeveloped technology and know-how
    
    
    
    782
    
    
    
    
    (179
    )
    
    
    
    603Patents
    
    
    
    84
    
    
    
    
    (15
    )
    
    
    
    69Trademarks and tradenames
    
    
    
    11
    
    
    
    
    (1
    )
    
    
    
    10Minimum pension liability  intangible asset
    
    
    
    8
    
    
    
    
    0
    
    
    
    
    8Other
    
    
    
    145
    
    
    
    
    (12
    )
    
    
    
    133Total
    
    
    
    1 030
    
    
    
    
    (207
    )
    
    
    
    823
 NetGross carrying
    
    
    
    Accumulated
    
    
    
    carryingDecember 31, 2003
    
    
    amount
    
    
    
    amortization
    
    
    
    valueDeveloped technology and know-how
    
    
    
    752
    
    
    
    
    (150
    )
    
    
    
    602Patents
    
    
    
    35
    
    
    
    
    (9
    )
    
    
    
    26Trademarks and tradenames
    
    
    
    4
    
    
    
    
    0
    
    
    
    
    4Minimum pension liability  intangible asset
    
    
    
    10
    
    
    
    
    0
    
    
    
    
    10Other
    
    
    
    8
    
    
    
    
    (3
    )
    
    
    
    5Total
    
    
    
    809
    
    
    
    
    (162
    )
    
    
    
    647
 The intangible asset related to the minimum pension liability is not subject to amortization.
For the remaining other intangible assets, 2004 amortization amounted to CHF 47 million (2003: CHF
33 million and 2002: CHF 33 million). Based on the other intangible assets values at December 31,
2004, the estimated future annual other intangible assets amortization expense is expected to be as
follows: 2005: CHF 55 million, 2006: CHF 53 million, 2007: CHF 51 million, 2008: CHF 49 million,
2009: CHF 47 million, 2010 and thereafter CHF 560 million. Included in 2004 are other intangible assets recognized in connection with the acquisition of
Raisio Chemicals, totaling CHF 233 million. These consist mainly of customer relationships of CHF
138 million (included in Other), patents of CHF 47 million and developed technology of CHF 30
million. These assets are being amortized over a weighted average useful life of 22 years. F-22




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 9. Financial investments and instruments  Fair value of financial investments and instruments The Company determines that, due to their short-term nature, financial assets and liabilities
such as cash and cash equivalents, accounts receivable, accounts payable and short-term debt, have
book values approximating their fair values. The book value and fair value of the Companys long-term debt is as follows: 2004
    
    
    
    2003Book
    
    
    
    Fair
    
    
    
    Book
    
    
    
    Fairvalue
    
    
    
    value
    
    
    
    value
    
    
    
    valueLong-term debt,
including current portion
    
    
    
    3 175
    
    
    
    
    2 677
    
    
    
    
    3 188
    
    
    
    
    3 202
 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 similar terms, credit ratings and remaining
maturities. 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. Quoted market prices
are not available for investments in equity affiliates. Financial investments 2004
    
    
    
    2003Investments in equity affiliates
    
    
    
    147
    
    
    
    
    137Investments in unconsolidated companies
    
    
    
    33
    
    
    
    
    10Total financial investments
    
    
    
    180
    
    
    
    
    147
 Investments in equity affiliates in 2004 include an amount of CHF 14 million resulting from
the acquisition of Raisio Chemicals and its related equity affiliates. At December 31, 2004, the cumulative unrealized loss before tax on investments in
unconsolidated companies, which is recorded in accumulated other comprehensive income, was CHF 1
million (December 31, 2003: CHF 1 million loss and December 31, 2002: no gain or loss). 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 for 2002 of CHF 38 million (CHF 23
million, net of tax). In 2003, the Company sold its investment in Hexcel Corporation for net
proceeds of CHF 21 million and realized a gain on the sale of CHF 16 million, which is included in
the Consolidated Statement of Income for 2003. The most significant of investments in equity affiliates are Compagnie Industrielle de Monthey
SA (investment interest maintained at 50 percent for 2004, 2003 and 2002), and Daihan Swiss
Chemical Corp (investment interest maintained at 50 percent for all of 2002 and 2003, and until
December 27, 2004). On December 27, 2004, Daihan Swiss Chemical Corp (Daihan Swiss) acquired the 50
percent of its shares that were not held by the Company and immediately cancelled such shares,
which resulted in the Company obtaining ownership of 100 percent of Daihan Swiss. Daihan Swiss
obtained the financing for this share repurchase with funds borrowed from the Company. The results
of Daihan Swiss will be consolidated within the Companys financial statements effective January 1,
2005. The following table presents as of December 31, 2004, 2003 and 2002, summarized financial
information on a 100 percent basis for investments in companies accounted for using the equity
method. 2004
    
    
    
    2003
    
    
    
    2002Sales
    
    
    
    149
    
    
    
    
    127
    
    
    
    
    152Income before taxes
    
    
    
    1
    
    
    
    
    4
    
    
    
    
    21Net income
    
    
    
    (1
    )
    
    
    
    2
    
    
    
    
    16Total assets
    
    
    
    178
    
    
    
    
    110
    
    
    
    
    136Shareholders equity
    
    
    
    273
    
    
    
    
    259
    
    
    
    
    280
 F-23




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) The income from earnings of equity affiliates of CHF 1 million (CHF 3 million in 2003 and
CHF 6 million in 2002) 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 1 million
(CHF 1 million in 2003 and CHF 2 million in 2002) is included in the Companys provision for income
taxes. 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 generally 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 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. 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 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 that 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 There was no hedge ineffectiveness for the Companys fair value hedges in both 2004 and in
2003. Gains resulting from hedge ineffectiveness of fair value hedges of CHF 1 million for 2002
were recorded in other financial expenses, net, in the consolidated statements of income. F-24




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 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 2004, 2003 and 2002. At December 31, 2004, the Company had open forward
contracts with maturity dates ranging from January 2005 to March 2005. At December 31, 2004, the
fair value of open natural gas forward contracts was an unrealized gain of CHF 0.7 million, before
taxes (2003: CHF 1.2 million; 2002: CHF 1.7 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 2004 and 2003, realized gains and losses recorded in cost of goods sold
and hedge ineffectiveness were not significant. Information with respect to other derivative financial instruments At December 31, 2004, the fair value of other derivative instruments not designated as
accounting hedges was CHF 15 million (2003: CHF 41 million), consisting of CHF 19 million included
in Prepaid and other current assets (2003: CHF 46 million) and CHF 4 million included in Accruals
and other current liabilities (2003: CHF 5 million). F-25




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 10. Other assets  2004
    
    
    
    2003Prepaid pension costs
    
    
    
    797
    
    
    
    
    739Deferred taxes
    
    
    
    177
    
    
    
    
    173Loans to third parties and equity affiliates
    
    
    
    19
    
    
    
    
    73Other
    
    
    
    52
    
    
    
    
    59Total
    
    
    
    1 045
    
    
    
    
    1 044
 F-26




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##### Table of Contents



Notes to Consolidated Financial Statements   11. Accruals and other current liabilities  2004
    
    
    
    2003Payroll and employee benefits
    
    
    
    178
    
    
    
    
    201Taxes other than income taxes
    
    
    
    77
    
    
    
    
    63Interest
    
    
    
    85
    
    
    
    
    87Rebates
    
    
    
    44
    
    
    
    
    52Environmental remediation and compliance
    
    
    
    32
    
    
    
    
    28Retirement and postemployment benefits
    
    
    
    35
    
    
    
    
    30Deferred income taxes
    
    
    
    70
    
    
    
    
    68Other
    
    
    
    310
    
    
    
    
    312Total
    
    
    
    831
    
    
    
    
    841
 F-27




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##### Table of Contents



Notes to Consolidated Financial Statements   12. Short-term debt  2004
    
    
    
    2003Bank overdrafts
    
    
    
    8
    
    
    
    
    23Loans
    
    
    
    139
    
    
    
    
    81Other (i)
    
    
    
    154
    
    
    
    
    154Current portion of long-term debt
    
    
    
    258
    
    
    
    
    1Total
    
    
    
    559
    
    
    
    
    259
  (i) Other includes employee and retiree deposits totaling CHF 141 million at
December 31, 2004 and CHF 146 million at December 31, 2003. The Company maintains certain commercial paper programs. The principle programs are in the
United States and provide for short-term borrowings up to USD 1 000 million. At December 31, 2004
and 2003, no amounts were outstanding under these programs in the United States. The Company maintains a multicurrency revolving loan facility expiring 2006 that provides for
borrowings in USD up to CHF 200 million equivalent as back-up support for the Companys commercial
paper program in the United States, and aggregate 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 unused portion of the facility. The loans bear interest at a 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 debt rating. As of December 31, 2004 and 2003, there
were no borrowings outstanding under this facility. The weighted average interest rate for short-term debt (excluding the current portion of
long-term debt) calculated at December 31, 2004 was 3.7 percent and at December 31, 2003 was 3.7
percent. Unused short-term credit lines totaled CHF 655 million at December 31, 2004 and CHF 601
million at December 31, 2003. F-28




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##### Table of Contents



Notes to Consolidated Financial Statements   13. Long-term debt  2004
    
    
    
    2003Bonds and Euro Medium-Term Notes
    
    
    
    3 036
    
    
    
    
    3 071Amounts owed to credit institutions
    
    
    
    95
    
    
    
    
    100Other long-term debt
    
    
    
    44
    
    
    
    
    17Total
    
    
    
    3 175
    
    
    
    
    3 188Less: current portion of long-term debt
    
    
    
    (258
    )
    
    
    
    (1
    )Total long-term debt
    
    
    
    2 917
    
    
    
    
    3 187
 Bonds and Euro Medium-Term Notes
    
    
    
    
    2004
    
    
    2003CHF
    
    
    1000
    
    
    3.25% Straight Bonds, principal due 2008
    
    
    1 052
    
    
    
    1 060EUR
    
    
    500
    
    
    4.875% Unsecured Notes, principal due 2018
    
    
    771
    
    
    
    777CHF
    
    
    300
    
    
    3.25% Straight Bonds, principal due 2009
    
    
    302
    
    
    
    303USD
    
    
    178
    
    
    U.S. pollution control and industrial development
bonds, principal due between 2008 and 2028
(weighted average interest rate of 2.88%)
    
    
    206
    
    
    
    224Total bonds
    
    
    
    
    
    
    
    
    2 331
    
    
    
    2 364EUR
    
    
    114
    (i)
    
    4.875% Euro Medium-Term Note, principal due 2005
    
    
    176
    
    
    
    178GBP
    
    
    243
    
    
    6.50% Euro Medium-Term Note, principal due 2013
    
    
    529
    
    
    
    529Total Euro Medium-Term Notes
    
    
    705
    
    
    
    707Total bonds and Euro Medium-Term Notes
    
    
    3 036
    
    
    
    3 071
  (i)
    The underlying note was denominated in German Marks (DEM 223). The annual maturities of long-term debt outstanding at December 31, 2004 are as follows:
2005 CHF 258 million; 2006 CHF 4 million; 2007 CHF 4 million; 2008 CHF 1 007 million; 2009 CHF 304 million; 2010 and thereafter CHF 1 552 million. F-29




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 14. Income taxes  Income from continuing operations before income taxes and minority interest consists of the
following: 2004
    
    
    
    2003
    
    
    
    2002Domestic
    
    
    
    194
    
    
    
    
    222
    
    
    
    
    258Foreign
    
    
    
    178
    
    
    
    
    217
    
    
    
    
    315Total income from continuing operations before income
taxes and minority interest
    
    
    
    372
    
    
    
    
    439
    
    
    
    
    573
 The provision for income taxes in 2004, 2003 and 2002 from continuing operations consists of
the following: 2004
    
    
    
    2003
    
    
    
    2002Domestic
    
    
    
    24
    
    
    
    
    47
    
    
    
    
    62Foreign
    
    
    
    42
    
    
    
    
    48
    
    
    
    
    42Total current provision
    
    
    
    66
    
    
    
    
    95
    
    
    
    
    104Domestic
    
    
    
    1
    
    
    
    
    (3
    )
    
    
    
    3Foreign
    
    
    
    17
    
    
    
    
    (19
    )
    
    
    
    45Total deferred provision
    
    
    
    18
    
    
    
    
    (22
    )
    
    
    
    48Share of taxes from earnings of equity affiliates
    
    
    
    1
    
    
    
    
    1
    
    
    
    
    2Total provision for income taxes
    
    
    
    85
    
    
    
    
    74
    
    
    
    
    154
 The Company is incorporated in Switzerland, but operates in numerous countries with differing
tax laws and rates. Consequently, substantial portions of the Companys income before income taxes
and provision for income taxes are generated outside of Switzerland. The Companys expected tax
rate consists of the weighted average rate applicable in the countries in which the Company
operates. The main factors causing the effective tax rate to differ from the expected tax rate are: In percent
    
    
    2004
    
    
    
    2003
    
    
    
    2002Expected tax rate
    
    
    
    30
    
    
    
    
    30
    
    
    
    
    30Non-deductible items
    
    
    
    6
    
    
    
    
    5
    
    
    
    
    2Tax free income
    
    
    
    (2
    )
    
    
    
    (1
    )
    
    
    
    (2
    )Income taxed at reduced rates
    
    
    
    (4
    )
    
    
    
    (8
    )
    
    
    
    (3
    )Changes in valuation allowance
    
    
    
    (1
    )
    
    
    
    1
    
    
    
    
    0Other
    
    
    
    (6
    )
    
    
    
    (10
    )
    
    
    
    0Effective tax rate
    
    
    
    23
    
    
    
    
    17
    
    
    
    
    27
 Non-deductible items include the tax effect of amortization of other intangible assets in
2004, 2003 and 2002. Income taxed at reduced rates includes the tax effect of certain subsidiaries of the Company
that operate in countries having lower tax rates. Changes in valuation allowance reflect increases in valuation allowances for deferred tax assets,
primarily loss carryforwards in certain tax jurisdictions, the future realization of which is
uncertain and decreases resulting from the release of previously established valuation allowances
when realization of the related deferred tax asset occurs or becomes likely to occur in the future. In 2004, Other includes (4) percent for the release of previously established reserves
following the settlement of certain outstanding tax matters. In addition, 2004 Other also
includes the following usual items: (4) percent for the effect of tax deductions in certain of the
Companys subsidiaries that were not recognized for financial reporting purposes, 5 percent for
taxes not based on profit such as franchise taxes and tax risk accruals and (3) percent for a
variety of other adjustments, none of which is individually significant. In 2003, Other includes (10) percent for the release of previously established reserves,
mostly the reserve released due to the settlement of a dispute between Novartis and the Company. In
addition, 2003 Other also includes the following usual items: (4) percent for the effect of tax
deductions in certain of the Companys subsidiaries that were not recognized for financial
reporting purposes, 6 percent for taxes not based on profit F-30




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) such as franchise taxes and tax risk accruals and (2) percent for a variety of other
adjustments, none of which is individually significant. 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. The significant components of activities that gave rise to deferred tax assets and liabilities
on the balance sheet at December 31, 2004 and 2003, were as follows: Deferred tax assets
    
    
    2004
    
    
    
    2003Pensions and other employee compensation
    
    
    
    107
    
    
    
    
    120Inventory
    
    
    
    34
    
    
    
    
    21Restructuring and special charges
    
    
    
    10
    
    
    
    
    10Environmental reserves
    
    
    
    148
    
    
    
    
    164Tax loss carryforwards
    
    
    
    130
    
    
    
    
    152Other
    
    
    
    155
    
    
    
    
    74Gross deferred tax assets
    
    
    
    584
    
    
    
    
    541Valuation allowance
    
    
    
    (110
    )
    
    
    
    (121
    )Net deferred tax assets
    
    
    
    474
    
    
    
    
    420Deferred tax liabilitiesProperty, plant and equipment
    
    
    
    (361
    )
    
    
    
    (391
    )Other
    
    
    
    (306
    )
    
    
    
    (199
    )Gross deferred tax liabilities
    
    
    
    (667
    )
    
    
    
    (590
    )Net deferred tax liabilities
    
    
    
    (193
    )
    
    
    
    (170
    )Included inPrepaid and other current assets
    
    
    
    124
    
    
    
    
    132Other assets
    
    
    
    177
    
    
    
    
    173Accruals and other current liabilities
    
    
    
    (70
    )
    
    
    
    (68
    )Deferred income taxes
    
    
    
    (424
    )
    
    
    
    (407
    )Net deferred tax liabilities
    
    
    
    (193
    )
    
    
    
    (170
    )
 In managements opinion, the majority of deferred tax assets will be realized because of the
depletion of certain significant tax deductions and anticipated future taxable income resulting
from the Companys operations. Valuation allowances have been established for certain tax loss
carryforwards and certain long-term deferred tax assets of the Company. For tax return purposes, the Company has available tax loss carryforwards of approximately CHF
366 million, of which CHF 16 million will expire in the next five years and CHF 270 million will
expire between five and twenty years. The remaining carryforwards do not expire. At December 31, 2004, unremitted earnings of subsidiaries outside of Switzerland of
approximately CHF 450 million were deemed to be permanently invested. Therefore, no deferred tax
liability has been recognized for taxes that might be incurred if such earnings were remitted to
Switzerland. F-31




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 15. Other liabilities  2004
    
    
    
    2003Environmental remediation and compliance
    
    
    
    477
    
    
    
    
    529Retirement and postemployment benefits
    
    
    
    665
    
    
    
    
    693Other
    
    
    
    164
    
    
    
    
    195Total
    
    
    
    1 306
    
    
    
    
    1 417
 The environmental remediation and compliance accrual, including the current portion, decreased
in 2004 by a net CHF 48 million (2003: CHF 57 million) as a result of a CHF 43 million (2003: CHF
22 million) usage of the accrual (see note 21) and a CHF 18 million (2003: CHF 35 million)
reduction related mainly to currency effects, offset in 2004 by additional reserves established in
connection with the acquisition of Raisio Chemicals. F-32




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 16. Shareholders equity  The Companys shareholders have approved the creation of authorized and conditional capital of
the Company. The approval allows for the issuance of an additional 10 million registered shares
with a par value of CHF 3 per share (2003: CHF 6 per share; 2002: CHF 9 per share). Of these 10
million shares, 6 million may be issued only through the exercise of option or conversion rights
and the remaining 4 million may be issued until February 2006, but would be subject to certain
transfer restrictions. At the Companys Annual General Meeting on February 26, 2004, the shareholders voted in favor
of a proposal made by the Board of Directors not to pay a dividend in 2004 (2003: no dividend
payment; 2002: CHF 134 million paid on March 27, 2002). The shareholders approved an extraordinary
payment to the shareholders in the form of a capital reduction of CHF 3 per share. The capital
reduction was in the form of a reduction in the nominal value of each common share from CHF 6 per
share to CHF 3 per share. The capital reduction payment was made on May 14, 2004, totaling CHF 197
million (2003: CHF 206 million paid on May 23, 2003; 2002: CHF 69 million paid on June 28, 2002). The shareholders also approved the cancellation of 1 303 500 shares of treasury stock
purchased in 2003 under the Companys share buyback program. These treasury shares were cancelled
on May 7, 2004. According to the Swiss Code of Obligations, the Company may under certain conditions, as defined,
acquire up to 10 percent of its own shares. The Company sold 1 963 591 shares in 2004 (1 202 797
shares in 2003 and 4 970 437 shares in 2002) of previously acquired treasury stock at market
prices. In addition, in 2004, the Company purchased 3 589 462 shares of treasury stock (2003: 2 374
611 shares of treasury stock and 2 174 577 in 2002) at market prices. At December 31, 2004, the
Company held 4 686 272 treasury shares (2003: 4 363 901 treasury shares). The Company designated a total of 3 751 972 shares in 2004 (3 496 234 shares in 2003) of its
treasury stock as reserved shares primarily for satisfaction of future share requirements under its
various outstanding employee stock option plans and also for possible future cancellation under the
Companys share repurchase program. The remaining 934 300 shares in 2004 (867 667 shares in 2003)
of treasury stock have been designated as unreserved shares. The after-tax components of accumulated other comprehensive loss are as follows: 2004
    
    
    
    2003Currency translation adjustment
    
    
    
    (489
    )
    
    
    
    (416
    )Minimum pension liability, net of tax
    
    
    
    (78
    )
    
    
    
    (79
    )Other, net of tax
    
    
    
    0
    
    
    
    
    2Accumulated other comprehensive loss
    
    
    
    (567
    )
    
    
    
    (493
    )
 There was no deferred tax effect on the unrealized gains/(losses) on available-for-sale
securities in either 2004 or in 2003. There was no deferred tax effect on cash flow hedges in
either 2004 or in 2003 (in 2002: a tax expense of CHF 1 million). The deferred tax effect on the
minimum pension liability adjustment is a deferred tax benefit of CHF 49 million in 2004 (2003: CHF
50 million; 2002: CHF 49 million). The currency translation adjustment is not adjusted for income
taxes as it relates primarily to indefinite investments in non-Swiss subsidiaries. F-33




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 17. Stock based compensation plans  The Company applies the fair value method of accounting as defined in SFAS No. 123 Accounting
for Stock-Based Compensation as amended, for its stock-based compensation plans. Descriptions of
the terms of the Companys plans are presented in the following paragraphs. In connection with the capital reduction of CHF 3 per share in 2003 (CHF 1 per share in 2002) (see
note 16), the Company reduced the exercise price of its then outstanding stock options (the
capital reduction repricing). No compensation expense was recorded as a result of those capital
reduction repricings. For the Leveraged Executive Asset Plan, which is described below, the capital
reduction repricing in 2003 was set by the investment bank . All exercise prices disclosed herein
have been adjusted to reflect the capital reduction repricings. In connection with the capital
reduction of CHF 3 per share in 2004, the exercise price of outstanding stock options was not
changed. LEAP  As of December 31, 2004, a total of 1 042 782 share options that were granted in connection
with one-time Leveraged Executive Asset Plan (LEAP) were outstanding. The options were granted in
1997 to the Companys then key executives and non-executive Board members (participants), have an
expiration date of March 15, 2005, and permit the holder thereof to purchase shares of the
Companys common stock at a price per share of CHF 107.16. Because the Company, upon establishment
of the LEAP in 1997, paid a fee to a major investment bank to assume all of the Companys
obligations to the participants in the LEAP, the Company has no obligation to issue shares of its
common stock nor any other obligation to the participants in connection with the LEAP. LTIP The Company has a Long-Term Incentive Plan (LTIP), which grants options and restricted
shares of common stock of the Company to senior management, other key employees and, in 2002, to
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 occur over three years. The options expire either five years or
ten years after the date of grant. In 2002, no compensation expense was recorded for the options
issued under this plan as the options granted had an exercise price equal to the market value of
the underlying common stock on the date of grant. As a result of the adoption by the Company in
2003 of SFAS No. 123 as amended, compensation expense of approximately CHF 3 million in 2004 (CHF 5
million in 2003) was recorded comprising of both current year awards and the unvested portion of
prior year awards. The following table summarizes option activity under the LTIP during 2004, 2003 and 2002: Weighted average
    
    
    Stock optionsexercise price
    
    
    outstandingBalance at December 31, 2001
    
    
    119.63
    
    
    
    1 778 449Options granted
    
    
    108.80
    
    
    
    481 401Options exercised
    
    
    108.99
    
    
    
    (32 098
    )Options canceled/forfeited
    
    
    111.07
    
    
    
    (32 413
    )Balance at December 31, 2002
    
    
    117.53
    
    
    
    2 195 339Options granted
    
    
    82.60
    
    
    
    176 627Options exercised
    
    
    0
    
    
    
    0Options canceled/forfeited
    
    
    105.02
    
    
    
    (26 989
    )Options expired
    
    
    160.00
    
    
    
    (264 355
    )Balance at December 31, 2003
    
    
    109.34
    
    
    
    2 080 622Options granted
    
    
    95.30
    
    
    
    81 024Options exercised
    
    
    82.60
    
    
    
    (2 762
    )Options canceled/forfeited
    
    
    114.48
    
    
    
    (72 239
    )Options expired
    
    
    109.60
    
    
    
    (314 888
    )Balance at December 31, 2004
    
    
    108.32
    
    
    
    1 771 757
 The following table summarizes the status of stock options outstanding and exercisable
at December 31, 2004: Stock options outstanding
    
    
    Stock options exercisableWeighted average
    
    
    
    
    
    
    Weighted average
    
    
    
    
    
    
    Weighted averageexercise price
    
    
    Number of
    
    
    remaining
    
    
    Number of
    
    
    remaining- outstanding/
    
    
    outstanding
    
    
    contractual life
    
    
    outstanding
    
    
    contractual lifeExercise price range
    
    exercisable
    
    
    options
    
    
    (in years)
    
    
    options
    
    
    (in years)82.60  111.88
    
    
    104.77/106.11
    
    
    
    1 658 025
    
    
    
    3.6
    
    
    
    1 066 079
    
    
    
    3.2160.00
    
    
    160.00/160.00
    
    
    
    113 732
    
    
    
    3.0
    
    
    
    113 732
    
    
    
    3.01 771 757
    
    
    
    
    
    
    
    1 179 811
 F-34




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 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. In connection with the LTIP 2003, the Company granted 186 503 restricted shares of common
stock, which are restricted for three years from the date of grant, to 720 participants. The market
value of the common stock at date of grant was CHF 85.30 per share. Compensation expense of
approximately CHF 16 million has been recognized in 2003 related to the grant of these shares. In connection with the LTIP 2004, the Company granted 154 996 restricted shares of common stock,
which are restricted for three years from the date of grant, to 705 participants. The market value
of the common stock at date of grant was CHF 95.30 per share. Compensation expense of approximately
CHF 15 million has been recognized in 2004 related to the grant of these shares. ESOP
 The Company has an Employee Stock Ownership Plan (ESOP) that enables substantially all
employees to purchase annually up to 20 shares of common stock at a price equal to 85 percent of
the average market price, 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. These shares are restricted from
resale for a period of three years from the date of purchase. During 2004, 1 590 employees (2003:
1 768 employees; 2002: 1 660 employees) purchased 28 715 shares (2003: 32 221 shares; 2002: 29 499
shares) for which approximately CHF 2 million (2003: CHF 2 million; 2002: CHF 3 million) was paid
to the Company. In 2002, no compensation expense was recorded under this plan. MAB
 The Company has 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 25 shares (prior to 2003, 20 shares) of common stock at CHF 15 per share (as
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 2004, 2003 and 2002: Exercise
    
    
    Rightsprice
    
    
    outstandingBalance at December 31, 2001
    
    
    15
    
    
    
    302 740Rights granted
    
    
    15
    
    
    
    86 040Rights exercised
    
    
    15
    
    
    
    (18 500
    )Balance at December 31, 2002
    
    
    15
    
    
    
    370 280Rights granted
    
    
    15
    
    
    
    105 275Rights exercised
    
    
    15
    
    
    
    (20 005
    )Balance at December 31, 2003
    
    
    15
    
    
    
    455 550Rights granted
    
    
    15
    
    
    
    104 200Rights exercised
    
    
    15
    
    
    
    (22 955
    )Balance at December 31, 2004
    
    
    15
    
    
    
    536 795
 Compensation expense is recorded in the year the rights are granted and, in 2004, CHF 9
million (2003: CHF 9 million; 2002: CHF 8 million) of compensation expense was recorded under this
plan. PSP  The Companys Performance Share Plan (PSP) expired in 2004. The PSP in 2001 had granted
selected senior and key management and non-executive Board members the right to receive up to an
aggregate 346 800 shares of common stock of the Company if certain future conditions were met. As
these conditions were not met, no shares were issued under the PSP. In 2003, in accordance with the
adoption of SFAS No. 123, as amended, the Company recorded CHF 1 million compensation expense for
the fair value of the rights that vested during 2003. Change in control and reserve of shares Upon a change in control of the Company (defined as 30 percent for LEAP and 33.33 percent for
LTIP, each such amount being a percentage of total voting rights), the vesting and restriction
periods for the plans stated above 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, 2004, the Company had approximately 2.0 million shares (2003: 2.2 million
shares; 2002: 2.0 million shares) of treasury stock reserved for issuance under the various stock
based compensation plans. 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 are as follows: F-35




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Expected option lives in years
    
    
    10.00
    
    
    
    10.00
    
    
    
    6.07Expected volatility in percentage
    
    
    25.00
    
    
    
    25.00
    
    
    
    23.00Risk-free interest rate in percentage
    
    
    2.62
    
    
    
    2.28
    
    
    
    3.23Expected dividend yield in percentage
    
    
    2.87
    
    
    
    2.79
    
    
    
    1.81Weighted average fair value in CHF
    
    
    21.85
    
    
    
    19.60
    
    
    
    24.05
 F-36




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 18. Retirement benefits  The Company sponsors pension and other postretirement 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 contribution and defined benefit pension plans. Defined contribution pension plans In countries in which employees are covered by defined contribution plans, employer
contributions charged to income from continuing operations were CHF 11 million in 2004, CHF 14
million in 2003 and CHF 16 million in 2002. Defined benefit pension plans Benefits to participants in the Companys defined benefit pension plans are generally based on
employees years of service, levels of compensation or stated amounts for each year of service. The majority of the defined benefit pension plans are funded, whereby contributions made by
the Company and plan participants are invested, and the resulting assets necessary to fund future
benefit obligations are held by independent trustees for the benefit of plan participants.
Accordingly, the assets acquired and maintained by these plans are not included in the Companys
consolidated balance sheets. These plans are referred to as funded plans in this note. In certain countries in which the Company operates, principally Germany, local practice is
that pension plans are not funded. In accordance with this practice, the Company does not fund
these plans. The Company charges income from continuing operations for benefits earned in each
period with a corresponding increase in pension liability. Benefit payments made each period to
retirees are charged against this liability. These plans are referred to as unfunded plans in this
note. Each year, the projected benefit obligation (PBO), which is the present value of projected
future benefits payable to current plan participants allowing for estimated future employee
compensation increases, is calculated for each plan. The measurement date for the Companys pension
plans that make up the majority of plan assets and benefit obligations is December 31st
for each year presented. The following table provides a reconciliation from beginning of year to end of year of the
changes in PBO and the changes in the fair value of plan assets, as well as the PBO funded status
of the plans. The PBO funded status consists of the excess (deficit) of the fair value of plan
assets over (under) PBO. 2004
    
    
    2003Funded
    
    
    Unfunded
    
    
    All
    
    
    Funded
    
    
    Unfunded
    
    
    Allplans
    
    
    plans
    
    
    plans
    
    
    plans
    
    
    plans
    
    
    plansChange in benefit obligation (PBO)PBO, beginning of year
    
    
    3 110
    
    
    
    525
    
    
    
    3 635
    
    
    
    2 984
    
    
    
    473
    
    
    
    3 457Service cost
    
    
    79
    
    
    
    9
    
    
    
    88
    
    
    
    76
    
    
    
    8
    
    
    
    84Interest cost
    
    
    149
    
    
    
    27
    
    
    
    176
    
    
    
    143
    
    
    
    28
    
    
    
    171Participant contributions
    
    
    24
    
    
    
    
    
    
    
    24
    
    
    
    22
    
    
    
    
    
    
    
    22Actuarial (gain) loss
    
    
    191
    
    
    
    (8
    )
    
    
    183
    
    
    
    62
    
    
    
    11
    
    
    
    73Plan amendments
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Benefits paid
    
    
    (133
    )
    
    
    (26
    )
    
    
    (159
    )
    
    
    (149
    )
    
    
    (25
    )
    
    
    (174
    )Foreign currency translation
    
    
    (41
    )
    
    
    (4
    )
    
    
    (45
    )
    
    
    (76
    )
    
    
    29
    
    
    
    (47
    )Other
    
    
    46
    
    
    
    (1
    )
    
    
    45
    
    
    
    49
    
    
    
    1
    
    
    
    50PBO, end of year
    
    
    3 419
    
    
    
    522
    
    
    
    3 941
    
    
    
    3 110
    
    
    
    525
    
    
    
    3 635Change in plan assetsFair value of plan assets,
beginning of year
    
    
    2 936
    
    
    
    
    
    
    
    2 936
    
    
    
    2 789
    
    
    
    
    
    
    
    2 789Actual return on plan assets
    
    
    219
    
    
    
    
    
    
    
    219
    
    
    
    240
    
    
    
    
    
    
    
    240Employer contributions
    
    
    99
    
    
    
    26
    
    
    
    125
    
    
    
    46
    
    
    
    25
    
    
    
    71Participant contributions
    
    
    24
    
    
    
    
    
    
    
    24
    
    
    
    22
    
    
    
    
    
    
    
    22Benefits paid
    
    
    (133
    )
    
    
    (26
    )
    
    
    (159
    )
    
    
    (149
    )
    
    
    (25
    )
    
    
    (174
    )Foreign currency translation
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )Other
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )
    
    
    46
    
    
    
    
    
    
    
    46Fair value of plan assets, end of year
    
    
    3 109
    
    
    
    
    
    
    
    3 109
    
    
    
    2 936
    
    
    
    
    
    
    
    2 936PBO funded status
    
    
    (310
    )
    
    
    (522
    )
    
    
    (832
    )
    
    
    (174
    )
    
    
    (525
    )
    
    
    (699
    )
 For both years presented, substantially all of the Companys funded pension plans had PBO in
excess of plan assets. F-37




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) Accumulated benefit obligation (ABO) status of defined benefit pension plans Accumulated benefit obligation (ABO) is less than PBO because ABO excludes assumptions as to
future increases in employee compensation when calculating the present value of the future benefit
obligation. ABO status of funded
pension plans The table below shows the ABO status at December 31, 2004 and 2003 of the Companys funded
pension plans separated between those having plan assets that are greater than or equal to ABO
(fully-funded) and those having plan assets that are less than ABO (under-funded): 2004
    
    
    2003Fully-
    
    
    Under-
    
    
    Total funded
    
    
    Fully-
    
    
    Under-
    
    
    Total fundedFunded plans
    
    funded
    
    
    funded
    
    
    plans
    
    
    funded
    
    
    funded
    
    
    plansAccumulated benefit
obligation (ABO)
    
    
    2 580
    
    
    
    458
    
    
    
    3 038
    
    
    
    2 392
    
    
    
    428
    
    
    
    2 820Fair value of plan assets
    
    
    2 743
    
    
    
    366
    
    
    
    3 109
    
    
    
    2 628
    
    
    
    308
    
    
    
    2 936ABO status  fully (under) funded
    
    
    163
    
    
    
    (92
    )
    
    
    71
    
    
    
    236
    
    
    
    (120
    )
    
    
    116
 Minimum pension liability For funded plans with ABO in excess of the fair value of plan assets, SFAS No. 87 requires
that the Company record on its consolidated balance sheets a minimum pension liability amount such
that the Companys net pension liability is at least equal to the amount of the under-funded ABO.
Net pension liability is the excess of pension liabilities over prepaid pension assets on the
Companys balance sheet. When recording a minimum pension liability, SFAS No. 87 requires the Company to record a
corresponding intangible asset equal to the amount of any unrecognized prior service cost, with the
remainder, if any, charged to other comprehensive income in shareholders equity. The recording of
this additional minimum pension liability has no impact on the Companys income from operations. The following table shows the components of the additional minimum pension liability as of December
31, 2004 and 2003 for those plans where such a liability was required to be recorded, mainly in the
United States; together with a reconciliation to the ABO status of all of the Companys
under-funded pensions plans: 2004
    
    
    2003Unrecognized prior service cost recorded as
intangible asset
    
    
    8
    
    
    
    10Recorded as other comprehensive income
    
    
    127
    
    
    
    129Currency adjustments
    
    
    (30
    )
    
    
    (22
    )Additional minimum pension liability
    
    
    (105
    )
    
    
    (117
    )Prepaid pension asset already recorded
    
    
    19
    
    
    
    7ABO status, plans where additional minimum
liability required
    
    
    (86
    )
    
    
    (110
    )Other under-funded plans, no additional
minimum liability required
    
    
    (6
    )
    
    
    (10
    )ABO status  All under-funded plans
    
    
    (92
    )
    
    
    (120
    )
 ABO status of unfunded pension plans For the Companys unfunded plans, the accrued pension liability exceeds the amount of existing
unfunded ABO, therefore no additional minimum pension liability is required. The table below shows
the ABO and related liabilities recorded at December 31, 2004 and 2003 for the Companys unfunded
defined benefit pension plans: 2004
    
    
    2003Unfunded
plansAccumulated benefit obligation
    
    
    489
    
    
    
    490Accrued pension liability
    
    
    505
    
    
    
    500Liability recognized in excess of ABO
    
    
    16
    
    
    
    10
 Defined benefit pension related assets and liabilities For each of its defined benefit pension plans, the Company records a pension-related
asset (liability) initially based upon the excess (deficit) of the fair value of plan assets over
(under) PBO. However, as required under SFAS No. 87, differences that result from using expected
rather than actual rates of return on plan assets, F-38




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) as well as differences that result from the evolution assumed to occur from period to period in the calculation of PBO versus actual evolution,
represent gains (losses) that are not given immediate recognition in the Companys consolidated
statements of income or consolidated balance sheets. Instead, this accumulated unrecognized gain
(loss) amount is amortized if it meets certain criteria; that is, where the unrecognized net gain
or loss exceeds 10 percent of the greater of the fair value of plan assets or PBO, the excess is
required to be amortized to future income over the average remaining service life of active
employee participants. In addition, where the Company amends pension plans resulting in changes to future benefits
based on participants prior service, any change in PBO resulting there from is not required to be
immediately charged to income from continuing operations. Rather, such increases in pension
obligations are amortized over the average remaining service life of active employees. Accordingly, the following table shows the components of the Companys net pension asset
(liability) and the reconciliation of these amounts to the PBO as of December 31, 2004 and 2003: 2004
    
    
    2003Funded
    
    
    Unfunded
    
    
    
    
    
    
    Funded
    
    
    Unfundedplans
    
    
    plans
    
    
    All plans
    
    
    plans
    
    
    Plans
    
    
    All plansPrepaid benefit cost(1)
    
    
    799
    
    
    
    
    
    
    
    799
    
    
    
    740
    
    
    
    
    
    
    
    740Accrued benefit liability(1)
    
    
    (108
    )
    
    
    (505
    )
    
    
    (613
    )
    
    
    (132
    )
    
    
    (500
    )
    
    
    (632
    )Minimum pension liability  intangible
asset
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    10
    
    
    
    
    
    
    
    10Accumulated other comprehensive
income, pre tax
    
    
    127
    
    
    
    
    
    
    
    127
    
    
    
    129
    
    
    
    
    
    
    
    129Currency adjustments(2)
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )
    
    
    (22
    )
    
    
    
    
    
    
    (22
    )Net pension asset (liability) on
consolidated balance sheets
    
    
    796
    
    
    
    (505
    )
    
    
    291
    
    
    
    725
    
    
    
    (500
    )
    
    
    225Unrecognized net gain (loss)
    
    
    (1 097
    )
    
    
    (19
    )
    
    
    (1 116
    )
    
    
    (882
    )
    
    
    (27
    )
    
    
    (909
    )Unrecognized prior service cost
    
    
    (9
    )
    
    
    2
    
    
    
    (7
    )
    
    
    (17
    )
    
    
    2
    
    
    
    (15
    )PBO funded status
    
    
    (310
    )
    
    
    (522
    )
    
    
    (832
    )
    
    
    (174
    )
    
    
    (525
    )
    
    
    (699
    )
 
 Net defined benefit plan pension expense The components of net pension expense for the Companys defined benefit pension plans during
the years ended December 31, 2004, 2003 and 2002 were: Funded plans
    
    
    Unfunded plans
    
    
    All plans2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Service cost
    
    
    79
    
    
    
    76
    
    
    
    88
    
    
    
    9
    
    
    
    8
    
    
    
    7
    
    
    
    88
    
    
    
    84
    
    
    
    95Interest cost
    
    
    149
    
    
    
    143
    
    
    
    155
    
    
    
    27
    
    
    
    28
    
    
    
    27
    
    
    
    176
    
    
    
    171
    
    
    
    182Expected return
on plan assets
    
    
    (208
    )
    
    
    (211
    )
    
    
    (230
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (208
    )
    
    
    (211
    )
    
    
    (230
    )Amortization of
prior service
cost
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    1Other (gains),
losses and
amortization,
net
    
    
    2
    
    
    
    (8
    )
    
    
    (26
    )
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    (7
    )
    
    
    (25
    )Total net pension
expense (income)
    
    
    24
    
    
    
    2
    
    
    
    (12
    )
    
    
    36
    
    
    
    37
    
    
    
    35
    
    
    
    60
    
    
    
    39
    
    
    
    23
 Key assumptions The weighted average key actuarial assumptions used to determine the Companys pension benefit
obligations were as follows: 2004
    
    
    2003Discount (interest) rate
    
    
    4.6
    %
    
    
    4.9
    %Rate of increase in compensation levels
    
    
    2.3
    %
    
    
    2.3
    %
 The weighted average key actuarial assumptions used to determine the Companys net
periodic benefit cost were as follows: 2004
    
    
    2003
    
    
    2002Discount (interest) rate
    
    
    4.9
    %
    
    
    5.1
    %
    
    
    5.3
    %Rate of increase in compensation levels
    
    
    2.3
    %
    
    
    2.4
    %
    
    
    2.9
    %Expected long-term rate of return on
plan assets
    
    
    6.2
    %
    
    
    6.2
    %
    
    
    6.5
    %
 F-39




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) The determination of the overall expected long-term rate of return on plan assets for the
Companys funded plans is based on the following parameters: long-term expected inflation rates,
long-term inflation-adjusted interest rates, and long-term risk premium of equity investments above
risk free rates of return. In addition, long-term historical rates of return adjusted, where
appropriate, to reflect more recent developments, are used. Funded defined benefit pension plan assets The investment policies and strategies for plan assets held by funded defined benefit pension
plans are directed toward the overriding target of achieving, on a long-term basis, the necessary
return on plan assets to meet benefit obligations as they become payable. Factors included in the
investment strategy for plan assets include achievement of consistent year-over-year results,
effective risk management based on the level of each plans funding status, and effective plan cash
flow management. Further, the investment policies generally exclude direct investments in the
Companys equity or debt securities. For the Companys funded defined benefit pension plans, the weighted average actual plan asset
allocation percentages as of December 31, 2004 and 2003, and the range of weighted average target
plan asset allocation percentages in effect as of December 31, 2004, are as follows: Actual plan asset
    
    
    Target plan assetallocation percentages at
    
    
    allocation percentages atDecember 31
    
    
    December 31,2004
    
    
    2003
    
    
    2004Asset categoryEquity securities
    
    
    36
    %
    
    
    34
    %
    
    
    35% - 45
    %Debt securities
    
    
    48
    %
    
    
    42
    %
    
    
    40% - 50
    %Real estate
    
    
    12
    %
    
    
    10
    %
    
    
    5% - 15
    %Other
    
    
    4
    %
    
    
    14
    %
    
    
    0% - 10
    %Total
    
    
    100
    %
    
    
    100
    %
 At December 31, 2004 and 2003, the Companys pension plans did not own any Company common
stock. The following table shows the undiscounted benefit amounts expected to be paid for each of the
next five successive fiscal years and for the aggregate next five years thereafter: Funded
    
    
    UnfundedUndiscounted expected benefit payments
    
    plans
    
    
    plans
    
    
    All plans2005
    
    
    103
    
    
    
    26
    
    
    
    1292006
    
    
    109
    
    
    
    27
    
    
    
    1362007
    
    
    116
    
    
    
    27
    
    
    
    1432008
    
    
    126
    
    
    
    28
    
    
    
    1542009
    
    
    133
    
    
    
    29
    
    
    
    162Aggregate for 2010 through 2014
    
    
    805
    
    
    
    158
    
    
    
    963
 The amount expected to be contributed by the Company to its defined benefit pension plans
during 2005 is CHF 129 million. Other postretirement benefits The Companys net liability for other postretirement benefits at December 31, 2004 was CHF 63
million (December 31, 2003: CHF 69 million) resulting principally from the postretirement
healthcare plan in the United States. The Companys other postretirement plans are not funded by
the Company, did not require significant amounts to be recognized in the consolidated statements of
income for 2004, 2003 or 2002, and are not expected to require significant future annual benefit
payments. F-40




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 19. Earnings per share  In 2004, 2003 and 2002, there was no difference between basic and diluted earnings per share
for income from continuing operations. In 2004 the basic weighted average number of shares
outstanding were 66 059 479 (2003: 68 361 123 and 2002: 68 549 964) and the diluted weighted
average number of shares outstanding were 66 059 479 (2003: 68 361 123 and 2002: 68 575 058). In 2002, the difference of 25 094 in the weighted average number of shares outstanding 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. In 2004 and 2003, the calculation of diluted earnings per share
did not include any stock options as their inclusion would have been antidilutive, that is, diluted
earnings per share would be higher than basic earnings per share. For purposes of calculating basic
and diluted earnings per share in 2004, 2003 and 2002 there was no required adjustment to the
reported income from continuing operations or net income. The calculation of diluted earnings per share in 2004 excluded 1 783 225 stock options
outstanding with exercise prices between CHF 82.60 and CHF 179.30, in 2003 excluded 2 092 090
stock options outstanding with exercise prices between CHF 82.60 and CHF 179.30, and in 2002
excluded 878 036 stock options outstanding with exercise prices between CHF 112.09 and CHF 181.70,
as their inclusion would have been antidilutive. For the years ended December 31, 2003 and 2002,
the calculation of diluted earnings per share excluded the convertible bonds issued in July 1998
and repaid in July 2003, as their inclusion would have been antidilutive. F-41




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 20. Related party transactions  Transactions with associated companies Investments in affiliates of CHF 147 million in 2004 and CHF 137 million in 2003 are included
in financial investments and are described in Note 9. Loans receivable from equity affiliates of CHF 11 million in 2004 and CHF 10 million in 2003
are included in other assets. Included is a loan to Compagnie Industrielle de Monthey SA, of CHF 10
million in 2004 and 2003, which bears interest at 3 percent in 2004 (2003: 1 percent). The Company had payables and accrued expenses to equity affiliates of CHF 12 million in 2004
and CHF 9 million in 2003, and short-term debt to equity affiliates of CHF 2 million in 2004 and
CHF 1 million in 2003. F-42




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##### Table of Contents



Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 21. Commitments and contingencies  Lease commitments The Company leases certain facilities under operating leases. The future minimum lease
commitments required under fixed term leases are: 2005 CHF 41 million; 2006 CHF 25 million; 2007
CHF 16 million; 2008 CHF 12 million; 2009 CHF 9 million; 2010 and thereafter CHF 25 million. Rental
expense amounted to CHF 57 million in 2004, CHF 64 million in 2003 and CHF 67 million in 2002. Purchase commitments The Company has various purchase commitments for materials, supplies and items of permanent
investment incident to the ordinary course of business. In the aggregate, these commitments are not
in excess of current market prices and reflect normal business operations. Guarantees In the normal course of business, the Company has provided certain trade and other 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, 2004, the
Company has provided guarantees to third parties for indebtedness of others of approximately CHF 17
million of which CHF 12 million expire in 2005 and CHF 5 million thereafter. 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. As of December 31, 2004 the Company
had issued CHF 31 million of environmental indemnifications that decrease to CHF 24 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, 2004, the Company has
recorded a liability related to the environmental indemnifications in the amount of CHF 12 million
(2003: CHF 12 million) and for the tax indemnifications a liability has been recorded in the amount
of CHF 1 million (2003: 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 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. In
connection with the Companys divestment of the Performance Polymers Business in 2000,
Vantico (now owned by the Huntsman Group) initiated arbitration proceedings against the Company as
a result of a dispute over an agreement with a third party and a pension-related lawsuit. A court
ruling has been issued in favor of the Companys pension fund, which has been appealed to a
superior court. This appeal is pending. The dispute and related arbitration proceedings regarding
the agreement with the third party were settled during 2004 resulting in the release of previously
established reserves totaling CHF 28 million, net of income taxes of CHF 9 million. Although the
outcome of the pension-related litigation cannot be predicted with certainty, management is of the
opinion that it 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s
subsidiary in the United States received a claim from the New Jersey Department of Environmental
Protection for alleged natural resource damages (see Environmental Matters below). In connection
with certain polyacrylamide products, the Companys subsidiary in the United States has been named
as one of the defendants in two class action lawsuits in West Virginia (see Litigation Matters
below). 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 F-43




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Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) disposal
facilities at all major manufacturing sites that allow the sites to comply with 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 509 million as of December 31, 2004 and CHF 557 million as of
December 31, 2003 have been recorded in the accompanying Consolidated Balance Sheets. The decrease
in the provision of CHF 48 million in 2004 compared to 2003 relates to usage of the provisions of
CHF 43 million and a CHF 18 million reduction related mainly to currency effects, offset in 2004 by
additional reserves established in connection with the acquisition of Raisio Chemicals. The
Companys environmental protection and improvement cash expenditures were approximately CHF 54
million in 2004 (CHF 31 million in 2003), including investments in construction, operations and
maintenance and usage of the provision. Under the Companys agreement with 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 based, environmental liabilities are
allocated between Novartis and the Company based on the ownership of the site or, if environmental
liabilities do not relate to production sites or these are not owned by either entity, according to
the polluter pays principle. If causation between the parties cannot be determined, costs are
shared equally. The agreement with Novartis is not subject to any time or amount limits but could
terminate for certain liabilities in the United States (i) upon a sale of substantially all of the
Companys assets, (ii) upon a change in control of the Company, or (iii) for individual facilities,
upon the sale of the facility (unless the Company retains responsibility for any clean-up at such
site). 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 and/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s subsidiary in the United States
is engaged in a large bio-remediation project that is expected to take up to eight 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 October 2003, the Companys subsidiary in the United States received a letter from the New
Jersey Department of Environmental Protection (NJDEP) seeking to begin discussions on natural
resource damage liability issues (NRDs) at the Toms River site for alleged injury to groundwater.
The subsidiary is engaged in on-going settlement discussions with the State to see if it can reach
a mutually beneficial settlement to avoid litigation. If a mutual agreement cannot be reached and
NJDEP decides to initiate litigation, the Company believes that it has significant defenses to
these potential NRD claims. 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 planning and 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, 2004, 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. Litigation Matters Two class action lawsuits have been filed against Companys subsidiary in the United States
and other chemical suppliers in two separate state courts in West Virginia relating to the sales of
certain products to coal preparation plants. In both cases, plaintiffs claim, on behalf of a class
of all workers in coal preparation plants, that these workers are entitled to medical monitoring
for exposure to residual acrylamide from the use of polyacrylamide products supplied by the
defendants. F-44




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Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) Based on knowledge and use of acrylamide in its own manufacturing operations for several years, the
Company does not believe that these claims have merit. However, if any liability were found, there
most likely would be a sharing of the liability among many of the defendants, although it is too
soon to assess what share any defendant would have of that liability, if any. Finally, the Company
has sufficient insurance coverage for these claims to prevent them from having a material adverse
effect on its financial position or results of operations. F-45




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Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data) 22. Valuation and qualifying accounts and reserves  Allowance for doubtful accountsFor the year ended December 31,
    
    
    2004
    
    
    
    2003
    
    
    
    2002Balance at beginning of year
    
    
    
    85
    
    
    
    
    96
    
    
    
    
    120Additions charged to cost and expenses
    
    
    
    24
    
    
    
    
    22
    
    
    
    
    50Deductions credited to cost and expenses
    
    
    
    (15
    )
    
    
    
    (13
    )
    
    
    
    (19
    )Other, net (i)
    
    
    
    (10
    )
    
    
    
    (18
    )
    
    
    
    (43
    )Currency adjustments
    
    
    
    (3
    )
    
    
    
    (2
    )
    
    
    
    (12
    )Balance at end of year
    
    
    
    81
    
    
    
    
    85
    
    
    
    
    96
 Allowance for obsolete and slow moving inventoryFor the year ended December 31,
    
    
    2004
    
    
    
    2003
    
    
    
    2002Balance at beginning of year
    
    
    
    50
    
    
    
    
    58
    
    
    
    
    66Additions charged to cost and expenses
    
    
    
    17
    
    
    
    
    20
    
    
    
    
    23Deductions credited to cost and expenses
    
    
    
    (16
    )
    
    
    
    (22
    )
    
    
    
    (18
    )Other, net (i)
    
    
    
    (3
    )
    
    
    
    (4
    )
    
    
    
    (9
    )Currency adjustments
    
    
    
    (2
    )
    
    
    
    (2
    )
    
    
    
    (4
    )Balance at end of year
    
    
    
    46
    
    
    
    
    50
    
    
    
    
    58
 Deferred income tax valuation allowanceFor the year ended December 31,
    
    
    2004
    
    
    
    2003
    
    
    
    2002Balance at beginning of year
    
    
    
    121
    
    
    
    
    131
    
    
    
    
    146Additions charged to cost and expenses
    
    
    
    11
    
    
    
    
    22
    
    
    
    
    10Deductions credited to cost and expenses
    
    
    
    (20
    )
    
    
    
    (19
    )
    
    
    
    (9
    )Other, net (i)
    
    
    
    3
    
    
    
    
    0
    
    
    
    
    0Currency adjustments
    
    
    
    (5
    )
    
    
    
    (13
    )
    
    
    
    (16
    )Balance at end of year
    
    
    
    110
    
    
    
    
    121
    
    
    
    
    131
  (i)
    Other, net is primarily additions applicable to acquisitions, amounts written-off and
miscellaneous other adjustments, and for allowance for doubtful accounts in 2002, Other, net
also included a reclassification to accrued liabilities for provisions that did not relate to
accounts receivable. F-46




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Notes to Consolidated Financial Statements  (in millions of Swiss francs, except share and per share data)   23. Restructuring and special charges  In 2004, the Company implemented the Shape program, which is primarily designed to adapt and
optimize production and the support organization of the Segment Water & Paper Treatment following
the acquisition of Raisio Chemicals and to accelerate the shift of focus in Segment Textile Effects
to growth regions in Asia by reducing its European presence. The program involves the closure of
manufacturing facilities in the UK and Italy and the rightsizing of plants in Europe and the United
States. It is expected that this will result in the reduction of approximately 950 positions. The
planned program completion date is 2007. The cost of the program is expected to total approximately CHF 174 million before taxes
comprised of employee severance costs of CHF 93 million, asset impairment charges of CHF 55 million
and other costs of CHF 26 million. During 2004, costs related to the program totaling CHF 80
million have been recognized in operating income in the consolidated statements of income comprised
of employee severance costs of CHF 17 million, asset impairment charges of CHF 50 million and other
costs of CHF 13 million. The fair values used to determine the asset impairment charges were
established by calculating present values of the estimated future cash flows attributable to the
affected assets. Restructuring and special charges for 2004 also includes CHF 11 million resulting from
expensing the fair value of Raisio Chemicals in-process research and development activities that
were acquired. F-47