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PLAINTIFF'S EXHIBIT
General
Since the incorporation of Imperial Chemical Industries PLC in 1926, the ICI Group has been one of the major industrial chemical organisations in the world with an impressive record in innovation. In 1997 the Group undertook significant reshaping activity, consistent with its plans to focus its resources in specialty chemicals. This reshaping activity has continued in 1998. The businesses of the Group now comprise National Starch, Quest, Industrial Specialties, Coatings (Paints), Materials (which comprises Acrylics and Polyurethanes), and Industrial Chemicals (which comprises Petrochemicals, Halochemicals, Tioxide and a number of Regional Businesses). The Group is actively pursuing the divestment of most of its Industrial Chemicals business consistent with its strategic shift to specialty chemicals.
The ICI Group has leading international positions in industrial adhesives, specialty starch, fragrances, flavours, food ingredients, specialty oleochemicals, paints, acrylics, polyurethane chemicals and systems based on methyl diphenyl di isocyanate (MDI), chlorofluorocarbon (CFC) replacements and titanium dioxide. It also has strong positions in synthetic resins and polymers, chemicals based on silica and alumina, surfactants and catalysts. In addition, the Group has strong regional positions in the UK in petrochemicals and chlor-alkali products.
Strategic Vision
The ICI Group's vision is to be the industry leader in creating value for customers and shareholders through market leadership, technological edge and a world competitive cost base. It aims to achieve this by:
market-driven innovation in products and services
The Group's innovative skills are a major competitive strength which are driven by the marketplace. The Group sets out to meet the needs of its chosen customers in ways that deliver the desired effect and service and create value for both parties.
winning in quality growth markets worldwide
The Group will invest in growth markets in which it has leading market positions. It aims to have all its businesses in such positions and it will do this by concentrating efforts on what it believes are the best quality growth opportunities around the globe.
inspiring and rewarding talented people
The Group is determined to create a way of working that attracts and retains high calibre individuals and that releases the energy and talents of everyone in the organisation. It aims to be an organisation in which all employees know what is expected of them, have the freedom to take initiatives, are accountable for the results and are properly rewarded for success.
exemplary performance in safety and health
The Group's goal is to have an exemplary performance in safety and health and become the world leader.
responsible care for the environment
Tough targets for the Group's environmental performance have been set. The guiding principle is Responsible Care, the international chemical industry's programme for continuous improvement in safety, health and environmental performance. The Group applies its standards with consistency around the world. The roll-out of new and improved products which are designed to have less impact on the environment will be a key feature.
relentless pursuit of operational excellence
Competitive pressure is increasing and the Group has responded with a number of initiatives including a major focus on purchasing and supply chain management and several significant restructuring programmes in the last two years.
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Reshaping
In the early 1990s, as part of its efforts to increase profitability and enhance shareholder value, the Group implemented two major restructuring programmes. These actions entailed focusing on those businesses and territories where it enjoyed strong market positions, a sustainable trading advantage through technology and brands and with costs which are competitive. Subsequently the Group demerged its bioscience operations in 1993.
In July 1997, ICI took the first major step to radically reposition itself as a major specialty chemical company with the acquisition of the companies and businesses comprising the specialty chemicals division ("Speciality Chemicals") from Unilever PLC and Unilever N.V. for a cash consideration of US$8bn (4.8bn). The acquisition is an excellent fit with the Group's strategy to shift its business profile towards specialty chemicals tailored to meet specific customer needs and where leading positions in profitable growth markets can be won through the application of the Group's technology and skills. The Group continues to look for opportunities to build its capability across Specialty Products, Coatings and Materials and in so doing shift the balance towards the lighter, less cyclical end of its portfolio, where it has the opportunity to build powerful leadership positions.
ICI has announced that, consistent with its strategy, it intends to divest most of its Industrial Chemicals portfolio. In July 1997 it announced that it had agreed to sell its polyester polymer and intermediates business, its Tioxide business (outside North America) and its polyester film businesses to DuPont for an aggregate consideration of US$3bn (1.8bn). The sale of the main elements of the polyester businesses was completed in 1997 and early 1998. The sale agreement also included the disposal of a 50% holding in ICI's Pakistan PTA operation, but this agreement was not completed. The sale of the Tioxide business also did not complete as, following an investigation by the US Federal Trade Commission (FTC) which required modification to the sale as proposed, no basis for a revised sales agreement could be reached. The non-completion of these sales was announced by ICI on 4 January 1999.
In July 1997, ICI completed the disposal of its 62.4% publicly quoted shareholding in ICI Australia Limited, a major manufacturer and supplier of mining explosives, chemicals, plastics, fertilisers, crop care products, paints and related consumer products in Australia. The total gross proceeds raised by ICI from the global offering combined with the proceeds from an associated share buy-back by ICI Australia Limited were approximately 1.0bn.
Other sales in 1997 included the Canadian based Forest Products business to the Pioneer Companies Inc. for 142m, and the UK based fertiliser business to Terra Industries for200m plus a deferred, phased, market related payment.
Further sales, completed in 1998, included:
ICI's 51% shareholding in the South Africa based explosives business AECI Explosives Limited to its joint venture partner, AECI Limited for US$117m;
explosives operations in Canada, Latin America and Europe and the distribution business in the USA to ICI Australia Limited (renamed Orica Limited from February 1998) for US$370m;
methylamines and derivatives business to Air Products for 67m;
'Propafilm' oriented polypropylene films business to UCB SA;
Teesside Utilities and Services business to Enron for 300m; and
Natural Colours business of Quest to Christian Hansen for $55m.
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ICI also announced, in April 1998, its agreement to sell the Crosfield business to W R Grace & Co. This sale could not subsequently be completed as terms could not be agreed which were acceptable to the US FTC and W R Grace & Co.
The Group made several acquisitions during the year, including:
Mydrin AGS GmbH, an adhesives company in Germany, from BTP pic for 22m in March;
the European Home Improvement business of Williams PLC, including well known brand names such as 'Polyfilla' and 'Cuprinol', for 350m in May;
the privately held US company Acheson Industries Inc, a leading producer of specialty materials for the electronics industry, for $560m in June;
Mona Industries Inc, a privately held US manufacturer and marketer of innovative specialty and personal care ingredients, in July.
As part of its strategy the Group intends to continue to divest or dilute its interests in
non-core businesses where it has no long-term competitive advantage. This includes most of Industrial Chemicals.
ICI has set itself an objective of achieving a 20% pre-tax return on net assets (RONA) through the chemical industry cycle. In 1998 the profit on operations before tax, goodwill amortisation, exceptional items and net interest was 653m, giving a return
of 11.9%. 1998 profits were again adversely affected by the strength of sterling and by a further deterioration in bulk chemicals markets, which was reflected in the results of the Industrial Chemicals business. Against this background, RONA for the Group's continuing operations, excluding Industrial Chemicals, was 17.5%. The Group sets
performance targets and remuneration levels based on improvements in shareholder value using economic value added measures.
As a consequence of the reshaping activity described above the results of various businesses are reported as Discontinued operations as defined in note 1 to the Group financial statements.
Geographic areas
The Group's headquarters are in the UK where its operations make it one of the UK's leading manufacturing and exporting companies. Outside the UK, operations are conducted by locally managed subsidiary companies staffed almost entirely by nationals of the country concerned. Seventy three per cent of the employees of the continuing businesses of the Group are located outside the UK.
The extent of the Group's activities outside the UK is indicated in the following table, which shows the turnover of and trading profit (before exceptional items) from continuing operations made by Group companies located in each geographic area for the three years ended 31 December 1998 (see Operating and financial review).
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Continuing operations United Kingdom
Turnover
1998 1997 m m
1996 m
Trading profit
before exceptional . items
1998* 1997 1996
m m m
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Sales in the UK
1,769 2,042 1,821
Sales overseas
1,366 3,135
1,479 1,616 <,td>
3,437 20
(9) 54
Continental Europe
2,403 1,845 1,655 178 49 51
USA 3,045 2,513 2,181 246 199 143
Other Americas
820 783 529 63 59 31
Asia Pacific
1,163 1,104 969 69 87 68
Other countries
118 106 98 14 22 6
10,684 9,872 8,869
Inter-area eliminations and sales to
discontinued operations
(1,589) (1,709) (1,667)
Total
9,095 8,163 7,202 590 407 353
Discontinued operations
191 2,899 3,318 37 213 312
Total
9,286 11,062 10,520 627 620 665
* After amortisation of goodwill 23m.
Industry segments
The following table shows turnover and trading profit (before exceptional items) for the Group's classes of business for the three years ended 31 December 1998 (see Operating and financial review).
Continuing operations Specialty Products National Starch Quest Industrial Specialties
Coatings Materials Industrial Chemicals
Inter-class eliminations and sales to discontinued operations
Total Discontinued operations Total
Turnover
1998 m
1997 m
Trading profit
before exceptional items
1996 1998 1997 1996 m m m m
1,646 656
1,027 3,329 2,167 1,352 2,466 9,314
782 321 831 546 1,934 546 2,170 2,161 1,490 1,583 3,020 3,399 8,614 7,689
219* 82 84
385 132* 114 (41)
116 32 67 215 160 130 (98)
28 28 147 158 20
(219) (451) (487) 9,095 8,163 7,202 590 407 353
191 2,899 3,318 37 213 312 9,286 11,06210,520 627 620 665
*1998 results are stated after amortisation of goodwill for National Starch and Coatings of 12m and 11m, respectively.
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Quest
Quest is a leading creator and manufacturer of fragrance, fragrance ingredients, flavour and food ingredients used by other manufacturers in a wide variety of consumer products. Fragrance products are sold to producers of perfumes, cosmetics, soaps, household products and detergents. Flavour and food ingredient products are sold to manufacturers of prepared foods, beverages, dairy foods, bakery and confectionery products. Dental flavours are also manufactured for use mainly in toothpastes and mouth-wash.
The Business operates through a Food Division, which in 1998 accounted for just under two thirds of the Business's sales, and a Fragrances Division, which accounted for the balance.
The major manufacturing facilities of the Business are located in the UK, the Netherlands, USA, Mexico, France, Australia, Ireland and Indonesia. Manufacturing facilities are also located in 11 other countries. Quest maintains its own sales and distribution facilities in 38 countries and is represented by sales agents in other countries. The Business's headquarters are in Naarden in the Netherlands.
Quest's flavour and fragrance products consist of compounds of blended ingredients under formulae created by its flavourists and perfumers. Fragrance ingredients are the scented building blocks of the fragrance formulae and often contribute additional technical characteristics, such as deodorancy or insect repellancy to the finished compound. In food ingredients, emulsifiers, hydrocolloids, proteins, colours and bio ingredients (enzymes, cultures and yeast) are developed and modified in order to meet the many and changing needs of customers' end- products. The particular functional characteristic imparted is often a major factor in the selection and acceptance of the consumer product.
The demand for consumer products utilising flavours, food ingredients and fragrances has been stimulated and broadened by such factors as increases, in a number of countries, in personal income, in the number of women in employment and in the teenage population; other factors are a greater health awareness and the continued growth in world population. In the fragrance sectors, these developments have expanded the market for colognes, deodorants, and toiletries for men, while in the food area, growth has been driven by the desire of consumers for increasingly sophisticated products compatible with a natural, healthy lifestyle. These characteristics have stimulated the demand for products such as convenience foods, soft drinks and low-cholesterol and low-fat food products that must conform to expected tastes, texture and appearance.
Innovation is at the heart of Quest's business. The development of new fragrance and flavour compounds is a complex artistic and technical process calling upon the combined knowledge and skill of Quest's perfumers and flavourists together with its application and research chemists. An important contribution to the creation of new fragrance and food products is the development of new ingredients. Quest maintains research centres at Ashford in the UK and Naarden in the Netherlands and specific product process development at 6 other sites around the world. In 1998 the Business spent approximately 40m (about 6% of annual sales value) on research, development, creation and application, of which one third was on fragrances and the balance was on foods.
The Business's competitive position is based principally on the quality of its customer relationships, the creative skills of its perfumers and flavourists, the technological advances resulting from its research and development and the customer service and support provided by its marketing and application groups. In terms of sales, Quest is one of the five largest organisations producing and marketing a wide range of fragrance and food products for sale to manufacturers of consumer products.
Quest's capital expenditure programme in 1998 focused on fragrance material production capabilities and automation of fragrance compounding. In the Food
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Division capital expenditure was directed at a selected expansion of existing capacity with particular focus on growth markets.
In December 1998 the Food Division sold its Natural Colours business to Christian Hansen of Denmark for $55m.
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A A VUA J
National Starch
National Starch is a leading manufacturer of adhesives, sealants, specialty food and industrial starches, specialty synthetic polymers and electronic and engineering materials. The Business produces thousands of technically advanced products and operates an international network of more than 158 manufacturing and customer service centres, located in 36 countries on 6 continents.
National Starch's world headquarters is in Bridgewater, New Jersey, USA. European headquarters are in High Wycombe, UK and Pacific operations headquarters are in Singapore.
The Business's overall sales, as well as its research and development spending, grew over the last 3 years at a compounded annual rate of 3%. Research and development expenditure (including technical service) currently represents about 4% of annual sales. About 20% of National Starch products in the USA are protected by patents, and most of the selling range consists of proprietary products and services.
National Starch comprises five distinct business groupings.
Adhesives and sealants National Starch is one of the largest global producers of industrial adhesives. The Adhesives and Sealants Division operates over forty manufacturing facilities around the world and has a strong global presence. It manufactures a broad range of adhesive types, including adhesives based on both natural and synthetic polymers, water-borne, hot melts, 100% solids, reactive adhesives and pressure sensitive adhesives.
The Business's products are widely used in packaging for securely sealing cases and cartons and fixing labels to bottles and cans. There are numerous paper converting applications such as laminating, bag making, tissue, paper tube winding and box manufacturing. Converting adhesives are also used in bookbinding, envelopes, magazines, and remoistenable stamps.
Adhesives are also critical components in the construction of disposable nappies/diapers, personal sanitary products and disposable hospital supplies.
National Starch's high performance curing adhesives are used to laminate plastic films, metal foils and paper for numerous flexible packaging applications. Pressure sensitive adhesives are used to manufacture self adhesive tapes, labels, decals, and transdermal drug delivery patches.
The Bondmaster business unit is a major supplier of adhesives and sealants for assembly operations in the woodworking, construction and transportation industries.
Food products National Starch's food starches are a vital part of thousands of everyday foods. They enhance taste and appearance and provide effects which enable end-consumer products to withstand the rigours of ultra high temperature (UHT) processing, microwave cooking, freeze/thaw cycles and extended storage.
The Business remains a leader in the development of effective starch-based replacements for fats.
'Novelose' resistant starch is a totally new form of ingredient that enables processors of low moisture foods such as snacks, extruded cereals, pasta and baked goods to significantly increase fibre content without adversely affecting processing and eating quality.
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XA
The 'Novation' series of specialty food starches deliver the performance that processors have come to expect from premium specialty starches with a native starch label plus the added benefit of new flavour possibilities.
Industrial starches In the pulp and paper industry, the Business's specialty starches provide strength and contribute to enhanced productivity in the manufacture of unbleached kraft, fine papers, bleached board, newsprint and recycled fibre stocks. Additives and liquid polymers improve the biodegradability and strength of tissue and towel products. Specialty surface size starches increase runnability in the size press and printability on the end user's printing press, while replacing more costly functional additives.
For the corrugating industry, specialty carrier starches provide bond strength for adhering board to corrugating medium and contribute to increased production and reduced waste. They improve the overall quality and water resistance of meat, fruit, vegetable and shipping cases. Specialty synthetic polymer products add increased water resistance for demanding applications.
The Business has also created a starch-based replacement for plastic packaging. 'Eco-Foam' loosefill, composed of nearly 100% starch, protects the contents of packages as effectively as polystyrene "peanuts", yet is fully degradable and decomposes in water. It is now available in the form of degradable shapes and sheets to replace polystyrene shippers and corrugated materials.
Specialty synthetic polymers National Starch has broad capabilities in specialty polymers, resins and redispersible powders for markets as diverse as personal care, construction, water treatment, detergents, paper coatings and apparel. The Business's binders, saturants and laminants add desirable characteristics to nonwovens (fibrefill, interlinings, disposable garments), textiles and papers.
Specialty polymers improve the holding power in hair sprays and gels and the manageability and softness of mousses, conditioners, shampoos and other styling aids. They are also used to thicken and emulsify cosmetic and beauty products and increase the functionality of sunscreens and hand and body creams and lotions.
The Business's acrylate-based products include dispersants, anti-sealants and detergent builders, as well as rheology modifiers (thickeners) for the carpet, adhesive and detergent industries. Dithiocarbamate chemistry results in microbiocides and metal precipitants for process water treatment.
Redispersible powder polymers improve the adhesion, flexural strength, insulation properties and shrink-resistance of cements, grouts, adhesives and other construction products.
Electronic and Engineering Materials (EEM) The Business produces electronic and engineering materials including adhesives, encapsulants and coatings for use in semiconductor and microelectronic packaging, multichip modules, hybrid circuits and passive components, electronic, electrical and high performance devices, medical and photonic applications, product assembly and structural bonding and repair applications. EEM also produces specialty process lubricants for forging and diecasting.
Manufacturing facilities Manufacturing facilities are located in Argentina, Australia, Belgium, Brazil, Canada, Chile, France, Germany, Hong Kong, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, New Zealand, People's Republic of China, Philippines, Republic of South Africa, Saudi Arabia, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, United Kingdom, United States and Venezuela.
Business activity In 1998, National Starch concluded acquisitions including: National Starch's largest
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acquisition ever - Acheson industries, Inc, Port Huron, Michigan, a leading global specialty materials business whose main product lines and markets include electronic materials used in the manufacture of cathode ray tube coatings, membrane touch switches for computer keyboards, polymer thick films for medical devices and conductive coatings for shielding in personal computers and cellular phones, as well as specialty process lubricants used in metal forging and diecasting for the automotive component and aerospace industries; BTP pic's Mydrin AGS GmbH adhesive operation in Germany, which strengthened the Business's position in Europe in the woodworking and paper converting adhesive categories; all patents and know-how relating to the 'Sycar1 line of proprietary, high performance organo-silicone thermoset resins used in adhesive and coating products for microelectronics and other high performance applications, acquired from Hercules Incorporated; the specialty starch business of Halotek-Fadel Industrial Ltda, Brazil; and BASF's acrylic solution pressure sensitive adhesive polymer business in Europe. In addition, the Business entered into a joint venture agreement with Dongsung Chemical Co. Ltd., South Korea's leading sport shoe adhesives and polyurethanes supplier.
New plants and expansions The Business continued to pursue its policy of supporting customers locally by opening and expanding plants in countries where the customers are located. Specialty Synthetic Polymers announced plant expansions in the People's Republic of China and North Carolina, USA.
The Adhesives division added new plants in Taiwan and Indonesia, completed plans to build a new plant in Brazil, expanded manufacturing in Mexico and Argentina, and expanded the Woodruff, South Carolina, USA hot melt and process development operation. In addition, Adhesives installed robotic packaging in France, Italy and Sweden.
The Indianapolis, Indiana, USA starch plant completed a $42m co-products installation.
New products During 1998 the Business introduced many new products. The Adhesives division introduced new pressure sensitive adhesives for self-adhesive wallpaper; a new paper converting adhesive called 'Velocity', which is cleaner running, generates less waste and offers higher productivity, and 'Bondmaster' Kor-Lok GT adhesives for faster throughput on radio frequency gluing and for better bonding on difficult species like ash and maple.
The Starch division introduced new 'Struc-ture' food starch which is a gelatine replacement for yoghurts and sour creams; 'Novelose' 240 resistant starch with higher fibre content for baked goods, and HI-CAP encapsulant, a gum arabic replacement, which handles twice as much oil and reduces cost for customers.
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