<DOCUMENT>
<TYPE>20-F
<SEQUENCE>1
<FILENAME>y94832e20vf.txt
<DESCRIPTION>FORM 20-F
<TEXT>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 2004
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 1-15419
CELANESE AG
(Exact name of Registrant as specified in its charter)
CELANESE CORPORATION
(Translation of Registrant's name into English)
FEDERAL REPUBLIC OF GERMANY
(Jurisdiction of incorporation or organization)
61476 KRONBERG/TAUNUS, GERMANY
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Ordinary Shares with no par value New York Stock Exchange
</Table>
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of Class)
---------------------
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT:
NONE
(Title of Class)
---------------------
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the Annual
Report:
<Table>
<Caption>
<S> <C>
Ordinary Shares with no par value........................... 49,321,468
(as of December 31, 2003)
</Table>
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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
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<S> <C> <C>
PART I
Item 1. Identity of Directors, Senior Management and Advisers....... 2
Item 2. Offer Statistics and Expected Timetable..................... 2
Item 3. Key Information............................................. 2
Selected Financial Data................................... 2
Exchange Rate Information................................. 4
Risk Factors.............................................. 4
Item 4. Information on the Company.................................. 11
Recent Developments....................................... 11
Introduction.............................................. 12
Business Summary.......................................... 12
Segment Overview.......................................... 12
Strategy.................................................. 13
Business Segments......................................... 15
Other Activities.......................................... 26
Acquisitions and Divestitures............................. 27
Raw Materials and Energy.................................. 27
Research and Development.................................. 28
Intellectual Property..................................... 29
Environmental and Other Regulation........................ 29
Organizational Structure.................................. 33
Description of Property................................... 33
Item 5. Operating and Financial Review and Prospects................ 36
Basis of Presentation..................................... 37
Major Events in 2003...................................... 38
Financial Highlights...................................... 40
Overview -- 2003 Compared with 2002....................... 41
Selected Data by Business Segment......................... 43
Summary by Business Segment -- 2003 Compared with 2002.... 44
Summary of Consolidated Results -- 2003 Compared with
2002.................................................... 46
Summary by Business Segment -- 2002 Compared with 2001.... 51
Summary of Consolidated Results -- 2002 Compared with
2001.................................................... 53
Liquidity and Capital Resources........................... 56
Market Risks.............................................. 62
Critical Accounting Policies and Estimates................ 64
Outlook................................................... 69
Item 6. Directors, Senior Management and Employees.................. 71
Directors and Senior Management........................... 71
Compensation of Directors and Officers.................... 74
Incentive Plans........................................... 79
Board Practices........................................... 80
Employees................................................. 82
Share Ownership........................................... 83
</Table>
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<Table>
<S> <C> <C>
Item 7. Major Shareholders and Related Party Transactions.............................................. 83
Major Shareholders........................................................................... 83
Related Party Transactions................................................................... 84
Item 8. Financial Information.......................................................................... 85
Export Sales................................................................................. 85
Legal Proceedings............................................................................ 85
Dividend Policy.............................................................................. 88
Item 9. The Offer and Listing.......................................................................... 88
Nature of Trading Market..................................................................... 88
Item 10. Additional Information......................................................................... 92
Articles of Association...................................................................... 92
Material Contracts........................................................................... 97
Exchange Controls and Other Limitations Affecting Security Holders........................... 97
Taxation..................................................................................... 97
Documents on Display......................................................................... 100
Item 11. Quantitative and Qualitative Disclosures About Market Risk..................................... 101
Interest-Rate Risk Management................................................................ 101
Foreign-Exchange Risk Management............................................................. 101
Commodity Risk Management.................................................................... 102
Stock Based Compensation Risk Management..................................................... 102
Item 12. Description of Securities Other Than Equity Securities......................................... 103
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies................................................ 103
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds................... 103
Item 15. Controls and Procedures........................................................................ 103
Item 16. Reserved....................................................................................... 103
Item 16A. Audit Committee Financial Expert............................................................... 103
Item 16B. Code of Ethics and Governance Matters.......................................................... 103
Item 16C. Principal Accountant Fees and Services......................................................... 104
Pre-Approval Policies and Procedures of the Finance and Audit Committee.................. 104
PART III
Item 17. Financial Statements........................................................................... 106
Item 18. Financial Statements........................................................................... 106
Item 19. Exhibits....................................................................................... 106
Index to Consolidated Financial Statements................................................... F-2
</Table>
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INTRODUCTION
Celanese AG is incorporated as a stock corporation organized under the laws
of the Federal Republic of Germany. As used in this annual report, "Celanese"
refers to Celanese AG, its consolidated subsidiaries and, except for accounting
purposes, its non-consolidated affiliates. For accounting purposes, "Celanese"
refers solely to Celanese AG and its majority owned subsidiaries over which
Celanese exercises control, as well as a special purpose entity which is a
variable interest entity where Celanese is deemed the primary beneficiary. See
Note 3 to the Consolidated Financial Statements contained in this annual report
(the "Consolidated Financial Statements").
---------------------
BASIS OF PRESENTATION
The Consolidated Financial Statements were prepared in accordance with
Accounting Principles generally accepted in the United States ("U.S. GAAP") for
all periods presented. The Consolidated Financial Statements reflect, for the
periods indicated, the financial condition, results of operations and cash flows
of the businesses transferred to Celanese from Hoechst Aktiengesellschaft, also
referred to as Hoechst, in a demerger that became effective on October 22, 1999,
adjusted for acquisitions and divestitures. The Consolidated Financial
Statements and other financial information included in this Annual Report,
unless otherwise specified, have been presented to separately show the effects
of discontinued operations. The Consolidated Financial Statements, for the
periods prior to the effective date of the demerger from Hoechst, assume that
Celanese had existed as a separate legal entity with four business segments,
Chemical Products, Acetate Products, Technical Polymers Ticona and Performance
Products, as well as the other businesses and activities of Hoechst transferred
to Celanese in the demerger. The financial results of Celanese, prior to the
effective date of the demerger, have been carved out from the consolidated
financial statements of Hoechst using the historical results of operations and
assets and liabilities of these businesses and activities and reflect the
accounting policies adopted by Hoechst in the preparation of its financial
statements and thus do not necessarily reflect the accounting policies which
Celanese might have adopted had it been an independent company during those
periods.
CURRENCY TRANSLATION
Celanese's Consolidated Financial Statements are prepared in euro. U.S.
dollar or U.S.$ amounts as of and for the year ended December 31, 2003 are
unaudited, and have been converted solely for the convenience of the readers for
2003 from euro into U.S. dollars, at an exchange rate of U.S.$1.2597 per E1.00,
the noon buying rate in New York City for cable transfers in foreign currencies
announced by the Federal Reserve Bank of New York for customs purposes (the
"Noon Buying Rate") on December 31, 2003. For information regarding recent rates
of exchange between euro and U.S. dollar, see "Item 3. Key
Information -- Exchange Rate Information." Celanese does not represent that the
U.S. dollar amounts presented in the U.S. dollar convenience translation or any
amounts translated from euro into other currencies could have been converted
from euro at the rates indicated.
On March 5, 2004, the Noon Buying Rate for the euro was U.S$1.2401 per
E1.00.
---------------------
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Investors are cautioned that the forward-looking statements contained in this
Annual Report involve both risk and uncertainty. Many important factors could
cause actual results to differ materially from those anticipated by these
statements. Many of these statements are macroeconomic in nature and are,
therefore, beyond the control of management. See "Forward-Looking Statements May
Prove Inaccurate" in "Item 5. Operating and Financial Review and Prospects."
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial information of
Celanese. You should read this table in conjunction with "Item 5. Operating and
Financial Review and Prospects," the audited Consolidated Financial Statements
and the notes to those statements that are included elsewhere in this Annual
Report.
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The balance sheet data shown below for 2003 and 2002, and the statement of
operations data for 2003, 2002 and 2001, all of which are set forth below, are
derived from the audited Consolidated Financial Statements included elsewhere in
this Annual Report and should be read in conjunction with those financial
statements and the notes thereto. The balance sheet for 2001, 2000 and 1999, and
the statement of operations data for 2000 and 1999 are derived from audited
Consolidated Financial Statements not included in this Annual Report.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2003 2003 2002 2001 2000 1999
--------- ------ ------ ------ ------ ------
U.S. $(1) E
--------- ------------------------------------------
(IN MILLIONS, EXCEPT FOR SHARE AND PER SHARE DATA,
PERCENTAGES AND NUMBER OF EMPLOYEES)
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... 5,133 4,075 4,064 4,433 4,461 3,712
Cost of sales............................................... (4,328) (3,436) (3,340) (3,772) (3,755) (3,092)
Selling, general and administrative expenses................ (568) (451) (474) (547) (519) (516)
Research and development expenses........................... (100) (79) (69) (82) (82) (67)
Special charges(2).......................................... (6) (5) 5 (464) (19) (537)
Operating profit (loss)..................................... 133 106 202 (430) 92 (509)
Interest and other income, net(3)........................... 96 76 11 (2) 55 (93)
Income tax benefit (provision).............................. (68) (54) (70) 106 (90) 87
Minority interests.......................................... -- -- -- -- -- 7
Earnings (loss) from continuing operations.................. 161 128 143 (326) 57 (508)
Earnings (loss) from discontinued operations................ 5 4 25 (59) 1 301
Cumulative effect of changes in accounting principles, net
of income tax............................................. (1) (1) 19 -- -- --
Net earnings (loss)......................................... 165 131 187 (385) 58 (207)
Earnings (loss) per common share -- basic(4)................ 3.34 2.65 3.72 (7.65) 1.09 (3.70)
Earnings (loss) per common share -- diluted(5).............. 3.34 2.65 3.72 (7.65) 1.09 (3.70)
BALANCE SHEET DATA:
Total assets................................................ 6,801 5,399 6,127 7,064 7,642 7,789
Debt........................................................ 635 504 615 880 1,165 948
Shareholders' equity........................................ 2,580 2,048 2,005 2,210 2,843 2,866
Dividends paid per share(6)................................. 0.55 0.44 -- 0.40 0.11 --
Common stock................................................ 176 140 140 143 143 143
Weighted average shares -- basic
(in thousands)............................................ 49,446 49,446 50,329 50,332 53,293 55,915
Weighted average shares -- diluted
(in thousands)............................................ 49,457 49,457 50,329 50,332 53,293 55,915
OTHER DATA:
Operating margin (%)(7)..................................... 2.6% 2.6% 5.0% -9.7% 2.1% -13.7%
Depreciation and amortization............................... 328 260 262 364 333 287
Capital expenditures........................................ 233 185 214 213 200 238
Trade working capital(8).................................... 645 513 578 555 822 831
Number of employees on a continuing basis (end of period) in
thousands................................................. 9.5 9.5 10.5 10.6 11.4 12.9
</Table>
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(1) The U.S.$ figures are unaudited and have been translated solely for the
convenience of the reader at an exchange rate of U.S. $1.2597 per E1.00, the
noon buying rate of the Federal Reserve Bank of New York on December 31,
2003.
(2) Special charges include impairment charges, provisions for restructuring,
which include costs associated with employee termination benefits and, plant
and office closures, and other expenses and income incurred outside the
normal course of ongoing operations. See Note 27 to the Consolidated
Financial Statements.
(3) Interest and other income, net, represents equity in net earnings of
affiliates, interest expense, and interest and other income, net, as set
forth in the Consolidated Financial Statements.
(4) Earnings (loss) per common share -- basic, is calculated by dividing net
earnings (loss) by the weighted average diluted shares outstanding. On the
effective date of the demerger, Hoechst issued 55,915,369 shares of Celanese
to existing Hoechst shareholders; these shares are deemed to be outstanding
for 1999.
(5) Earnings (loss) per common share -- diluted is calculated by dividing net
earnings (loss) by the weighted average shares outstanding. At December 31,
2003, Celanese had approximately 11,000 dilutive common stock equivalents.
On the effective date of the demerger, Hoechst issued 55,915,369 shares of
Celanese to existing Hoechst shareholders; these shares are deemed to be
outstanding for 1999.
(6) See "Item 8. Financial Information -- Dividend Policy."
(7) Celanese defines operating margin as operating profit (loss) divided by net
sales.
(8) Celanese defines trade working capital as trade accounts receivable from
third parties and affiliates net of allowance for doubtful accounts, plus
inventories, less trade accounts payable to third parties and affiliates.
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EXCHANGE RATE INFORMATION
As noted in "Currency Translation" above, Celanese uses the euro as its
reporting currency and pays dividends on its shares in euro. Furthermore, prices
quoted for Celanese shares on the Frankfurt Stock Exchange are quoted in euro.
Fluctuations in the exchange rate between the euro and the U.S.$ will
affect:
o The U.S.$ equivalent for dividends received by U.S. holders of Celanese
shares; and
o The trading market price of Celanese shares on the Frankfurt and New York
Stock Exchanges.
The table below shows the Noon Buying Rates for the euro in U.S.$. The
average amounts set forth below under "Average" are calculated as the average of
the Noon Buying Rates on the last business day of each month.
<Table>
<Caption>
YEAR LOW HIGH AVERAGE END
---- ------ ------ ------- ------
<S> <C> <C> <C> <C>
1999............................................... 1.0016 1.1812 1.0660 1.0047
2000............................................... 0.8270 1.0335 0.9231 0.9388
2001............................................... 0.8437 0.9535 0.8952 0.8901
2002............................................... 0.8594 1.0485 0.9454 1.0485
2003
July.......................................... 1.1164 1.1580 1.1365 1.1231
August........................................ 1.0871 1.1390 1.1155 1.0986
September..................................... 1.0845 1.1650 1.1267 1.1650
October....................................... 1.1596 1.1833 1.1714 1.1609
November...................................... 1.1417 1.1995 1.1710 1.1995
December...................................... 1.1956 1.2597 1.2298 1.2597
2004
January....................................... 1.2389 1.2853 1.2638 1.2452
February...................................... 1.2426 1.2848 1.2640 1.2441
March (through March 5, 2004)................. 1.2088 1.2431 1.2271 1.2401
</Table>
For a more complete discussion of exchange rate fluctuations and the
hedging techniques used by Celanese to manage its exposure to these
fluctuations, please see "Risk Factors" set forth below and "Item 5. Operating
and Financial Review and Prospects -- Market Risks," "Item 11. Quantitative and
Qualitative Disclosures About Market Risk" and "Item 9. The Offer and
Listing -- Nature of the Trading Market."
RISK FACTORS
Many factors could have an effect on Celanese's financial condition, cash
flows and results of operations. Celanese is subject to various risks resulting
from changing economic, environmental, political, industry, business and
financial conditions. The principal factors are described below.
SUCCESSFUL COMPLETION OF THE BCP CRYSTAL OFFER AND THE RELATED SUBSEQUENT
RESTRUCTURING OF CELANESE CONTEMPLATED BY BCP CRYSTAL WILL LIKELY HAVE AN EFFECT
ON FUTURE OPERATIONS
On December 16, 2003, BCP Crystal Acquisition GmbH & Co. KG or BCP Crystal,
a German limited partnership controlled by a group of investment funds advised
by The Blackstone Group, announced its intention to launch a voluntary public
offer to acquire all the outstanding shares of Celanese AG for a price of E32.50
per share, without interest. The offer commenced on February 2, 2004. The offer
is subject to a number of conditions, of which certain conditions can be waived
by BCP Crystal, including that at least 85 percent of the outstanding registered
ordinary shares of Celanese be validly tendered into the offer and not
withdrawn. On March 12, BCP Crystal announced its decision to reduce the minimum
acceptance condition from 85 percent to 75 percent. In accordance with
applicable German law, such a change automatically extends the
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initial acceptance period of the offer, and an announcement as to the outcome of
the offer is expected on or about April 3, 2004.
If the offer is successfully completed, there will be a substantial
reduction in the number of Celanese shareholders and, consequently, there may no
longer be an active public market for Celanese ordinary shares. In addition, BCP
Crystal has indicated in its offer document that if the tender offer is
successful, it intends in due course and in accordance with applicable German
law, to delist Celanese ordinary shares from the New York Stock Exchange and,
depending on the level of acceptance of the offer, it may apply to revoke the
admission of the Celanese ordinary shares to the Frankfurt Stock Exchange.
The successful completion of the tender offer will likely result in
material changes to the financing structure, future results of operations and
cash flows of Celanese. These changes may include the following:
o It is expected that Celanese will be downgraded to a below investment
grade rating. If the downgrade is below a specified level and due to the
change of control upon the successful completion of the offer, it would
result in the acceleration of the maturity of approximately one-third of
total debt outstanding at December 31, 2003. The total debt outstanding
at December 31, 2003 was E504 million.
o The terms and conditions of the loan agreements being arranged by BCP
Crystal are expected to be more restrictive and the interest rates of the
financing are expected to be higher than the Company's current debt
financing.
o BCP Crystal has stated in its tender offer document, that it intends to
prevent, to the extent permitted by law, any dividend on the Celanese
shares for the fiscal year ended 2003 from being distributed to Celanese
shareholders. If the offer succeeds, it cannot be predicted whether
Celanese will pay dividends or conduct share buybacks in the future.
The successful completion of the offer may have a material adverse effect
on Celanese's ability to realize the benefit associated with its U.S. federal
net operating loss carryforward deferred tax asset. Under U.S. tax law, the U.S.
federal net operating loss carryforwards may be subject to limitation in the
event of an ownership change. Celanese is unable to determine what effect this
limitation would have, if any, on the deferred tax assets attributable to these
carryforwards. See "Item 4. Recent Developments", and "Item 5. Operating and
Financial Review and Prospects."
CELANESE IS AN INTERNATIONAL COMPANY AND IS EXPOSED TO GENERAL ECONOMIC,
POLITICAL AND REGULATORY CONDITIONS AND RISKS IN THE COUNTRIES IN WHICH IT HAS
SIGNIFICANT OPERATIONS
Celanese operates in the global market and has customers in many countries.
Celanese has major facilities located in North America, Europe and the Pacific
Rim, including facilities in Germany, China, Japan, Korea and Saudi Arabia
operated through joint ventures. Its principal customers are similarly global in
scope, and the prices of its most significant products are typically world
market prices. Consequently, Celanese's business and financial results are
affected directly and indirectly by world economic, political and regulatory
conditions.
Conditions such as the uncertainties associated with war, terrorist
activities, epidemics, pandemics, political instability in any of the countries
in which Celanese operates could affect Celanese by causing delays or losses in
the supply or delivery of raw materials and products as well as increased
security costs, insurance premiums and other expenses. These conditions could
also result in or lengthen economic recession in the United States, Germany,
Asia or elsewhere. Moreover, changes in laws or regulations, such as unexpected
changes in regulatory requirements (including import or export licensing
requirements), or changes in the reporting requirements of United States, German
or European Union governmental agencies, could increase the cost of doing
business in these regions. Any of these conditions may have an effect on
Celanese's business and financial results as a whole and may result in volatile
current and future prices for Celanese shares.
5
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CYCLICALITY IN THE INDUSTRIAL CHEMICALS INDUSTRY HAS IN THE PAST AND MAY IN THE
FUTURE RESULT IN REDUCED OPERATING MARGINS OR OPERATING LOSSES
Consumption of the basic chemicals that Celanese manufactures, in
particular those in acetyl products, such as methanol, formaldehyde, acetic acid
and vinyl acetate monomer, has increased significantly over the past 30 years.
Despite this growth in consumption, producers have experienced alternating
periods of inadequate capacity and excess capacity for these products. Periods
of inadequate capacity, including some due to raw material shortages, have
usually resulted in increased selling prices and operating margins. This has
often been followed by periods of capacity additions, which have resulted in
declining capacity utilization rates, selling prices and operating margins.
Celanese expects that these cyclical trends in selling prices and operating
margins relating to capacity shortfalls and additions will likely persist in the
future, principally due to the continuing combined impact of five factors:
o Significant capacity additions, whether through plant expansion or
construction, can take two to three years to come on stream and are
therefore necessarily based upon estimates of future demand.
o When demand is rising, competition to build new capacity may be
heightened because new capacity tends to be more profitable, with a lower
marginal cost of production. This tends to amplify upswings in capacity.
o When demand is falling, the high fixed cost structure of the
capital-intensive chemicals industry leads producers to compete
aggressively on price in order to maximize capacity utilization.
o As competition in these products is focused on price, being a low-cost
producer is critical to profitability. This favors the construction of
larger plants, which maximize economies of scale, but which also lead to
major increases in capacity that can outstrip current growth in demand.
o Cyclical trends in general business and economic activity produce swings
in demand for chemicals.
Celanese believes that the basic chemicals industry, particularly in the
commodity chemicals manufactured by Celanese's Chemical Products segment, is
currently characterized by overcapacity, and that there may be further capacity
additions in the next few years.
THE LENGTH AND DEPTH OF PRODUCT AND INDUSTRY BUSINESS CYCLES OF CELANESE'S
MARKETS, PARTICULARLY IN THE AUTOMOTIVE, ELECTRICAL, CONSTRUCTION AND TEXTILE
INDUSTRIES, MAY RESULT IN REDUCED OPERATING MARGINS OR OPERATING LOSSES
Some of the markets in which Celanese's customers participate, such as the
automotive, electrical, construction and textile industries, are cyclical in
nature, thus posing a risk to Celanese which is beyond its control. These
markets are highly competitive, to a large extent driven by end-use markets, and
may experience overcapacity, all of which may affect demand for and pricing of
Celanese's products.
CELANESE IS SUBJECT TO RISKS ASSOCIATED WITH THE INCREASED VOLATILITY IN RAW
MATERIALS PRICES AND THE AVAILABILITY OF KEY RAW MATERIALS
Celanese purchases significant amounts of natural gas, ethylene, butane,
and propylene from third parties for use in its production of basic chemicals in
the Chemical Products segment, principally methanol, formaldehyde, acetic acid,
vinyl acetate monomer, as well as oxo products. Celanese uses a portion of its
output of these chemicals, in turn, as inputs in the production of further
products in all its segments. Celanese also purchases significant amounts of
cellulose or wood pulp for use in its production of cellulose acetate in the
Acetate Products segment. Celanese purchases significant amounts of natural gas,
electricity, coal and fuel oil to supply the energy required in its production
processes.
Although Celanese has agreements providing for the supply of natural gas,
ethylene, propylene, wood pulp, electricity, coal and fuel oil, the contractual
prices for these raw materials and energy vary with market
6
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conditions and may be highly volatile. Factors which have caused volatility in
Celanese's raw material prices in the past and which may do so in the future
include:
o Shortages of raw materials due to increasing demand, e.g., from growing
uses or new uses;
o Capacity constraints, e.g., due to construction delays, strike action or
involuntary shutdowns;
o The general level of business and economic activity; and
o The direct or indirect effect of governmental regulation.
Celanese strives to improve profit margins of many of its products through
price increases when warranted and accepted by the market; however, Celanese's
operating margins may decrease if it cannot pass on increased raw material
prices to customers, or Celanese may not be able to capture the benefit of raw
material price declines if raw material prices fall to levels below those at
which Celanese is committed to purchase under forward purchase contracts. Even
in periods during which raw material prices decline, Celanese may suffer
decreasing operating profit margins if raw material price reductions occur at a
slower rate than decreases in the selling prices of Celanese's products.
A substantial portion of Celanese's products and raw materials are
commodities whose prices fluctuate as market supply/demand fundamentals change.
Celanese manages its exposure through the use of derivative instruments and
forward purchase contracts for commodity price hedging, entering into long-term
supply agreements, and multi-year purchasing and sales agreements. Celanese's
policy, for the majority of its natural gas and butane requirements, allows
entering into supply agreements and forward purchase or cash-settled swap
contracts, generally for up to 24 months. During 2003, Celanese entered into
forward purchase and cash-settled swap contracts for approximately 50 percent of
its estimated natural gas requirements, generally up to three to six months
forward. As these forward contracts expire, Celanese may be exposed to future
price fluctuations if the forward purchase contracts are not replaced, or if it
elects to replace them, Celanese may have to do so at higher costs. Although
Celanese seeks to offset increases in raw material prices with corresponding
increases in the prices of its products, it may not be able to do so, and there
may be periods when such product price increases lag behind raw material cost
increases. In the future, Celanese may modify its practice of purchasing a
portion of its commodity requirements forward, and consider utilizing a variety
of other raw material hedging instruments in addition to forward purchase
contracts in accordance with changes in market conditions.
Celanese has a policy of maintaining, when available, multiple sources of
supply for raw materials. However, some of Celanese's individual plants may have
single sources of supply for some of their raw materials, such as carbon
monoxide and acetaldehyde. There can be no assurance that the ability to obtain
sufficient raw materials will not be adversely affected by unforeseen
developments that would cause an interruption in supply. Even if Celanese has
multiple sources of supply for a raw material, there can be no assurance that
these sources can make up for the loss of a major supplier. Nor can there be any
guarantee that profitability will not be affected should Celanese be required to
qualify additional sources of supply in the event of the loss of a sole or a
major supplier.
FAILURE TO DEVELOP NEW PRODUCTS AND PRODUCTION TECHNOLOGIES OR TO IMPLEMENT
PRODUCTIVITY AND COST REDUCTION INITIATIVES SUCCESSFULLY MAY HARM CELANESE'S
COMPETITIVE POSITION
Celanese's operating results, especially in its Performance Products and
Technical Polymers Ticona segments, depend significantly on the development of
commercially viable new products, product grades and applications, as well as
production technologies. If Celanese is unsuccessful in developing new products,
applications and production processes in the future, its competitive position
and operating results will be negatively affected. Likewise, Celanese has
undertaken and is continuing to undertake initiatives in all segments to improve
productivity and performance and to generate cost savings. There can, however,
be no assurance that these initiatives will be completed or beneficial or that
the estimated cost savings from such activities will be realized.
7
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FRANKFURT AIRPORT EXPANSION COULD HAVE A NEGATIVE EFFECT ON CELANESE'S
KELSTERBACH PLANT
The Frankfurt airport's expansion plans include the construction of an
additional runway. One of the three sites under consideration, the northwest
option, would be located in close proximity to Celanese's Kelsterbach production
plant. The construction of this particular runway could have a negative effect
on the plant's current production capacity and future development. While the
state government and the owner of the Frankfurt airport promote the expansion of
the northwest option, it is uncertain whether this option is in accordance with
applicable laws. Neither the final outcome of this matter nor its timing can be
predicted at this time.
ENVIRONMENTAL LIABILITIES AND COMPLIANCE COSTS MAY HAVE A SIGNIFICANT NEGATIVE
EFFECT ON CELANESE'S OPERATING RESULTS
Costs related to Celanese's compliance with and potential obligations under
environmental laws for remediation of contaminated sites may have a significant
negative impact on its operating results. These include obligations related to
sites currently or formerly owned or operated by Celanese, or where waste from
its operations was disposed. Celanese also has obligations related to the
indemnity agreement contained in the demerger and transfer agreement between
Celanese AG and Hoechst, also referred to as the demerger agreement. Celanese's
accruals for environmental remediation obligations may be insufficient if the
assumptions underlying those accruals prove incorrect or if Celanese is held
responsible for currently undiscovered contamination. See "Celanese and Hoechst
have obligations to pay each other certain amounts, some of which are not yet
determinable" below, "Item 4. Information on the Company -- Environmental and
Other Regulation", and Notes 25 and 26 to the Consolidated Financial Statements.
Stricter environmental, safety and health laws, regulations and enforcement
policies could result in substantial costs and liabilities to Celanese and could
subject Celanese's handling, manufacture, use, reuse or disposal of substances
or pollutants to more rigorous scrutiny than at present. Consequently,
compliance with these laws could result in significant capital expenditures as
well as other costs and liabilities and materially adversely affect Celanese's
business and operating results. For example, recent European Union regulations
will require a trading system for carbon dioxide emissions to be in place by
January 1, 2005. This regulation will affect Celanese's power plants at the
Kelsterbach, Oberhausen and Lanaken sites. Celanese may be required to purchase
carbon dioxide credits, which could result in increased operating costs, or
develop additional cost-effective methods to reduce carbon dioxide emissions
further, which could result in increased capital expenditures. See "Item 4.
Information on the Company -- Environmental and Other Regulation".
Celanese is also involved in several claims, lawsuits and administrative
proceedings relating to environmental matters. While Celanese does not believe,
based upon currently available facts, that the ultimate resolution of any such
pending matters will have a material adverse effect on Celanese's operating
results, an adverse outcome in any of them may negatively affect Celanese's
earnings and cash flows in a particular reporting period.
CHANGES IN ENVIRONMENTAL, HEALTH AND SAFETY REGULATORY REQUIREMENTS COULD HAVE A
SIGNIFICANT NEGATIVE EFFECT ON THE DEMAND FOR CELANESE'S PRODUCTS
New or revised governmental regulations relating to health, safety and the
environment may also affect demand for Celanese's products.
Pursuant to the European Union regulation on Risk Assessment of Existing
Chemicals, the European Chemicals Bureau of the European Commission has been
conducting risk assessments on approximately 140 major chemicals. Some of the
chemicals initially being evaluated include vinyl acetate monomer or VAM, which
Celanese produces, as well as competitors' products, such as styrene and
1,3-butadiene. These risk assessments entail a multi-stage process to determine
to what extent the European Commission should classify the chemical as a
carcinogen and, if so, whether this classification and related labeling
requirements should apply only to finished products that contain specified
threshold concentrations of a particular chemical. In the case of VAM, a final
ruling is not expected until the end of 2004. Celanese and other VAM producers
are participating in this process with detailed scientific analyses supporting
the industry's position that VAM is
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<PAGE>
not a probable human carcinogen and that labeling of final products should not
be required. If labeling is required, then it should depend on relatively high
parts per million of residual VAM in these end products. It is not possible for
Celanese to predict the outcome or effect of any final ruling.
Several recent studies have investigated possible links between
formaldehyde exposure and various end points including leukemia. On the basis of
these new studies, the International Agency for Research on Cancer or IARC has
stated its intention to review whether it should change formaldehyde's
classification from Group 2A (probable human carcinogen) to Group 1 (known human
carcinogen). The results of IARC's review will be examined by government
agencies with responsibility for setting worker and environmental exposure
standards and labeling requirements. Celanese is a producer of formaldehyde and
plastics derived from formaldehyde. Celanese is participating together with
other producers and users in the evaluations of these findings. Celanese cannot
predict the final outcome or effect of any final ruling.
Other recent initiatives will potentially require toxicological testing and
risk assessments of a wide variety of chemicals, including chemicals used or
produced by Celanese. These initiatives include the Voluntary Children's
Chemical Evaluation Program and High Production Volume Chemical Initiative in
the United States, as well as various European Commission programs, such as the
new European Environment and Health Strategy, commonly known as SCALE, as well
as the Proposal for the Registration, Evaluation and Authorization and
Restriction of Chemicals or REACH. REACH, which the European Commission proposed
in October 2003, will establish a system to register and evaluate chemicals
manufactured or imported to the European Union. Depending on the final ruling,
additional testing, documentation and risk assessments will occur for the
chemical industry. This will affect European producers of chemicals as well as
all chemical companies worldwide that export to member states of the European
Union. The final ruling has not yet been decided.
Depending on the outcome of the above-mentioned assessments in the United
States and Europe, additional requirements may be placed on the production,
handling, labeling or use of the subject chemicals. Such additional requirements
could increase the cost incurred by Celanese's customers to use its chemical
products and otherwise limit the use of these products, which could adversely
affect the demand for these products.
CELANESE'S PRODUCTION FACILITIES HANDLE THE PROCESSING OF SOME VOLATILE AND
HAZARDOUS MATERIALS THAT SUBJECT CELANESE TO OPERATING RISKS THAT COULD
ADVERSELY AFFECT CELANESE'S OPERATING RESULTS
Celanese's operations are subject to operating risks associated with
chemical manufacturing, including the related storage and transportation of raw
materials, products and wastes. These hazards include, among other things:
o Pipeline and storage tank leaks and ruptures;
o Explosions and fires; and
o Discharges or releases of toxic or hazardous substances.
These operating risks can cause personal injury, property damage and
environmental contamination, and may result in the shutdown of affected
facilities and the imposition of civil or criminal penalties. The occurrence of
any of these events may materially adversely affect the productivity and
profitability of a particular manufacturing facility and Celanese's operating
results and cash flows.
Celanese maintains property, business interruption and casualty insurance
which it believes is in accordance with customary industry practices, but
Celanese cannot provide any assurance that this insurance will be adequate to
fully cover all potential hazards incidental to its business.
For more detailed information on environmental issues, see "Item 4.
Information on the Company -- Environmental and Other Regulations" and Note 26
to the Consolidated Financial Statements.
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<PAGE>
FLUCTUATIONS IN EXCHANGE AND INTEREST RATES MAY AFFECT CELANESE'S OPERATING
RESULTS
Celanese is exposed to market risk through commercial and financial
operations. Celanese's market risk consists principally of exposure to
fluctuations in currency exchange and interest rates.
As Celanese conducts a significant portion of its operations outside the
euro zone, fluctuations in currencies of such countries, especially the U.S.
dollar, may materially affect Celanese's operating results. For example, changes
in currency exchange rates may affect:
o The relative prices at which Celanese and its competitors sell products
in the same market; and
o The cost of items required in Celanese's operations.
Celanese uses financial instruments to hedge its exposure to foreign
currency fluctuations. The notional amounts under such foreign currency
contracts outstanding at December 31, 2003 were E606 million.
Celanese holds a variety of interest rate sensitive assets and liabilities
to manage the liquidity and cash needs of its day-to-day operations. Celanese is
primarily exposed to changes in interest rates in the U.S. dollar and the euro.
To manage these risks, Celanese enters into interest rate swap agreements to
reduce the exposure of interest rate risk inherent in Celanese's debt portfolio.
Celanese uses swaps for hedging purposes only. The maturities of these swaps
depend on the underlying debt portfolio.
SIGNIFICANT CHANGES IN PENSION FUND INVESTMENT PERFORMANCE OR ASSUMPTIONS
RELATING TO PENSION COSTS MAY HAVE A MATERIAL EFFECT ON THE VALUATION OF PENSION
OBLIGATIONS, THE FUNDED STATUS OF PENSION PLANS, AND CELANESE'S PENSION COST
Celanese's funding policy for pension plans is to accumulate plan assets
that, over the long run, will approximate the present value of projected benefit
obligations. Celanese's pension cost is materially affected by the discount rate
used to measure pension obligations, the level of plan assets available to fund
those obligations at the measurement date and the expected long-term rate of
return on plan assets. Significant changes in investment performance or a change
in the portfolio mix of invested assets can result in corresponding increases
and decreases in the valuation of plan assets, particularly equity securities,
or in a change of the expected rate of return on plan assets. A change in
discount rate would result in a significant increase or decrease in the
valuation of pension obligations, affecting the reported funded status of
Celanese's pension plans as well as the net periodic pension cost in the
following financial years. Similarly, changes in the expected return on plan
assets assumption can result in significant changes in the net periodic pension
cost of the following financial years. For further information see "Item 5:
Operating and Financial Review and Prospects -- Critical Accounting Policies"
and Note 20 to the Consolidated Financial Statements.
CELANESE AND HOECHST HAVE OBLIGATIONS TO PAY EACH OTHER CERTAIN AMOUNTS, SOME OF
WHICH ARE NOT YET DETERMINABLE
Under the demerger agreement, Celanese agreed to indemnify Hoechst for
environmental liabilities that Hoechst may incur with respect to Celanese's
German production sites, which were transferred from Hoechst to Celanese in
connection with the demerger. Celanese also has an obligation to indemnify
Hoechst against liabilities for environmental damages or contamination arising
under 17 divestiture agreements entered into by Hoechst prior to the demerger.
Celanese's obligation regarding two additional divestiture agreements had been
settled during 2002. As the indemnification obligations depend on the occurrence
of unpredictable future events, the costs associated with them are not yet
determinable and may materially affect operating results.
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Celanese's obligation to indemnify Hoechst against liabilities for
environmental contamination in connection with the divestiture agreements is
subject to the following thresholds:
o Celanese will indemnify Hoechst for the total amount of these liabilities
up to E250 million;
o Hoechst will bear the full amount of those liabilities between E250
million and E750 million; and
o Celanese will indemnify Hoechst for one third of those liabilities for
amounts exceeding E750 million.
Celanese has made payments through December 31, 2003 of E36 million for
environmental contamination liabilities in connection with the divestiture
agreements. As of December 31, 2003, Celanese has reserves of approximately E42
million for this contingency, and may be required to record additional reserves
in the future.
Also, Celanese has undertaken in the demerger agreement to indemnify
Hoechst to the extent that Hoechst is required to discharge liabilities,
including tax liabilities, in relation to assets included in the demerger, where
such liabilities have not been demerged due to transfer or other restrictions.
Celanese did not make any payments to Hoechst in either 2003 or 2002 in
connection with this indemnity.
Under the demerger agreement, Celanese will also be responsible, directly
or indirectly, for all of Hoechst's obligations to past employees of businesses
that were demerged to Celanese. Under the demerger agreement, Hoechst agreed to
indemnify Celanese from liabilities (other than liabilities for environmental
contamination) stemming from the agreements governing the divestiture of
Hoechst's polyester businesses, which were demerged to Celanese, insofar as such
liabilities relate to the European part of that business. Hoechst has also
agreed to bear 80 percent of the financial obligations arising in connection
with the government investigation and litigation associated with the sorbates
industry for price fixing described in "Item 8. Financial Information -- Legal
Proceedings" and Note 25 to the Consolidated Financial Statements, and Celanese
has agreed to bear the remaining 20 percent.
HOLDERS OF A SIGNIFICANT NUMBER OF SHARES IN CELANESE MAY BE ABLE TO BLOCK
CORPORATE ACTIONS
Kuwait Petroleum Corporation or KPC owned 29.2 percent of the Celanese
shares outstanding as of December 31, 2003. KPC has the ability, as a matter of
German corporate law, to block some corporate actions by Celanese such as
mergers, spin-offs and capital measures which require either a majority of 75
percent of the votes cast or 75 percent of the share capital represented at a
shareholders' meeting. An officer of Kuwait Petroleum Corporation has been
elected as one of the shareholder representatives on the supervisory board of
Celanese. On December 15, 2003, KPC entered into an agreement with BCP Crystal
to tender its 14,400,000 shares of Celanese in accordance with the terms of the
BCP Crystal offer.
If the BCP Crystal offer is successful, BCP Crystal has stated that it
intends to enter into a domination and profit and loss transfer agreement with
Celanese, pursuant to which, among other things, BCP Crystal will be entitled to
direct the management of Celanese and to receive all its profits, and remaining
minority shareholders of Celanese will lose the right to receive dividends,
other than a guaranteed dividend.
ITEM 4. INFORMATION ON THE COMPANY
RECENT DEVELOPMENTS
On December 16, 2003, BCP Crystal announced its intention to launch a
voluntary public offer to acquire all of the outstanding shares of Celanese AG
for a price of E32.50 per share, without interest. BCP Crystal filed a Schedule
TO-C with the Securities and Exchange Commission or the Commission on December
24, 2003, and its tender offer document was published and mailed to Celanese
shareholders on February 2, 2004, after being approved by the German Federal
Financial Supervisory Authority (Bundesanstalt fuer Finanzaufsicht or BaFin). In
accordance with the German Securities Acquisition and Takeover Act
(Wertpapiererwerbs- und Uebernahmegesetz), and applicable United States
securities laws. On February 10, 2004 the board of management and supervisory
board of Celanese delivered and published their reasoned opinions (begruendete
Stellungnahmen) on the offer and Celanese filed its Schedule 14D-9 with the
Commission. The offer is subject to a number of conditions, of which certain
conditions can be waived by BCP Crystal, including
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<PAGE>
that at least 85 percent of the registered outstanding shares of Celanese be
validly tendered into the offer and not withdrawn. On March 12, 2004 BCP Crystal
announced its decision to reduce the minimum acceptance condition from 85
percent to 75 percent. In accordance with applicable German law, such a change
automatically extends the initial acceptance period of the offer for two weeks,
and an announcement as to the outcome of the offer is expected on or about April
3, 2004.
INTRODUCTION
Celanese AG was incorporated as Diogenes Erste Vermoegensverwaltungs GmbH
as a stock corporation organized under the laws of the Federal Republic of
Germany on November 22, 1996. It changed its name to Celanese AG upon its
demerger from Hoechst on October 22, 1999. Celanese's registered office is
located at Frankfurter StraSSe 111, 61476 Kronberg/Taunus, Germany, telephone
+49 69 305 16000.
BUSINESS SUMMARY
Celanese is a leading global industrial chemicals company with strong
competitive positions in its major products and production technologies. Its
business involves processing chemical raw materials, such as ethylene and
propylene, and natural products, including natural gas and wood pulp, into
value-added chemicals and chemical-based products. Celanese's leadership
position is based on two key factors: its significant market shares and
competitive cost structures in its major products. Celanese's competitive cost
structures are based on economies of scale, vertical integration, technical
know-how and the use of advanced technologies. During the fourth quarter of
2003, Celanese realigned its business segments to reflect a change of how it
manages the business and assesses performance. See Notes 1 and 29 to the
Consolidated Financial Statements. The Celanese portfolio now consists of four
main business segments: Chemical Products, Acetate Products, Technical Polymers
Ticona and Performance Products.
In 2003, Celanese had net sales of E4,075 million and an operating profit
of E106 million from continuing operations. At December 31, 2003, Celanese had
approximately 9,500 employees worldwide on a continuing basis. As of December
31, 2003, Celanese had 24 production plants and six research centers in ten
countries. Most of Celanese's facilities are located in the Americas,
principally in the three North America Free Trade Agreement countries: the
United States, Canada and Mexico. Celanese also has major operations, including
significant joint ventures, in Asia. In 2003, 47 percent of net sales was
derived from sales in North America, 41 percent from sales in Europe, 11 percent
from sales in Asia and Australia and 1 percent from sales in the rest of the
world. Celanese has a large and diverse global customer base consisting
principally of major industrial companies. In 2003, sales to the 10 largest
customers of Celanese accounted for less than 30 percent of its net sales and
the single largest customer represented less than 7 percent of its net sales.
Celanese's aggregate capital expenditures for property, plant and equipment
were E185 million in 2003, E214 million in 2002, and E213 million in 2001. North
America and Europe accounted for 51 percent and 46 percent, respectively, of
Celanese's capital expenditures in 2003. The capital expenditures were financed
by means of Celanese's operating cash flows, cash reserves and additional funds
drawn down from existing credit facilities. See also "Business Segments" for
capital expenditures by business segment. For a description of principal
acquisitions and dispositions of businesses during the last three years, see
"Acquisitions and Divestitures," "Item 5. Operating and Financial Review and
Prospects -- Summary of Consolidated Results -- 2003 Compared to
2002 -- Discontinued Operations for the years ended December 31, 2003, 2002 and
2001", and Note 7 to the Consolidated Financial Statements.
As of December 31, 2003, Celanese had 49,321,468 shares outstanding and
approximately 90,000 shareholders. Its ordinary shares are traded on the
Frankfurt Stock Exchange under the symbol CZZ and on the New York Stock Exchange
under the symbol CZ.
SEGMENT OVERVIEW
Celanese is an integrated company that operates through four principal
business segments: Chemical Products, Acetate Products, Technical Polymers
Ticona and Performance Products.
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Chemical Products. This segment produces and supplies acetyl products,
including acetic acid, acetate esters, vinyl acetate monomer, polyvinyl alcohol,
and emulsions. Acetic acid is a commodity used in the production of other basic
chemicals. Acetate esters are used in coatings and inks. Vinyl acetate monomer
is primarily used in a variety of adhesives, paints and coatings. Polyvinyl
alcohol is made from vinyl acetate monomer and is used in adhesives, building
products, paper coatings, films and textiles. Emulsions and emulsion powders are
a key component of water based quality surface coatings, adhesives, non-woven
textiles and other applications. Most of the other chemicals produced in this
segment are organic solvents and intermediates for pharmaceutical, agricultural
and chemical products. Celanese is the world's leading producer of acetic acid
and vinyl acetate monomer and the largest North American producer of methanol,
the major raw material used for the production of acetic acid. Celanese is the
largest polyvinyl alcohol producer in North America and the second largest
producer in the world. Based on sales, the emulsions business holds a number two
position in conventional emulsions (excluding styrene butadiene resins or SBRs)
in Europe and a number one position in European VAM-based emulsions. The
business is also a leading supplier of emulsion powders globally.
Acetate Products. This segment primarily produces and supplies acetate tow
(filter products) and acetate filament. Products from this segment are found in
cigarette filters, fashion apparel, linings, and home furnishings. Celanese is
one of the world's leading producers of acetate tow and acetate filament,
including production by its joint ventures in Asia.
Technical Polymers Ticona. This segment develops, produces and supplies a
broad portfolio of high performance technical polymers for application in
automotive and electronics products and in other consumer goods, often replacing
metal or glass. Together with its 45 percent-owned affiliate Polyplastics, its
50 percent-owned affiliate Korea Engineering Plastics Company Ltd., and Fortron
Industries, its 50-50 joint venture with Kureha Chemicals Industry of Japan,
Celanese is a leading participant in the global technical polymers business.
Performance Products. This segment consists of Nutrinova, the food
ingredients business, which produces and sells high intensity sweeteners and
food protection ingredients, such as sorbic acids and sorbates, for the food,
beverage and pharmaceuticals industries.
The table below illustrates each segment's share of total segment net sales
to external customers for the years ended December 31, 2003, 2002 and 2001.
NET SALES TO EXTERNAL CUSTOMERS BY SEGMENT
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
% OF % OF % OF
E SEGMENT(1) E SEGMENT(1) E SEGMENT(1)
----- ---------- ----- ---------- ----- ----------
(IN MILLIONS, EXCEPT PERCENTAGES)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chemical Products............... 2,628 65% 2,482 62% 2,723 62%
Acetate Products................ 578 14% 670 17% 762 18%
Technical Polymers Ticona....... 675 17% 696 17% 706 16%
Performance Products............ 150 4% 161 4% 159 4%
----------------------------------------------------------------------------------------------
</Table>
---------------
(1) The percentages in this column represent the percentage contribution of each
segment to the total of all segments.
OTHER ACTIVITIES
The portfolio of Celanese contains other businesses and activities separate
from its principal chemical operations, which consists primarily of general
corporate functions, captive insurance companies, the innovative products
subsidiaries Celanese Ventures GmbH and Celanese Advanced Materials, Inc.,
companies that provide infrastructure services, and other ancillary businesses.
Celanese Advanced Materials, Inc.
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consists of the high performance polymer, polybenzimidazole or PBI, and the
Vectran(R) polymer fiber product lines.
STRATEGY
Celanese will continue to pursue its strategy of investing in new
production capacity in growth areas and extending its value chain into higher
value products; enhancing the value of its portfolio; reducing costs and
increasing productivity; and focusing on financial soundness.
CELANESE IS INVESTING IN NEW PRODUCTION CAPACITY IN GROWTH AREAS AND EVALUATING
OPPORTUNITIES TO EXTEND ITS VALUE CHAIN INTO HIGHER VALUE PRODUCTS
Celanese took further steps to position its strong value chain in acetyl
products for growth and greater profitability by investing in new capacity in
high-growth regions and by integrating its European emulsions business, acquired
at year-end 2002, into the Chemical Products segment.
Celanese is preparing to build a 600,000 metric ton world-scale acetic acid
plant in China, the world's fastest growing market for acetic acid and its
derivatives. Celanese received government approval to build the Nanjing plant in
March 2003 and it is expected to come on stream in late 2005 or early 2006.
Celanese Acetate LLC and the China National Tobacco Company announced an
agreement in 2003 to double the capacity of the three filter tow plants in
China, in which Celanese owns a 30 percent interest. The expansions are expected
to be completed by 2007.
Ticona announced plans to increase the capacity of its GUR(R) ultra high
molecular weight polyethylene plant in Oberhausen, Germany, by 10,000 tons. With
this expansion, Ticona's total worldwide capacity is expected to increase by 17
percent in the second half of 2004.
Celanese's joint venture with Hatco Corporation, Estech GmbH, brought on
stream in October 2003 a plant to produce neopolyol esters at Oberhausen,
Germany. The plant supplies the growing specialty lubricants markets in Europe,
Africa and the Middle East.
Ticona and its Asian partners broke ground in July 2003 for a new
polyacetal plant in China, a major growth market for engineering plastics. The
new plant is expected to start operations in the second quarter of 2005.
CELANESE IS ENHANCING THE VALUE OF ITS PORTFOLIO OF BUSINESSES
Celanese continues to optimize its business portfolio to focus on
businesses in which it can achieve market, cost and technology leadership over
the long term. Celanese took major steps in 2003 to find solutions for several
noncore and underperforming businesses. In September, Celanese reached an
agreement to sell its acrylates business to The Dow Chemical Company or Dow. The
transaction was completed in February 2004. In October 2003, European Oxo GmbH,
Celanese's European oxo chemicals joint venture with Degussa AG, began
operations. This joint venture combines Celanese's and Degussa's commercial,
technical and operational C3-oxo business activities. In December 2003, Celanese
divested its nylon business in the Technical Polymers Ticona segment to BASF
Aktiengesellschaft or BASF. Celanese is exploring options to extract greater
value from its Nutrinova food ingredients business in the Performance Products
segment. These options could include joint ventures or a partial or full sale.
CELANESE IS STRIVING FOR COST AND PRODUCTIVITY LEADERSHIP BY SEEKING TO REDUCE
ITS RELIANCE ON U.S. GULF COAST NATURAL GAS AND BY USING A NUMBER OF TOOLS, SUCH
AS SIX SIGMA, TO INCREASE OPERATIONAL EXCELLENCE
Celanese is continually seeking opportunities to reduce its consumption of
high-cost U.S. Gulf Coast natural gas. In July 2003, it announced that it will
purchase most of its North American internal methanol requirements from Southern
Chemical Corporation beginning in 2005 under a multi-year agreement. The
methanol will be produced from natural gas at a facility in Trinidad at a lower
cost. In addition, Celanese is engaged in several projects and process
technology improvements focused on energy reduction.
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Celanese also uses best practices to reduce costs and increase equipment
reliability in maintenance and project engineering. Advanced process control
projects help to generate significant savings in energy and raw materials while
increasing yields in production units. Most significantly, Six Sigma, a
structured process based on statistics for achieving greater productivity and
growth, has become a pervasive and important tool in both operations and
administration for projects ranging from lowering costs to increasing capacity
and from reducing working capital to minimizing capital expenditures required
for expansion.
CELANESE HAS A POLICY OF SOUND FINANCIAL POSITION
In 2003, Celanese further strengthened its financial position. As the
result of favorable currency movements, strong cash flow management and cash
from insurance recoveries, Celanese reduced its debt in 2003. Celanese
contributed E115 million to its U.S. qualified pension plan in 2003 as part of
its goal to close the gap between plan assets and obligations. In addition,
strong cash generation enabled Celanese to pay a E0.44 per share 2002 dividend
and complete a share buyback of 2 percent of outstanding shares in April 2003.
THE SUCCESS OF THE BCP CRYSTAL OFFER MAY HAVE AN EFFECT ON CELANESE'S STRATEGY
BCP Crystal has indicated in its offer document that it agrees with
management's current strategy and would continue to support Celanese's
management. However, it also indicated that, upon successful completion of the
offer, it intends to review Celanese's assets, corporate structure,
capitalization, operations, policies management and personnel to determine what
changes, if any, would be desirable. As a result of this review or in light of
future developments, according to the offer document, BCP crystal may then
reconsider its current intentions and views and may attempt to make any changes
that it deems necessary or appropriate with respect to Celanese to the extent
permitted by law.
BUSINESS SEGMENTS
CHEMICAL PRODUCTS
The Chemical Products segment consists of six business lines: Acetyls,
Acetyl Derivatives and Polyols, Polyvinyl Alcohol, Emulsions, Specialties, and
other chemical activities. All business lines in this segment mainly conduct
business using the "Celanese" trade name, except Polyvinyl Alcohol, which uses
the
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trademark Celvol(R), and Emulsions, which uses the trademarks Mowilith(R) and
Celvolit(R). The following table lists key products and their major end use
markets.
<Table>
<Caption>
----------------------------------------------- -----------------------------------------------
KEY CHEMICAL PRODUCTS MAJOR END USE MARKETS
----------------------------------------------- -----------------------------------------------
<S> <C>
Methanol Formaldehyde and Acetic Acid
----------------------------------------------- -----------------------------------------------
Acetic Acid Vinyl Acetate Monomer, Acetic Anhydride and
Purified Terephthalic Acid or PTA, an
intermediate used in the production of
polyester resins, films and fibers
----------------------------------------------- -----------------------------------------------
Acetic Anhydride Cellulose Acetate and Pharmaceuticals
----------------------------------------------- -----------------------------------------------
Vinyl Acetate Monomer Paints, Adhesives, Paper Coatings, Films and
Textiles
----------------------------------------------- -----------------------------------------------
Acetate Esters Coatings, Inks
----------------------------------------------- -----------------------------------------------
Oxo Alcohols Plasticizers, Acrylates, Esters, Solvents and
Inks
----------------------------------------------- -----------------------------------------------
Polyvinyl Alcohol Adhesives, Building Products, Paper Coatings,
Films and Textiles
----------------------------------------------- -----------------------------------------------
Emulsions Water-Based Quality Surface Coatings,
Adhesives, Non-Woven Textiles
----------------------------------------------- -----------------------------------------------
Emulsion Powders Building Products
----------------------------------------------- -----------------------------------------------
Carboxylic Acids Lubricants, Detergents and Specialties
----------------------------------------------- -----------------------------------------------
Amines Agricultural Products and Water Treatments
----------------------------------------------- -----------------------------------------------
</Table>
Business Lines
Acetyls. The acetyls business line produces:
o Methanol, principally used internally in the production of acetic acid
and formaldehyde. The balance is sold to the merchant market.
o Acetic acid, used to manufacture vinyl acetate monomer and other
acetyl derivatives. Celanese manufactures acetic acid for its own use,
as well as for sale to third parties, including producers of purified
terephthalic acid, or PTA, and to other participants in the acetyl
derivatives business.
o Vinyl acetate monomer, used in a variety of adhesives, paints, films,
coatings and textiles. Celanese manufactures vinyl acetate monomer for
its own use, as well as for sale to third parties.
o Acetic anhydride, a raw material used in the production of cellulose
acetate, detergents and pharmaceuticals.
o Acetaldehyde, a major feedstock for the production of polyols.
Acetaldehyde is also used in other organic compounds such as
pyridines, which are used in agricultural products.
Celanese is a leading global producer of acetic acid and the world's
leading producer of vinyl acetate monomer according to the Tecnon Orbichem's
Acetic Acid and Vinyl Acetate 1999-2009 World Survey. According to data from the
CMAI 2002-2003 World Methanol Analysis, Celanese is the largest producer of
methanol in North America.
Acetic acid, methanol, and vinyl acetate monomer, like other commodity
products, are characterized by cyclicality in pricing. The principal raw
materials in these products are natural gas and ethylene, which are purchased
from numerous sources; carbon monoxide, which is purchased by Celanese under
long-term contracts; methanol, which is both manufactured and purchased by
Celanese under short-term contracts; and
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<PAGE>
butane, which is purchased from several suppliers. All these raw materials,
except carbon monoxide, are themselves commodities and are available from a wide
variety of sources.
Celanese's production of acetyl products employs leading proprietary and
licensed technologies, including Celanese's proprietary AO Plus(TM)
acid-optimization technology for the production of acetic acid and VAntage(TM)
vinyl acetate monomer technology. AO Plus enables plant capacity to be increased
with minimal investment, while VAntage enables significant increases in
production efficiencies, lower operating costs and increases in capacity at 10
to 15 percent of the cost of building a new plant.
Acetyl Derivatives and Polyols. The acetyl derivatives and polyols
business line produces a variety of solvents, polyols, formaldehyde and other
chemicals, which in turn are used in the manufacture of paints, coatings,
adhesives, and other products.
Many acetyl derivatives products are derived from Celanese's production of
acetic acid and oxo alcohols. Primary products are:
o Ethyl acetate, an acetate ester that is a solvent used in coatings,
inks and adhesives and in the manufacture of photographic films and
coated papers;
o Butyl acetate, an acetate ester that is a solvent used in inks,
pharmaceuticals and perfume;
o Propyl acetate, an acetate ester that is a solvent used in inks,
lacquers and plastics;
o Methyl ethyl ketone, a solvent used in the production of printing inks
and magnetic tapes;
o Butyric acid, an intermediate for the production of esters used in
artificial flavors;
o Propionic acid, an organic acid used to protect and preserve grain;
and
o Formic acid, an organic acid used in textile dyeing and leather
tanning.
Polyols and formaldehyde products are derivatives of methanol and are made
up of the following products:
o Formaldehyde, primarily used to produce adhesive resins for plywood,
particle board, polyacetal engineering resins and a compound used in
making polyurethane;
o Polyol products such as pentaerythritol, used in coatings and
synthetic lubricants; trimethylolpropane, used in synthetic
lubricants; neopentyl glycol, used in powder coatings; and 1,3
butylene glycol, used in flavorings and plasticizers.
Oxo alcohols and intermediates are produced from propylene and ethylene and
include:
o Butanol, used as a solvent for lacquers, dopes and thinners, and as an
intermediate in the manufacture of chemicals, such as butyl acrylate;
o Propanol, used as an intermediate in the production of amines for
agricultural chemicals, and as a solvent for inks, resins,
insecticides and waxes;
o Synthesis gas, used as an intermediate in the production of oxo
alcohols and specialties.
Acetyl derivatives and polyols are commodity products characterized by
cyclicality in pricing. The principal raw materials used in the acetyl
derivatives business line are acetic acid, various alcohols, methanol,
acetaldehyde, propylene, ethylene and synthesis gas. Celanese manufactures many
of these raw materials for its own use as well as for sales to third parties,
including its competitors in the acetyl derivatives business. Celanese purchases
propylene and ethylene from a variety of sources. Celanese manufactures
acetaldehyde for its European production, but it purchases all its acetaldehyde
requirements for its North American operations from Petroleos Mexicanos, the
Mexican national oil company. Petroleos Mexicanos has been a reliable supplier.
Acetaldehyde is also available from other sources.
Polyvinyl Alcohol. Polyvinyl alcohol is a performance chemical engineered
to satisfy particular customer requirements. It is used in adhesives, building
products, paper coatings, films and textiles. The
17
<PAGE>
primary raw material to produce polyvinyl alcohol is vinyl acetate monomer,
while acetic acid is produced as a by-product. Prices vary depending on industry
segment and end use application. Products are sold on a global basis, and
competition is from all regions of the world. Therefore, regional economies and
supply and demand balances affect the level of competition in other regions.
According to Stanford Research International's December 2003 report on PVOH,
Celanese is the largest North American producer of polyvinyl alcohol and the
second largest producer in the world.
Emulsions. Celanese purchased the emulsions business of Clariant AG on
December 31, 2002. The products in this business are sold under the Mowilith(R)
and Celvolit(R) brands and include conventional emulsions, high-pressure vinyl
acetate ethylene emulsions, and powders. Emulsions are made from vinyl acetate
monomer, acrylate esters and styrene. Emulsions are a key component of
water-based quality surface coatings, adhesives, non-woven textiles and other
applications. According to Kline & Co., a chemicals industry consultant, based
on sales the business held a number two position in emulsions (excluding SBRs)
in Europe and a number one position in European VAM-based emulsions in 2001.
Specialties. The specialties business line produces:
o Carboxylic acids such as pelargonic acid, used in detergents and
synthetic lubricants, and heptanoic acid, used in plasticizers and
synthetic lubricants;
o Amines such as methyl amines, used in agrochemicals, monoisopropynol
amines, used in herbicides, and butyl amines, used in the treatment of
rubber and in water treatment; and
o Oxo derivatives and special solvents, such as crotonaldehyde, which is
used by the Performance Products segment for the production of
sorbates, as well as raw materials for the fragrance and food
ingredients industry.
The prices for these products are relatively stable due to long-term
contracts with customers whose industries are not generally subject to the
cyclical trends of commodity chemicals.
The primary raw materials for these products are olefins and ammonia, which
are purchased from world market suppliers based on international prices.
In March 2002, Celanese formed Estech, a venture with Hatco Corporation, a
leading producer of synthetic lubricants, for the production and marketing of
neopolyol esters or NPEs. This venture, in which Celanese holds a 51 percent
interest, built and operates a 7,000 metric ton per year NPE plant at Celanese's
Oberhausen, Germany site. The plant came on stream in the fourth quarter of
2003. Neopolyol esters are used as base stocks for synthetic lubricants in
refrigeration, automotive, aviation and industrial applications, as well as in
hydraulic fluids. Celanese supplies Estech with carboxylic acids and polyols,
the main raw materials for producing NPEs.
Celanese contributed its commercial, technical and operational C3-oxo
business activities in Oberhausen, Germany to European Oxo GmbH, Celanese's
European oxo chemicals joint venture with Degussa AG. The joint venture began
operations in October 2003.
Facilities
The Chemical Products segment has production sites in the United States,
Canada, Mexico, Singapore, Spain, Sweden, Slovenia and Germany. The emulsions
business line also has tolling arrangements in the United Kingdom, France and
Greece. Celanese also participates in a joint venture in Saudi Arabia that
produces methanol and MTBE. Over the last few years, Celanese has continued to
shift its production capacity to lower cost production facilities while
expanding in growth markets, such as China. As a result, Celanese plans to shut
down its formaldehyde unit in Edmonton, Alberta, Canada during 2004. Celanese
announced plans to build a 600,000 metric ton acetic acid plant in Nanjing,
China, which is expected to come on stream in late 2005 or early 2006.
18
<PAGE>
Capital Expenditures
The Chemical Products segment's capital expenditures were E96 million, E106
million, and E70 million for the years 2003, 2002 and 2001, respectively. The
capital expenditures incurred during the last three years related primarily to
efficiency and safety improvement-related items associated with the normal
operations of the business, as well as spending for a new plant for synthesis
gas, an important raw material for the production of oxo alcohols and
specialties, at Celanese's Oberhausen site. The new plant, which will supply
European Oxo GmbH and Celanese, came on stream in the third quarter of 2003 and
is expected to improve reliability and reduce production costs. Capital
expenditures in 2003 also included the integration of a company-wide SAP system.
Markets
The following table illustrates net sales by destination of the Chemical
Products segment by geographic region for the years ended December 31, 2003,
2002 and 2001.
NET SALES TO EXTERNAL CUSTOMERS BY DESTINATION -- CHEMICAL PRODUCTS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
% OF % OF % OF
E SEGMENT E SEGMENT E SEGMENT
----- ------- ----- ------- ----- -------
(IN MILLIONS, EXCEPT PERCENTAGES)
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North America....................... 1,046 39% 1,100 44% 1,273 47%
Europe/Africa....................... 1,047 40% 865 35% 958 35%
Asia/Australia...................... 462 18% 442 18% 411 15%
Rest of World....................... 73 3% 75 3% 81 3%
</Table>
The Chemical Products segment markets its products both directly to
customers and through distributors. It also utilizes a number of "e-channels",
including its website at www.chemvip.com, as well as system to system linking
through its industry portal, Elemica.
In the acetyls business line, the methanol market is regional and highly
dependent on the demand for products made from methanol. In addition to its own
demands for methanol, Celanese's production is sold to a few regional customers
who are manufacturers of chemical intermediates and to a lesser extent, by
manufacturers in the wood products industry. Celanese typically enters into
short-term contracts for the sale of methanol. Acetic acid and vinyl acetate
monomer are global businesses which have several large customers. Generally,
Celanese supplies these global customers under multi-year contracts. The
customers of acetic acid and vinyl acetate monomer produce polymers used in
water-based paints, adhesives, paper coatings, film modifiers and textiles.
Celanese has long-standing relationships with most of these customers.
Polyvinyl alcohol is sold to a diverse group of regional and multinational
customers mainly under single year contracts. The customers of the polyvinyl
alcohol business line are primarily engaged in the production of adhesives,
paper, films, building products, and textiles.
Emulsions and emulsion powders are sold to a diverse group of regional and
multinational customers. Customers for emulsions are manufacturers of
water-based quality surface coatings, adhesives, and non-woven textiles.
Customers for emulsion powders are primarily manufacturers of building products.
Acetyl derivatives and polyols are sold to a diverse group of regional and
multinational customers both under multi-year contracts and on the basis of
long-standing relationships. The customers of acetyl derivatives are primarily
engaged in the production of paints, coatings and adhesives. In addition to its
own demand for acetyl derivatives to produce cellulose acetate, Celanese sells
acetyl derivatives to other participants in the cellulose acetate industry.
Celanese manufactures formaldehyde for its own use as well as for sale to a few
regional customers that include manufacturers in the wood products and chemical
derivatives industries. The sale of formaldehyde is based on both long and short
term agreements. Polyols are sold globally to a wide
19
<PAGE>
variety of customers, primarily in the coatings and resins and the specialty
products industries. Oxo products are sold to a wide variety of customers,
primarily in the construction and automotive industries. The oxo market is
characterized by oversupply and numerous competitors.
The specialties business line primarily serves global markets in the
synthetic lubricant, agrochemical, rubber processing and other specialty
chemical areas. Much of the specialties business line involves "one customer,
one product" relationships, where the business develops customized products with
the customer, but the specialties business line also sells several chemicals
which are priced more like commodity chemicals.
Competition
Principal competitors of Celanese in the Chemical Products segment include
Acetex Corporation, Air Products and Chemicals, Inc., Atofina S.A., BASF, Borden
Chemical, Inc., BP p.l.c. ("BP"), Chang Chun Petrochemical Co., Ltd., Daicel,
Dow, Eastman Chemical Corporation ("Eastman"), E. I. Du Pont de Nemours and
Company ("DuPont"), Methanex Corporation ("Methanex"), Millennium Chemicals Inc.
("Millennium"), Nippon Goshei, Perstorp Inc., Rohm & Haas Company, Showa Denko
K.K., and Kuraray Co. Ltd.
ACETATE PRODUCTS
The Acetate Products segment consists of two major business lines, acetate
filter products and acetate filament. Both these business lines use the
"Celanese" brand to market their products. The following table lists key
products of the Acetate Products segment and their major markets.
<Table>
<Caption>
----------------------------------------------- -----------------------------------------------
KEY ACETATE PRODUCTS MAJOR MARKETS
----------------------------------------------- -----------------------------------------------
<S> <C>
Acetate Tow Cigarette Filters
----------------------------------------------- -----------------------------------------------
Acetate Filament Fashion Apparel, Linings and Home Furnishings
----------------------------------------------- -----------------------------------------------
</Table>
Business Lines
Products from the two major business lines are found in cigarette filters,
fashion apparel, linings and home furnishings. According to the 2002 Stanford
Research Institute International Chemical Economics Handbook, Celanese is the
world's leading producer of acetate fibers, including production of its joint
ventures in Asia.
Celanese produces acetate flake by processing wood pulp with acetic
anhydride. Celanese purchases wood pulp that is made from reforested trees from
major suppliers and produces acetic anhydride internally. The acetate flake is
then further processed into acetate fiber in the form of a tow band or filament.
The acetate filter products business line produces acetate tow, which is
used primarily in cigarette filters. The acetate tow market continues to be
characterized by stability and slow growth.
Celanese has a 30 percent interest in three manufacturing joint ventures
with Chinese state-owned enterprises that produce cellulose acetate flake and
tow in China. Additionally, in 2003, 21 percent of Celanese's sales of acetate
tow were sold to the state-owned tobacco enterprises, the largest single market
for acetate tow in the world. As demand for acetate tow in China exceeds local
supply, Celanese and its Chinese partners have agreed to expand capacity at
their three manufacturing joint ventures. Although increases in manufacturing
capacity of the joint ventures will reduce, beginning in 2005, the volume of
Celanese's future direct sales of cellulose acetate tow to China, the dividends
paid by the joint ventures to Celanese are projected to increase once the
expansions are complete in 2007.
The acetate filament business line is a supplier to the textile industry.
Demand for acetate filament is dependent on fashion trends and the world
economy. Although the popularity of knit garments in the U.S. fashion industry
has had a positive effect on demand for acetate filament, global demand for
lining and
20
<PAGE>
shell material has declined due to fashion trends, such as the prevalence of
casual office wear. In addition, market conditions in North America and Asia
have significantly affected the global textile business and negatively affected
consumption of all fibers, including acetate. Product substitution from acetate
filament to polyester fibers and other filaments has also occurred. Celanese
continues to work more closely with downstream apparel manufacturers and major
retailers to increase awareness of acetate's suitability for high-end fashion
apparel due to its breathable and luxurious qualities.
The Acetate Products segment is continuing its cost reduction and
operations improvement efforts. These efforts are directed toward reducing costs
while achieving higher productivity of employees and equipment. In addition to
restructuring activities undertaken in prior periods, Celanese outsourced the
operation and maintenance of its utility operations at the Narrows, Virginia and
Rock Hill, South Carolina plants in 2003. Celanese also announced the closure of
its Charlotte, North Carolina administrative and research and development
facility; these functions will be relocated to the Rock Hill and Narrows
locations in 2004. Celanese is continuing to assess its worldwide acetate
production capacity, and it is probable that Celanese will close certain
facilities in the latter half of this decade.
Facilities
The Acetate Products segment has production sites in the United States,
Canada, Mexico and Belgium, and participates in three manufacturing joint
ventures in China.
Capital Expenditures
The Acetate Products segment's capital expenditures were E34 million, E31
million, and E35 million for the years 2003, 2002 and 2001, respectively. The
capital expenditures incurred during these years related primarily to
efficiency, environmental and safety improvement-related items associated with
the normal operations of the business. Capital expenditures in 2003 also
included the integration of a company-wide SAP system.
Markets
The following table illustrates the destination of the net sales of the
Acetate Products segment by geographic region for the years ending December 31,
2003, 2002 and 2001.
NET SALES TO EXTERNAL CUSTOMERS BY DESTINATION -- ACETATE PRODUCTS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
% OF % OF % OF
E SEGMENT E SEGMENT E SEGMENT
--- ------- --- ------- --- -------
(IN MILLIONS, EXCEPT PERCENTAGES)
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North America........................... 167 29% 199 30% 253 33%
Europe/Africa........................... 169 29% 177 26% 166 22%
Asia/Australia.......................... 228 40% 272 41% 321 42%
Rest of World........................... 14 2% 22 3% 22 3%
</Table>
Sales in the acetate filter products industry are principally to the major
tobacco companies that account for a majority of worldwide cigarette production.
Celanese's contracts with most of its customers, including its largest customer,
with whom it has a long-standing relationship, are entered into on an annual
basis. In recent years, the cigarette industry has experienced consolidation. In
the acetate filter products industry, changes in the cigarette manufacturer
customer base and shifts among suppliers to those customers have had significant
effects on acetate tow prices in the industry as a whole.
In the acetate filament industry, Celanese's sales are made to textile
companies that range in size from the largest in the industry to others which
are quite small. The textile companies either weave or knit the acetate filament
yarns to produce greige fabrics. The greige fabrics are then dyed and finished,
either by the
21
<PAGE>
greige fabrics manufacturer or by converters who buy the fabrics and contract
with dyeing and finishing companies to process the fabrics. The finished fabrics
are sold to manufacturers who cut and sew the fabrics into apparel for retail
stores.
The textile industry, in particular the apparel portion of the industry,
continues to undergo structural changes as production moves from high-wage to
low-wage countries. In recent years, this has resulted in a changing customer
base for all participants in the textile chain from the yarn manufacturer to the
garment manufacturer. Market conditions in North America and Asia have reduced
profitability in the global textile industry. Many North American manufacturers
in the textile chain have reduced capacity, vertically integrated with other
manufacturers or exited from the business. Although demand in the Asian market
continues to rise, intense competition has eroded pricing and reduced
profitability. Product substitution to polyester and other fibers has also
occurred. Celanese's acetate filament business has been adversely affected by
these trends in the industry.
Celanese is participating in the expanding Asian filament market through
its marketing alliance with Teijin Limited. Teijin agreed to assist Celanese
with qualifying its acetate filament with customers beginning in January 2002
and Celanese has successfully transitioned a majority of that business. Teijin
discontinued acetate filament production in March 2002.
Competition
Principal competitors in the Acetate Products segment include Acordis
Industrial Nederland bv, Daicel, Eastman, Mitsubishi Rayon Company, Limited,
Novaceta S.p.a., and Rhodia S.A. ("Rhodia").
TECHNICAL POLYMERS TICONA
Ticona develops, produces and supplies a broad portfolio of high
performance technical polymers. The following table lists key Ticona products,
their trademarks, and their major markets.
<Table>
<Caption>
----------------------------------------------- -----------------------------------------------
KEY TICONA PRODUCTS MAJOR MARKETS
----------------------------------------------- -----------------------------------------------
<S> <C>
Hostaform(R)/Celcon(R) (Polyacetals) Automotive, Electronics, Consumer Products and
Medical
----------------------------------------------- -----------------------------------------------
GUR(R) (Ultra High Molecular Weight Profiles, Battery Separators, Industrial
Polyethylene or PE-UHMW) Specialties. Filtration, Coatings and Medical
----------------------------------------------- -----------------------------------------------
Celanex(R)/Vandar(R)/Riteflex(R)/Impet(R) Electrical, Electronics, Automotive, Appliances
(Polyester Engineering Resins) and Consumer Products
----------------------------------------------- -----------------------------------------------
Vectra(R) (Liquid Crystal Polymers) Electronics, Telecommunications, Medical and
Consumer Products
----------------------------------------------- -----------------------------------------------
Fortron(R)* (Polyphenylene Sulfide or PPS) Electronics, Automotive and Industrial
----------------------------------------------- -----------------------------------------------
Celstran(R), Compel(R) (long fiber reinforced Automotive and Industrial
thermoplastics)
----------------------------------------------- -----------------------------------------------
</Table>
---------------
* Fortron is a registered trademark of Fortron Industries.
Ticona's technical polymers have chemical and physical properties enabling
them, among other things, to withstand high temperatures, resist chemical
reactions with solvents and resist fracturing or stretching. These products are
used in a wide range of performance-demanding applications in the automotive and
electronics sectors and in other consumer and industrial goods, often replacing
metal or glass.
Ticona is an innovation-oriented business. Ticona focuses its efforts on
developing new markets and applications for its product lines, often developing
custom formulations to satisfy the technical and processing requirements of a
customer's applications. For example, Ticona has worked closely with fuel system
suppliers to develop an acetal copolymer with the chemical and impact resistance
necessary to withstand exposure to
22
<PAGE>
hot diesel fuels in the new generation of common rail diesel engines. The
product can also be used in automotive fuel sender units where it remains stable
at the high operating temperatures present in direct-injection diesel engines.
Ticona is also developing products such as Topas(R), a metallocene catalyst
based cycloolefin copolymer, or COC. Topas is developing markets and
applications where transparency, high temperature resistance and water vapor
barrier properties are key requirements.
Ticona's customer base consists primarily of a large number of plastic
molders and component suppliers, which are often the primary suppliers to
original equipment manufacturers, or OEMs. Ticona works with these molders and
component suppliers as well as directly with the OEMs to develop and improve
specialized applications and systems.
Prices for most of these products, particularly specialized product grades
for targeted applications, generally reflect the value added in complex polymer
chemistry, precision formulation and compounding, and the extensive application
development services provided. The specialized product lines are not
particularly susceptible to cyclical swings in pricing. Polyacetals pricing,
mainly in standard grades, is, however, somewhat more price competitive, with
many minimum-service providers competing for volume sales.
Product Lines
Polyacetals are sold under the trademarks Celcon(R) in North America and
Hostaform(R) in Europe and the rest of the world. Polyplastics and Korea
Engineering Plastics, in which Ticona holds 45 and 50 percent ownership
interests, respectively, are leading suppliers of polyacetals and other
engineering resins in the Asia/ Pacific region. Polyacetals are used for
mechanical parts, including door locks and seat belt mechanisms, in automotive
applications and in electrical, consumer and industrial applications such as
keyboards, ski bindings, and gears for appliances.
The primary raw material for polyacetals is formaldehyde, which is
manufactured from methanol. Ticona currently purchases formaldehyde and methanol
in the United States from Celanese's Chemical Products segment and, in Europe,
manufactures formaldehyde from purchased methanol.
GUR(R), an ultra high molecular weight polyethylene or PE-UHMW, is an
engineered material used in heavy-duty automotive and industrial applications
such as car battery separator panels and industrial conveyor belts, as well as
in specialty medical and consumer applications, such as porous tips for marker
pens, sports equipment and prostheses. The basic raw material for GUR is
ethylene.
Polyesters such as Celanex(R) polybutylene terephthalate, or PBT, and
Vandar(R), a series of PBT-polyester blends, are used in a wide variety of
automotive, electrical and consumer applications, including ignition system
parts, radiator grilles, electrical switches, appliance housings, boat fittings
and perfume bottle caps. Impet-Hi(TM) polyethylene terephthalate, or PET, is a
polyester which exhibits rigidity and strength useful in large injection molded
part applications, as well as high temperature resistance in automotive or
electrical/ electronic applications. Riteflex(R) is a co-polyester which adds
flexibility to the range of high performance properties offered by Ticona's
other products. Raw materials for polyesters vary. Base monomers, such as
dimethyl terephthalate or DMT and PTA, are widely available with pricing
dependent on broader polyester fiber and packaging resins market conditions.
Smaller volume specialty co-monomers for these products are typically supplied
by a few companies.
Liquid crystal polymers, or LCPs, such as Vectra(R), are used in electrical
and electronics applications and for precision parts with thin walls and complex
shapes. Fortron(R), a polyphenylene sulphide, or PPS, product, is used in a wide
variety of automotive and other applications, especially those requiring heat
and/or chemical resistance, including fuel system parts, radiator pipes and
halogen lamp housings, and often replaces metal in these demanding applications.
Fortron is manufactured by Fortron Industries, Ticona's 50-50 joint venture with
Kureha Chemicals Industry of Japan. Celstran(R) and Compel(R) are long fiber
reinforced thermoplastics, which impart extra strength and stiffness, making
them more suitable for larger parts than conventional thermoplastics.
23
<PAGE>
Facilities
Ticona has polymerization, compounding and research and technology centers
in Germany and the United States, as well as additional compounding facilities
in Brazil. Ticona's Kelsterbach, Germany production site is located in close
proximity to one of the sites being considered for a new runway under the
Frankfurt airport's expansion plans. The construction of this particular runway
could have a negative effect on the plant's current production capacity and
future development. While the state government and the owner of the airport
promote the expansion of this option, it is uncertain whether this option is in
accordance with applicable laws. Neither the final outcome of this matter nor
its timing can be predicted at this time.
Capital Expenditures
Ticona's capital expenditures were E49 million, E66 million, and E96
million for the years 2003, 2002 and 2001, respectively. Ticona had expenditures
in each of these three years relating primarily to efficiency and safety
improvement-related items associated with the normal operations of the business.
In addition, Ticona had expenditures in 2001 and 2002 for significant capacity
expansions at its Bishop, Texas and Shelby, North Carolina sites. Ticona doubled
its U.S. capacity for GUR PE-UHMW by building a new 30,000 metric tons per year
facility in Bishop, Texas, replacing the existing plant in Bayport, Texas. The
new plant came on stream in the third quarter of 2002. Ticona is expanding its
Oberhausen GUR PE-UHMW capacity by 10,000 metric tons per year. This expansion
is expected to come on stream in 2004. In the fourth quarter of 2002, Ticona
increased capacity by 6,000 metric tons at its polyacetals facility in
Kelsterbach, Germany and commenced a further increase of 17,000 metric tons,
which will come on stream in 2004. The capital expenditures for 2003 also
include construction of a new administrative building in Florence, Kentucky and
integration of a company-wide SAP system.
Markets
The following table illustrates the destination of the net sales of the
Technical Polymers Ticona segment by geographic region for the years ending
December 31, 2003, 2002 and 2001.
NET SALES TO EXTERNAL CUSTOMERS BY DESTINATION -- TECHNICAL POLYMER TICONA
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
% OF % OF % OF
E SEGMENT E SEGMENT E SEGMENT
--- ------- --- ------- --- -------
(IN MILLIONS, EXCEPT PERCENTAGES)
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North America........................... 310 45% 339 48% 353 50%
Europe/Africa........................... 330 49% 318 46% 317 45%
Asia/Australia.......................... 17 3% 19 3% 14 2%
Rest of World........................... 18 3% 20 3% 22 3%
</Table>
Ticona's sales in the Asian market are made through its joint ventures,
Polyplastics, Korea Engineering Plastics and Fortron Industries, which are
accounted for under the equity method and therefore not included in Ticona's
consolidated net sales. If Ticona's portion of the sales made by these joint
ventures were included in the chart above, the percentage of sales sold in
Asia/Australia would be substantially higher. A number of Ticona's polyacetals
customers, particularly in the appliance, electrical components, toys and
certain sections of the electronics/telecommunications fields, have moved
tooling and molding operations to Asia, particularly southern China. To meet the
expected increased demand in this region, Ticona, along with Polyplastics,
Mitsubishi Gas Chemical Company Inc., and Korea Engineering Plastics agreed on a
joint venture to construct and operate a world-scale 60,000 metric ton
polyacetals facility in China. When completed, Ticona will indirectly own an
approximate 38 percent interest in this joint venture. Work on the new facility
commenced in July 2003, and the new plant is expected to start operations in the
second quarter of 2005.
24
<PAGE>
Ticona's principal customers are suppliers to the automotive industries as
well as industrial suppliers. These customers primarily produce engineered
products, and Ticona works closely with its customers to assist them to develop
and improve specialized applications and systems. Ticona has long-standing
relationships with most of its major customers, but it also uses distributors
for most of its major products, as well as a number of electronic channels, such
as its BuyTiconaDirect(TM) on-line ordering system, and other electronic
marketplaces to reach a larger customer base. For most of Ticona's product
lines, contracts with customers typically have a term of one to two years. A
significant swing in the economic conditions of the end markets of Ticona's
principal customers could significantly affect the demand for Ticona's products.
Competition
Ticona's principal competitors include BASF, Bayer AG, DuPont, General
Electric Company and Solvay S.A. Smaller regional competitors include Asahi
Kasei Corporation, DSM NV, Mitsubishi Plastics, Inc., Chevron Phillips Chemical
Company, L.P., Braskem S.A., Teijin and Toray Industries Inc.
PERFORMANCE PRODUCTS
The Performance Products segment consists of the food ingredients business
conducted by Nutrinova.
This business uses its own trade names to conduct business. The following
table lists key products of the Performance Products segment and their major
markets.
<Table>
<Caption>
----------------------------------------------- -----------------------------------------------
KEY PERFORMANCE PRODUCTS MAJOR MARKETS
----------------------------------------------- -----------------------------------------------
<S> <C>
Sunett(R) (Acesulfame-K) Beverages, Confections, Dairy Products and
Pharmaceuticals
----------------------------------------------- -----------------------------------------------
Sorbates Dairy Products, Baked Goods, Beverages, Animal
Feeds, Spreads and Delicatessen Products
----------------------------------------------- -----------------------------------------------
</Table>
Business Lines
Nutrinova's food ingredients business consists of the production and sale
of high intensity sweeteners and food protection ingredients, such as sorbic
acids and sorbates, as well as the resale of dietary fiber products worldwide
and the resale of other food ingredients in Japan, Australia, Mexico and the
United States.
Acesulfame-K, a high intensity sweetener marketed under the trademark
Sunett, is used in a variety of beverages, confections and dairy products
throughout the world. The primary raw materials for this product are diketene
and sulfur trioxide. Sunett pricing for targeted applications reflects the value
added in the precision formulations and extensive technical services provided.
Nutrinova's strategy is to be the most reliable and highest quality producer of
this product, to develop new applications for the product and to expand into new
markets. Nutrinova maintains a strict patent enforcement strategy, which has
resulted in favorable outcomes in a number of patent infringement matters in
Europe and the United States. Nutrinova's European and U.S. patents for making
Sunett expire in 2005.
Nutrinova's food protection ingredients are used in foods, beverages and
personal care products. The primary raw materials for these products are ketene
and crotonaldehyde. Sorbates pricing is extremely sensitive to demand and
industry capacity and is not necessarily dependent on the prices of raw
materials.
Facilities
Nutrinova has production facilities in Germany, as well as sales and
distribution facilities in all major world markets.
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Capital Expenditures
The Performance Products segment's capital expenditures were E2 million, E4
million, and E2 million for the years 2003, 2002 and 2001, respectively. The
capital expenditures incurred during these years related to efficiency and
safety improvement items associated with the normal operation of the business.
Markets
The following table illustrates the destination of the net sales of the
Performance Products segment by geographic region for the years ending December
31, 2003, 2002 and 2001.
NET SALES TO EXTERNAL CUSTOMERS BY DESTINATION -- PERFORMANCE PRODUCTS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
% OF % OF % OF
E SEGMENT E SEGMENT E SEGMENT
--- ------- --- ------- --- -------
(IN MILLIONS, EXCEPT PERCENTAGES)
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North America.............................. 65 43% 60 37% 57 36%
Europe/Africa.............................. 52 35% 58 36% 58 37%
Asia/Australia............................. 25 17% 27 17% 26 16%
Rest of World.............................. 8 5% 16 10% 18 11%
</Table>
Nutrinova directly markets Sunett(R) primarily to a limited number of large
multinational and regional customers in the beverage and food industry under
long-term and annual contracts. Nutrinova markets food protection ingredients
primarily through regional distributors to small and medium sized customers and
directly through regional sales offices to large multinational customers in the
food industry. Nutrinova is currently developing markets and new applications
for its omega-3 fatty acid, docosahexanoeic acid, Nutrinova -- DHA(TM).
Potential application areas include functional foods and beverages, dietary
supplements, clinical nutrition and pharmaceutical end-uses.
Competition
The principal competitors for Nutrinova's Sunett sweetener are Holland
Sweetener Company, The Nutrasweet Company, Ajinomoto Co., Inc. and several
Chinese manufacturers. In sorbates, Nutrinova competes with Nantong AA, Daicel,
Chisso Corporation, Yu Yao/Ningbo, Yancheng AmeriPac and other Japanese and
Chinese manufacturers of sorbates.
OTHER ACTIVITIES
Other Activities includes revenues mainly from the captive insurance
companies, Celanese Ventures GmbH, Celanese Advanced Materials, Inc., as well as
corporate activities, several service companies and other ancillary businesses,
which do not have significant sales.
Celanese's two wholly-owned captive insurance companies are a key component
of Celanese's global risk management program, as well as a form of self
insurance for the property, liability and workers compensation risks of
Celanese. The captive insurance companies issue insurance policies to Celanese
subsidiaries to provide consistent coverage amid fluctuating costs in the
insurance market and to lower long-term insurance costs by avoiding or reducing
commercial carrier overhead and regulatory fees. The captive insurance companies
issue insurance policies and coordinate claims handling services with third
party service providers. They retain risk at levels approved by the board of
management and obtain reinsurance coverage from third parties to limit the net
risk retained. One of the captive insurance companies also insures certain third
party risks.
Celanese Ventures promotes research projects that lie outside Celanese's
principal businesses or, due to their long-term perspective and widely-spread
application possibilities, cannot be operated by the principal businesses alone.
Celanese Ventures is presently active in developing high temperature membrane
electrode
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assemblies or MEAs for fuel cells, and it inaugurated the world's first pilot
plant for MEAs at the Celanese's Frankfurt site. Celanese Ventures is also
developing new catalysts for high performance polymers. Celanese Advanced
Materials consists of the high performance polymer PBI and the Vectran(R)
polymer fiber product lines.
ACQUISITIONS AND DIVESTITURES
CELANESE ACQUIRED THE FOLLOWING BUSINESSES:
o As a part of its strategy of forward integration, Celanese purchased the
European emulsions and global emulsion powders business of Clariant AG on
December 31, 2002 valued at E147 million.
CELANESE DIVESTED THE FOLLOWING BUSINESSES:
o In September 2003, Celanese and Dow reached an agreement for Dow to
purchase the acrylates business of Celanese. This transaction was
completed in February 2004.
o In December 2003, the Ticona segment completed the sale of its nylon
business line to BASF.
o Effective January 1, 2002, Celanese sold its interest in InfraServ GmbH &
Co. Deponie Knapsack KG ("Deponie") to Trienekens AG.
o In December 2002, Celanese sold Trespaphan, its global oriented
polypropylene film business, to a consortium consisting of the
Dor-Moplefan Group and Bain Capital, Inc.
o During 2002, Celanese sold its global allylamines and U.S. alkylamines
businesses to U.S. Amines Ltd.
o In January 2001, Celanese sold its investment in Infraserv GmbH & Co.
Muenchsmuenster KG to Ruhr Oel GmbH.
o In January 2001, Celanese sold its CelActiv(TM) and Hoecat(R) catalyst
business to Synetix.
o In April 2001, Celanese sold NADIR filtration GmbH, formerly Celgard
GmbH, to KCS Industrie Holding AG.
o In June 2001, Celanese sold its ownership interest in Hoechst Service
Gastronomie GmbH to Eurest Deutschland GmbH and Infraserv GmbH & Co.
Hoechst KG.
o In October 2001, Celanese sold its ownership interest in Covion Organic
Semiconducters GmbH, a developer and producer of light-emitting organic
polymers, to Avecia, its joint venture partner in Covion Organic
Semiconductors GmbH.
For further information on the acquisitions and divestitures discussed
above, see "Item 5. Operating and Financial Review and Prospects -- Summary of
Consolidated Results -- 2003 Compared with 2002 -- Discontinued Operations for
the Years Ended December 31, 2003, 2002 and 2001" and Note 7 to the Consolidated
Financial Statements.
RAW MATERIALS AND ENERGY
Celanese purchases a variety of raw materials from sources in many
countries for use in its production processes. Celanese has a policy of
maintaining, when available, multiple sources of supply for materials. However,
some of Celanese's individual plants may have single sources of supply for some
of their raw materials, such as carbon monoxide and acetaldehyde. In 2003, a
primary U.S. supplier of wood pulp to the Acetate Products segment shut down its
pulp facility. This closure resulted in increased operati