HUNTSMAN INTERNATIONAL HOLDINGS LLC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________

Commission file number 333-88057

HUNTSMAN INTERNATIONAL HOLDINGS LLC
(Exact name of registrant as specified in its charter)

Delaware 87-0630359
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700

(Address of principal executive offices and telephone number)

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
---- ----

On March 31, 2002, 1,000 membership interests of Huntsman International Holdings
LLC were outstanding.

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HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
2001 FORM 10-K ANNUAL REPORT

Some of the statements contained in this report are forward-looking in
nature. In some cases, you can identify forward-looking statements by
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative of such terms or other comparable terminology, or
by discussions of strategy. You are cautioned that our business and operations
are subject to a variety of risks and uncertainties, and, consequently, our
actual results may materially differ from those projected by any forward-looking
statements. Some of those risks and uncertainties are discussed below in "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Cautionary Statement for Forward-Looking Information" and elsewhere
in this report. We make no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such
statement is made.

Market data used throughout this report was obtained from internal Company
surveys and industry surveys and publications. These industry surveys and
publications generally state that the information contained therein has been
obtained from sources believed to be reliable. Results of internal Company
surveys contained in this report, while believed to be reliable, have not been
verified by any independent outside sources. References in this report to our
market position and to industry trends are based on information supplied by Chem
Systems, an international consulting and research firm, and International
Business Management Associates, an industry research and consulting firm. We
have not independently verified such market data.

PART I

ITEM 1. BUSINESS

GENERAL

Our company, Huntsman International Holdings LLC, formerly known as
Huntsman ICI Holdings LLC, is a Delaware limited liability company. Our
membership interests are owned 60% by Huntsman Specialty Chemicals Corporation
("Huntsman Specialty"), 30% by Imperial Chemicals Industries PLC ("ICI") and its
affiliates and 10% by institutional investors. For convenience in this report,
the terms "Holdings," "Company," "our," "us" or "we" may be used to refer to
Huntsman International Holdings LLC and, where the context requires, its
subsidiaries. Our direct wholly-owned operating subsidiary is Huntsman
International LLC ("Huntsman International"), a Delaware limited liability
company formerly known as Huntsman ICI Chemicals LLC.

The Company and Huntsman International were formed in 1999 in connection
with a transaction between Huntsman Specialty and ICI (the "Transaction"). In
that Transaction, on June 30, 1999, we acquired ICI's polyurethane chemicals,
selected petrochemicals and TiO(2) businesses and Huntsman Specialty's
propylene oxide ("PO") business. We also acquired BP Chemicals Limited's 20%
ownership interest in an olefins facility in Wilton, U.K. and certain related
assets. We then transferred the acquired businesses to Huntsman International
and its subsidiaries. For a more detailed description of these transactions
and our Company's structure, see "Item 13--Certain Relationships and Related
Transactions--Company Background."

We are a global manufacturer and marketer of specialty and commodity
chemicals, with three principal businesses: Specialty Chemicals, Petrochemicals
and Titanium Dioxide ("TiO(2)").

- Our Specialty Chemicals business produces polyurethane, PO, surfactants
and surfactant intermediaries. Our customers use our polyurethane
products in a wide variety of polyurethane applications, including
automotive interiors, refrigeration and appliance insulation,
construction products, footwear, furniture cushioning and adhesives. PO
is used in a variety of applications,

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the largest of which is the production of polyols sold into the
polyurethane chemicals market. Our surfactants and surfactant
intermediates are used primarily in consumer detergents, toiletries,
baby shampoos and personal care products, as well as in a variety of
industrial uses.

- Our Petrochemicals business produces olefins and aromatics at
integrated facilities in northern England. Olefins and aromatics are
the key building blocks for the petrochemical industry and are used in
plastic, synthetic fibers, packaging materials and a wide variety of
other applications.

- Our TiO(2) business operates under the trade name "Tioxide." TiO(2)is a
white pigment used to impart whiteness, brightness and opacity to
products such as paints, plastics, paper, printing inks, synthetic
fibers and ceramics.

For the year ended December 31, 2001, we had revenues of $4.6 billion and
adjusted EBITDA of $398 million. For the year ended December 31, 2001, our
Specialty Chemicals, Petrochemicals and TiO(2) businesses represented 55%, 26%
and 19%, respectively, of revenues. For additional information about the
revenues, profit and total assets of each of our business segments, see "Notes
to Consolidated Financial Statements--19. Industry Segment and Geographic Area
Information." For the definition of adjusted EBITDA, see "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--2001 Actual Compared to 2000 Actual."

RECENT EVENTS

SENIOR NOTES OFFERING

On March 18, 2002, Huntsman International sold $300 million aggregate
principal amount of its 9.875% Senior Notes due 2009 in a transaction exempt
from the registration requirements of the Securities Act of 1933. Huntsman
International used approximately $58 million of the net proceeds to repay
outstanding indebtedness under the revolving portion of our senior secured
credit facilities. The balance of the net proceeds was used to repay amounts due
under the term loan portion of our senior secured credit facilities, eliminating
scheduled term loan amortization requirements in 2002 and substantially reducing
scheduled term loan amortization requirements in 2003. For more information, see
"Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Senior Notes Offering."

AMENDMENT OF SENIOR SECURED CREDIT FACILITIES

On March 15, 2002, Huntsman International entered into an amendment to our
senior secured credit facilities. This amendment, among other things, allowed
Huntsman International to (i) issue the senior notes, (ii) apply the proceeds of
the offering of the senior notes to substantially reduce the amortization
payments on the term loan portion of our senior secured credit facilities due in
2002 and 2003, and (iii) temporarily repay outstanding principal amounts under
the revolving portion of our senior secured credit facilities. This amendment
also adjusts certain financial covenant levels in 2002 and 2003. Additionally,
this amendment provides that Huntsman International will not, and will not
permit any of its subsidiaries to, amend, modify or terminate any provisions of
its recently offered senior notes. For more information, see "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

COST REDUCTION PROGRAM

We have announced the first phase of a cost reduction program in our
Specialty Chemicals business which includes the closure of our Shepton Mallet,
U.K. polyols manufacturing facility by the end of 2002. During 2001, we incurred
$47 million in restructuring and plant closing costs. For more information, see
"Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Restructuring and Plant Closing Costs."

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SALE OF EQUITY INTERESTS IN OUR COMPANY

On November 2, 2000, ICI entered into certain agreements with Huntsman
Specialty, Huntsman International and our Company, under which ICI had an option
to transfer to Huntsman Specialty or its permitted designated buyers, and
Huntsman Specialty or its permitted designated buyers have a right to buy, the
30% of the membership interests in our Company that are indirectly held by ICI
for $363.5 million plus interest from November 30, 2000 until the completion of
such sale. Pursuant to these agreements, on October 30, 2001, ICI exercised its
put right requiring Huntsman Specialty or its nominee to purchase ICI's equity
interest in our Company. On December 20, 2001, ICI and Huntsman Specialty
amended ICI's put option arrangement under these agreements to, among other
things, provide that the purchase of ICI's equity interest would occur on July
1, 2003, or earlier under certain circumstances, and to provide for certain
discounts to the purchase price for ICI's equity interest. The amended option
agreement also requires Huntsman Specialty to cause us to pay up to $112 million
of dividends to our members, subject to certain conditions. These conditions
include the receipt of consent from our senior secured lenders and the ability
of Huntsman International and us to make restricted payments under the
indentures governing our outstanding notes. In addition, in order to secure its
obligation to pay the purchase price for ICI's equity interest, Huntsman
Specialty granted ICI a lien on one-half of Huntsman Specialty's 60% equity
interest in our Company.

CERTAIN EVENTS AFFECTING HUNTSMAN CORPORATION AND HUNTSMAN POLYMERS CORPORATION

We are party to certain arrangements described in this report with Huntsman
Corporation, an entity that together with its affiliates indirectly holds 60% of
our membership interests. See "Item 13--Certain Relationships and Related
Transactions." In October 2001, Huntsman Corporation engaged Dresdner Kleinwort
Wasserstein, Inc. as its financial advisor and investment banker to assist
Huntsman Corporation and certain of its domestic subsidiaries in identifying and
exploring strategic alternatives, including developing out of court or court
sanctioned financial restructuring plans.

On December 20, 2001, Huntsman Corporation entered into a supplemental
accounts receivable credit agreement (the "Supplemental Credit Agreement") with
certain of the lenders under its existing senior credit facilities (the
"Existing HC Credit Facilities"), pursuant to which a revolving loan facility of
$40 million and a term loan facility of $110 million were made available. On the
same date, Huntsman Corporation, which is not in compliance with certain
financial covenants in the Existing HC Credit Facilities, entered into
amendment, forbearance, and waiver agreements (collectively, the "Amendment
Agreement") related to the Existing HC Credit Facilities. Under the Amendment
Agreement, existing defaults and some future defaults were waived (but not the
failure to pay incremental interest at a default rate ("Default Interest")), and
the lenders agreed to forbear exercising rights and remedies arising from the
failure to pay Default Interest, all until March 15, 2002 (the "Forbearance
Period"). On March 15, 2002, the Forbearance Period was extended until June 30,
2002 by lenders holding a majority of the indebtedness under the Existing HC
Credit Facilities.

If the Forbearance Period is not extended beyond June 30, 2002, Huntsman
Corporation's debt is not restructured, or the rights of the lenders under the
Existing HC Credit Facilities are not otherwise stayed, the lenders could pursue
their remedies, including acceleration of the indebtedness and foreclosure on
collateral, which includes a pledge of Huntsman Corporation's 80.1% equity
interest in Huntsman Specialty Chemicals Holdings Corporation ("HSCHC"). HSCHC
owns 100% of Huntsman Specialty, which in turn owns 60% of our equity interests.
Foreclosure on the HSCHC equity would result in a change of control within the
meaning of our senior secured credit facilities and the indentures governing our
notes and Huntsman International's notes.

Huntsman Corporation failed to make the interest payment under its senior
subordinated notes (the "HC Notes") on January 1, 2002. Huntsman Polymers
Corporation, a wholly-owned subsidiary of Huntsman Corporation, failed to make
the interest payment under its senior notes (the "Polymers Notes") due December
1, 2001. Huntsman Corporation and Huntsman Polymers Corporation are discussing
the possible restructuring of their indebtedness with representatives of a
majority of their noteholders. A

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restructuring could result in a change of control within the meaning of our
senior secured credit facilities and the indentures governing our notes and
Huntsman International's notes.

In connection with the December 2001 amendment of ICI's put option
agreement, Huntsman Specialty pledged one-half of its 60% equity interest in our
Company to ICI. A foreclosure by ICI on such equity would result in a change of
control under our senior secured credit facilities and the indentures governing
our notes and Huntsman International's notes. A change of control would
constitute a default under our senior secured credit facilities. It would also
entitle (i) the holders of Huntsman International's senior notes and senior
subordinated notes to exercise their rights to require Huntsman International to
repurchase these notes from them and (ii) the holders of our notes to exercise
their rights to require us to repurchase the notes from them. Under such
circumstances there can be no assurance that we or Huntsman International would
have sufficient funds to purchase all the notes.

Huntsman International and our Company have not guaranteed or provided any
other credit support to Huntsman Corporation under the Existing HC Credit
Facilities or the HC Notes or to Huntsman Polymers Corporation under the
Polymers Notes. Neither events of default under the Existing HC Credit
Facilities, the HC Notes or the Polymers Notes, nor the exercise of any remedy
by the lenders thereunder will cause any cross-defaults or cross-accelerations
under our senior secured credit facilities or the indentures governing our notes
or Huntsman International's notes, except insofar as foreclosure on the stock of
HSCHC would constitute a "change of control" as described in the preceding
paragraphs.

On February 27, 2002, an involuntary bankruptcy petition was filed against
Huntsman Polymers Corporation in the United States bankruptcy court located in
Delaware by three holders of the Polymers Notes that collectively held,
according to their petition, less than 1% of the outstanding Polymers Notes. On
February 28, 2002, the petitioners filed a motion to dismiss their petition. A
hearing on the motion took place on March 8, 2002, and the court signed an order
granting petitioners' motion to dismiss the petition with prejudice.

For additional information, see "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Cautionary Statement
for Forward-Looking Information."

SPECIALTY CHEMICALS

SPECIALTY CHEMICALS--GENERAL

Our specialty chemicals business is composed of:

- the polyurethane chemicals business that we acquired from ICI;

- the PO business that we acquired from Huntsman Specialty;

- the TPU business that we acquired from Rohm and Haas in August 2000;

- the ethyleneamines business we acquired from The Dow Chemical Company
in February 2001; and

- the European surfactants business we acquired from Rhodia S.A. in April
2001.

POLYURETHANE CHEMICALS. We market a complete line of polyurethane
chemicals, including MDI, TDI, TPU, polyols, polyurethane systems and aniline,
with an emphasis on MDI-based chemicals. Our customers produce polyurethane
products through the combination of an isocyanate, such as MDI or TDI, with
polyols, which are derived largely from PO and ethylene oxide. Primary
polyurethane end-uses include automotive interiors, refrigeration and appliance
insulation, construction products, footwear, furniture cushioning, adhesives and
other specialized engineering applications.

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According to Chem Systems, we own the world's two largest MDI production
facilities in terms of capacity, located in Rozenburg, Netherlands and Geismar,
Louisiana. These facilities receive raw materials from aniline facilities
located in Wilton, U.K. and Geismar, Louisiana, which in terms of production
capacity are the world's two largest aniline facilities.

PO. We are a leading North American producer of PO. Our customers process
PO into derivative products such as polyols for polyurethane products, propylene
glycol ("PG") and various other chemical products. End uses for these derivative
products include applications in the home furnishings, construction, appliance,
packaging, automotive and transportation, food, paints and coatings and cleaning
products industries. We are also, according to Chem Systems, a leading U.S.
marketer of PG, which is used primarily to produce unsaturated polyester resins
for bath and shower enclosures and boat hulls, and to produce heat transfer
fluids and solvents. As a co-product of our PO manufacturing process, we also
produce methyl tertiary butyl ether ("MTBE"). MTBE is an oxygenate that is
blended with gasoline to reduce harmful vehicle emissions and to enhance the
octane rating of gasoline. See "--MTBE Developments" for a further discussion of
MTBE.

We manufacture PO and MTBE at our facility in Port Neches, Texas. The
current capacity of our PO facility is approximately 525 million pounds of PO
per year. We produce PG under a tolling arrangement with Huntsman Petrochemical
Corporation, which has the capacity to produce approximately 130 million pounds
of PG per year at a neighboring facility.

TPU. In August 2000, we completed our acquisition of the Morton global TPU
business from The Rohm and Haas Company. The acquired TPU business adds
production capacity in Osnabruck, Germany and Ringwood, Illinois, which
complements our existing footwear-based TPU business.

ETHYLENEAMINES. In February 2001, we completed our acquisition of the
global ethyleneamines business of Dow. The acquired ethyleneamines business adds
production capacity in Freeport, Texas and a long-term supply arrangement for up
to 50% of the existing production capacity of Dow's ethyleneamines plant in
Terneuzen, Netherlands.

SURFACE SCIENCES. Effective April 1, 2001, our specialty chemicals business
acquired the European surfactants business of Albright & Wilson, a subsidiary of
Rhodia S.A. Our new surface sciences organization (which includes the European
surfactants business acquired from Albright & Wilson) was created as a separate
business unit within the Specialty Chemicals division during the second quarter
of 2001.

Our surface sciences business is a leading manufacturer of surfactants and
surfactant intermediates in Europe and is characterized by its breadth of
product offering and market coverage. Our surfactant products are primarily used
in consumer detergent and industrial cleaning applications. In addition, we
manufacture and market a diversified range of mild surfactants and specialty
formulations for use in baby shampoos and other personal care applications. We
are also a leading producer of powder and liquid laundry detergents and other
cleaners. In addition, we offer a wide range of surfactants and formulated
specialty products for use in various industrial applications such as leather
and textile treatment, foundry and construction, agrochemicals, polymers and
coatings. Our surfactants products are manufactured in seven facilities located
in the U.K., France, Italy and Spain.

Our Specialty Chemicals business accounted for 55% and 48% of our net sales
in 2001 and 2000, respectively, and, on a pro forma basis, accounted for 48% of
our net sales in 1999.

SPECIALTY CHEMICALS--INDUSTRY OVERVIEW

The polyurethane chemicals industry is estimated to be a $26 billion global
market, consisting primarily of the manufacture and marketing of MDI, TDI and
polyols, according to Chem Systems.

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In 2001, according to Chem Systems, MDI, TDI, polyols and other products,
such as specialized additives and catalysts, accounted for 27%, 15%, 44% and 14%
of industry-wide polyurethane chemicals sales, respectively. MDI is used
primarily in rigid foam; conversely, TDI is used primarily in flexible foam
applications that are generally sold as commodities. Polyols, including
polyether and polyester polyols, are used in conjunction with MDI and TDI in
rigid foam, flexible foam and other non-foam applications. TPU is used in
flexible elastomers and other specialty non-foam applications. PO, one of the
principal raw materials for polyurethane chemicals, is primarily used in
consumer durables. The following chart illustrates the range of product types
and end uses for polyurethane chemicals:

Polyurethane Chemicals

Flexible Foam Right Foam Non-Foam
(Primarily TDI and (Primarily MDI and (Primarily MDI and
Polyols) Polyols Polyols)

Bedding Bedding Insulation Coastings
Furniture Refrigeration Adhesives
Automotive Packaging Sealants
Carpet Underlay Transportation Elastomers
Furniture

Polyurethane products are created through the reaction of MDI or TDI with a
polyol. Polyurethane chemicals are sold to customers who react the chemicals to
produce polyurethane products. Depending on their needs, customers will use
either commodity polyurethane chemicals produced for mass sales or specialty
polyurethane chemicals tailored for their specific requirements. By varying the
blend, additives and specifications of the polyurethane chemicals, manufacturers
are able to produce and develop a breadth and variety of polyurethane products.
The following table sets forth information regarding the three principal
polyurethane chemicals markets:

Source: Chem System

MDI. As reflected in the chart above, MDI has a substantially larger market
size and a higher growth rate than TDI primarily because MDI can be used to make
polyurethanes with a broader range of properties and can therefore be used in a
wider range of applications than TDI. Chem Systems reports that future growth of
MDI is expected to be driven by the continued substitution of MDI-based
polyurethane for

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fiberglass and other materials currently used in insulation foam for
construction. Other markets, such as binders for reconstituted wood board
products, are expected to further contribute to the continued growth of MDI.

According to Chem Systems, global consumption of MDI was approximately 5.5
billion pounds in 2001, growing from 2.9 billion pounds in 1992, which
represents a 7.6% compound annual growth rate. This growth rate is the result of
the broad end-uses for MDI and its superior performance characteristics relative
to other polymers. The U.S. and European markets consume the largest quantities
of MDI. With the recent recovery of the Asian economies, the Asian markets are
becoming an increasingly important market for MDI and we believe that demand for
MDI in Asia will continue to increase as its less developed economies continue
to mature. There are four major producers of MDI: Bayer, our Company, BASF and
Dow.

TDI. The TDI market generally grows at a rate consistent with GDP. The four
largest TDI producers supply approximately 60% of global TDI demand, according
to Chem Systems. The consumers of TDI consist primarily of numerous
manufacturers of flexible foam blocks sold for use as furniture cushions and
mattresses. Flexible foam is typically the first polyurethane market to become
established in developing countries, and, as a result, development of TDI demand
typically precedes MDI demand.

TPU. TPU is a high quality material with unique qualities such as
durability, flexibility, strength, abrasion-resistance, shock absorbency and
chemical resistance. We can tailor the performance characteristics of TPU to
meet the specific requirements of our customers, such as for use in injection
molding and components for the automotive and footwear industries. It is also
extruded into films and profiles and finds a wide variety of applications in the
construction, adhesives, sealants and elastomers ("CASE") markets.

POLYOLS. Polyols are reacted with isocyanates, primarily MDI and TDI, to
produce finished polyurethane products. In the U.S., approximately 77% of all
polyols produced are used in polyurethane applications, according to Chem
Systems. Approximately two-thirds of the polyols used in polyurethane
applications are processed with TDI to produce flexible foam blocks and the
remaining one-third is processed in various applications that meet the specific
needs of individual customers. The creation of a broad spectrum of polyurethane
products is made possible through the different combinations of the various
polyols with MDI, TDI and other isocyanates. The market for specialty polyols
that are reacted with MDI has been growing at approximately the same rate at
which MDI consumption has been growing. We believe that the growth of commodity
polyols demand has paralleled the growth of global GDP.

ETHYLENEAMINES. Ethyleneamines are highly versatile performance chemicals
with a wide variety of end-use applications including lube oil additives, epoxy
hardeners, wet strength resins, chelating agents and fungicides.

ANILINE. Aniline is an intermediate chemical used primarily as a raw
material to manufacture MDI. Approximately 80% of all aniline produced is
consumed by MDI producers, while the remaining 20% is consumed by synthetic
rubber and dye producers. According to Chem Systems, global capacity for aniline
is approximately 6.7 billion pounds per year. Generally, most aniline produced
is either consumed downstream by the producers of the aniline or is sold to
third parties under long-term supply contracts. The lack of a significant spot
market for aniline means that, in order to remain competitive, MDI manufacturers
must either be integrated with an aniline manufacturing facility or have a
long-term cost-competitive aniline supply contract.

PO. Demand for PO depends largely on overall economic demand, especially
that of consumer durables. Consumption of PO in the U.S. represents
approximately one third of global consumption. According to Chem Systems, U.S.
consumption of PO was approximately 3.5 billion pounds in 2001, growing from 2.6
billion pounds in 1992, which represents a 3.2% compound annual growth rate.
According to Chem Systems, the following chart illustrates the primary end
markets and applications for PO, and their respective percentages of total PO
consumption:

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Propylene Oxide

66% 23% 46% 4% 3%

Polyether Polyols Propylene Glycols Alkoxylates Glycol Ethers Other

Flexible Foams Heat Transfer Fluids Surfactants Solvents Starch Modification
-Furniture Solvents -Detergents Brake Fluids Propylene Carbonate
-Automotive Antifreeze/De-Icers -Industrial De-icers
-Matresses Humectants Personal Care Products Chemical Intermediates
-Insulation Dispersants Agricultural Chemicals
Rigid Foams Personal Care Products
-Automotive -Cosmetics
-Appliances -Pharmaceuticals
-Insulation Pet Foods
Coatings
Adhesives
Sealants
Elastomers

Two U.S. producers, Lyondell and Dow, account for approximately 90% of
North American PO production. We believe that Dow consumes approximately 70% of
their North American PO production in their North American downstream
operations, and that approximately 50% of Lyondell's North American PO
production is consumed internally or sold to Bayer, which recently acquired
Lyondell's polyols business.

MTBE. We currently use our entire production of tertiary butyl alcohol
("TBA"), a co-product of our PO production process to produce MTBE. MTBE is an
oxygenate that is blended with gasoline to reduce harmful vehicle emissions and
to enhance the octane rating of gasoline. Historically, the refining industry
utilized tetra ethyl lead as the primary additive to increase the octane rating
of gasoline until health concerns resulted in the removal of tetra ethyl lead
from gasoline. This led to the increasing use of MTBE as a component in gasoline
during the 1980s. U.S. consumption of MTBE grew at a compound annual rate of
15.2% in the 1990s due primarily to the implementation of federal environmental
standards that require improved gasoline quality through the use of oxygenates.
MTBE has experienced strong growth due to its ability to satisfy the oxygenation
requirement of the Clean Air Act Amendments of 1990 with respect to exhaust
emissions of carbon monoxide and hydrocarbon emissions from automobile engines.
Some regions of the U.S. have adopted this oxygenate requirement to improve air
quality even though they may not be mandated to do so by the Clean Air Act.
While this trend has further increased MTBE consumption, the use of MTBE is
becoming increasingly controversial and may be substantially curtailed or
eliminated in the future by legislation or regulatory action. See, "--MTBE
Developments" below.

SURFACE SCIENCES. According to Chem Systems, the European market for
surfactants is valued at approximately (euro)2 billion or approximately two
million metric tons per annum. Growth in surfactants is generally expected to
follow GDP growth rates within Western Europe for the next several years.
However, individual sectors of the European surfactants market are expected to
experience higher growth rates. Demand growth for surfactants is viewed as being
relatively stable and exhibits little cyclicality. The main consumer product
applications for surfactants can demand new formulations with unproved
performance characteristics, as a result lifetimes for these consumer (end)
products can often be quite short. This affords considerable opportunity for
innovative surfactants manufacturers to provide surfactants and blends with
differentiated specifications and properties. For basic surfactants, pricing
bears a strong relationship to underlying raw material prices and tends to lag
petrochemical price movements.

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SPECIALTY CHEMICALS--SALES AND MARKETING

We manage a global sales force at 45 locations with a presence in 33
countries, which sells our polyurethane chemicals to over 2,000 customers in 67
countries. Our sales and technical resources are organized to support major
regional markets, as well as key end-use markets which require a more global
approach. These key end-use markets include the appliance, automotive, footwear,
furniture, and CASE industries.

Approximately 50% of our polyurethane chemicals sales are in the form of
"systems" in which we provide the total isocyanate and polyol formulation to our
customers in a ready-to-use form. Our ability to supply polyurethane systems is
a critical factor in our overall strategy to offer comprehensive product
solutions to our customers. We have strategically located our polyol blending
facilities, commonly referred to in the chemicals industry as "systems houses,"
close to our customers, enabling us to focus on customer support and technical
service. We believe this customer support and technical service system
contributes to customer retention and also provides opportunities for
identifying further product and service needs of customers. We intend to
increase the utilization of our systems houses to produce and market greater
volumes of polyols and MDI polyol blends.

We have entered into contractual arrangements with Huntsman Corporation and
Huntsman Petrochemical Corporation, under which Huntsman Corporation and
Huntsman Petrochemical Corporation provide us with all of the management, sales,
marketing and production personnel required to operate our PO business and our
MTBE business. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Cautionary Statement for Forward Looking
Information--If we are unable to maintain our relationships with Huntsman
Corporation and ICI, then we may not be able to replace on favorable terms our
contracts with them or the services and facilities that they provide, if at all"
and "Item 13--Certain Relationships and Related Transactions." We believe that
the extensive market knowledge and industry experience of the sales executives
and technical experts provided to us by Huntsman Corporation and Huntsman
Petrochemical Corporation, in combination with our strong emphasis on customer
relationships, have facilitated our ability to establish and maintain long-term
customer contracts. Due to the specialized nature of our markets, our sales
force must possess technical knowledge of our products and their applications.
Our strategy is to continue to increase sales to existing customers and to
attract new customers by providing quality products, reliable supply,
competitive prices and superior customer service.

Based on current production levels, through Huntsman International, we have
entered into long-term contracts to sell 100% of our PO to customers including
Huntsman Petrochemical Corporation through 2007. Other contracts provide for the
sale of our MTBE production to Texaco and BP Amoco. More than 70% of our annual
MTBE production is committed to Texaco and BP Amoco, with our contract with
Texaco expiring in 2007. In addition, over 40% of our current annual PG
production is sold pursuant to long-term contracts.

Our surface sciences business has its own sales and marketing capabilities.
The global and regional headquarters for the business are both located in the
United Kingdom.

9

SPECIALTY CHEMICALS--MANUFACTURING AND OPERATIONS

Our primary specialty chemicals facilities are located at Geismar,
Louisiana, Port Neches, Texas, Rozenburg, Netherlands and Wilton, U.K. The
following chart provides information regarding the capacities of some of our key
facilities:

(1) The Geismer facility is owned as follows: we own 100% of the MDI, TDI
and polyol facilities, and Rubicon, Inc., a manufacturing joint venture
with Crompton Corp. in which we own a 50% interest, owns the aniline
and nitrobenzene facilities. Rubicon is a separate legal entity that
operates both the assets that we own jointly with Crompton Corp. and
our wholly-owned assets at Geismar.
(2) We have the right to approximately 80% of this capacity under the
Rubicon joint venture arrangements.
(3) We produce under a tolling arrangement with Huntsman Petrochemical
Corporation.
(4) As part of the first phase of a cost reduction program, we have
announced the closure of our Shepton Mallet, U.K. facility in 2002 and
the reduction in force of approximately 270 employees at Shepton
Mallet, U.K. and other locations during the fourth quarter of 2001 and
during the first half of 2002.

Since 1996, over $600 million has been invested to improve and expand our
MDI production capabilities through the rationalization of older, less efficient
facilities and the modernization of newer facilities. We expect to pursue future
plant expansions and capacity modification projects when justified by market
conditions.

In addition to MDI, we produce TDI and polyols at our Geismar facility and
polyols and polyol blends at our Rozenburg facility. We manufacture TDI and
polyols primarily to support our MDI customers' requirements. We believe the
combination of our PO business, which produces the major feedstock for polyols,
with our polyols business creates an opportunity to expand our polyols business
and market greater volumes of polyols through our existing sales network and
customer base.

We use a proprietary manufacturing process to manufacture PO. We own or
license all technology, know-how and patents developed and utilized at this
facility. Our process reacts isobutane and oxygen in proprietary oxidation
(peroxidation) reactors, thereby forming tertiary butyl hydroperoxide ("TBHP")
and TBA which are further processed into PO and MTBE, respectively. Because our
PO production process is less expensive relative to other technologies and
allows all of our PO co-products to be processed into saleable or useable
materials, we believe that our PO production technology possesses several
distinct advantages over its alternatives.

Our surface sciences business includes seven production sites located in
the United Kingdom (at Whitehaven), France (Lavera and St. Mihiel), Spain
(Barcelona and Alcover), and Italy (Castiglione and Patrica/Frosinone), and a
research facility located in the United Kingdom (at Oldbury). Our surfactants
facilities are well located in Europe, with broad capabilities in conversion,
sulfonation and ethoxylation. The surfactants facilities have a competitive cost
base and use modern production tools that allow for flexibility in production
capabilities and technical innovation.

RUBICON JOINT VENTURE. We are a 50% joint venture owner, along with
Crompton Corp., of Rubicon, Inc., which owns aniline, nitrobenzene and
diphenylamine ("DPA") manufacturing facilities in Geismar, Louisiana. In
addition to operating our 100% owned MDI, TDI and polyol facilities at Geismar,
Rubicon also operates the joint venture's owned aniline, nitrobenzene and DPA
facilities and is responsible for providing other auxiliary services to the
entire Geismar complex. We are entitled to approximately 80%

10

of the nitrobenzene and aniline production capacity of Rubicon, and Crompton
Corp. is entitled to 100% of the DPA production. As a result of this joint
venture, we are able to achieve greater scale and lower costs for our products
than we would otherwise have been able to obtain.

RAW MATERIALS. The primary raw materials for polyurethane chemicals are
benzene and PO. Benzene is a widely-available commodity that is the primary
feedstock for the production of MDI. Approximately one-third of the raw material
costs of MDI is attributable to the cost of benzene. Our integration with our
suppliers of benzene, nitrobenzene and aniline provides us with a competitively
priced supply of feedstocks and reduces our exposure to supply interruption.

The primary raw materials for ethyleneamines are ethylene dichloride and
caustic soda. We have entered into long-term arrangements for the supply of
ethylene dichloride and caustic soda from The Dow Chemical Company, which
produces these raw materials at facilities that are in close proximity to our
Freeport, Texas manufacturing facility.

The primary raw materials for our surface sciences business are linear
alkylbenzene, ethylene oxide, natural alcohols, caustic soda and fatty acids.
All of these raw materials are widely available in the merchant market at
competitive prices. Our Whitehaven, U.K. facility also produces natural alcohols
which gives us a competitive advantage in alcohol-based surfactants.

A major cost in the production of polyols is attributable to the costs of
PO. We believe that the integration of our PO business with our polyurethane
chemicals business will give us access to a competitively priced, strategic
source of PO and the opportunity to further expand into the polyol market. The
primary raw materials used in our PO production process are butane/isobutane,
propylene, methanol and oxygen, which accounted for 56%, 21%, 14% and 2%,
respectively, of total raw material costs in 2001. We purchase our raw materials
primarily under long-term contracts. While most of these feedstocks are
commodity materials generally available to us from a wide variety of suppliers
at competitive prices in the spot market, we purchase all of the propylene used
in the production of our PO from Huntsman Petrochemical Corporation, and through
Huntsman Petrochemical Corporation's pipeline, which is the only propylene
pipeline connected to our PO facility.

SPECIALTY CHEMICALS--COMPETITION

Competitors in the polyurethane chemicals business include leading
worldwide chemical companies such as BASF, Bayer, Dow and Lyondell. While these
competitors produce various types and quantities of polyurethane chemicals, we
focus on MDI and MDI-based polyurethane systems. We compete based on
technological innovation, technical assistance, customer service, product
reliability and price. In addition, our polyurethane chemicals business also
differentiates itself from its competition in the MDI market in two ways: (1)
where price is the dominant element of competition, our polyurethane chemicals
business differentiates itself by its high level of customer support including
cooperation on technical and safety matters; and (2) elsewhere, we compete on
the basis of product performance and our ability to react to customer needs,
with the specific aim of obtaining new business through the solution of customer
problems. Nearly all the North American PO production capacity is located in the
U.S. and controlled by three producers, Lyondell, Dow and us. We compete based
on price, product performance and service.

There are numerous surfactants producers in Europe and worldwide. We are
one of the major European producers of surfactants. Our main competitors include
worldwide leading chemical companies such as Sasol, BASF, Shell, Cognis
(recently sold to financial investors Schroder Ventures and Goldman Sachs
Capital Partners), Clariant, and Akzo, as well as various smaller or more local
competitors. We compete on the basis of price with respect to our basic
surfactant product offering and, in addition to price, on the basis of
performance and service with respect to our specialty and blended surfactant
products.

11

SPECIALTY CHEMICALS--MTBE DEVELOPMENTS

The presence of MTBE in some groundwater supplies in California and other
states (primarily due to gasoline leaking from underground storage tanks) and in
surface water (primarily from recreational watercraft) has led to public concern
about MTBE's potential to contaminate drinking water supplies. Heightened public
awareness regarding this issue has resulted in state, federal and, more
recently, foreign initiatives to rescind the federal oxygenate requirements for
reformulated gasoline or restrict or prohibit the use of MTBE in particular. For
example, the California Air Resources Board adopted regulations that would
prohibit the addition of MTBE to gasoline after 2002 (recently revised to take
effect January 1, 2004). In addition, the State of California requested that the
U.S. Environmental Protection Agency (the "EPA") waive the federal oxygenated
fuels requirements of the federal Clean Air Act for gasoline sold in California.
The EPA denied the State's request on June 12, 2001. Certain other states have
also taken actions to restrict or eliminate the future use of MTBE. We are
unable to state what the short and long term effects of the EPA's action on
California's ban on MTBE use will be on our business. The actual effect of other
state actions on the use of MTBE in gasoline is similarly unclear. However,
bills have been introduced in the U.S. Congress to accomplish similar goals of
curtailing or eliminating the oxygenated fuels requirements in the Clean Air
Act, or of curtailing MTBE use. In 1999, the U.S. Senate also passed a
resolution calling for a phase out of MTBE. While this resolution has no binding
legal effect, there can be no assurance that future Congressional action will
not result in a ban or other restrictions on MTBE use. The U.S. Senate is
considering comprehensive energy legislation (S.517) that includes provisions
regulating fuels. In that context, floor amendments have been added to the bill
that would ban in four years the use of MTBE in gasoline in the United States.
Whether this bill in its present or a similar form will become law is unknown at
this time. The bill in its present form is controversial, both on matters
related to MTBE and to other energy policies, and it is unclear whether such a
law will be enacted by Congress. In addition, on March 20, 2000, the EPA
announced its intention, through an advanced notice of proposed rulemaking, to
phase out the use of MTBE under authority of the federal Toxic Substances
Control Act. In its notice, the EPA also called on the U.S. Congress to restrict
the use of MTBE under the Clean Air Act. Any phase-out of or prohibition against
the use of MTBE in California (in which a significant amount of MTBE is
consumed), in other states, or nationally may result in a significant reduction
in demand for our MTBE and result in a material loss in revenues or material
costs or expenditures.

The state of New York has proposed a ban on the sale of MTBE in New York.
The Oxygenated Fuel Association ("OFA"), an organization representing MTBE
producers, challenged the proposed ban in federal court in New York. In a motion
for summary judgment, OFA asserted that the state of New York was precluded by
the doctrine of federal preemption from banning MTBE sales in the state because
of the federal oxygenated requirement under the federal Clean Air Act. The
court, however, rejected OFA's motion. Although this ruling was based on the
court's determination that there are factual issues precluding summary judgment,
the ruling tends to provide some support for the theory that an individual state
can act unilaterally to preclude the sale of MTBE within its jurisdiction.
Several states have promulgated such bans, which are scheduled to take effect
variously over the next several years. OFA will continue to pursue the New York
case, as well as a similar case in California.

In Europe, in 2001, Denmark proposed to the EU that a directive be issued,
taking effect in 2005, allowing individual EU countries to ban the use of MTBE.
No other EU member state joined Denmark's proposal. The EU issued a risk
assessment of MTBE on November 7, 2001. While no ban of MTBE was recommended,
several risk reduction measures relating to storage and handling of
MTBE-containing fuel were recommended. Separate from EU action, Denmark entered
into a voluntary agreement with refiners to reduce the sale of MTBE in Denmark.
Under the agreement, use of MTBE in 92- and 95-octane gasoline in Denmark will
cease by May 1, 2002; however, MTBE will still be an additive in a limited
amount of 98-octane gasoline sold in 100 selected service stations in Denmark.

In the event that there should be a phase-out of MTBE in the United States,
we believe we will be able to export MTBE to Europe or elsewhere or use our
co-product TBA to produce saleable products other than MTBE. We believe that our
low production costs will put us in a favorable position relative to other
higher cost sources (primarily, on-purpose manufacturing). If we opt to produce
products other than MTBE,

12

necessary modifications to our facilities may require significant capital
expenditures and the sale of the other products may produce a materially lower
level of cash flow than the sale of MTBE. Furthermore, we cannot give any
assurance that we will not be named in litigation by citizens groups,
municipalities or others relating to the environmental effects of MTBE or that
such litigation will not have a material adverse effect on our business,
financial condition, results of operations or cash flows. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Cautionary Statement for Forward-Looking Information--Pending or
future litigation or legislative initiatives related to MTBE may subject us to
products or environmental liability or materially adversely affect our sales."

PETROCHEMICALS

PETROCHEMICALS--GENERAL

We are a highly-integrated European olefins and aromatics producer.
Olefins, principally ethylene and propylene, are the largest volume basic
petrochemicals and are the key building blocks from which many other chemicals
are made. For example, olefins are used to manufacture most plastics, resins,
adhesives, synthetic rubber and surfactants that are used in a variety of
end-use applications. Aromatics are basic petrochemicals used in the manufacture
of polyurethane chemicals, nylon, polyester fiber and a variety of plastics.

OLEFINS. Our olefins facility at Wilton, U.K. is one of Europe's largest
single-site and lowest cost olefins facilities, according to Chem Systems. Our
Wilton facility has the capacity to produce approximately 1.9 billion pounds of
ethylene, 880 million pounds of propylene and 225 million pounds of butadiene
per year. We sell over 80% of our ethylene and propylene volume through
long-term contracts with The Dow Chemical Company, European Vinyls Corporation,
ICI, BP Chemicals and others, and over 64% of our total ethylene and propylene
volume is transported via direct pipelines to our customers or consumed
internally. The Wilton olefins facility benefits from its feedstock flexibility
and superior logistics, which allows for processing of naphthas, condensates and
natural gas liquids ("NGLs").

AROMATICS. We produce aromatics at our two integrated manufacturing
facilities located in Wilton, U.K. and North Tees, U.K. According to
Chem Systems, we are a leading European producer of cyclohexane with 700 million
pounds of annual capacity, a leading producer of paraxylene with 800 million
pounds of annual capacity and are among Europe's larger producers of benzene
with 1,300 million pounds of annual capacity. Additionally, our North Tees site,
which is currently idle, has an annual capacity to produce 275 million pounds of
cumene. We use most of the benzene produced by our aromatics business internally
in the production of nitrobenzene for our polyurethane chemicals business and
for the production of cyclohexane. The balance of our aromatics products are
sold to several key customers. Our aromatics business entered into a contract
with Shell Trading International Limited for the purchase of aromatics-rich
feedstock. This transaction allowed us to close part of our aromatics facilities
in the fourth quarter of 1999, thereby reducing fixed production costs while
maintaining production of key products. Shell has indicated that it will not
supply feedstock to the North Tees site after December 31, 2002. We are
currently evaluating alternative sources of supply to this unit.

Our petrochemicals business accounted for 26% and 31% of net sales in 2001
and 2000, respectively, and, on a pro forma basis, accounted for 26% of our net
sales in 1999.

PETROCHEMICALS--INDUSTRY OVERVIEW

Petrochemical markets are essentially global commodity markets. However,
the olefins market is subject to some regional price differences due to the more
limited inter-regional trade resulting from the high costs of product
transportation. The global petrochemicals market is cyclical and is subject to
pricing swings due to supply and demand imbalances, feedstock prices (primarily
driven by crude oil prices) and general economic conditions.

13

As shown in the following table, both globally and in Western Europe, our
primary market, ethylene is the largest petrochemicals market and paraxylene has
been the fastest growing:

- -----------

Source: Chem Systems

The ethylene market in Western Europe is supplied by numerous producers,
none of whom has a dominant position in terms of its share of Western European
production capacity. Western European ethylene consumption in 2001 is estimated
by Chem Systems at 46.1 billion pounds, representing an average industry
operating rate of 93%. Propylene capacity in Western Europe is approximately
33.5 billion pounds per year. Western European propylene consumption in 2001 is
estimated at 31.8 billion pounds, representing an average industry operating
rate of 92%. The top three Western European producers of ethylene are AtoFina,
Dow and EniChem. Olefins capacity in Western Europe has expanded moderately in
recent years primarily through implementation of low-cost process improvement
projects at existing units. No greenfield olefins capacity has been constructed
in Western Europe since 1994. According to Chem Systems, given that it usually
takes a minimum of three years between any announcement of a new plant and the
plant coming on-line, it appears that the earliest any new plant might come
on-line in Europe is in 2004.

According to Chem Systems, the petrochemical industry is at or near its
cyclical trough following a period of oversupply in the last few years and
supply and demand characteristics are expected to improve in coming years,
resulting in improved profitability.

Like the ethylene market, the aromatics market, which is comprised of
benzene and paraxylene, in Western Europe is characterized by several major
producers, including, according to Chem Systems, Dow, AtoFina, Shell, EniChem,
ExxonMobil and BASF. Annual Western European benzene production capacity is
approximately 20 billion pounds and consumption was estimated by Chem Systems at
17.6 billion pounds in 2001. Paraxylene production capacity in Western Europe in
2001, according to Chem Systems, was approximately 4.8 billion pounds and
consumption was estimated at 4.4 billion pounds.

Both the benzene and paraxylene markets are currently in a period of
overcapacity. The increasing restrictions imposed by regulatory authorities on
the aromatics content of gasoline in general, and the benzene content in
particular, have led to an increase in supply of aromatics in recent years. In
2001, global paraxylene demand grew by 3.0% largely as a result of the global
economic growth, while global capacity rose by 2%. As a result of these
dynamics, according to Chem Systems, margins in the aromatics industry,
particularly those in paraxylene, are expected to continue to exhibit
characteristic cyclicality and recover

14

from currently depressed cyclical lows early in the next few years as polyester
growth drives a rebalancing of supply and demand.

PETROCHEMICALS--SALES AND MARKETING

In recent years, our sales and marketing efforts have focused on developing
long-term contracts with customers to minimize our selling expenses and
administration costs. In 2001, over 85% of our primary petrochemicals sales
volume was made under long-term contracts. We delivered over 70% of our
petrochemical products volume in 2001 by pipeline, and we delivered the balance
of our products by road and ship to either the U.K. or export markets, primarily
in continental Western Europe.

PETROCHEMICALS--MANUFACTURING AND OPERATIONS

We produce olefins at our facility in Wilton, U.K. In addition, we own and
operate two integrated aromatics manufacturing facilities at our Wilton and
North Tees sites at Teesside, U.K. Information regarding these facilities is set
forth in the following chart:

The Wilton olefins facility's flexible feedstock capability, which permits
it to process naphtha, condensates and NGL feedstocks, allows us to take
advantage of favorable feedstock prices arising from seasonal fluctuations or
local availability. According to Chem Systems, the Wilton olefins facility is
one of Europe's most cost efficient olefins manufacturing facilities on a cash
cost of production basis. In addition to our manufacturing operations, we also
operate an extensive logistics operations infrastructure in North Tees. This
infrastructure includes both above and below ground storage facilities, jetties
and logistics services on the River Tees. These operations reduce our raw
material costs by providing greater access and flexibility for obtaining
feedstocks.

RAW MATERIALS. Teesside, situated on the northeast coast of England, is
near a substantial supply of oil, gas and chemical feedstocks. Due to our
location at Teesside, we have the option to purchase feedstocks from a variety
of sources. However, we have elected to procure the majority of our naphtha,
condensates and NGLs from local producers, as they have been the most economical
sources. In order to secure the optimal mix of the required quality and type of
feedstock for our petrochemical operations at fully competitive prices, we
regularly engage in the purchase and sale of feedstocks and hedging activities.

PETROCHEMICALS--COMPETITION

The markets in which our petrochemicals business operates are highly
competitive. Our competitors in the olefins and aromatics business are
frequently some of the world's largest chemical companies such as BP Amoco, Dow,
ExxonMobil and Shell. The primary factors for competition in this business are
price, service and reliability of supply. The technology used in these
businesses is widely available and licensed.

15

TITANIUM DIOXIDE

TIOXIDE--GENERAL

Our TiO(2) business, which operates under the tradename "Tioxide," is a
leading European TiO(2) producer and has among the largest production capacity
in the world, with an estimated 13% market share, according to International
Business Management Associates. TiO(2) is a white pigment used to impart
whiteness, brightness and opacity to products such as paints, plastics, paper,
printing inks, synthetic fibers and ceramics. In addition to its optical
properties, TiO(2) possesses traits such as stability, durability and
non-toxicity, making it superior to other white pigments. According to
International Business Management Associates, global consumption of TiO(2) was
approximately 3.9 million tonnes in 2000, growing from 3.0 million tonnes in
1992, representing a 3.2% compound annual growth rate, which approximates global
GDP growth for that period.

We offer an extensive range of products that are sold worldwide to over
3,000 customers in all major TiO(2) end markets and geographic regions. The
geographic diversity of our manufacturing facilities allows our TiO(2) business
to service local customers, as well as global customers that require delivery to
more than one location. Our TiO(2) business has an aggregate annual nameplate
capacity of approximately 576,000 tonnes at our eight production facilities.
Five of our TiO(2) manufacturing plants are located in Europe, one is in North
America, one is in Asia, and one is in South Africa. Our North American
operation consists of a 50% interest in a manufacturing joint venture with NL
Industries, Inc. and our South African operations consist of a 60%-owned
subsidiary.

We recently commenced construction of a new TiO(2) manufacturing plant at
our Greatham, U.K. facility. This new plant will allow us to close an older
plant located at Greatham and will increase our annual production capacity of
the facility to 100,000 tonnes of chloride-based TiO(2). We expect to commence
production at the new plant in mid-2002. In addition, we are in the process of
expanding our Huelva, Spain plant by 17,000 tonnes by late 2003.

We are among the world's lowest cost TiO(2) producers, according to
International Business Management Associates. We have embarked on a
comprehensive cost reduction program which has eliminated approximately $120
million of annualized costs since 1996. As part of this program, we have reduced
the number of product grades we produce, focusing on those with wider
applications. This program has resulted in reduced total plant set-up times and
further improved product quality, product consistency, customer service and
profitability. We currently anticipate achieving additional savings of $80
million by the end of 2004.

Our TiO(2) business accounted for 19% and 22% of our net sales in 2001 and
2000, respectively, and on a pro forma basis, accounted for 26% of our net sales
in 1999.

TIOXIDE--INDUSTRY OVERVIEW

Global consumption of TiO(2) was 3.9 million tonnes in 2000 according to
International Business Management Associates. The historical long-term growth
rate for global TiO(2) consumption has been generally consistent with global GDP
growth. Although short-term influences such as customer and producer stocking
and de-stocking activities in response to changes in capacity utilization and
price may distort this trend, over the long-term, GDP growth is the primary
underlying factor influencing growth in TiO(2) demand. The TiO(2) industry
experiences some seasonality in its sales because paint sales generally peak
during the spring and summer months in the northern hemisphere, resulting in
greater sales volumes during the first half of the year.

The global TiO(2) market is characterized by a small number of large global
producers. The TiO(2) industry currently has five major producers (DuPont,
Millennium Chemicals, our Company, Kerr-McGee and NL Industries), which account
for approximately 80% of the global market share, according to International
Business Management Associates. No producer has announced greenfield TiO(2)
capacity in the last few

16

years. Based upon current price levels and the long lead times for planning,
governmental approvals and construction, additional greenfield capacity is not
expected in the near future, although we have announced a feasibility study of
constructing a new ICON chloride-based TiO(2) manufacturing facility in China.

There are two manufacturing processes for the production of TiO(2), the
sulfate process and the chloride process. Most recent capacity additions have
employed the chloride process technology and, currently, the chloride process
accounts for approximately 64% of global production capacity according to
International Business Management Associates. However, the global distribution
of sulfate and chloride-based TiO(2) capacity varies by region, with the sulfate
process being predominant in Europe, our primary market. The chloride process is
the predominant process used in North America and both processes are used in
Asia. While most end-use applications can use pigments produced by either
process, market preferences typically favor products that are locally available.

TIOXIDE--SALES AND MARKETING

Approximately 95% of our TiO(2) sales are made through our direct sales and
technical services network, enabling us to cooperate more closely with our
customers and to respond to our increasingly global customer base. Our
concentrated sales effort and local manufacturing presence have allowed us to
achieve our leading market shares in a number of the countries where we
manufacture TiO(2).

In addition, we have focused on marketing products to higher growth
industries. For example, we believe that our TiO(2) business is well-positioned
to benefit from the projected growth in the plastics sector, which, according to
International Business Management Associates, is expected to grow faster than
the overall TiO(2) market over the next several years. The table below
summarizes the major end markets for our TiO(2) products:

TIOXIDE--MANUFACTURING AND OPERATIONS

Our TiO(2) business has eight manufacturing sites in seven countries with a
total estimated capacity of 576,000 tonnes per year. Approximately 73% of our
TiO(2) capacity is located in Western Europe. The following table presents
information regarding our TiO(2) facilities:

17

(1) We have recently announced plans to expand the capacity at these
facilities.
(2) This facility is owned and operated by Louisiana Pigment Company,
L.P., a manufacturing joint venture that is owned 50% by us and 50% by
Kronos Louisiana, Inc., a subsidiary of NL Industries, Inc. The
capacity shown reflects our 50% interest in Louisiana Pigment Company.
(3) This facility is owned by Tioxide Southern Africa (Pty) Limited, a
company that is owned 60% by us and 40% by AECI. We operate this
facility and are responsible for marketing 100% of the production.

JOINT VENTURES. We own a 50% interest in a manufacturing joint venture
located in Lake Charles, Louisiana. The remaining 50% interest is held by our
joint venture partner Kronos Louisiana, Inc., a wholly-owned subsidiary of NL
Industries, Inc. We share production offtake and operating costs of the plant
equally with Kronos, though we market our share of the production independently.
The operations of the joint venture are under the direction of a supervisory
committee on which each partner has equal representation.

We also own a 60% interest in Tioxide Southern Africa (Pty) Limited, based
in Umbogintwini, near Durban, South Africa. The remaining 40% interest is owned
by AECI, a major South African chemicals and minerals company. We operate this
facility and are responsible for marketing 100% of the production.

RAW MATERIALS. The primary raw materials used to produce TiO(2) are
titanium-bearing ores. There are a limited number of ore suppliers and we
purchase ore under long-term supply contracts. The cost of titanium-bearing ores
has been relatively stable in comparison to TiO(2) prices. Titanium-bearing ore
represents approximately 40% of TiO(2) pigment production costs.

TiO(2) producers extract titanium from ores and process it into pigmentary
TiO(2) using either the chloride or sulfate process. Once an intermediate TiO(2)
pigment has been produced, it is "finished" into a product with specific
performance characteristics for particular end-use applications. The finishing
process is common to both the sulfate and chloride processes and is a major
determinant of the final product's performance characteristics.

The sulfate process generally uses less-refined ores that are cheaper to
purchase but produce more co-product than the chloride process. Co-products from
both processes require treatment prior to disposal in order to comply with
environmental regulations. In order to reduce our disposal costs and to increase
our cost competitiveness, we have developed and marketed the co-products of our
TiO(2) business. We now sell over 50% of the co-products generated by our
business.

TIOXIDE--COMPETITION

The global markets in which our TiO(2) business operates are highly
competitive. The primary factors of competition are price, product quality and
service. The major global producers against whom we compete are DuPont,
Millennium Chemicals, Kerr-McGee Chemicals and NL Industries. We believe that
our low production costs, combined with our presence in numerous local markets,
give us a competitive advantage,

18

particularly with respect to those global customers demanding presence in the
various regions in which they conduct business.

SIGNIFICANT CUSTOMERS

In 2001, sales from our Specialty Chemicals, Petrochemicals and TiO(2)
businesses to ICI and its affiliates accounted for approximately 6% of our
consolidated revenue. In 2000, sales to ICI and its affiliates accounted for
approximately 8% of our consolidated revenue. ICI indirectly owns 30% of our
membership interests. See "Item 13--Certain Relationships and Related
Transactions" for a further discussion of our relationship with ICI. In 2001,
our Petrochemicals business had sales to two significant customers, which
amounted to 13% and 11% of sales for our Petrochemicals segment.

RESEARCH AND DEVELOPMENT

In 2001 and 2000, we spent $63 million and $59 million, respectively, on
research and development of our products and, on a pro forma basis, we spent a
total of $73 million and $68 million in 1999 and 1998, respectively.

INTELLECTUAL PROPERTY RIGHTS

Proprietary protection of our processes, apparatuses, and other technology
and inventions is important to our businesses. For our specialty chemicals
business, we own more than 300 U.S. patents and pending U.S. patent applications
(including provisionals), and more than 2,150 foreign counterparts, including
both issued patents and pending patent applications. For our TiO(2) business, we
have approximately 20 U.S. patents and pending patent applications, and
approximately 180 foreign counterparts. For our petrochemicals business, we own
approximately 35 patents and pending applications (both U.S. and foreign). We
also rely upon unpatented proprietary know-how and continuing technological
innovation and other trade secrets to develop and maintain our competitive
position.

In addition to our own patents and patent applications and proprietary
trade secrets and know-how, we have entered into certain licensing arrangements
that authorize us to use certain trade secrets, know-how and related technology
and/or operate within the scope of certain patents owned by other entities. We
also license and sub-license certain intellectual property rights to affiliates
and to third parties. In connection with our transaction with Huntsman
International Holdings, ICI and Huntsman Specialty (under the terms of a
Technology Transfer Agreement and a PO/MTBE Technology Transfer Agreement), we
have licensed back to ICI and Huntsman Corporation (on a non-exclusive basis)
certain intellectual property rights for use in their respective retained
businesses, and ICI and Huntsman Corporation have each licensed certain retained
intellectual property to us.

For our specialty chemicals business, we have brand names for a number of
our products, and we own approximately 35 U.S. trademark registrations and
applications for registration currently pending at the United States Patent and
Trademark Office, and approximately 2,030 foreign counterparts, including both
registrations and applications for registration. For our TiO(2) business, we
have approximately 180 trademark registrations and pending applications,
approximately 110 of which relate to the trademark "Tioxide." Our petrochemicals
business is not dependent on the use of trademarks. We have entered into a
trademark license agreement with Huntsman Group Intellectual Property Holdings
Corporation under which we have obtained the rights to use the trademark
"Huntsman", subject to certain restrictions.

EMPLOYEES

We employed over 7,400 people as of December 31, 2001. Additionally, over
650 people are employed by our U.S. joint ventures. Approximately 96% of our
employees, excluding employees of our joint ventures, work outside the United
States and approximately 54% of our employees are subject to collective
bargaining agreements. Overall, we believe that our relations with our employees
are good. In addition, Huntsman Corporation and Huntsman Petrochemical
Corporation are providing operating, management and

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administrative services to us for our PO business similar to the services that
they provided to Huntsman Specialty with respect to the PO business before it
was transferred to us. See "Item 13--Certain Relationships and Related
Transactions."

ENVIRONMENTAL REGULATIONS

Our business of manufacturing and distributing chemical products and its
related production of by-products and wastes, entails risk of adverse
environmental effects. As a result, we are subject to extensive federal, state,
local and foreign laws, regulations, rules and ordinances relating to pollution,
protection of the environment and the generation, storage, handling,
transportation, treatment, disposal and remediation of hazardous substances and
waste materials. In the ordinary course of business, we are subject to frequent
environmental inspections and monitoring by governmental enforcement
authorities. In addition, our production facilities require operating permits
that are subject to renewal, modification and, in certain circumstances,
revocation. Actual or alleged violations of environmental laws or permit
requirements could result in restrictions or prohibitions on plant operations,
substantial fines and civil or criminal sanctions. Moreover, changes in
environmental regulations could inhibit or interrupt our operations, or require
us to change our equipment or operations, and any such changes could have a
material adverse effect on our businesses. See "Item 1--Business--Specialty
Chemicals--MTBE Developments" for a discussion of the proposed regulations
regarding MTBE. Accordingly, given our businesses, environmental or regulatory
matters may cause us significant unanticipated losses, costs or liabilities.

Under some environmental laws, we may be jointly and severally liable for
the costs of environmental contamination on or from our properties and at
off-site locations where we disposed of or arranged for the disposal or
treatment of hazardous wastes. For example, in the United States under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, and similar state laws, a current owner or operator of real property
may be liable for such costs regardless of whether the owner or operator owned
or operated the real property at the time of the release of the hazardous
substances and regardless of whether the release or disposal was in compliance
with law at the time it occurred. In addition, under the United States Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), and similar state
laws, as the holder of permits to treat or store hazardous wastes, we may, under
some circumstances, be required to remediate contamination at our properties
regardless of when the contamination occurred. Similar laws are being developed
or are in effect to varying degrees in other parts of the world, most notably in
the EU. For example, in the U.K., a new contaminated land regime is expected to
come into effect shortly which will provide a detailed framework for the
identification, management and remediation of contaminated sites. This law may
increase governmental scrutiny of our U.K. facilities.

We may also incur future costs for capital improvements and general
compliance under environmental laws, including costs to acquire, maintain and
repair pollution control equipment. Capital expenditures are planned, for
example, under national legislation implementing the EU Directive on Integrated
Pollution Prevention and Control. Under this directive the majority of our
plants will, over the next few years, be required to obtain governmental
authorizations which will regulate air and water discharges, waste management
and other matters relating to the impact of operations on the environment, and
to conduct site assessments to evaluate environmental conditions. Although the
implementing legislation in most Member States is not yet in effect, it is
likely that additional expenditures may be necessary in some cases to meet the
requirements of authorizations under this directive. In particular, we believe
that related expenditures to upgrade our wastewater treatment facilities at
several sites may be necessary and associated costs may be material. Wastewater
treatment upgrades unrelated to this initiative also are planned at certain
facilities. In addition, we may also incur material expenditures, beyond
currently anticipated expenditures, in complying with EU Directives, including
the Directive on Hazardous Waste Incineration and the Seveso II Directive, which
governs major accident hazards. It is also possible that additional expenditures
to reduce air emissions at two of our U.K. facilities may be material. Capital
expenditures and, to a lesser extent, costs and operating expenses relating to
environmental matters will be subject to evolving regulatory requirements and
will depend on the timing of the promulgation and enforcement of specific
standards which impose requirements on our operations.

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Therefore, we cannot assure you that material capital expenditures beyond those
currently anticipated will not be required under environmental laws.

Our operations involve the handling, transportation and use of numerous
hazardous substances. From time to time, these operations may result in
violations under environmental laws including spills or other releases of
hazardous substances into the environment. In the event of a catastrophic
incident, we could incur material costs or experience interruption in our
operations as a result of addressing and implementing measures to prevent such
incidents in the future. Currently, we are aware of the following matters:

- We are investigating a spill at our North Tees facility that was
discovered on March 27, 2001. The U.K. Environmental Agency
issued an enforcement notice with respect to this spill on March
30, 2001, following an investigation into an alleged leak of a
mixture consisting of approximately 60% benzene into the River
Tees, allegedly following a dewatering procedure at our North
Tees site. The requirements of that notice were complied with, to
the satisfaction of the U.K. Environmental Agency, by the end of
May 2001. We contained the spill and conducted a remediation
program to reclaim the material. The U.K. Environmental Agency is
also continuing to investigate the incident; a decision by the
U.K. Environmental Agency as to whether to prosecute or not is
likely to be made in early or mid-2002. If the U.K. Environmental
Agency finds us legally responsible, we could face legal action
and possible penalties. Although we can give no assurances, based
on currently available information and our understanding of
similar investigations and penalties in the past, we do not
believe that, if such action was initiated and we are ultimately
found to be legally responsible, the probable penalties would be
material to our financial position or results of operations.
Nevertheless, because this matter is in the initial stages of
investigation by the U.K. Environmental Agency, we cannot assure
you that it will not have a material effect on us.

- The Texas Natural Resource Conservation Commission has issued
certain notices of violation relating to air emissions and
wastewater issues at the Port Neches facility, and filed an
amended administrative petition with respect to certain of these
violations on January 12, 2001. We met with the TNRCC on several
occasions in 2001 and early 2002 and have reached a tentative
settlement with the agency on all outstanding issues concerning
Port Neches. It is anticipated that the settlement will be
presented to the Commission for final approval sometime in
mid-2002. If the settlement is approved, it will result in a fine
of no more that $100,000 which would be allocable to the PO/MTBE
facility. Thus, we do not believe such fine will be material to
us.

- We are aware that there is or may be soil or groundwater
contamination at some of our facilities resulting from past
operations at these or neighboring facilities. Based on available
information and the indemnification rights that we possess
(including indemnities provided by Huntsman Specialty and ICI for
the facilities that each of them transferred to us), we believe
that the costs to investigate and remediate known contamination
will not have a material adverse effect on our business,
financial condition, results of operations or cash flows;
however, we cannot give any assurance that such indemnities will
fully cover the costs of investigation and remediation, that we
will not be required to contribute to such costs or that such
costs will not be material.

Given the nature of our business, violations of environmental laws may
result in restrictions imposed on our operating activities, substantial fines,
penalties, damages or other costs, any of which could have a material adverse
effect on our business, financial condition, results of operations or cash
flows. See "Item 7--Management's Discussion and Analysis of Financial Conditions
and Results of Operations--Environmental Matters."

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ITEM 2. PROPERTIES

We own or lease chemical manufacturing and research facilities in the
locations indicated in the list below, which we currently believe are adequate
for our short-term and anticipated long-term needs. We own or lease office space
and storage facilities throughout the U.S. and many foreign countries. Our
principal executive offices, which are leased from Huntsman Corporation, are
located at 500 Huntsman Way, Salt Lake City, Utah 84108. The following is a list
of our material owned or leased properties where manufacturing, blending,
research and main office facilities are located. For additional information, see
"Item 1--Business--Specialty Chemicals" "--Petrochemicals" and "--Titanium
Dioxide."

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(1) 50% owned manufacturing joint venture with Crompton Corp.
(2) Leased.
(3) Leased land and/or building.
(4) 50% owned manufacturing joint venture with Kronos Louisiana, Inc., a
subsidiary of NL Industries, Inc.
(5) 60% owned subsidiary with AECI.

ITEM 3. LEGAL PROCEEDINGS

We are a party to various proceedings instituted by governmental
authorities and others arising under provisions of applicable laws, including
various environmental laws. Based in part on the indemnities provided to us by
ICI and Huntsman Specialty in connection with their transfer of businesses to us
and our insurance coverage, we do not believe that the outcome of any of these
matters will have a material adverse effect on our financial condition or
results of operations. See "Item 1--Business--Environmental Regulations" for a
discussion of environmental proceedings.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 2001, no matters were submitted to a vote of
our security holders.

PART II

ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

MARKET INFORMATION

As of the date of this report, there was no established public trading
market for any class of our membership interests.

HOLDERS

As of the date of this report, there were six holders of record of our
membership interests. Huntsman Specialty, an indirect subsidiary of Huntsman
Corporation, owns 60% of our membership interests, ICI and its affiliates own
30% of our membership interests and four institutional investors own the
remaining 10% of our membership interests.

DISTRIBUTIONS

Pursuant to our limited liability company agreement and the limited
liability company agreement of Huntsman International, we have a tax sharing
arrangement with all of our membership interest holders. Under the arrangement,
because we are treated as a partnership for United States income tax purposes,
we will receive payments from our wholly-owned subsidiary, Huntsman
International, and we will in turn make payments to our membership interest
holders in an amount equal to the United States federal and state income taxes
we and Huntsman International would have paid had we and Huntsman International
been a consolidated or unitary group for federal tax purposes. The arrangement
also provides that we will pay to Huntsman International cash payments received
from our membership interest holders in amounts equal to the amount of United
States federal and state income tax refunds or benefit against future tax
liabilities equal to the amount Huntsman International would have received from
the use of net operating losses or tax credits generated by Huntsman
International.

Except in accordance with the above paragraph, our senior secured credit
facilities restrict our ability to pay dividends or other distributions on our
equity interests. The indentures governing our notes and Huntsman
International's notes, also place certain restrictions on our ability to pay
dividends and make other distributions.

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ITEM 6 SELECTED FINANCIAL DATA

The following table sets forth selected financial data for our Company as
of the dates and for the periods indicated. Information should be read in
conjunction with our Consolidated Financial Statements and Notes thereto
included on the pages immediately following the Index to Consolidated Financial
Statements appearing on page F-1. See also "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations."

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

We were formed as a joint venture between Huntsman Specialty, ICI and
institutional investors. On June 30, 1999, we contributed cash and U.S.
operating assets to our wholly-owned subsidiary, Huntsman International. With
this capitalization, Huntsman International acquired ICI's polyurethane
chemicals, petrochemicals (including ICI's 80% interest in the Wilton olefins
facility), and TiO(2) businesses, and Huntsman Specialty's PO business. In
addition, Huntsman International acquired the remaining 20% ownership interest
in the Wilton olefins facility from BP Chemicals. For a further discussion of
these transactions, see "Item 1--Business--General" and "Item 13--Certain
Relationships and Related Transactions--Company Background."

We derive our revenues, earnings and cash flow from the manufacture and
sale of a wide variety of specialty and commodity chemical products. These
products are manufactured at facilities located in the Americas, Europe, Africa
and Asia and are sold throughout the world. We manage our businesses in three
segments: Specialty Chemicals (the former ICI polyurethanes and Huntsman
Specialty PO businesses and the acquisitions we have completed since 1999);
Petrochemicals (the former ICI petrochemical business and the assets acquired
from BP Chemicals); and Tioxide (the former ICI titanium dioxide business).

The profitability of our three principal business segments is impacted to
varying degrees by economic conditions, prices of raw materials, customers'
inventory levels, global supply and demand pressures as well as other seasonal
and, to a limited extent, cyclical factors. Generally, the global market for our
specialty chemicals products has grown at rates in excess of global GDP growth,
while the demand for our petrochemical and Tioxide products has historically
grown at rates that are approximately equal to global GDP growth.

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Huntsman Specialty is considered the acquirer and predecessor of the
businesses transferred to us in the transactions with Huntsman Specialty, ICI
and BP Chemicals. These transactions have also resulted in the implementation of
a new basis of accounting, resulting in new carrying values for the transferred
ICI and BP Chemicals businesses. Our consolidated financial statements reflect
this new basis of accounting beginning with the date of the transactions with
Huntsman Specialty, ICI and BP Chemicals as follows (in millions of dollars):

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RESULTS OF OPERATIONS

2001 ACTUAL COMPARED TO 2000 ACTUAL

(1) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization, and taxes. EBITDA is included in
this report because it is a basis on which we assess our financial
performance and debt service capabilities, and because certain covenants in
our borrowing arrangements are tied to similar measures. However, EBITDA
should not be considered in isolation or viewed as a substitute for cash
flow from operations, net income or other measures of performance as
defined by accounting principles generally accepted in the United States
("U.S. GAAP") or as a measure of a company's profitability or liquidity. We
understand that while EBITDA is frequently used by security analysts,
lenders and others in their evaluation of companies, EBITDA as used herein
is not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
(2) For purposes of the covenants in our senior secured credit facilities, loss
on sale of accounts receivable related to the securitization program is
excluded from the computation of EBITDA.

REVENUES. Revenues in 2001 increased by $127 million, or 3%, to $4,575
million from $4,448 million during 2000. The increase in revenues resulted from
an increase in sales in the Specialty Chemicals segment which was partially
offset by decreases in sales at the Petrochemicals and Tioxide segments. Sales
in the Specialty Chemicals segment benefited from the acquisition of the TPU,
ethyleneamines and surfactants businesses and the inclusion of the European
performance chemicals sales.

SPECIALTY CHEMICALS - Our Specialty Chemicals sales, excluding non-comparable
acquisitions, declined by $44 million, or 2%, during 2001 as compared to 2000.
Total Specialty Chemicals sales increased by $420 million, or 20%, for 2001 as
compared to 2000. Total MDI sales decreased by 1% as compared to the 2000
period. A strong recovery in the Asian economies led to an increase of sales

26

volumes of 26% in that region, while in Europe sales volumes grew by 6%. In the
Americas, sales volumes decreased by 14% due to weaker demand resulting from the
continued economic slowdown. Polyols sales increased by 7% as compared to the
2000 period. Polyols sales volumes grew by 9%, with the increase attributable to
all three geographic regions. Higher sales volumes were partially offset by a 2%
decrease in average selling prices for polyols as compared to the same period in
2000, a substantial portion of which was due to a weakening in the value of the
euro versus the U.S. dollar. PO sales increased by 2% mainly due to an 11%
decrease in average selling prices for PO which was partially offset by a 13%
increase in PO sales volumes. MTBE sales revenue decreased by 6% compared to the
2000 period. Lower sales were due to a 7% decrease in average selling prices for
MTBE. The decline in average selling prices for MTBE was primarily attributable
to lower gasoline prices. Non-comparative sales from TPU, ethyleneamines,
surfactants, and performance chemicals were $464 million. Ethyleneamines and
surfactants were not present in the comparable period in 2000. TPU was included
beginning September 2000 and performance chemicals are included beginning July
2000.

PETROCHEMICALS - Our Petrochemicals sales decreased by $208 million, or 15%,
in 2001 as compared to 2000. Sales volumes of ethylene and propylene decreased
by 12% and 10%, respectively. Lower sales volumes of ethylene and propylene were
a result of reduced customer demand, lower sales of product which had been
purchased for resale, and a higher volume of material delivered on exchange.
Average selling prices of ethylene and propylene declined by 13% and 18%,
respectively, in 2001 as compared to 2000 due to lower feedstock prices and
weaker market conditions. In aromatics, sales of benzene increased by 25%, while
sales of cyclohexane and paraxylene decreased by 22% and 8%, respectively, in
2001 as compared to 2000. The increased sales volume of benzene resulted from
reduced internal requirements for the product. Lower sales volumes of
cyclohexane were a result of lower production resulting from a temporary
shortage of a key feedstock. Benzene and cyclohexane average selling prices
declined by 23% and 15%, respectively, in 2001 as compared to 2000, while the
paraxylene average selling prices rose by 1%. Bassell, a major customer of our
petrochemical business, has announced the closure of its Wilton, U.K.,
polypropylene facility. Bassell has also indicated that it intends to stop
purchasing propylene from us after our current contract with Bassell expires on
December 31, 2003. In 2001, Bassell purchased 350 million pounds of propylene or
approximately 40% of our output.

TIOXIDE - Our Tioxide sales decreased by $84 million, or 9%, in 2001 as
compared to 2000. Sales volumes decreased by 4% as compared to 2000. Sales in
Europe and North America each decreased by 5%, while sales volumes in the other
regions of the world decreased by 2%. Lower volumes were primarily due to
reduced customer demand resulting from global economic weakness. Average selling
prices declined by 6% due to reduced industry operation rates as well as the
continued weakness of the value of the euro versus the U.S. dollar.

GROSS PROFIT. Gross profit in 2001 decreased by $157 million, or 21%, to
$585 million from $742 million in 2000.

SPECIALTY CHEMICALS - Our Specialty Chemicals gross profit, excluding
non-comparable acquisitions, declined by $62, or 14%, in 2001 as compared to
2000. Total Specialty Chemicals gross profit declined by $6 million, or 1%, in
2001 as compared to 2000. Gross profit on MDI and polyols decreased by 6% and
9%, respectively. Lower gross profit on MDI was a result of higher energy and
natural gas prices in 2001 as compared to 2000. Polyols gross profit benefited
from increased sales volumes, but this benefit was more than offset by a
decrease in average selling prices and higher energy and raw material costs,
particularly in the U.S. Gross profit in PO and MTBE was a result of the lower
revenues described above which were partially offset by a decline in key raw
materials including isobutane and propylene. Non-comparative gross profit from
TPU, ethyleneamines, surfactants and performance chemicals was $56 million.
Ethyleneamines and surfactants were not present in the comparable period in
2000. TPU is included beginning September 2000 and performance chemicals
beginning July 2000.

PETROCHEMICALS - Our Petrochemicals gross profit decreased by $75 million, or
101%, in 2001 as compared to 2000. Lower gross profit was a re