20-F 1 d20f.htm ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 Annual Report for the fiscal year ended December 31, 2005
Table of Contents

As filed with the Securities and Exchange Commission on April 20, 2006


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

 


 

¨    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2005

 

OR

 

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

¨    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 1-14734

 

GROUPE DANONE

(Exact name of registrant as specified in its charter)

 

Not Applicable

(Translation of registrant’s

name into English)

 

17, Boulevard Haussman

75009 Paris

France

(Address of principal

executive offices)

 

France

(Jurisdiction of incorporation

or organization)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class:


  

Name of each exchange

on which registered:


American Depositary Shares, or ADSs,

each representing one-fifth of one Ordinary Share,

nominal value €0.50 per share

   New York Stock Exchange
Ordinary Shares, nominal value €0.50 per share    New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

264,235,190 ordinary shares, nominal value € 0.50 per share at December 31, 2005

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes    x    No    ¨

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes    ¨    No    x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

 

Yes    x    No    ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-acccelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    x

  Accelerated filer    ¨   Non-accelerated filer    ¨

 

Indicate by check mark which financial statement item the registrant has elected to follow:

 

Item 17    ¨    Item 18    x

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes    ¨    No    x



Table of Contents

TABLE OF CONTENTS

 

          Page

Presentation of Information

   1

Cautionary Statement Regarding Forward-Looking Statements

   1
     PART I     

Item 1.

   Identity of Directors, Senior Management and Advisors    3

Item 2.

   Offer Statistics and Expected Timetable    3

Item 3.

   Key Information    3

Item 4.

   Information on Groupe Danone    11

Item 5.

   Operating and Financial Review and Prospects    34

Item 6.

   Directors, Senior Management and Employees    50

Item 7.

   Major Shareholders and Related Party Transactions    65

Item 8.

   Financial Information    68

Item 9.

   The Offer and Listing    70

Item 10.

   Additional Information    74

Item 11.

   Quantitative and Qualitative Disclosures About Market Risk    94

Item 12.

   Description of Securities Other than Equity Securities    96
     PART II     

Item 13.

   Defaults, Dividend Arrearages and Delinquencies    97

Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds    97
     PART III     

Item 15.

   Controls and Procedures    98

Item 16.

   [Reserved]    98

Item 16A.

   Audit Committee Financial Expert    98

Item 16B.

   Code of Ethics    98

Item 16C.

   Principal Accountant Fees and Services    98

Item 16D.

   Exemptions from the Listing Standards for Audit Committees    99

Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers    99

Item 17.

   Financial Statements    100

Item 18.

   Financial Statements    100

Item 19.

   Exhibits    100

 

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PRESENTATION OF INFORMATION

 

In this annual report, the “Company” refers to Groupe Danone, and “Danone” or the “Group” refers to Groupe Danone and its consolidated subsidiaries and equity affiliates. All references herein to “U.S. dollars,” “dollars,” “cents” or “$” are to the currency of the United States; references to “France” are to the Republic of France; and references to “euro” or “€” are to the currency of the European Union member states (including France) participating in the European Monetary Union.

 

The Company’s next general meeting of shareholders has been called for April 18, 2006. As provided under French law, the meeting is to be adjourned in the event of lack of the required quorum. The date set by the Company for the meeting in the likely event the first meeting is adjourned is April 27, 2006. Accordingly, in this annual report, the date indicated for the next general meeting of shareholders is April 27, 2006.

 

Unless the context requires otherwise, all references herein to “markets” for particular products, or to market share, refer to markets for packaged products and exclude products which may be otherwise marketed or sold. All references herein to “fresh dairy products” and the dairy products business or markets refer to processed dairy products and exclude milk, cream and butter. The market share and volume data contained in this annual report have been compiled by the Company based in part upon statistics and other information obtained from several third-party sources. In addition, the Company utilizes its own surveys of competitors’ sales and customers’ purchases and inventory levels.

 

The Company maintains and publishes statistical information relating to its business in metric units, such as metric tons and thousands of liters. One metric ton equals 1,000 kilograms or 2,204 pounds, and one thousand liters equals approximately 264 gallons.

 

Various amounts and percentages in this annual report have been rounded and, accordingly, may not total 100%.

 

Since December 1990, the Company has sponsored an American Depositary Receipts, or ADRs, program in the United States with Citibank, N.A., as depositary. The American Depositary Shares, or ADSs, issued pursuant to such program have been registered with the Securities and Exchange Commission under a Registration Statement on Form F-6. Each such ADS represents one-fifth of one share. Since November 20, 1997, the ADSs have been listed on the New York Stock Exchange under the symbol “DA.” Groupe Danone has reached its current filing limit for ADRs. As a result, Citibank, N.A., as depositary, will no longer accept deposits of ordinary shares for the issuance of ADRs for Groupe Danone until further notice. The Groupe Danone ADR Program remains open for the cancellation of ADRs.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Certain of the statements contained in this annual report that are not historical facts, including, without limitation, certain statements made in the sections entitled “Item 3. Key Information—Risk Factors,” “Item 4. Information on Groupe Danone,” particularly the subsection “—Business Strategy,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk,” are statements of future expectations. Forward-looking statements (within the meaning of Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934, as amended) can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “is expected to,” “will,” “will continue,” “should,” “would,” “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof, or comparable terminology, or by discussions of strategy, plans or intentions. Although the Company believes its expectations are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties. Risks that could cause actual results to differ materially from the results anticipated in the forward-looking statements include, among other things:

 

    the risks of actual or alleged contamination or deterioration of food products;

 

    risks and uncertainties attendant to doing business in numerous countries which may be exposed to, or may have recently experienced, economic or governmental instability;

 

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    changes in economic trends and seasonality;

 

    pricing and availability of raw materials;

 

    changes in exchange rates, including particularly the exchange rates of the euro to non-euro currencies;

 

    customers and market concentration;

 

    changes in laws and regulations;

 

    increasing levels of competition in France and other international prepared food and beverage markets; and

 

    general competitive and market factors on a global, regional and/or national basis.

 

Readers are urged to carefully review and consider the various disclosures made by the Company that attempt to advise interested parties of the factors affecting the Company’s business, including the disclosures made under the captions “Item 3. Key Information—Risk Factors,” “Item 4. Information on Groupe Danone,” particularly the subsection “—Business Strategy,” and “Item 5. Operating and Financial Review and Prospects” in this annual report, as well as the Company’s other periodic reports on Form 6-K submitted to the Securities and Exchange Commission. The Company does not intend, and does not assume any obligation, to update any industry information or forward-looking statements set forth in this annual report to reflect subsequent events or circumstances.

 

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PART I

 

Item 1.    Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2.    Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.    Key Information

 

Selected Financial Data

 

The Company publishes its consolidated financial statements in euro. Solely for the convenience of the reader, this annual report contains translations of certain euro amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the converted amounts actually represent such U.S. dollar amounts or that the original amounts could have been, or could be, converted into U.S. dollars at the rates indicated or at any other rate. Unless otherwise stated, the translations of euro into U.S. dollars have been made at the rate of $ 1.1842 per € 1.00, or € 0.8446 per $ 1.00, the noon buying rate in New York City for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on December 30, 2005. See “—Exchange Rate Information” below for information regarding the euro/U.S. dollar exchange rates from 2001 to the present.

 

Unless otherwise indicated, the financial information contained in this annual report has been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union, which differ in certain significant respects from United States generally accepted accounting principles (“U.S. GAAP”). See Note 2 to the Company’s audited consolidated financial statements for the years ended December 31, 2004 and 2005 (the “Consolidated Financial Statements”) included elsewhere in this annual report for a description of the principal differences between IFRS and U.S. GAAP, as they relate to the Group, and a reconciliation to U.S. GAAP of net income and stockholders’ equity.

 

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The table below presents selected consolidated financial data for the Group for the two-year period ended December 31, 2005. Such data have been extracted or derived from the Consolidated Financial Statements of the Group, and are qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and the Notes thereto and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. The Consolidated Financial Statements have been audited by PricewaterhouseCoopers Audit, independent registered public accounting firm, as indicated in their report thereon, dated April 14, 2006, which also appears in this annual report.

 

     Year ended December 31,

 
             2004        

            2005        

    2005(1)

 
     (in millions of €, except per share data)    

(in millions

of $, except

per share

data)

 

Amounts in accordance with IFRS:

                        

Consolidated Income Statement Data

                        

Net sales

   12,273     13,024     $ 15,423  

Trading operating income

     1,608       1,738       2,058  

Operating income

     1,559       1,706       2,020  

Net income from discontinued operations

     47       504       597  

Net income from continuing operations

     591       1,167       1,382  

Net income—attributable to Group

     449       1,464       1,734  

Net income—attributable to minority interests

     189       207       245  

Earning per share attributable to the Group(2)

     1.79       5.95       7.05  

Earnings per share from continuing operations attributable to the Group

     1.60       3.90       4.62  

Diluted earnings per share attributable to the Group(2)

     1.79       5.87       6.95  

Diluted earnings per share from continuing operations attributable to the Group(2)

     1.62       3.86       4.57  

Consolidated Balance Sheet Data

                        

Current assets

   5,427     6,118     $ 7,245  

Non-current assets

     10,652       10,607       12,560  

Total assets

     16,079       16,725       19,805  

Net debt(3)

     4,538       3,572       4,230  

Stockholders’ equity attributable to the Group

     4,256       5,280       6,253  

Minority interests

     250       341       404  

Dividends per share(2)

     1.35       1.70       2.01  

Cash Flow Statement Data

                        

Cash flow provided by operations

   1,574     1,716     $ 2,032  

Cash flow provided by operating activities

     1,694       1,847       2,187  

Cash flow provided by investing activities

     214       312       369  

Cash flow used in financing activities

     (1,872 )     (2,102 )     (2,489 )

(1)   Translated solely for convenience into dollars at the Noon Buying Rate on December 30, 2005 of $ 1.1842 per € 1.00.
(2)   Earnings and dividends per share have been adjusted following the June 2004 two-for-one stock split. Basic earnings per share is based on an average number of shares of 250,671,990 and 246,038,406 as of December 31, 2004 and 2005, respectively. Diluted earnings per share are based on the average number of shares outstanding during the year assuming full conversion of all common stock equivalents and convertible bonds and taking into account the related reduction in interest charges, net of tax. Such average number of shares was 257,530,982 and 250,280,950 for the years ended December 31, 2004 and 2005, respectively.
(3)   Net debt is defined as current and non-current financial liabilities less cash, cash equivalents and marketable securities. Danone’s management uses net debt as an internal liquidity indicator. Danone believes this information will be useful to investors since it is used as a performance measure by credit rating agencies. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Condition” for a reconciliation of net debt to total debt.

 

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The table below presents selected consolidated financial data for the Group for the five-year period ended December 31, 2005 in accordance with U.S. GAAP.

 

     Year ended December 31,

     2001

   2002

   2003

   2004

   2005

   2005(1)

     (in millions of €, except per share data)   

(in millions

of $, except
per share

data)

Approximate amounts in accordance with U.S. GAAP(2):

                                         

Consolidated Income Statement Data

                                         

Net sales

   13,044    12,155    11,678    12,130    12,881    $ 15,254

Operating income

     772      2,095      1,511      1,465      1,645      1,948

Net income

     205      1,420      923      399      1,335      1,581

Of which net income from continuing operations

     168      1,378      874      341      812      962

Of which net income from discontinued operations

     37      42      49      58      523      619

Earnings per share (basic)(3)

     0.74      5.38      3.63      1.59      5.43      6.43

Of which earnings per share from continuing operations

     0.60      5.23      3.43      1.36      3.30      3.91

Of which earnings per share from discontinued operations

     0.14      0.16      0.20      0.23      2.13      2.52

Earnings per share (diluted)(3)

     0.74      5.22      3.54      1.57      5.35      6.34

Of which earnings per share from continuing operations

     0.61      5.04      3.34      1.35      3.27      3.87

Of which earnings per share from discontinued operations

     0.13      0.18      0.20      0.22      2.08      2.46

Earnings per ADS (diluted)(3)(4)

     0.15      1.05      0.71      0.31      1.07      1.27

Of which earnings per ADS from continuing operations

     0.12      1.01      0.67      0.27      0.65      0.77

Of which earnings per ADS from discontinued operations

     0.03      0.04      0.04      0.04      0.42      0.50

Consolidated Balance Sheet Data

                                         

Stockholders’ equity attributable to the Group

     5,554      4,836      4,671      4,472      5,434      6,435

Total assets

     16,827      15,260      14,355      13,285      13,993      16,571

(1)   Translated solely for convenience into dollars at the Noon Buying Rate on December 30, 2005 of $ 1.1842 per € 1.00.
(2)   For a description of the reconciliation to U.S. GAAP, see Note 2 to the Consolidated Financial Statements.
(3)   Earnings per share have been adjusted following the June 2004 two-for-one stock split. Basic earnings per share is based on an average number of shares of 278,724,154, 263,700,262, 254,583,270, 250,671,990 and 246,038,406 as of December 31, 2001, 2002, 2003, 2004 and 2005, respectively. Diluted earnings per share and ADS are based on the average number of shares outstanding during the year assuming full conversion of all common stock equivalents and convertible bonds and taking into account the related reduction in interest charges, net of tax. Such average number of shares was 285,394,760, 274,482,258, 263,196,496, 257,530,982 and 250,280,950 for the years ended December 31, 2001, 2002, 2003, 2004 and 2005, respectively.
(4)   Earnings per American Depositary Share, or ADS (diluted), has been calculated by dividing Earnings per share (diluted) for the applicable period as set forth in the immediately preceding line in the table, by five to reflect the ratio of one-fifth of one share per ADS.

 

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Exchange Rate Information

 

The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in New York City for cable transfers for foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York expressed in U.S. dollars per € 1.00. These rates are provided solely for the convenience of the reader and are not the rates used by the Company in the preparation of its Consolidated Financial Statements included elsewhere in this annual report. For its general financial reporting, the Group uses the rate published by the Banque de France. No representation is made that euro could have been, or could be, converted into U.S. dollars at these rates or any other rate.

 

     U.S. dollars per € 1.00

    

Yearly/Period

end rate


  

Average

Rate(1)


   High

   Low

Yearly amounts

                           

2001

     0.89      0.89      0.95      0.84

2002

     1.05      0.95      1.05      0.86

2003

     1.26      1.14      1.26      1.04

2004

     1.35      1.25      1.36      1.18

2005

     1.18      1.24      1.35      1.17

Monthly amounts

                           

October 2005

     1.20      1.20      1.21      1.19

November 2005

     1.18      1.18      1.21      1.17

December 2005

     1.18      1.19      1.20      1.17

January 2006

     1.22      1.21      1.23      1.20

February 2006

     1.19      1.19      1.21      1.19

March 2006

     1.21      1.20      1.22      1.19

April 2006 (through April 19)

   $ 1.23    $ 1.22    $ 1.23    $ 1.21

(1)   The average of the Noon Buying Rates on the last business day of each month during the relevant period.

 

Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro-denominated prices of the shares and, as a result, will affect the market price of the ADSs in the United States. In addition, exchange rate fluctuations will affect the U.S. dollar equivalent of any cash dividends received by holders of ADSs.

 

For a discussion of the impact of exchange rate fluctuations on the Group’s results of operations, see “Item 5. Operating and Financial Review and Prospects—Impact of Changes in Exchange Rates.”

 

Risk Factors

 

In addition to the other information contained in this annual report, prospective investors should consider carefully the risks described below. The risks described below are not the only ones facing the Group. Additional risks not currently known to the Group or that the Group currently deems immaterial may also impair its business operations. The Group’s business, financial condition or results of operations could be materially adversely affected by any of these risks.

 

The actual or alleged contamination or deterioration of the Group’s products, or of similar products of other producers, could hurt the Group’s reputation and its operating results and financial condition

 

The Group’s business could be negatively affected by the actual or alleged contamination or deterioration of certain of its principal products, or of similar products sold by other producers. A substantial portion of the Group’s products, such as fresh dairy products, must be maintained within certain temperatures to retain their flavor and nutritional value and avoid contamination or deterioration. Depending on the specific type of food

 

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product, a risk of contamination or deterioration exists at each stage of the production cycle, including the purchase and delivery of food raw materials such as milk, the processing and packaging of food products, the stocking and delivery of finished products to distributors and food retailers, and the storage and shelving of finished products at the points of final sale. With respect to bottled water, the natural sources of Danone’s supply may be subject to pollution. In addition, as part of its strategy of promoting products with a strong health component, the Group is developing more and more complex products made from organic materials, especially probiotics. In the event that certain of Danone’s products are found, or are alleged, to have suffered contamination or deterioration, whether or not while such products were under Danone’s control, the Group’s net sales, results of operations and financial condition could be materially adversely affected. In addition, reports or allegations of inadequate product quality control with respect to certain products of other food manufacturers could negatively impact sales of the Group’s products. The Group believes that it has put in place measures to limit the risk of contamination, in particular through regular audits of its sites, alliances with scientific organizations of international standing and the implementation of zero tolerance quality assurance and food safety policies.

 

Instability in markets where the Group operates could harm its business

 

The Group’s operations are subject to the risks and uncertainties attendant to doing business in numerous countries which may be exposed to, or may have recently experienced, economic or governmental instability, particularly in China, Latin America, certain regions of Asia and the Middle East. Also, a number of countries in which the Group’s operations are conducted have less developed and less stable legal environments, maintain controls on the repatriation of profits and invested capital, impose taxes and other payments and put in place restrictions on the activities of multinational companies. Management believes that it has taken and continues to take appropriate measures to minimize the risks arising from the Group’s international operations. However, there can be no assurance that the financial results of the Group could not be materially affected by a downturn in economic conditions or by any regional crisis or significant regulatory change.

 

Seasonal consumption cycles and weather conditions may result in fluctuations in demand for some of the Group’s products and impact results of operations

 

Some of the Group’s product markets are affected by seasonal consumption cycles and weather conditions which can have a negative impact on the Group’s interim and annual results. In particular, bottled water and beverages experience peak demand during the summer months. As a result, the Group’s sales are generally higher during these months. Conversely, relatively cool summer temperatures, such as occurred in Europe in 2004, may result in substantially reduced sales of beverages, especially bottled water, and thus may have a material adverse effect on the Group’s results of operations.

 

Price increases and shortages of food and packaging raw materials could adversely affect the Group’s results of operations

 

The Group’s results of operations may be affected by the availability and pricing of raw materials, principally materials needed to produce Danone’s food and beverage products, including mainly milk, wheat, sugar and cocoa, and materials needed for packaging its products, including mainly PET and PVC plastics and light cardboard for cartons. Factors such as changes in the global or regional levels of supply and demand, weather conditions and government controls could substantially impact the price of food and packaging raw materials. A substantial increase in raw material prices (if not passed on to customers through price increases) or a continued interruption in supply could have a material adverse effect on the Group’s financial condition and results of operations.

 

The Group’s results of operations and financial condition could be harmed by changes in exchange rates

 

The Group publishes its Consolidated Financial Statements in euro. In addition, in 2005, approximately 51% of the Group’s consolidated net sales and approximately 60% of its trading operating income were in euro.

 

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However, a substantial portion of the Group’s assets, liabilities, sales, costs and earnings are denominated in currencies other than the euro, particularly in the Chinese yuan, U.S. dollar and U.S. dollar-influenced currencies, the British pound or the Polish zloty. As a result, the Group is exposed to fluctuations in the values of such currencies against the euro with respect to the translation into euro of amounts to be reflected in its Consolidated Financial Statements. These currency fluctuations, especially with respect to these principal non-euro currencies, can have a significant impact on the Group’s results of operations. In particular, the appreciation of the euro relative to other currencies decreases the euro value of the contribution to the Group’s consolidated results and financial condition of subsidiaries which maintain their financial accounts in such other currencies. In addition, to the extent the Group incurs expenses and effects sales in different currencies in cross-border transactions, fluctuations in exchange rates can also affect the profitability of such transactions. As a result of the Group’s international strategy, the contribution by international activities to net sales, operating results and margins is expected to continue to increase over time.

 

The Group’s dependence on key customers and increased market concentration could negatively affect the Group’s ability to achieve its targeted margins and reduce its competitiveness

 

While the final consumers of Danone products are individual retail customers, Danone sells its products principally to major retail and grocery chains. The distribution market has become increasingly concentrated. In 2005, the Group’s ten largest customers worldwide accounted in the aggregate for approximately 30% of the Group’s consolidated net sales. Six of those customers are French companies and the Group’s largest client, Carrefour, represented approximately 9% of the Group’s consolidated net sales in 2005. Any increase in the Group’s dependence on key customers or market concentration generally could negatively affect the margins and competitiveness of the Group.

 

The Group depends on a limited number of suppliers for certain products and services

 

In connection with its policy of optimizing its purchasing procedures, the Group centralizes the purchase of certain materials or sub-contracted services, such as the ferments used in the fresh dairy products activities or information technology services, from a limited number of suppliers. If these suppliers are not able to supply the Group with the quantities of materials the Group needs or if the suppliers are not able to provide services in the required time period, this could have a material adverse effect on the Group’s financial condition and results of operations.

 

Changes in governmental regulations could harm the Group’s business

 

As a producer of consumer foods and beverages, the Group’s activities are subject to extensive regulation by national authorities and international organizations, including regulation with respect to the environment, hygiene, quality control and tax laws. The Group’s activities may also be subject to all kinds of barriers or sanctions imposed by countries in order to limit international trade. The activities of the Group are also subject to increasingly restrictive regulation with regard to the protection of health and human safety, especially concerning assertions about the health benefits of products marketed by the Group. The Group’s activities could be adversely affected by any significant changes in such regulation. While the Group believes that it has put in place appropriate measures to limit the risks associated with these activities through a policy of environmental management, including, in particular, the establishment of regular inspections (industrial, environmental and quality control) at all of its sites, the introduction of higher standards or more stringent regulations could necessitate additional investment and result in substantial costs for the Group.

 

The Group’s dominant position in certain markets may lead to accusations of abuse of dominance or anti-competitive practices

 

In certain of its markets, the Group is the market leader. As a consequence, the Group may be accused of the abuse of a dominant position or the use of anti-competitive practices. Such allegations could affect the reputation

 

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of the Group, result in judicial proceedings and could have a material adverse effect on the Group’s financial condition and results of operations.

 

The Group’s results of operations and financial condition could be harmed by a failure of its information systems

 

The Group is increasingly dependent upon information technology network systems to obtain the numerical data which it uses as a basis for its operating management decisions. Any failure of these applications or communications networks may delay or taint certain decisions and result in financial losses.

 

The Group may not be able to adequately protect its intellectual property rights

 

Given the importance of brand recognition to its business, the Group has invested considerable effort in protecting its portfolio of intellectual property rights, including trademark registration, such as, for example, the trademarks Danone, Evian, and LU. The Group also uses security measures to protect its patents, licenses and proprietary formulae. However, the Group cannot be certain that the steps it has taken will be sufficient to protect its intellectual property rights adequately or that third parties will not infringe upon or misappropriate its proprietary rights. Moreover, some of the countries in which the Group operates offer less protection for intellectual property rights than Europe or North America. If the Group is unable to protect its proprietary rights against infringement or misappropriation, its future financial results and its ability to develop its business could be harmed.

 

Labor disputes may cause work stoppages, strikes and disruptions

 

The Group has in the past implemented, and may in the future continue to implement, restructuring measures, including plant closings and headcount reductions, in order to lower production costs, improve efficiency of its facilities, exploit synergies and respond to the demands of a changing market. Restructurings could harm its employee relations and result in labor disputes, including work stoppages, strikes and disruptions, which in turn could have an adverse impact on the Group’s business or financial results.

 

Competition may lead to a reduction of the Group’s margins and a decline in profitability

 

The markets for each of Danone’s main business lines are highly competitive markets in which large international groups and numerous local actors are present. In Western Europe, the markets served by Danone tend to be relatively mature and competition for market share is therefore particularly intense. With respect to the Group’s activities outside Western Europe, certain international food and beverage groups also have important positions in certain product lines and in certain emerging markets and seek to expand such positions or enter new markets. In addition, certain retail and grocery chains have developed their own private labels and certain of Danone’s customers also offer their own competing products, which could pose a commercial conflict between Danone’s customers as such and as direct competitors. As a result, the Group must continually strive to strengthen the selling power and premium image of its brand names, differentiate its products and improve the efficiency and management of its operations in order to maintain or increase its profit margins. Failure to remain competitive would have a material adverse effect on the Group’s operating results and financial condition.

 

The Group’s sales may be affected by overall economic trends in its principal geographic markets

 

As a producer principally of consumer foods and beverages, the Group’s results of operations may be affected by the overall economic trends of its principal geographic markets. In periods of economic slowdown, consumer purchase decisions may be affected by specific consumer behaviors, thus creating negative pressure on the sales volume of many of the Group’s products.

 

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The Group’s strategy relies significantly on acquisitions, which involve risks

 

The Group’s strategy is to become the leader in each of the markets in which it operates. Within the context of continued concentration in the food and beverage industry, this strategy involves the pursuit of external growth opportunities through acquisitions and alliances. These acquisitions and alliances could have a negative impact on the Group’s business if the Group is unsuccessful in the integration process or fails to achieve the synergies and savings it expects from these acquisitions. Furthermore, the relations with partners of the Group in certain entities are governed by documents or agreements that could allow certain decisions to be made with the agreement of such partners or without the agreement of the Group. Such restrictions could make it difficult for the Group to pursue its objectives through these entities. Finally, certain agreements signed with partners could subject the Group to put options, notably in the event of a change of control of the Group.

 

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Item 4.    Information on Groupe Danone

 

History and Development

 

Groupe Danone is a société anonyme, a form of limited liability company, organized under the laws of the Republic of France. It was incorporated on February 2, 1899. Under Groupe Danone’s bylaws, revised in 1941, the Company’s existence is to last 141 years, i.e., until December 13, 2040, except in the event of earlier dissolution or extension. Its principal office is located at 17, Boulevard Haussmann, 75009 Paris, France, and its telephone number is (+33) 1.44.35.20.20. The Company’s agent in the United States is The Dannon Company Inc., located at 120 White Plains Road, Tarrytown, New York 10591-5536, USA.

 

The Company is registered with the Register of Commerce and Companies of Paris (Registre du Commerce et des Sociétés de Paris) under number 552 032 534.

 

The Company’s origins date back to 1966 when the French glass manufacturers, Glaces de Boussois and Verrerie Souchon Neuvesel, merged to form Boussois Souchon Neuvesel, or BSN. In 1967, BSN had sales of flat glass and glass containers of approximately € 150 million. In 1970, BSN began a program of diversification in the food industry and successively purchased Brasseries Kronenbourg, Société Européenne de Brasserie and Société Anonyme des Eaux Minérales d’Evian, which at the time were major customers of BSN for glass containers. As a result of these acquisitions, BSN became France’s market leader in beer and bottled water, as well as infant food, which was at that time one of Evian’s product lines. In 1973, BSN merged with Gervais Danone, a French dairy products and pasta group, thereby becoming France’s largest food and beverage group with consolidated sales in 1973 of approximately € 1.4 billion, of which 52% consisted of food and beverage sales.

 

Throughout the remainder of the 1970s and the 1980s, BSN focused on expansion in the food and beverage industry, primarily in Western Europe, after disposing of its flat glass business. This expansion included the acquisition of major breweries in Belgium, Spain and Italy; The Dannon Company, the leader in yogurt production in the United States; Générale Biscuit, a French holding company which owned LU and other major producers of biscuits in Europe; the biscuit subsidiaries of Nabisco, Inc. in France, Italy, the United Kingdom and Asia; and Galbani, Italy’s leading cheese maker. As a result, with consolidated sales of € 7.4 billion in 1989, BSN became Europe’s third largest diversified food group, ranking first in France, Italy and Spain.

 

Beginning in the early 1990s, BSN pursued a strategy of consolidating its main business lines, developing synergies in Western Europe and expanding into growing markets. Moreover, BSN paved the way for a strategy of development outside of Western Europe. As a result, BSN increased the scope of its operations and strengthened its portfolio of brands through a number of significant acquisitions and joint ventures. Within Western Europe, BSN acquired Volvic in France to strengthen its position in the bottled water sector. Outside Western Europe, BSN pursued an active acquisition strategy to expand internationally in the Asia-Pacific region, Latin America and Eastern Europe, as well as in selected markets like South Africa and the Middle East.

 

In 1994, BSN changed its name to Groupe Danone, adopting the name of the Group’s best known international brand, with a view to consolidate its position as an international food and beverage group and to reinforce the marketing strength of the Danone brand name.

 

In 1997, the Group’s management decided to focus on three core activities on a worldwide basis (fresh dairy products, beverages, and biscuits and cereal products). The Group has since completed several significant divestitures in grocery, pasta, ready-to-serve meals and confectionery activities, mainly in France, Belgium, Italy, Germany and Spain. In 1999 and 2003, the Group sold 56% and 44%, respectively, of the capital of BSN Glasspack, the holding company of its glass containers business, and, in 2000, the Group sold most of its European beer activities to different companies in the industry, including Scottish & Newcastle. In 2002, the Group sold Kro Beer Brands, owner of the brands Kronenbourg and 1664, among others; its Italian cheese and meat activities (Galbani); as well as its beer producing activities in China. In 2005, the Group sold its sauces activities in the United Kingdom and in the United States and, in January 2006, its sauces activities in Asia. In addition, in 2005 the Group finalized its exit from the European beer activities, selling its interest in Mahou. These divestitures since 1997 represented net sales of approximately € 5.9 billion in the aggregate.

 

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This strategy enabled Danone to concentrate its financial and human resources on product lines with strong commercial potential and in which the Group holds leading world positions as well as to pursue its expansion outside Western Europe through internal growth and strategic acquisitions.

 

Since 1998, the Group has been organized around three core activities:

 

    fresh dairy products, including yogurts, dairy desserts and infant foods, representing approximately 55% of consolidated net sales;

 

    beverages, representing approximately 27% of consolidated net sales; and

 

    biscuits and cereal products, representing approximately 18% of consolidated net sales.

 

Key Events in 2005

 

The Group’s revenue in 2005 amounted to € 13,024 million, an increase of 6.1% compared to 2004. At constant exchange rates and scope of consolidation, growth in revenue was 6.7%. Trading operating margin, which increased for the eleventh consecutive year, by 25 basis points in 2005, reached 13.35% compared to 13.10% in 2004, in spite of a large increase in the cost of transport and the price of raw materials, in particular, plastics.

 

As part of its strategy of maintaining profitable growth of its businesses, the Group concluded the following transactions:

 

    In January 2005, the Group finalized the sale of Italaquae (Beverages in Italy) and proceeded with the contribution of its biscuits activities in Argentina and Brazil to Bagley LatinoAmerica formed with the Arcor group.

 

    In April 2005, the Group and The Coca-Cola Company signed an agreement modifying the terms of their partnership for the distribution of the Group’s bottled water in North America. Under this agreement, The Coca-Cola Company repurchased the 49% interest in CCDA Waters held by the Group.

 

    In August 2005, the Group sold its sauces activities in the United Kingdom and the United States, generating a net capital gain of € 473 million, and announced that it was in the process of selling its sauces activities in Asia.

 

    In November 2005, following the decision to exit the Home and Office Delivery (“HOD”) water business in the United States, the Group sold the assets held by DS Water, LP to the Kelso investment fund. The agreement signed with Kelso also included the concurrent repurchase by the Group of the interest held by the Suntory group in DS Waters, LP pursuant to the put option granted by the Group to Suntory. This sale was finalized in November 2005 and generated a net loss of € 313 million.

 

    In December 2005, the Group finalized its exit from the European beer business with the sale of its minority interest in Mahou. This sale generated a net gain of € 292 million.

 

Furthermore, in 2005, following rumors of a public tender offer for the Company, the Autorité des Marchés Financiers (the “AMF”) opened an investigation which did not result in a complaint due to failure to establish a breach in the regulations of the AMF.

 

Finally, at the end of 2005, the Group performed its annual impairment review of its long-lived assets. As a result of this review, the Group recorded an impairment charge of € 53 million related to the goodwill of Danone Waters of Canada (HOD Water in Canada) and a charge of € 51 million relating to its minority investment in Bakoma (Fresh Dairy Products in Poland) (see Notes 5 and 7 to the Consolidated Financial Statements).

 

Business Overview

 

Danone is one of the world’s leading food companies, with worldwide sales and operating income of approximately € 13 billion and € 1.7 billion, respectively, in 2005. By volume, Danone is the world’s leading

 

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producer of fresh dairy products, the second largest producer of biscuits and cereal products and the co-leading producer of packaged water. Danone’s portfolio of brands and products includes national and international market leaders such as Danone (Dannon in the United States), the world’s leading brand of fresh dairy products; Evian, the world’s leading brand of bottled still water; Volvic, the Group’s other major international brand of bottled still water; LU, Europe’s leading biscuits brand; Wahaha, the leading Chinese brand of bottled water; and Aqua, the leading brand of packaged water in Indonesia. In addition, the Group is also present in the infant food market in France through its subsidiary Blédina. Overall, approximately 80% of world sales were realized through leading positions in local markets.

 

The Group’s strategy of international expansion, through both internal and external growth, has led to a significant increase in net sales outside Western Europe. These sales represented 48% of total net sales in 2005 compared to less than 15% in 1995.

 

The brand name Danone (Dannon in the United States) currently represents approximately 48% of the Group’s net sales and experienced growth of close to 7% in 2005 at constant exchange rates and scope of consolidation. In addition to fresh dairy products, the brand has been extended to certain other products, such as bottled water in the United States and certain European countries as well as biscuits in Asia. Four of the Group’s brands (Danone, LU, Evian and Wahaha) represent approximately 67% of the Group’s net sales. These four brands had a growth rate in net sales at constant exchange rates and scope of consolidation of close to 7% in 2005.

 

In addition, the Group has developed two probiotic dairy product lines known under the names Actimel on the one hand and Activia and Bio on the other, as well as a line of low-fat products, under the names Taillefine, Vitalinea, and Ser. Theses brands, which are progressively being extended to all countries in which the Group is present, represented 48% of the Group’s growth in net sales in 2005.

 

Danone’s main product for export is bottled water, mainly under the brand names Evian and Volvic. Evian was exported to more than 120 countries in 2005 and has strong market shares in the United Kingdom, Germany and Japan. Volvic is the leading still mineral water brand in Germany and the leading imported water in Japan.

 

The Group also has a strategy of internal and external growth aimed at establishing a geographic equilibrium between developed and emerging countries. In this context, the Group has identified new geographic regions (“Nouvelles Frontières”) which constitute areas of growth: China, Indonesia, Mexico, Russia and the United States in fresh dairy products. These new geographic regions represented 25% of the Group’s net sales in 2005.

 

Business Strategy

 

The Group’s strategy relies upon (i) a concentration on three categories of products which have substantial elements of health and well-being, (ii) strong and grouped brand names, kept dynamic by sustained advertising campaigns, (iii) a balanced geographical distribution between developed countries and emerging countries and (iv) an ambitious strategy of innovation supported by an ever growing knowledge of consumer expectations.

 

The continued internal growth of the Group in recent years is based upon the Group’s ability to sell quality products satisfying demands of local markets by (i) improving the products sold by recently acquired companies, (ii) introducing products that are accessible to large numbers of consumers in emerging countries in order to develop mass consumption of packaged food products and ensure demand for the Group’s brands for the future and (iii) taking advantage of the Group’s marketing expertise to sell value-added products already sold in other countries, to accompany increases in purchasing power and developments in consumer trends. The Group believes that demographic trends and economic developments in Asia and Latin America will lead in the medium term, despite possible economic difficulties, to significant market expansion. The progressive improvement in the purchasing power of local populations, together with the development of a middle class, is expected to increase demand for bottled beverages and brand name food products.

 

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The Group will continue to follow a strategy whereby its three business lines will grow profitably, as a model of development to guarantee the Group’s values and specificity.

 

Danone believes that it can sustain a growth rate of 5% to 7% at constant exchange rates and scope of consolidation by (i) having a portfolio of activities concentrated on dynamic health-oriented products, especially in fresh dairy products, (ii) advertising and promoting a selected number of major brands, (iii) having a significant presence in countries which present the best prospects for long-term growth, particularly China, Mexico and Indonesia, especially in beverages, (iv) occupying leading positions internationally in each business line built on strong leading positions in local markets and (v) offering promising innovations based on satisfaction of consumers.

 

Net sales growth at constant exchange rates and scope of consolidation is expected to continue to be a leading force for improving the Group’s economic performances, due to the continuing leadership of products generating a favorable mix effect and the achievement by the Group of a critical size in several emerging markets. Concurrently, the Group will continue to promote numerous initiatives aimed at increasing its global efficiency and widespread appeal. In a difficult international economic climate and in the absence of a significant crisis, Danone expects that its consolidated trading operating margin at constant exchange rates and scope of consolidation should improve by between 20 and 40 basis points in 2006 and that current net earnings per share should increase by more than 10%.

 

The Group will continue its policy of making acquisitions in order to consolidate current positions and to hold leading local market positions in each of its business lines. With significant free cash flow (defined as cash flows provided by operating activities less capital expenditures net of disposals) and a level of net debt (defined as current and non-current financial liabilities less cash, cash equivalents and marketable securities) representing less than one year of cash flow provided by operations (excluding financial liabilities linked to options granted to minority stockholders), the Group possesses the necessary resources to sustain its growth.

 

Products and Markets

 

The tables below show, for each of the years 2004 and 2005, consolidated net sales and trading operating income by principal geographic areas and business lines.

 

Geographic Areas

 

     Year ended December 31,

 
         2004    

        2005    

 
     (millions of €, except percentages)  

Net Sales(1)

                        

Europe(2)

   8,096     66.0 %   8,179     62.8 %

Asia

   1,965     16.0 %   2,235     17.2 %

Rest of the World

   2,212     18.0 %   2,610     20.0 %
    

 

 

 

Total

   12,273     100.0 %   13,024     100.0 %
    

 

 

 

Trading Operating Income(1)

                        

Europe

   1,209     75.2 %   1,266     72.8 %

Asia

   259     16.1 %   256     14.7 %

Rest of the World

   220     13.7 %   314     18.1 %

Unallocated income (expense)(3)

   (80 )   (5.0 )%   (98 )   (5.6 )%
    

 

 

 

Total

   1,608     100.0 %   1,738     100.0 %
    

 

 

 


(1)   Net sales or trading operating income of the Group’s subsidiaries after elimination of sales between companies belonging to the same area and elimination of inter-region sales.
(2)   France represented approximately 35.3% of net sales for Europe in 2005 (36.8% in 2004).
(3)   Unallocated income (expense) represents the balance of Group income (expenses) that have not been allocated to any specific operating division.

 

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Business Lines

 

     Year ended December 31,

 
     2004

    2005

 
     (millions of €, except percentages)  

Net Sales(1)

                        

Fresh dairy products

   6,510     53.0 %   7,184     55.1 %

Beverages(2)

   3,201     26.1 %   3,473     26.7 %

Biscuits and cereal products(3)

   2,562     20.9 %   2,367     18.2 %
    

 

 

 

Total

   12,273     100.0 %   13,024     100.0 %
    

 

 

 

Trading Operating Income(1)

                        

Fresh dairy products

   917     57.0 %   1,019     58.6 %

Beverages(2)

   493     30.7 %   474     27.3 %

Biscuits and cereal products(3)

   278     17.3 %   343     19.7 %

Unallocated income (expense)

   (80 )   (5.0 )%   (98 )   (5.6 )%
    

 

 

 

Total

   1,608     100.0 %   1,738     100.0 %
    

 

 

 


(1)   Net sales or trading operating income of Danone’s subsidiaries after elimination of sales between companies belonging to the same division and elimination of intra-group sales. Intra-group sales consist of sales of products between companies that are in different divisions. Intra-group sales were € 20 million and € 21 million for the years 2005 and 2004, respectively.
(2)   The beverages businesses in Italy, sold in January 2005, were only consolidated in 2004.
(3)   In 2004, the biscuits businesses in the United Kingdom and Ireland, which were subsequently sold, were only consolidated during the first nine months of the year. In addition, the biscuits business in Latin America were only consolidated in 2004.

 

Fresh Dairy Products

 

With net sales of fresh dairy products in 2005 of approximately € 7.2 billion, representing approximately 4.1 million tons, Danone is the leading producer of fresh dairy products worldwide, with approximately 18% of the world’s market share and a weighted average market share of approximately 30% for its consolidated subsidiaries in 30 countries, which is four times more than its closest competitor. Danone’s principal products in this business line are yogurts and similar products which, together, accounted for close to 95% of Danone’s total net sales of fresh dairy products in 2005, with the remainder represented by infant food sold principally in France under the Blédina brand.

 

Principal Markets.    Sales in Europe accounted for 70% of net sales of fresh dairy products and sales in the Rest of the World accounted for 30%. Danone’s principal markets for fresh dairy products in Europe are France, Spain, Germany, the Benelux countries and Italy, which together accounted for approximately 50% of Danone’s sales of fresh dairy products in 2005. In the Rest of the World, the Group’s principal markets are the United States, Mexico and Argentina.

 

In France, Danone is the market leader for fresh dairy products with over one-third of the total market. Danone markets yogurts and similar products and other fresh dairy products principally under the Danone brand name. The Group is also the market leader in France for infant food with its brand Blédina. Sales in France experienced negative growth in 2004 and 2005 due primarily to difficult consumption conditions in France and competing retail and discount brands.

 

In Spain, Danone has a 56.33% interest in Danone S.A., Spain’s leading producer of fresh dairy products with a share of the Spanish market of approximately 46%. Danone is also the leading producer of yogurt in Italy, with a market share of approximately 25%.

 

In Germany, Danone is the leader in a relatively fragmented market. Danone also markets its products in Belgium and Portugal where it holds leading positions through locally established production subsidiaries and in The Netherlands, Denmark, the United Kingdom, Austria, Switzerland, Finland, Sweden and Greece through marketing subsidiaries and franchises that sell Danone’s product lines.

 

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With the acquisition of the brand Shape in August 2002, the third-leading brand of low-fat fresh dairy products in the United Kingdom, Danone has become the second largest player in the fresh dairy product market in the United Kingdom.

 

In Eastern Europe, Danone is the leading producer of fresh dairy products in Poland, Hungary, the Czech Republic, Bulgaria, Romania and Turkey. In each of these countries, the Danone brand name has one of the highest levels of brand awareness in the food market. The Group holds the second-leading position in Russia, a country where the Group’s production capacity is currently being increased and that is one of the Group’s “Nouvelles Frontières” countries due to its potential for growth. In addition, the Group has a market presence in the Ukraine, Croatia and the Baltic countries.

 

Danone is the leading producer of fresh dairy products in terms of both net sales and volumes in Latin America. Danone is in a leading market position in Mexico, Argentina and Brazil. In North America, the Group occupies the leading position in Canada and the number two position in the United States. The fresh dairy products business in the United States, which includes the Dannon Company and Stonyfield Farm, the leader in the market for organic products, is one of the “Nouvelles Frontières” countries due to its potential for growth.

 

In the Asia-Pacific region, Danone is present in Australia and Japan through licenses or joint ventures. In 2003, the Group reinforced its presence in Japan with the acquisition of an additional equity interest in Yakult, with which the Group entered into a partnership in the beginning of 2004 with the objective of strengthening their global leadership in probiotics and further accelerating the growth of both companies in the functional food and beverage market. Through this partnership, a joint venture was formed in India in 2005, Yakult Danone India Private Limited, with the goal of developing the Indian market in probiotics. Through its association with Shanghai Bright Dairy in China, Danone is pursuing the establishment of the Danone brand in a still relatively small market where the Activia brand was launched at the end of 2005. In 2005, the Group opened a new research and development center in Shanghai aimed primarily at facilitating its entry into the fresh dairy products market in Asia.

 

In 2005, the Group reinforced its presence in the North Africa/Middle East region, notably in Egypt, where it acquired the company Olait, and in Saudi Arabia, where it gained control of the Al Safi Danone Company which is the leader in its market. The Group also has minority interests in major producers of fresh dairy products in Morocco, Algeria, Tunisia and Israel, which all have leading positions in their respective countries. In addition, the Group is present in South Africa, with a majority interest in Danone Clover.

 

Principal Brand Names.    The Group has developed two lines of probiotic dairy products known under the names Actimel on the one hand and Activia and Bio on the other, a line of low-fat products, under the names Taillefine, Vitalinea, and Ser, and a line of “fromage frais” designed for children, known as Danimo, Danimals and Petit Gervais.

 

Driven by health consciousness and numerous scientific discoveries, the probiotic market is one of the most dynamic in the fresh dairy product segment. Actimel, a probiotic dairy product that helps to strengthen natural defenses, has been produced for over 10 years and continues to exhibit strong growth in sales. Net sales at constant exchange rates and scope of consolidation increased by more than 19% in 2005, reaching nearly € 890 million. The growth of Actimel, which in 2005 represented nearly 18% of the Group’s growth in net sales, derived 63% of its growth from four countries: Spain, Germany, the United Kingdom and Italy. Furthermore, the strong rates of growth recorded in 2005 in Argentina, Poland and Russia confirm the potential of this type of product in emerging countries. Similarly, the line of probiotic products to facilitate intestinal digestion, marketed under the name Activia, experienced strong growth during the last years. Its net sales at constant exchange rates and scope of consolidation increased by nearly 36% in 2005, reaching nearly € 845 million. The growth was especially strong in Eastern Europe, Germany, the United Kingdom, Mexico and Brazil. The product line, which is expected to be introduced in additional countries, was launched in the United States in January 2006.

 

Petit Gervais aux Fruits, the “fromage frais” designed for children, is now consumed in thirty-five countries. This growth has been driven by a strategy of constant innovation and local adaptation (from one

 

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country to another the product line has different names: Danonino, Danimals, Petits Gervais). Its net sales at constant exchange rates and scope of consolidation increased by nearly 8% in 2005, reaching nearly € 736 million. Furthermore, in 2004, Petit Gervais aux Fruits underwent an organoleptic renovation and nutritional adaptation. A series of studies was performed on children aged five to eight in thirty-five countries where this product is sold in order to identify consumer preferences. These studies were incorporated in the development of new flavors in each of these countries.

 

New Products.    Danone is continuously involved in the introduction of new products while trying to develop, as quickly and widely as possible, a worldwide market for high-potential products. At the same time, Danone is continuously reviewing or relaunching some of its key existing products to better meet consumer demand in terms of recipes, formats or packaging. The dynamism of the segment is strongly linked to its capacity to deploy, extend and adapt global concepts very rapidly in numerous countries with its varied product lines.

 

In 2005, several launches confirmed the ability of this segment to innovate and adapt global concepts to the local market:

 

    In the United States, the Group launched the beverage DanActiv, a probiotic dairy product that is the local variety of Actimel, in three cities.

 

    In Canada, the Group launched Cardivia, the first non-fat yogurt enriched with omega-3 fatty acids. According to early studies, omega-3 fatty acids plays an important role in cardiovascular health.

 

    In France, the Group renewed the Taillefine line and successfully launched the Taillefine “double zero” line (0% added sugar and 0% fat) as well as the infant brand Mon Premier Danone, which is aimed at infants of 6 to 24 months of age.

 

In addition, in January 2006, the Group launched in France Senja, a 100% soy product, with no lactose or cholesterol.

 

Market Trends.    Overall, the market for fresh dairy products on a worldwide basis has grown steadily over the past several years. This market has grown continually in Western Europe, driven by the innovative and dynamic nature of health-oriented products. In the United States, the fresh dairy products market has increased over the past few years, making this product line one of the most dynamic in the country’s food industry. Danone has the number two position in this market. Emerging markets have generally enjoyed favorable conditions, particularly in Turkey, Argentina and Mexico. Management believes that the introduction of new products, particularly health-oriented products, infant foods and drinkable versions, will allow Danone to continue to improve its market position. In addition, management believes that premiums often associated with innovative products will help raise the total value of the market for fresh dairy products.

 

Danone expects to see continued growth in demand for infant food in France, driven in part by trends toward increased consumption of convenience foods under the influence of new lifestyles and the success of new and innovative product lines that combine practicality and nutritional quality.

 

Beverages

 

Danone’s beverage activities comprise natural water, “Aquadrinks” (flavored natural water and tea beverages) and functional beverages. In 2005, net sales of beverages were € 3.5 billion, of which 40% were in Europe, 47% in Asia and 13% in the Rest of the World.

 

Danone is the co-leading producer of packaged water in the world based on volume, with two of the five leading brands of bottled water in the world (Evian and Volvic) as well as the leading brand of packaged water in the world (Aqua in Indonesia). With approximately 19 billion liters of packaged water sold in 2005, Danone has a market share of approximately 12%. Danone is also the second-leading producer of packaged water in Europe, the leading producer of packaged water in Asia-Pacific and a major actor in Latin America.

 

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Principal Markets and Brand Names.    The Group maintains strong market shares in Western Europe, where there is a long tradition of consumption of still and sparkling bottled water. Danone’s principal market for bottled water is France, where Danone has approximately 22% of the national market in terms of volume, mainly through its Evian, Volvic, Badoit, Salvetat and Arvie brands. Danone is also the leading producer of bottled water in Spain, with over 21% of the Spanish market through its Lanjarón, Font Vella and Fonter brands. In the United Kingdom, where the still water market is experiencing strong growth, the Group has a leadership position with a market share close to 28%, due to its Evian and Volvic brands. In Germany, the Group is the leader in the market for still water with a market share of approximately 24%. Furthermore, with the formation of The Danone Springs of Eden BV in 2003 with Eden Springs Ltd, the Group holds the number two position in the European HOD water market.

 

In Eastern Europe, Danone is the market leader in Poland, the largest market in the region, with Zywiec Zdroj and Polska Woda, a joint venture entered into in 2000 with the Italian group San Benedetto. In addition, Danone reinforced its presence in Turkey with the repurchase at the end of 2003 of the 50% interest held by its partner Sabanci in Danone Hayat.

 

In North Africa and the Near and Middle East, the Group is present in Morocco, where it acquired in 2001, in collaboration with the Moroccan conglomerate ONA, a 30% interest in Sotherma, a leader in the bottled water market in Morocco.

 

The Group is present in the United States in the premium bottled water market through its brand Evian which has been marketed by The Coca-Cola Company since July 2002. In 2005, the Group and The Coca-Cola Company reached an agreement providing for an increase of approximately 20% in expenditures for advertising and promoting Evian products, as well as the sale to The Coca-Cola Company of Danone’s interest in CCDA Waters, a company formed in 2002 to sell the Group’s bottled water products in the United States. After a strategic review of the prospects for the development of the local HOD market, the Group decided to disengage from this activity in the United States. The Group sold the assets held by DS Water, LP to the Kelso investment fund. The agreement signed with Kelso also included the concurrent repurchase by the Group of the interest held by the Suntory group in DS Waters, LP pursuant to the put option granted by the Group to Suntory.

 

In Canada, the Group occupies a strong position in the bottled water market, with its Crystal Springs, Labrador, Naya and Evian brand names. The Group also has a leading position in the HOD water market.

 

In Latin America, Danone is the market leader in packaged water. With a 36% market share, the Group is the leader in the bottled water market in Mexico through Bonafont, the leading Mexican producer in this market. The Group also holds a 50% interest in Pureza Aga, a major actor in the Mexican HOD water market. In addition, the Group reinforced its presence in the large container water market in Mexico through the acquisition of Bonafont Garrafones y Servicios in 2004. Based on size, the Mexican bottled water market is one of the largest markets worldwide and the largest emerging market. The Group also has a leading position in the bottled water market in Argentina with the Villa del Sur and Villavicencio brands and is the market leader in Uruguay with the Salus brand.

 

In Asia, Danone is the clear leader in packaged water with a market share of approximately 20% in the region.

 

In China, the Group is the market leader with approximately 25% of the packaged water market where it sold more than 4 billion liters in 2005, primarily under the Wahaha and Robust brands. The Group is also the market leader of dairy drinks in this country and is a major actor in the cola and ready-to-drink tea markets.

 

In Indonesia, the Group holds a 74% interest in Aqua, which is the clear leader in the country with more than 50% of the market. A significant part of its revenue is achieved through the sale of water in large containers. In 2005, the brand name Aqua had the leading position in the worldwide packaged water market with more than 4.5 billion liters of water sold.

 

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In Japan, in September 2002, the Group entered an agreement with Mitsubishi Corp. and Kirin Beverage Corp., one of the leaders in the Japanese beverage market, with the aim of accelerating growth of the Volvic brand in Japan and participating in the growth of the domestic segment of the market. The Group is the leader by value in the bottled water market in Japan and has a dominant position in the “premium” segment with its imported water brands Volvic and Evian.

 

New Products.    Once again, innovations contributed significantly to growth, and the Group confirmed its ability to respond to the development of consumption trends in 2005.

 

In the natural water segment, the Group’s objective is to make the health aspects of its products more visible to its consumers. In Mexico, the brand Bonafont focused its advertising on the elimination benefits of its spring water. Furthermore, with the goal of creating new consumption habits, new formats or packaging were introduced, such as the 50 cl Evian bottle launched in France in 2005.

 

The “Aquadrinks” segment (flavored water based on natural water and tea beverages), where sales have been particularly strong, expanded its range of product types and brands. In Mexico, Levite, the flavored water launched in 2002, represented more than 25% of Bonafont’s 2005 sales. In Spain, Poland and Turkey, the Group successfully launched a brand of flavored water during 2005. Due to its innovations, the Group holds approximately 50% of the flavored water market in France, notably the Volvic and Taillefine brands. In addition, in 2005, the Group expanded its Volvic Thé line with new flavors and occupies the second leading position in the tea beverage segment.

 

The functional beverage segment, another area of development, had significant growth in 2005. After the success of the Ser brand in Argentina, which is the local leader in diet beverages, in 2005 the Group launched the Taillefine Fiz line in France, which is now the second leading brand in the French diet beverage market. This brand is expected to be expanded to additional countries in 2006. In Asia, the Group continues to introduce Mizone, a functional beverage launched in Indonesia in 2005. The Group has also launched new products in this region, such as Nutri-express in China and Just Juice Bubbles in New Zealand.

 

Market Trends.    Packaged water is one of the most dynamic segments of the world’s food market due to consumption trends favoring safety and health. Despite already relatively high levels of per capita consumption, the European market, the largest in the world, continues to experience sustained growth. Outside Western Europe, the global trend in consumption of bottled water has shown a regular progression. Certain countries which already have a significant market, including China and Indonesia, are experiencing double-digit growth rates. The segment of water-based, slightly sweetened, refreshment drinks is a growing market and flavored water is expected to represent a significant portion of the growth of the segment. Likewise, functional beverages are expected to be one of the areas of growth in the segment in the years to come.

 

Biscuits and Cereal Products

 

With net sales in 2005 of approximately € 2.4 billion, representing approximately 1.1 million metric tons, Danone is the world’s second-leading producer of biscuits and cereal products. Danone’s biscuit products include cookies, which represent more than half of the segment’s net sales, as well as savory snacks, crispbreads and crackers, and packaged cakes. The segment retains a strong potential with, in certain regions, rates of growth higher than the average for other food segments.

 

Principal Markets and Brand Names.    In 2005, sales in Europe accounted for 75% of biscuit and cereal products net sales and sales in Asia accounted for 25%.

 

Danone’s main product lines are marketed under the LU brand name, which accounts for more than 45% of the segment’s net sales and which has a dominant position in Western Europe. The Danone brand name is used in Asia, especially in China and Indonesia. The Group also has various local brands worldwide resulting from the many business acquisitions carried out by the Group over the past 15 years.

 

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In Western Europe, Danone is the market leader and has strong leading positions in France, the Benelux countries, Greece and Finland. In Italy and Spain, the Group is number two in the market. The Group is no longer present in the United Kingdom and Ireland following the disposal in 2004 of its biscuits businesses in these countries.

 

In Eastern Europe, Danone is the clear market leader with a strong position in Russia, Poland, Hungary, the Czech Republic and Slovakia.

 

In Latin America, Danone is an important biscuit and cereal products actor with a strong presence in Brazil and Argentina. In April 2004, the Group and the Arcor group signed an agreement aimed at merging their biscuits businesses in South America, thus forming the leading player in the market in that region. Bagley LatinoAmerica, the newly formed company to which the Group transferred the biscuits activities of Danone Argentina and Danone Brazil in January 2005, is 49% held by the Group.

 

In the Asia-Pacific region, Danone is the market leader for biscuits and cereal products. One of the Group’s objectives in this segment is to develop nutritional products that are affordable to everyone. In order to achieve this objective, the Group is striving to develop product formats that are adapted to the budget of the average consumer. Danone has very strong positions in China and India, two of the top three largest biscuit and cereal product markets in the world in terms of volumes consumed. In the biscuits and cereal products segment, Danone is the leading brand in China and Britannia is the leading brand in India. Danone also has leading positions in Malaysia. In Indonesia, the Group continues to reinforce its growth in the biscuit market under the Danone brand name. The Group was also present in New Zealand through its subsidiary Griffins, which was sold in early April 2006.

 

New Products.    Danone’s strategy for innovation tends to emphasize the nutritional qualities of biscuits, the establishment of additional eating times throughout the day and the promotion of affordable products in the segment, especially in the Asia-Pacific region. Furthermore, in 2004 and 2005, the strategy for the segment in Europe mainly consisted of renewing certain existing products, with the goal of improving quality and taste in order to differentiate them from competing brands. This strategy depends mainly on enriching the cereal content of its products and reducing the amount of sugar and fat, as well as developing complete cereal products.

 

The breakfast product line (“Petit Déjeuner”) continued to be deployed across Europe and has an increased number of varieties. Launched in 1999, this line targets breakfast, a mealtime during which the consumption of biscuits remains minor. The biscuits of this line take advantage of the concept of “Long Lasting Energy” (“Energie à Diffusion Progressive”) developed by Danone Vitapole, which has been validated by international experts. The research and development teams of the Group have been able to show that certain complex sugars in cereals are digested slowly and over an optimal length of time release the necessary sugars for the healthy functioning of the body and brain. This nutritional advantage, the result of an original combination and formulation of the biscuit, including preparation and cooking, has been included in the Prince Petit Déjeuner line, targeted at the youth market, as well as the LU Petit Déjeuner, its equivalent for adults. Launched successfully in France, the line has also been developed in Belgium, Holland, Italy and Spain, and for the past few years has expanded into Hungary, Russia, Poland and the Czech Republic. In 2004, the segment expanded its Petit Déjeuner line with the launch of its first low-fat cookie product.

 

In addition, at the end of 2004 the segment reinforced its strategy of offering nutritional products accessible to everyone. After the success of Biskuat in Indonesia, the segment launched Ja Gai in China, a nutritionally enriched product, primarily in calcium, at a price of € 0.15.

 

Nutrition and Health

 

The Group’s strategy depends on the development of products with a strong nutrition and health component. The Group believes that nutrition plays an important formative role in health and well-being. This conviction has

 

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been reaffirmed year after year and inspired Danone’s Food, Health and Nutrition Charter, which was published in March 2005. This charter reaffirms the five convictions and nine commitments of the Group in nutrition and health. The nine commitments include the application of research to nutrition and health, dialogue with scientists, sharing of knowledge with the scientific world, health professionals and informing consumers, primarily through nutritional labeling of products.

 

Research and Development

 

Danone’s overall research and development objective is to contribute to the Group’s profitable growth by:

 

    ensuring uncompromising food safety;

 

    contributing to the development of products to better respond to consumers’ expectations in terms of nutritional value, taste or practicality; and

 

    designing innovative production processes in line with the Group’s cost reduction policy.

 

In 2000, Danone significantly revised its research and development policy to transform it into a major competitive advantage of the Group. To increase efficiency, speed and communication within the Group, the research and development teams have been grouped together in one global multidisciplinary center, Danone Vitapole Daniel Carasso (recently renamed the Danone Research Center Daniel Carasso), incorporating the three main business lines, and research has been refocused on a limited number of strategic projects. This center, located in the Paris region, has been operational since mid-2002 and employs approximately 550 researchers, engineers and technicians, supported by 250 people throughout the world. Also, as part of its strategy aimed at further accelerating growth in the functional food and beverage market, in the beginning of 2004 the Group concluded an agreement with Yakult Honsha, the world leader in the market for probiotics. As part of this agreement, a liaison office was created between the Group and Yakult for facilitating joint projects, particularly in the areas of research and development. Finally, in 2005, the Group opened a new research center in Shanghai. The purpose of this center is to develop products that deliver the nutrition and health benefits needed locally and that are adapted to the tastes of Asian consumers, in particular, Chinese, Indonesians and Indians. It will thus allow the Group to introduce its leading brands and concepts by adapting them to local specificities, in terms of ingredients as well as texture and taste. The opening of this center reflects the Group’s objective of developing its activities in Asia, and particularly to increase its position in the fresh dairy products market. The center complements the research and development activities of the Group in Asia, which already includes three entities: a center in Shanghai dedicated to the biscuits business and two centers dedicated to beverages for China.

 

In order to conduct basic research related to nutrition, flavor and food processing and preservation, Danone regularly collaborates with outside entities such as universities and specialized public research centers. The Group benefits from the expertise of external scientific committees on strategic themes, such as the committee of experts on probiotics or the Evian Center for Water. Furthermore, the Group maintains permanent relations with the scientific community in order to better understand nutrition issues and to stay informed of the latest developments in research. This permanent dialogue with scientists as well as the support of research constitute two of the commitments made by the Group in its Food, Health and Nutrition Charter.

 

Danone has also established an international prize to reward research in nutrition or major contributions to public health. Product development and improvement is the responsibility of the Group’s research and development teams, which apply the results of both internal and outside research. Furthermore, the sixteen Danone Institutes worldwide contribute to public awareness regarding nutrition through their activities for the benefit of professionals in the fields of nutrition and healthcare and have launched several projects for researchers and practitioners. In 2005, the Group formed a partnership to last a minimum of four years with the Pasteur Institute in order to improve understanding of the mechanism of action of probiotics. Finally, in 2005, the Group participated in the 18th International Congress of Nutrition in South Africa. Through its participation in this event, which takes place every four years, the Group reaffirmed its willingness to build a permanent relationship with the scientific community and to participate in the progress of science by developing initiatives in the fields of nutrition and health.

 

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In 2005, Danone spent € 123 million (€ 129 million in 2004) on research and development, representing close to 1% of total net sales.

 

Purchasing

 

Danone’s principal raw material needs consist of (i) materials needed to produce Danone’s food and beverage products, including primarily milk, fruits, flour, sugar, cocoa and fats or, collectively, food raw materials and (ii) materials needed for packaging its products, primarily plastics and cardboard or, collectively, packaging raw materials. Energy supplies represent a smaller portion of the Group’s purchases. See “Item 3. Key Information—Risk Factors—Price increases and shortages of food and packaging raw materials could adversely affect the Group’s results of operations.”

 

Food Raw Materials.    Milk represents the most important food raw material for the Group in terms of cost. In each country where Danone requires milk for the production of its dairy products, the Company’s operating subsidiaries generally enter into contracts with individual local milk producers or dairy cooperatives. In Europe, the price of milk is essentially fixed by the European Union or supported by various national governments through quotas and customs charges such that only a small portion of purchases is directly subject to fluctuations in the worldwide market. In 2005, milk prices remained relatively stable in Western Europe, but remained on an upward trend in Eastern Europe and the Americas. Purchasing of other food raw materials, mainly fruit mixtures, sugar, cocoa, flour and vegetable oils, is managed through global or regional purchasing programs, allowing for synergies in terms of volumes and skills. Purchases of sugar and cocoa are closely monitored because the market structure for these products is highly concentrated, with a small number of intermediaries controlling a substantial portion of total supply.

 

Packaging Raw Materials.    The Group also manages its purchases of packaging raw materials through global or regional programs in order to optimize shared knowledge and volume effects. Factors that influence the pricing of packaging materials include international and regional supply and demand, economic cycles, installed production capacities and oil prices. The price of PET and plastics, which are among the most significant packaging raw materials purchased by the Group, varied widely in Europe and Asia in 2004 and 2005, mainly due to the fluctuation in the price of oil. The other significant raw materials used for packaging (such as cardboard) did not experience significant change in prices at the Group level during the year.

 

Organizational Systems and Information Technology

 

In 2004, the Group established an information systems organization which allows the optimization and rationalization of information technology investments while taking advantage of global synergies.

 

Project Themis

 

For several years, the Group has been in the process of implementing an integrated information system (Themis) through an SAP framework. The year 2005 was marked by significant deployments in the beverages segment, primarily in England and France, as well as in the fresh dairy products segment in Portugal and Mexico. In 2005, approximately 57% of worldwide sales are from subsidiaries that have implemented Themis.

 

With the continued deployment of Themis, new projects are being studied in other operational areas, such as the management of warehouses and inventories or the management of industrial maintenance. These extensions are expected to be implemented in pilot sites in 2006 (United States for management of inventory, France and Germany for industrial maintenance) and should be implemented in the Group’s other subsidiaries beginning in 2007.

 

After a pilot phase in three plants (Biscuits in the Czech Republic, Beverages in France and Fresh Dairy Products in Poland), the ISIS project (industrial performance piloting project) is also being deployed in various industrial sites of the Group.

 

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Research and Development

 

In research and development, speed of conception and bringing a product to market as well as ensuring its launch are important factors of success. The establishment of the Artemis system allows research teams to accelerate the phases of conception and ensure product launches, offering in one device all of the nutritional and food safety information related to the ingredients used by Danone, as well as a tool to aid in product formulation. It is currently being deployed in various operational units of the Group.

 

eSupply Chain

 

For several years, the Group has been optimizing its purchases, with the goal of improving upstream efficiency as well as collaboration with its suppliers. This effort was made concurrently with the formation of CPGmarket in 2000 with Nestlé, Henkel and SAP. CPGmarket was sold to Accenture at the end of 2004. It offers to suppliers and purchasers a range of technological solutions, such as electronic quotes and online bids (eSourcing) as well as a transactional platform for exchanging EDI messages for online transfer of documents, from ordering to invoicing (eSupply Chain). Currently, over 40 subsidiaries of the Group use the CPGmarket’s eSourcing software for over 50% of their purchases on all markets. The Group is also in the process of deploying the eSupply Chain software, and in 2005, 105 supplier-purchaser “pairs” were put in place. This program will be extended in 2006 and 2007 to all of the Group’s subsidiaries in Europe and North America, over 50 industrial sites.

 

Sales and Marketing

 

In sales and marketing, various projects in 2005 allowed the Group to develop its knowledge in order to ensure improved performance for its customers, in particular:

 

    the creation of Internet sites allowing the sharing of information about the Group’s products—www.danonefoodservice.com,

 

    the creation of a marketing database allowing collaborative work among the agencies, the creators of the product and the marketing teams, and

 

    the deployment of a business control system at points of sale in several major markets.

 

Intellectual Property

 

The Group owns rights to trademarks, brand names, models and copyrights throughout the world. The territorial extent of protection depends on the significance of the product concerned. The Group has established a chart of its intellectual property and regularly updates and revises its portfolio of products and corresponding rights for each of its subsidiaries in order to monitor the protection of its brand names.

 

The Group is also the owner of patents, licenses and proprietary recipes, as well as substantial know-how and technologies related to its products and the processes for their production, the packages used for its products and the design and exploitation of various processes and equipment used in its business.

 

Such trademarks, brand names, models, copyrights, licenses, patents, proprietary recipes and know-how, which are held by the Company and several entities throughout the Group, represent major commercial assets for Danone. The Group is committed to taking appropriate legal steps to protect and exploit such intellectual and industrial property. See “Item 3. Key Information—Risk Factors—The Group may not be able to adequately protect its intellectual property rights.”

 

Risk Management Policy

 

The Group maintains an active risk management policy to preserve the investment of shareholders and the interests of employees, consumers and the environment. The policy is based upon identification and control of risks in conjunction with a global policy of insuring goods and potential liabilities.

 

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Since 2002, the Group has had in place a global risk identification policy (with a specific application called “Vestalis”) by charting major operational risks which allows the classification of problems in terms of the risks’ frequency of occurrence and their financial impact on the Group. Vestalis has been deployed or is in the process of being deployed in 67 of the Group’s subsidiaries, which represents approximately 88% of the Group’s net sales in 2005. This chart allows the identification of risks and weaknesses in the entire process, to group them by country or business segment and to define corrective actions, which may be local or global, as applicable.

 

The Group has a global insurance policy based on stringent technical evaluations using worldwide available insurance products based on their availability and local regulations. The insurance policy for risk is uniform for all of the subsidiaries over which the Company has direct or indirect operational control.

 

In addition, in order to optimize its insurance expenses and maintain a strong level of control over its risks, the Group self-insures through its reinsurance subsidiary Danone Ré, a company consolidated in the Group’s financial statements. The self-insurance policy covers certain risks whose costs can be accurately estimated as the Group is aware of their frequency and their financial impact. Such risks relate essentially to (i) coverage for damage to goods, transport, operating losses and civil liability for the majority of the Group’s companies and (ii) payments for disabilities, training and death for the French subsidiaries. These self-insurance programs are limited to accidents under € 7.5 million per accident. Moreover, “stop loss” insurance protects Danone Ré against an increased frequency of accidents and loss. These self-insurance programs are managed by professional insurers and the provisions recorded in the financial statements are determined by independent actuaries.

 

Customers, Distribution and Marketing

 

Customers

 

While end consumers of Danone products are individual retail customers, the principal portion of Danone’s sales are to major retail and grocery chains. The retail industry has become increasingly concentrated over the past several years. In many markets, the Group’s three largest clients represent a significant portion of net sales. This concentration, particularly advanced in Europe, is expected to increase in North America and in emerging countries. In 2005, the Group’s 10 largest customers worldwide, of which six are French retail groups, accounted in the aggregate for approximately 30% of total consolidated net sales. Danone’s largest client alone, Carrefour, accounted for approximately 9% of consolidated net sales in 2005.

 

The Group has global partnership agreements with major retailers. These partnership agreements typically contain provisions concerning geographic expansion policy, logistical collaboration or management of food safety. However, they typically exclude pricing terms which remain within the responsibility of the Group’s subsidiaries.

 

In recent years, certain European retail chains have rapidly expanded internationally. The Group has benefited from this expansion by using existing commercial relationships to introduce its products in certain international markets and therefore accelerate its own geographic expansion as well as the international development of its brands. In these new areas, most large retail chains seek to develop the marketing of brand name quality products as their means of growth and profitability.

 

Distribution

 

Although distribution policies vary among different countries due to local characteristics, the Group has two major distribution policies: on the one hand the flow of products towards major retailers and on the other hand the flow designated for traditional market outlets.

 

In emerging countries, particularly in Asia and Latin America, a large portion of Danone’s sales is made through traditional market outlets or through smaller distribution networks that are most often controlled by the Group. A strong distribution structure is a competitive factor in those countries in which traditional businesses

 

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and independent supermarkets still represent a significant share of food sales. In Latin America, a significant amount of sales of fresh dairy products are made through local networks. In Argentina, the Group benefits from a distribution network which enables delivery to over 75,000 sales points through a fleet of 1,000 trucks. Similarly, in Indonesia, the beverages subsidiary Aqua has built a distribution network by signing agreements with 70 exclusive distributors, who account for 80% of deliveries. This amounts to a total of 10,000 trucks stamped with the Aqua name, circulating in Indonesia every day to supply 1.3 million points of sale.

 

In recent years, the Group has built leadership positions in the market for water in large containers in Latin America, Asia and, more recently, in Europe. This business requires a direct relationship with the consumers (for example, Home and Office Delivery (“HOD”) in Europe) or through franchised retail shops (for example, Robust in China).

 

The Group follows an active policy of streamlining its distribution facilities in order to increase quality of service while reducing costs. This policy is based on an ongoing assessment of the Group’s organizational models and solutions that have been implemented, especially outsourcing its distribution in collaboration with specialized distributors.

 

The Group has undertaken several initiatives, working closely with its mass retailers to accelerate the development of product categories, to optimize the flow of products and the inventory levels of its customers. These include efficient consumer response, or ECR, which in addition to achieving stock management, automatic stock replenishments and just-in-time delivery is used to coordinate stock levels between the stores, the client’s warehouses and Danone’s warehouses. ECR is also used to work with distributors to better manage consumer demand and expectations. Danone also works with its customers to develop marketing concepts to enhance its customers’ sales, such as joint promotions for specific events.

 

Marketing

 

The Group’s advertising and promotional strategy constitutes a key element in the success of its overall strategy based on innovation, brand recognition and market leadership. The Group engages significant resources to ensure the success of its advertising and promotional strategy and management expects advertising costs, in relation to net sales, to remain at least at the same level in the future.

 

For several years, the Group has been following a policy of resource optimization by focusing on a few brands in order to maximize efficiency. Accordingly, more and more products have been introduced under leading brand names such as Danone or Taillefine/Vitalinea, currently used for fresh dairy products, beverages and biscuits and cereal products. In addition, each subsidiary of the Group annually conducts a segmentation study of its brand portfolio using internal methods in order to optimize the allocation of advertising budgets.

 

Danone’s operating companies in each business line and geographic market are responsible for developing their own advertising, promotional and sales strategies adapted to local consumer patterns. The Group maintains a decentralized marketing and sales structure in order to provide its operating companies with the proximity and flexibility necessary to respond and adapt to a broad and changing variety of market conditions. In order to ensure (i) coherence of retailing strategies within the Group, (ii) an optimal sharing of marketing know-how and (iii) an optimization of promotional costs, the Group has a director in charge of coordinating commercial retail strategies and initiatives as well as a policy of ensuring that strategic principles and initiatives extend across product lines and geographic areas.

 

The Group believes that direct marketing, which aims at creating direct contact with consumers, will continue to develop rapidly. This strategy, in France, is oriented around a centralized database, which contains 4 million French households and which allows the Group to regularly communicate with its consumers through personalized mailing campaigns that are adapted to consumer profiles. In January 2006, this marketing initiative was renewed with the launch of “Danone and you.” This new communication method aims to supply consumers

 

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with more information, advice and transparence on their food products. This program includes, notably, an annual guide devoted to nutrition and health and a Danone and you magazine focused on families with children, as well as a dedicated Internet site.

 

Food Safety and Quality Management

 

Food Safety

 

Food safety is a paramount consideration for Danone. Over the last several years, the Group has implemented a voluntary policy of risk identification and control. The implementation of this policy involves the Group’s Quality Department, the Food Safety Center (CSA), the Divisional Quality Departments and the subsidiaries. In 2004, the food safety policy was redefined in internal documents, called directives. These directives govern fundamental aspects of food safety, in particular, traceability, risk analysis, allergens and biosafety. Risk management is the responsibility of the CSA. In cooperation with the business segments, the CSA works on the identification and classification of risks according to their magnitude and frequency of occurrence. Risk are classified in four categories: microbiological, chemical, physical or allergenic. The goal is to control the risks in the Group as well as in suppliers. The Group strives to continually improve control over its supply chain by (i) gaining complete knowledge of the raw materials it purchases, (ii) rigorously monitoring the chain of distribution, (iii) developing a more efficient upstream tracing system and (iv) controlling the production processes (by defining and implementing rules relating to hygiene and production, methods based on international standards and control of critical sites). For certain risks, such as pesticides and heavy metals, the Group has implemented monitoring programs, while for others, such as risks of allergies, the Group imposes preventive measures for all its subsidiaries that go beyond regulatory requirements. Danone’s policy also includes the implementation of rigorous procedures for crisis management, in particular, the creation of a dedicated crisis management center with connections to the subsidiaries’ cores, in order to guarantee consumer safety while maintaining the reputation of its brands. In addition, the Group uses tracing tools in order to enable the Group to identify for a given lot of products, the origin of raw materials used, the procedures followed, the controls carried out and the customers to whom the products were sold. Furthermore, the Group periodically evaluates the level of control over all the risks to which the Group’s businesses are exposed.

 

Beyond risks that are scientifically established, the Group remains particularly committed to keeping up-to-date on risks perceived by the consumer, such as genetically modified organisms and the risks of obesity. To this end, the Group has developed a network of privileged advisors, including consumer associations that discuss and attempt to clarify topics that are of common concern through various formal and informal forums.

 

Quality Management

 

The Group considers quality to be a managerial responsibility that is rooted in understanding consumers and customers as well as in the pursuit of performance. The Group has made quality a determining factor for all of its processes, businesses and activities. The quality management policy has three main components: (i) the identification, evaluation and control of food safety risks at each stage from the procurement of raw materials through the consumption of products, (ii) the improvement of all processes and (iii) monitoring the quality perceived by consumers. This quality policy is based on monitoring product performance through internal tests and external consumer testing. In addition, external audits are performed to assess the manufacturing process and hygiene. In the water segment, for example, this process of verification goes from the original water supply all the way to the actual dispatch of the products for sale.

 

Quality management teams oversee quality systems and their implementation at each of Danone’s operating subsidiaries. They are specifically dedicated to: (i) the development of new products through organoleptic tests performed internally and by consumers, allowing a clear vision of the products on the market as well as how the Group responds to consumers’ needs; (ii) teaching skills to employees in quality control departments through specific training programs allowing for experience sharing and transfer of best practices between different subsidiaries; and (iii) developing quality control systems in each subsidiary. The Group is accordingly engaged in

 

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a process of evolution of the certification of its industrial sites towards Danone’s reference system, built on the ISO 22000 standard. This reference system will allow the Group to have a single instrument of quality management and will also facilitate the alignment of all of its action plans towards achieving the objectives defined by the Group. At December 31, 2005, approximately 51% of the Group’s industrial sites were certified to the ISO 9000 standard.

 

Industrial Risk Management

 

The safety of the Group’s industrial sites, its employees and people living at the sites’ boundaries is a key priority for the industrial policy of the Group. The Group’s critical industrial sites are relatively little exposed to major natural disasters (floods, earthquakes, cyclones). These risks are evaluated in advance of each major installation and new industrial installations are designed with all applicable safety standards. However, the Group’s international development makes it necessary for the Group to establish itself in areas that are occasionally exposed to earthquakes (Japan, Indonesia, Turkey, Mexico and Algeria).

 

The Group’s industrial activities do not intrinsically expose it to particular risks compared to other industries. The management of fire and explosion risk remains a major concern of the Group’s three segments.

 

In order to reinforce its risk management, the Group has put in place procedures to evaluate the level of safety at its industrial sites. These evaluations are made by independent auditors and allow operational units to define and implement customized prevention and protection policies. These procedures are based on international standards that most often go beyond local standards. Furthermore, they allow an exhaustive inventory of the various potential industrial risks, and are also applicable to partnerships with the most significant suppliers.

 

In 2005, 135 of these safety audits were conducted by independent entities, which assigned a rating from 1 to 5 for each audited site. The average rating for the sites was 4.00 in 2005, compared to 3.94 in 2004 and 1.74 in 1994, marking a strong improvement in safety conditions since the establishment of this preventative system. In addition, 53 sites had a rating of 5, authorizing them to obtain the RHP certificate (Highly Protected Risks).

 

Regulatory and Environmental Matters

 

Regulatory Matters

 

The Group’s activities are subject to numerous laws and regulations, which are becoming more and more stringent and are constantly evolving. These laws and regulations relate principally to water, air, noise, ground and waste. These activities are subject to obtaining authorizations and making filings under French legislation with respect to the protection of the environment and equivalent regulations in other countries. Packaging is subject to specific regulations, in particular European Directive 94/62, amended in 2004, relating to packaging and packaging waste, reduction at the source, reduction of the toxicity of hazardous substances and recycling and recovery. In addition, the Group’s activities are subject to the European Directive of 2003 establishing an exchange system and quotas for greenhouse gas emissions, and since 2005, the transpositions of the National Allocation Plans for quotas in the European Union. Four of the Group’s sites are in the European Union and subject to quotas, while the other sites are below the minimum eligibility threshold.

 

The principal potential risks relating to the environment are: (i) water pollution (essentially organic and biodegradable pollution), (ii) risks related to refrigerating installations (ammonia and other refrigerating liquids), and (iii) risks related to the storage of raw materials (flour and sugar silos) or products for the cleaning and disinfection of the Group’s plants (acid or alkaline products), especially when these installations are located in inhabited areas. Nevertheless, the Group believes that, in light of its activities, it has a limited negative impact on the environment.

 

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Environmental Policy

 

Danone’s environmental policy aims to respond to the growing concerns of many different parties, especially consumers, about the environmental impact of industrial plants and products. In 1996, the Company’s management established the basic principles of the Group’s commitment to environmental protection through the adoption of an environmental charter which applies to each of Danone’s facilities and divisions (research and development, purchasing, marketing, production and headquarters) in all the countries where the Group operates. The charter aims to create a system of systematic accountability and protection of the environment at every step of production, from design to delivery of the final product, and encourages the participation of all employees. In addition, since 1991, the Group has had an environmental department to define and coordinate the application of its environmental policy in collaboration with a network of more than 70 correspondents throughout the world. This policy focuses on three principal areas: industrial activity, packaging and agriculture-related issues.

 

Industrial Activity

 

The application of the Group’s environmental policy in its facilities involves three areas: ensuring compliance with regulations, which is linked with control of environmental risks, reduction of water and energy consumption and of waste production through its “Green Plants” (“usines sobres”) program and, finally, ISO 14001 certification of the Company’s sites.

 

Regulatory Compliance and Risk Management

 

Since 1995, all of the Group’s industrial sites are subject to an annual self-evaluation of their environmental situation. The internal evaluation serves to raise the environmental awareness of the actors in the field, and give them an in-depth knowledge of the sites to enable them to establish action plans. To ensure regulatory compliance and reinforce risk management, the Group implemented in 2000 a program for the audit of its production facilities by a specialized company. The analysis covers multiple criteria such as operating licenses, water supplies, outflow, atmospheric emissions, storage of raw materials, refrigerating installations, energy, noise and environmental, soil and waste management. The conclusions of the analysis lead to recommendations for the development of quantified and prioritized plans. At December 31, 2005, most of the Group’s plants had been audited, excluding those recently acquired, and the Group believes that the results and actions taken indicate that no major risks are present that would have a serious detrimental effect on the environment.

 

Decrease in the Consumption of Natural Resources

 

Since 1995, the Group’s “Green Plants” program has been aimed at reducing the consumption of water and energy and reducing the production of waste material. This program corresponds to the Group’s desire to promote an economic and sustainable business model, limiting plants to using only the resources absolutely necessary to the plant’s activities. The average ratios of the Group between 2002 and 2005 (total water used per ton produced; thermal energy per ton produced; total energy per ton produced) have decreased significantly. Furthermore, in 2005, the rate of waste recycling is approximately 75%. Targets were fixed in September 2001 by the Group’s executive committee for the reduction of the ratios for the consumption of water and energy between 2000 and 2010: 30% for the consumption of water and thermal energy and 20% for total energy (thermal and electric). These reductions constitute a significant response from the Group to the necessity of reducing the emission of gases causing the greenhouse effect.

 

Environmental Management

 

The Group has implemented an environmental management program enabling it to ensure that all of its plants integrate environmental consciousness into plant activities. At December 31, 2005, 84 sites (industrial sites, corporate headquarters and research centers) had ISO 14001 certifications, amounting to approximately 42% of the Group’s sites. In the event of an environmental accident, there are procedures in place in each of the

 

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plants and sites to manage the situation and minimize the consequences of such an accident. A guide to the management of environmental emergencies was distributed to each plant at the beginning of 2001 and is updated annually.

 

Packaging

 

Management believes that environmental consciousness in the packaging of the Group’s products can play a large role in the protection of the environment. Since 1992, Danone has been involved in “Eco-Emballages,” an organization targeted at developing the collection and recycling of packaging in France. In 17 European countries, Danone has actively participated in decreasing packaging waste through “Point Vert” type organizations. Danone also strives to reduce packaging waste at the source by slightly lightening its packaging materials. The Group has set a target of reducing the weight of its packaging by 10% over ten years. In 2005, 24 subsidiaries tracked the packaging/product weight ratio for their ten most significant products. Danone established a network of contact people who are dedicated to educate and train various interested parties in product development and marketing, in particular through the publication of a manual on ecological packaging and of a tool to assess the impact of activities on the environment.

 

Agriculture

 

Most of the Group’s raw materials are agricultural products. In order to protect the environment without diminishing the quality of its products, the Group encourages farmers to adopt farming methods that are more environmentally friendly than traditional methods. The Group implemented pilot operations for its cereal, dairy farm and fresh produce suppliers to test these methods for limiting the use of fertilizer and phyto-sanitary products to a strict minimum, without negatively affecting competitiveness of its operations.

 

The Group wishes to expand this method progressively through the farms that supply its plants. In 2002, the Group joined forces with Nestlé and Unilever on a program called the “Sustainable Agriculture Initiative” (“SAI”). This initiative comprises sharing experiences in sustainable agriculture with other industrial businesses in cooperation with farmers and consumers, first in Europe and then throughout the world. Sustainable agriculture, as defined in SAI, is a broader concept than integrated agriculture, as it includes the consumption of natural resources (such as energy sources) and the economic and social impact of operations on local communities. Integrated agriculture should be considered an initial step towards sustainable agriculture. In 2003, the SAI established sustainable agriculture practices for the production of cereal and milk in Europe. In 2004, all of the Group’s milk producers were audited according to internal standards regarding food quality, traceability and security. Since 2005, these audits have also covered environmental aspects.

 

Protection of Water Resources

 

In 1998, the Group and in particular the beverages division joined the 1971 Ramsar Convention on Wetlands to implement awareness campaigns, training and information relating to the preservation and use of wetlands. The Ramsar Convention signed in 1971 consists of 138 countries that agreed to policies favoring wetlands, marshes, peatland and other natural water retention sites in the plains or highlands, which filter rainwater and supply the water tables. These zones are fundamental for the conservation of water and water quality. In 2002, following a Group initiative, the Danone–Evian Fund was created to support projects for the protection and sustainable management of water and water quality. The fund, which has a budget of € 1 million, is managed by the Ramsar Convention with the help of a local French not-for-profit organization for the defense of coastlines.

 

For example, the Evian spring has special protection. The recognized catchment area where Evian natural spring water begins covers over 34 square kilometers at an average altitude of 850 meters. Eighty-five percent of this pristine catchment area is covered by forests, natural meadows and marshes. Human presence is limited to a few villages and family farms principally making cheese. Société des Eaux Minérales d’Evian joined with the French government in 1992 to found the Association pour la Protection de l’Impluvium des Eaux Minérales

 

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d’Evian (APIEME). This organization seeks to protect the Evian natural spring water catchment area by expanding the sewer system, experimenting with more environmentally friendly farming practices and bringing livestock housing into regulatory compliance.

 

In 2004, the Group performed a complete inventory of the springs that it uses, their risks and their level of protection. In 2005, the Group deployed a tool allowing it to more precisely identify the risks related to these 78 springs, in order to establish an action plan to reduce these risks. In addition, the Group promotes sharing best practices among those responsible for the management of these springs.

 

Training and Employee Information

 

The Group attempts to increase the environmental awareness of its employees through various informational tools. Each year, approximately 15,000 employees attend environmental awareness sessions. In addition, a specific training program for the protection of the environment and plant assets is offered to all industrial engineers. Since 2000, an Intranet site has enabled the dissemination of information relating to the environment, the Group’s environmental policy and sharing experience. The environmental department also has tools for the dissemination of such information and in 2005 established a worldwide network of 72 environmental coordinators in Europe, South America and China.

 

Environmental Expense and Investment

 

Investments for the protection of the environment amounted to approximately € 16 million (approximately 2.6% of the Group’s total industrial investments) in 2005 of which 44% were for water (water treatment, purification stations, economies of consumption), 14% were for waste (improving collection, storage, sorting) and 7% were for energy (economies of consumption, conversion to cleaner energy sources). Management does not expect these investments to increase significantly in the near future.

 

Expenses related to the environment amounted to approximately € 33 million in 2005. They included expenses for the management of water, energy and waste and taxes other than packaging charges. The latter amounted to € 63 million in 2005. In addition, the fines, penalties and damages paid to third parties in connection with environmental issues were less than € 0.2 million in 2005. No significant provision for risks or expenses related to the environment is included in the Consolidated Financial Statements as of December 31, 2005.

 

Competition

 

Competitors in Danone’s core businesses include other large international food and beverage groups, such as Nestlé, Kraft, Pepsi Co. and The Coca-Cola Company, as well as smaller companies with focused markets or product lines and food retailing chains offering generic or private label products. The food and beverage sector is highly competitive due to the large number of national and international competitors. Management believes that Danone’s strategy to maintain and improve its profitability is based on the quality, convenience, and innovative aspects of Danone’s products and the strong image associated with its brands in the important areas of health, nutrition and food safety. Management believes that success in this industry is achieved through strong local market positions, and therefore the Group seeks to be the market leader in each country where it operates. This strategy allows for a long-lasting, balanced and constructive relationship with major distribution networks, by marketing key products yielding growth and profitability.

 

Because Danone’s markets in Western Europe tend to be relatively mature, competition for market share is particularly intense. Danone’s strategy, complemented by a strong advertising component focusing on certain brands, is to differentiate itself from its competitors by marketing innovative, value-added products that respond to a growing consumer demand for health-oriented/well-being food products. This effort is reinforced by significant advertising based on a portfolio of concentrated brands.

 

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In North America the food and beverage markets are relatively mature and competition is intense. In competition with other large food and beverage groups, Danone has based its strategy on its experience of the management of value-added, health-oriented products and its ability to market locally its diverse global product lines.

 

In the Rest of the World, essentially in emerging countries, competition in the Group’s three business lines is high. This is due to the presence of local competitors who usually market products at very low prices, but is also due to the efforts of international competitors to penetrate or increase their activities in these high potential markets. Danone’s strategy has consisted of targeting these areas by marketing quality products that emphasize health and safety and are accessible to the greatest number of consumers.

 

Organizational Structure

 

The table below presents a list of the Company’s principal operational subsidiaries by business line, including name, country of incorporation or residence and proportion of Danone’s direct and indirect ownership interest at December 31, 2005.

 

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FRESH DAIRY PRODUCTS


 

BEVERAGES


 

BISCUITS AND CEREAL PRODUCTS


 

OTHER

FOOD ACTIVITIES


EUROPE

 

GERMANY

Danone GmbH 100%

AUSTRIA

Danone Ges.mbH 100%

BELGIUM

N.V. Danone S.A. 100%

BULGARIA

Danone Serdika 100%

DENMARK

Danone A/S 100%

SPAIN

Danone S.A. 56.33%

Danone Canaries (Iltesa) 44.22%

FINLAND

Danone Finlande Oy 100%

FRANCE

Blédina 100%

Danone 100%

UNITED KINGDOM

Danone Ltd 100%

GREECE

Danone Greece 100%

HUNGARY

Danone Kft 100%

IRELAND

Danone Ltd 100%

ITALY

Danone SpA 100%

THE NETHERLANDS

Danone Nederland B.V. 100%

POLAND

Bakoma(1) 52.43%

Danone Sp zoo 100%

PORTUGAL

Danone Portugal S.A. 54.38%

CZECH REPUBLIC

Danone a.s. 98.30%

ROMANIA

Danone SRL 65%

RUSSIA

Danone Industria 70%

Danone Volga 63.54%

SLOVAKIA

Danone Spol s.r.o. 100%

SLOVENIA

Danone 100%

SWEDEN

Danone AB 100%

 

TURKEY

Danone Tikvesli 100%

UKRAINE

Danone 100%

 

AMERICAS

 

ARGENTINA

Danone Argentina S.A. 99.45%

Logistica La Serenissima 94.48%

BRAZIL

Danone Ltda. 100%

CANADA

Danone Inc. 100%

MEXICO

Danone de Mexico 100%

UNITED STATES

The Dannon Co. 100%

Stonyfield Farm 82.08%

 

AFRICA AND THE MIDDLE EAST

 

SOUTH AFRICA

Danone Clover 55%

Clover Danone Beverages 39.46%

ALGERIA

Danone Djurdjura 51%(2)

SAUDI ARABIA

Al Safi Danone Company 50.10%

ISRAEL

Strauss Dairy 20%

MOROCCO

Centrale Laitière 29.22%

TUNISIA

Stial-Socoges 50%

EGYPT

Danone Dairy Egypt (Olait) 100%

 

ASIA

 

JAPAN

Calpis Ajinomoto Danone 50%

Yakult 19.37%

INDONESIA

Danone PT Dairy Indonesia 96.78%

 

EUROPE

 

GERMANY

Danone Waters Deutschland 100%

BELGIUM

Danone Waters Brand Benelux 100%

SPAIN

Aguas de Lanjarón 78.75%

Dasanbe 50%

Font Vella 78.01%

FRANCE

Evian (SAEME) 100%

Mont Roucous 100%

Seat 99.86%

Smda 100%

Volvic 100%

UNITED KINGDOM

Danone Waters UK &

Ireland 100%

THE NETHERLANDS

The Danone Springs of Eden BV(2) 66.65%

POLAND

Polska Woda 50%

Zywiec Zdroj 100%

SWITZERLAND

Evian Volvic Suisse 100%

TURKEY

Danone Hayat 100%

 

AMERICAS

 

ARGENTINA

Aguas Danone de Argentina 100%

CANADA

Danone Waters of Canada 100%

Danone Naya 100%

UNITED STATES

Great Brands of Europe 100%

 

MEXICO

Bonafont 100%

Pureza Aga 50%

URUGUAY

Salus 58.37%

 

AFRICA AND THE

MIDDLE EAST

 

MOROCCO

Sotherma 30%

 

ASIA

 

AUSTRALIA

Frucor Beverages 96.78%

CHINA

Aquarius 48.39%

Wahaha group 49.36%

Robust group 89.04%

Shenzhen Health Drinks 96.78%

INDONESIA

Aqua 71.62%

JAPAN

Kirin Danone Mitsubishi 25%

NEW ZEALAND

Frucor 96.78%

 

EUROPE

 

GERMANY

LU snack Foods 100%

Griesson De Beukelaer 40%

BELGIUM

LU Belgie 100%

DENMARK

LU Nordic 100%

SPAIN

LU Biscuits S.A. 100%

FINLAND

LU Suomi 100%

FRANCE

LU France 100%

GREECE

Papadopoulos 60%

ITALY

Saiwa 100%

HUNGARY

Györi Keksz 100%

NORWAY

LU Norge 100%

THE NETHERLANDS

LU Nederland 100%

POLAND

LU Polska 75%

CZECH REPUBLIC

Opavia LU 100%

RUSSIA

Bolshevik 76.42%

Chock and Rolls 76.42%

SWEDEN

LU Sverige 100%

 

AMERICAS

 

ARGENTINA/BRAZIL

Bagley LatinoAmerica 49%

 

AFRICA AND THE

MIDDLE EAST

 

EGYPT

Danone Mashreq 99.97%

MOROCCO

Bimo 50%

TUNISIA

Société Tunisienne de Biscuiterie 49%

 

ASIA

 

CHINA

Jiangmen Danone Biscuits 96.78%

Shanghai Danone Biscuits Foods

Co. Ltd 87.1%

INDIA

Britannia Industries Ltd. 24.66%

INDONESIA

PT Danone Biscuits 96.78%

MALAYSIA

Danone Biscuits Manufacturing

(M) Sdn Bhd 96.78%

Danone Snacks Manufacturing

(M) Sdn Bhd 96.78%

NEW ZEALAND

Griffin’s Foods 96.78%(4)

PAKISTAN

Continental Biscuits Ltd 47.90%

 

ASIA

 

CHINA

Amoy Foods Ltd 96.78%(3)

Shanghaï Amoy Foods 58.07%(3)


(1)   The Group only holds 18.15% of the voting rights of Bakoma.
(2)   By virtue of an agreement among shareholders, the effective voting rights are 50%.
(3)   The Group sold its interest in Amoy Foods Ltd and Shanghai Amoy Foods on January 12, 2006.
(4)   The Group sold its interest in Griffin’s Foods in April 2006.

 

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Property, Plants and Equipment

 

Danone operates production facilities located around the world in its principal markets. At December 31, 2005, Danone had 201 production sites, out of which approximately 40% were located in Europe (14% in France, 6% in Spain and 20% elsewhere in the European Union), 45% in the Asia-Pacific region (30% in China and 15% in New Zealand, India, Indonesia and elsewhere in southeastern and southwestern Asia) and 15% in the Rest of the World (7% in the United States and Canada and 4% in Argentina, Brazil and countries in Central America). The table below sets forth the total number of Danone’s facilities at December 31, 2005 and total production by main business line in 2005.

 

Business Line


  

Number

of Plants(1)


  

Total Production

(thousands of tons or

millions of liters)


Fresh dairy products

   47    4,223

Beverages

   109    12,933

Biscuits and cereal products

   42    692

(1)   Excludes three plants of Amoy Foods Ltd, which was sold on January 12, 2006.

 

Danone’s general policy is to own its production facilities. Although Danone’s production facilities are numerous and widely dispersed, certain facilities are particularly important centers of production. In 2005, Danone’s five largest fresh dairy products facilities were located in Argentina, Belgium, Mexico, the United States and Saudi Arabia, and accounted for approximately 28% of Danone’s production for fresh dairy products. Danone’s two largest sources of bottled water, both located in France, accounted for 22% of Danone’s total production capacity for packaged water in 2005, and the two most important sources of production of water in large containers, both located in Indonesia, accounted for approximately 9% of Danone’s total water production capacity. Danone’s five largest biscuit and cereal product facilities are located in Belgium, France, Italy and Indonesia and accounted for approximately 35% of Danone’s total production capacity for biscuits and cereal products.

 

Danone’s central management conducts periodic reviews of its production sites to consider possibilities for improving efficiency, quality, protection of the environment and safety. On the basis of such reviews, management establishes plans for the expansion, specialization, upgrading and modernization or closing of specific sites.

 

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Item 5.    Operating and Financial Review and Prospects

 

The following discussion is based upon, and should be read in conjunction with, the Consolidated Financial Statements and the Notes thereto, included elsewhere in this annual report. The figures referred to in the following discussion are, unless otherwise noted, determined in accordance with IFRS.

 

U.S. GAAP Reconciliation

 

The Consolidated Financial Statements of Groupe Danone have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, or IFRS. The application of these principles gives rise to certain differences compared with U.S. generally accepted accounting principles, or U.S. GAAP. The application of U.S. GAAP would result in a decrease in 2005 consolidated net income of € 129 million (a decrease of € 50 million in 2004) to € 1,335 million, a decrease in net sales of € 143 million (a decrease of € 143 million in 2004) to € 12,881 million and an increase in stockholders’ equity of € 154 million (€ 216 million at December 31, 2004) to € 5,434 million at December 31, 2005. See Note 2 to the Consolidated Financial Statements for a discussion of the material differences between IFRS as applied by the Group in its Consolidated Financial Statements and U.S. GAAP.

 

Effects of Changes in the Scope of Consolidation and Exchange Rates

 

Variations in the scope of consolidation, such as acquisitions and divestitures, may increase or decrease the Group’s consolidated sales and results of operations in comparison to prior years and thus make it difficult to discern the performance of its underlying business. Similarly, as a global business operating in numerous currencies, changes in exchange rates of the euro, which is the Group’s reporting currency, may result in an increase or decrease in the consolidated sales and results of operations as reported in the Consolidated Financial Statements. In order to enable investors to follow the year-to-year changes in the Group’s operations, as required by the French securities regulator, the Group has provided details of the impact on its net sales and operating income of changes in the scope of consolidation and in exchange rates and have isolated the changes related solely to the underlying business.

 

The Group calculates the impact of currency variances by converting the figures from the previous year as reported in their local currencies by the companies within the scope of consolidation using the exchange rates for the current year. In 2005, the Group’s results were mainly impacted by the depreciation of the euro, in particular against the U.S. dollar and currencies linked to the U.S. dollar. For further detail on the impacts of these currency variations, see the discussion below in “—Overview—Exchange Rates.”

 

The Group calculates the impact of changes in the scope of consolidation for the current year, by taking into account the changes in the scope of consolidation that occurred in the current year and assuming these changes had occurred in the prior year for the same period. In order to calculate the effect of changes in the scope of consolidation with respect to acquired entities, the Group uses financial information provided by such entities for periods prior to their acquisition. For details on the principal changes in the scope of consolidation in 2004 and 2005, see “—Overview—Changes in Scope of Consolidation.”

 

Critical Accounting Policies

 

For a complete description of the Group’s significant accounting policies, please see Notes 1 and 2 to the Consolidated Financial Statements. The Group’s critical accounting policies are those that have meaningful impact on the reporting of its financial condition and results and require significant management judgment and estimates. These policies include the Group’s accounting for (a) asset impairment, (b) put options granted to minority stockholders, (c) trade and consumer promotion activities and (d) income taxes and deferred taxes.

 

Asset Impairment.    Evaluating the impairment of long-lived assets, including goodwill, indefinite-lived brands and investments in affiliates, involves management judgment in estimating the fair values and future cash

 

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flows related to these assets. The predictability of future cash flows involves considerable management judgment and is notably based upon assumptions on expected future operating performance. In 2005, the Group recorded impairment charges of € 104 million, including € 53 million in relation to the goodwill of Danone Waters of Canada (HOD water in Canada) and € 51 million in relation to Bakoma (Fresh Dairy Products in Poland). In 2004, the Group recorded provision and impairment charges of € 608 million relating to the Group’s activities in the HOD water business in the United States and in Europe. See Notes 5 and 7 to the Consolidated Financial Statements for a more detailed description of impairment charges.

 

Put Options Granted to Minority Stockholders.    The Group is committed to acquiring the minority shareholdings owned by third parties in some of the less than 100% owned subsidiaries, should these third parties wish to exercise their put options. The exercise prices of these put options, which are reflected as financial liabilities in the consolidated balance sheet, are usually based on the profitability and the financial position of the entity as of the exercise date. Evaluating the exercise price of these put options requires management judgment in estimating the future profitability and financial performance of the related subsidiaries.

 

Trade and Customer/Consumer Promotion Activities.    Danone offers various sales incentive programs to customers and consumers. The amount and timing of expense recognition for these trade and consumer activities involve significant management judgment based on estimated participation and performance levels. Actual expenses may differ if the levels of participation and performance vary from these estimates. However, the vast majority of the Group’s incentive programs do not exceed one year and therefore do not require highly uncertain long-term estimates.

 

Income Taxes and Deferred Taxes.    Determining income tax expense and establishing reserves involves management judgment as to the ultimate resolution of any tax issues, and the number of years with open tax audits varies depending on the tax jurisdiction. Historically, the Group’s assessments in respect of the ultimate resolution of tax issues have been reasonably accurate. While it is often difficult to predict the final outcome or timing of resolution of any particular tax matter, the Group expects the resolution of current open tax issues not to be dissimilar from the historical trend. In addition, in certain countries where it operates, the Group has tax losses that can be carried forward. They mainly result from the tax deductibility of goodwill and operating losses in certain countries as well as from the loss incurred in 2005 on the disposal of the HOD water activities in the United States. Determining the amount of these tax losses that the Group will be able to use in the future and the corresponding deferred tax assets to be recognized in the consolidated financial statements, requires management judgment, especially in estimating the future performance of the subsidiaries and the tax groups that generated those tax losses.

 

Overview

 

Refocusing Strategy

 

In line with the Group’s strategy of focusing on its three core business lines, between 1997 and 2005, the Group sold nearly all of its grocery activities, its glass containers business, the cheese and cured meat activities of Galbani, its beer activities in Europe and its sauce activities.

 

At the same time, the Group has continued to strengthen its position in its strategic segments while following a policy of increasing the profitability of its businesses. In this context, between 2002 and 2005, the Group concluded various partnerships and sold certain of its equity interests:

 

    In 2002, the Group entered into a cooperation agreement with The Coca-Cola Company for the distribution of the Group’s bottled water products in North America. In 2005, a new agreement was signed providing for an increase of approximately 20% in expenditures for advertising and promoting Evian products, as well as the sale to The Coca-Cola Company of Danone’s interest in CCDA Waters, a company formed in 2002 to sell the Group’s bottled water products in the United States (notably the Dannon Water and Sparkletts brands).

 

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    In 2003, the Group consolidated its worldwide leadership in the Home and Office Delivery water market (“HOD”) by combining its operations with those of Eden Springs Ltd in Europe under The Danone Springs of Eden, BV.

 

    In 2003 and 2004, the Group significantly reinforced its presence in Japan, with the acquisition of an additional equity interest in Yakult, the leader in probiotics, in which the Group now holds an equity interest of 20%, and with the conclusion of a partnership with Yakult particularly focused on the development of joint research and development projects and of probiotic products. In 2005, this partnership resulted in the formation of a joint venture in India, Yakult Danone India Private Limited, with the aim of developing the Indian market in probiotics.

 

    In April 2004, the Group and ARCOR, the leader in the Argentinean food industry, signed an agreement aimed at merging their biscuits businesses in South America in 2005, thus forming the leading player in the market in that region. The newly formed entity, Bagley LatinoAmerica, is 49% owned by Groupe Danone and 51% owned by the ARCOR group, which has assumed operational management as of January 2005.

 

    In 2004, the Group sold its biscuits businesses in the United Kingdom and Ireland and announced the sale, effective early 2005, of its bottled water business in Italy.

 

    In 2005, the Group sold its sauces businesses in the United Kingdom and in the United States and announced the sale, effective January 2006, of its sauces businesses in Asia.

 

    In 2005, the Group sold its minority interest in the Spanish company Mahou, finalizing its exit from the beer business.

 

Acquisitions and Investments

 

As part of the Group’s development strategy, Danone is continuously considering potential acquisitions. Danone may acquire an initial equity interest of less than 100% in a target company, including, as the case may be, a minority interest, and concurrently enter into agreements with other shareholders allowing Danone to increase its interest over time to obtain effective control, a majority interest or sole ownership.

 

Financial investments were € 636 million in 2005 compared to € 98 million in 2004. The principal financial investments in 2005 related to:

 

    the acquisition of the interest held by the Suntory group in DS Waters, LP, following the exercise of the put option granted by the Group to Suntory, as well as the repurchase of financial obligations of DS Waters, LP. The entirety of the assets held by DS Waters, LP was concurrently sold to the Kelso investment fund in November 2005;

 

    the acquisition of an additional 3.22% interest in Danone Asia, a holding company that holds the Group’s interests in the Asia-Pacific region. Following this acquisition, the interest held by the Group in Danone Asia increased from 93.56% to 96.78%;

 

    the acquisition of an additional 29% interest in Sotubi (Biscuits in Tunisia), raising the Group’s holdings in this company to 49%; and

 

    the acquisition of the Egyptian fresh dairy products company Olait (renamed Danone Dairy Egypt).

 

Financial investments in 2004 were principally related to the acquisition of an additional interest in Zywiec Zdroj (Beverages in Poland), bringing the Group’s holdings from 88% to 100%, the acquisition of assets of Chock & Rolls (Biscuits in Russia) and the acquisition of an interest in Bonafont Garrafones y Servicios (HOD Water in Mexico).

 

In addition, the Company and its subsidiaries concluded various agreements providing for the repurchase by the Group of interests held by third parties in certain companies in the event these shareholders wish to sell their

 

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interests (see Notes 5 and 25 to the Consolidated Financial Statements). No significant financial investment is currently considered probable regarding these options, except for the exercise in 2006 of options relating to Danone Asia, Danone Romania (Fresh Dairy Products in Romania) and Bolshevik (Biscuits in Russia), in an amount of € 120 million. Following the exercise of these options, the Group would have interests of 100% in Danone Asia and Danone Romania and 92.53% in Bolshevik.

 

Finally, repurchases of the Company’s shares made through the program authorized by the general shareholders’ meetings for the years 2004 and 2005 represented expenditures of € 685 million in 2005 compared to € 226 million in 2004. The Group anticipates that in 2006, share repurchases will amount to between € 600 million and € 800 million.

 

Capital Investments.    Capital investments amounted to € 607 million in 2005, compared to € 520 million in 2004 (representing, respectively, 4.7% and 4.2% of consolidated net sales). For several years the Group has implemented a policy aimed at reducing capital investments. In 2005, approximately 40% of capital investments were investments in capacity in the “Nouvelles Frontières” countries, those with strong growth in net sales (Russia, Mexico, China, Indonesia and the United States), notably:

 

    an increase in production capacity in the beverages businesses in Indonesia, primarily for planned launches of new products;

 

    continued investments aimed at increasing the production capacity of a production plant for fresh dairy products in Tchekov, Russia;

 

    increased production capacity for Wahaha in China, primarily investments in new packaging lines;

 

    doubling the production capacity of organic products for Stonyfield in the United States; and

 

    investments in production in the United States related to the launch of the probiotic line Activia in January 2006.

 

In 2004, capital investments included: (i) investments in capacity in Europe to meet the growth in sales of Actimel and (ii) investments in capacity in the “Nouvelles Frontières” countries. One of the main investments for 2004 related to a production plant for fresh dairy products in Tchekov, Russia.

 

As in 2005, the Group anticipates the continuation in 2006 of its investment efforts in the “Nouvelles Frontières” countries. In addition, in the context of its additional interest in Sotubi (see below), the Group and its partners in Sotubi signed an agreement to develop the biscuits market in Algeria, primarily through the formation of a joint venture. A new production plant is currently being constructed in Algeria. The Group also expects to increase its production capacity in flavored water in France and fresh dairy products in Turkey and Argentina. The Group anticipates that its capital investments should represent approximately 4.7% of its net sales in 2006.

 

Changes in Scope of Consolidation

 

The principal acquisitions in 2005 included:

 

    the acquisition of an additional 3.22% interest in Danone Asia, a holding company that holds the Group’s interests in the Asia-Pacific region. Following this acquisition, the interest held by the Group in Danone Asia increased from 93.56% to 96.78%; and

 

    the acquisition of an additional 29% interest in Sotubi (Biscuits in Tunisia), raising the Group’s holdings in this company from 20% to 49%.

 

The acquisitions in 2004 were essentially related to the acquisition of an additional interest in Zywiec Zdroj (Beverages in Poland), the acquisition of the assets of Chock and Rolls (Biscuits in Russia) and the acquisition of an interest in Bonafont Garrafones y Servicios (HOD Water in Mexico).

 

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The principal divestments in 2005 included:

 

    Italaquae (Beverages in Italy):    In November 2004, the Group concluded an agreement to sell its bottled water activities in Italy. The sale was finalized in January 2005.

 

    Galletas Noël (Biscuits in Colombia):    The sale of this company, which was accounted for under the equity method in the Group’s financial statements, was finalized in February 2005.

 

    CCDA Waters (Beverages in the United States):    In April 2005, the Group and The Coca-Cola Company signed an agreement modifying the terms of their partnership for the distribution of the Group’s bottled water in North America. Under this agreement, The Coca-Cola Company repurchased the 49% interest in CCDA Waters held by the Group.

 

    Delta Dairy (Fresh Dairy Products in Greece):    The sale of this company, which was accounted for under the equity method in the Group’s financial statements, was finalized in May 2005.

 

    HP Foods and Lea & Perrins (Sauces in the United Kingdom and the United States):    The sale of these companies was finalized in August 2005.

 

    DS Waters LP (HOD Water in the United States):    Following the decision to exit the HOD water business in the United States, the Group sold the assets held by DS Water, LP to the Kelso investment fund. The agreement signed with Kelso also included the concurrent repurchase by the Group of the interest held by the Suntory group in DS Waters, LP pursuant to the put option granted by the Group to Suntory.

 

    Mahou (Beer in Spain):    The sale of this company, which was accounted for under the equity method in the Group’s financial statements, was finalized in December 2005.

 

The principal divestments in 2004 were related to the sale in July of subsidiaries in the biscuits segment in the United Kingdom (Jacob’s) and in Ireland (Irish Biscuits).

 

Exchange Rates

 

A significant part of the Group’s assets is located outside France and is denominated in currencies other than the euro. In 2005, 51% of the Group’s net sales were booked in euro and the remaining 49% were in other currencies, primarily the Chinese yuan, the U.S. dollar, the British pound and the Mexican peso. In addition, 40% of the Group’s trading operating income was denominated in currencies other than the euro. As a result, foreign exchange rate fluctuations against the euro could have a significant effect on the Group’s income statement. These fluctuations also have an effect on the value on the Group’s consolidated balance sheet of assets and liabilities recorded in currencies other than the euro. The significant devaluation of the U.S. dollar in 2003 and 2004 led to a significant relative decrease of the net assets of U.S. companies as recorded on the Group’s consolidated balance sheet and has also significantly reduced their contribution to the Group’s revenues and operating results.

 

Seasonality

 

Seasonal consumption cycles affect certain of Danone’s product markets, which can have an impact on Danone’s quarterly and annual results. In particular, the demand for water is at its peak during the second and third quarters of the year, and demand for biscuits is generally strongest during the fourth quarter of each year. As a result, Danone typically records its lowest quarterly net sales during the first quarter of each year. In addition, rainy summers, such as those in Europe in 2004, may negatively impact sales of packaged water and, as a result, total net sales. Conversely, warmer temperatures, such as those experienced in Europe in the summer of 2003, can stimulate demand and thus favorably impact net sales.

 

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Other Factors

 

Inflation has not had a material impact on the Group’s consolidated results of operations in the last three years, since the rate of inflation in the Group’s principal markets during such period has, on an overall basis, been relatively low. Other factors affecting Danone’s business activities and results of operations include raw material prices, fluctuations in exchange rates, competition, economic conditions and consumer spending power in countries where the Group operates, fluctuations in interest rates, nutritional trends and certain government actions. For more information on how these particular factors may affect Danone’s business and results of operations, see “Item 3. Key Information—Risk Factors.”

 

Valuation of Assets

 

The Group performs a review of long-lived assets (including goodwill) for impairment at least once a year. As described in Notes 1.4 and 1.5 to the Consolidated Financial Statements, this review consists of comparing the recoverable value of the assets to their net carrying value. The recoverable value corresponds to the higher of value in use and market value. In 2005, as a result of this review, the Group recorded a non-current charge of € 53 million relating to its investment in the HOD water business in Canada and a non-current charge of € 51 million relating to its minority interest in Bakoma (Fresh Dairy Products in Poland).

 

In 2004, the Group recorded a non-current charge of € 608 million relating to investments in the HOD water business in the United States and in Europe. This non-current charge consisted of (i) a depreciation of the carrying value of the Group’s investment in DS Waters LP and a provision for the put option granted to Suntory Ltd, for a total amount of € 455 million and (ii) a depreciation in the carrying value of the Group’s investment in The Danone Springs of Eden BV in the amount of € 153 million.

 

See Notes 5 and 7 to the Consolidated Financial Statements for a more detailed description of impairment charges.

 

Recent Events

 

As described in Note 16 to the Consolidated Financial Statements, the Group completed the early redemption of its convertible bonds on January 2, 2006, in an amount of € 70 million.

 

On January 12, 2006, the Group announced the sale of its sauces businesses in Asia for € 190 million, realizing a gain of more than € 100 million.

 

In January 2006, the investment funds to which the Group had disposed of Galbani in 2002, announced that they had themselves disposed of Galbani. This disposal makes it probable that the loan granted by the Group to these investment funds will be repaid before its maturity in 2013.

 

In April 2006, the Company announced the sale of Griffin’s Foods (Biscuits in New Zealand) for a total consideration of NZ$385 million (€ 194 million).

 

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Consolidated Results of Operations

 

The tables below present (i) the principal components of the consolidated income statement in euro and as a percentage of net sales and (ii) the Group’s net sales, trading operating income and trading operating margin by main business line and geographic area for each of the years ended December 31, 2004 and 2005. The information below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, included elsewhere in this annual report.

 

     Year ended December 31,

 
     2004

    2005

 
     (millions of €, except percentages)  

Net sales(1)

   12,273     100.0 %   13,024     100.0 %

Cost of goods sold

   (6,223 )   50.7 %   (6,644 )   51.0 %

Selling expenses

   (3,108 )   25.3 %   (3,331 )   25.6 %

General and administrative expenses

   (976 )   8.0 %   (1,017 )   7.8 %

Research and development expenses

   (129 )   1.0 %   (123 )   1.0 %

Other (expense) income

   (229 )   1.9 %   (171 )   1.3 %
    

       

     

Trading operating income

   1,608     13.1 %   1,738     13.3 %

Other operating (expense) income

   (49 )   0.4 %   (32 )   0.2 %

Operating income

   1,559     12.7 %   1,706     13.1 %

Cost of net debt

   (94 )   0.8 %   (101 )   0.8 %

Other financial (expense) income

   104     0.9 %   (9 )   —    

Income before income tax

   1,569     12.8 %   1,596     12.3 %

Income taxes

   (428 )   3.5 %   (473 )   3.7 %

Income from consolidated companies

   1,141     9.3 %   1,123     8.6 %

Net income (loss) of affiliates

   (550 )   4.5 %   44     0.3 %

Net income from continuing operations

   591     4.8 %   1,167     8.9 %

Net income from discontinued operations

   47     0.4 %   504     3.9 %
    

       

     

Net income

   638     5.2 %   1,671     12.8 %

Attributable to the Group

   449     3.7 %   1,464     11.2 %

Attributable to minority interests

   189     1.5 %   207     1.6 %
    

 

 

 


(1)   Net sales are stated net of rebates and discounts, as well as trade support actions that are generally invoiced by customers.

 

     Net Sales

   Trading Operating Income

    Trading Operating Margin(1)

 
         2004    

       2005    

       2004    

        2005    

        2004    

        2005    

 
     (millions of €, except percentages)  

By Business Line

                                  

Fresh dairy products

   6,510    7,184    917     1,019     14.1 %   14.2 %

Beverages

   3,201    3,473    493     474     15.4 %   13.7 %

Biscuits and cereal products

   2,562    2,367    278     343     10.9 %   14.5 %

Unallocated expenses

   —      —      (80 )   (98 )   —       —    
    
  
  

 

 

 

Total

   12,273    13,024    1,608     1,738     13.10 %   13.35 %
    
  
  

 

 

 

By Geographic Area

                                  

Europe(2)

   8,096    8,179    1,209     1,266     14.9 %   15.5 %

Asia

   1,965    2,235    259     256     13.2 %   11.5 %

Rest of the World

   2,212    2,610    220     314     10.0 %   12.0 %

Unallocated expenses

   —      —      (80 )   (98 )   —       —    
    
  
  

 

 

 

Total

   12,273    13,024    1,608     1,738     13.10 %   13.35 %
    
  
  

 

 

 


(1)   Trading operating income as a percentage of net sales.
(2)   France represented approximately 35.3% of the net sales of Europe in 2005 (36.8% in 2004).

 

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Results of Operations for the Years Ended December 31, 2004 and 2005

 

Net Sales.    Net sales for the Group increased by 6.1% from € 12,273 million in 2004 to € 13,024 million in 2005. This increase in net sales resulted from a 6.7% increase in net sales at constant exchange rates and scope of consolidation and a positive impact of currency exchange rates (1.6%), partially offset by a net negative effect (-2.2%) of changes in the scope of consolidation of the Group’s operations. The 6.7% increase in net sales at constant exchange rates and scope of consolidation achieved in 2005 resulted from an increase in sales volumes (5.2%) and an increase in price per unit of goods sold (1.5%).

 

The effect of changes in the scope of consolidation primarily resulted from the sale in 2004 of the Group’s biscuits activities in the United Kingdom (Jacob’s) and in Ireland (Irish Biscuits), by the deconsolidation of the biscuits activities in Latin America as of January 1, 2005 and by the sale of the bottled water activities in Italy in January 2005. These negative effects were partially offset by the first-time consolidation of Al Safi Danone Company, after the Group obtained control of this company on July 1, 2005. The currency conversion effect was mainly due to the depreciation of the euro against the U.S. dollar and currencies related to it, particularly the Chinese yuan.

 

Geographically, at constant exchange rates and scope of consolidation, growth in net sales in 2005 was driven by Asia and the Rest of the World, which achieved growth rates of 12.9% and 15.6%, respectively. Growth in Europe, which is a more mature market, was 2.8%.

 

Cost of Goods Sold.    Cost of goods sold corresponds to production costs, including costs of raw materials (food and packaging), labor costs and depreciation of production machinery. In absolute terms, the cost of goods sold increased by 6.8% from € 6,223 million in 2004 to € 6,644 million in 2005. As a percentage of net sales, cost of goods sold increased from 50.7% in 2004 to 51.0% in 2005, representing an approximately 30 basis point increase. This increase was mainly due to the increase in cost of certain raw materials, particularly plastics. These unfavorable factors were partially compensated by the Group’s policy of optimizing its use of ingredients and packaging, rationalizing raw materials flows in collaboration with suppliers and increasing productivity.

 

Selling Expenses.    Selling expenses correspond to advertising and promotional expenses, distribution costs and costs relating to the sales force. In absolute terms, selling expenses increased from € 3,108 million in 2004 to € 3,331 million in 2005, representing 25.3% and 25.6% of net sales, respectively. This increase in percentage of net sales resulted mainly from a significant increase in distribution costs following the increase in oil prices. This was partially offset by the Group’s policy of optimizing its advertising and promotional campaigns and reinforcing the accessibility of the Group’s products in terms of price, especially in emerging countries. In 2005, marketing expenses remained stable as a percentage of net sales.

 

General and Administrative Expenses.    General and administrative expenses increased slightly in 2005 to € 1,017 million from € 976 million in 2004, representing 7.8% of net sales in 2005 compared to 8.0% in 2004. This slight decrease in percentage of net sales was mainly due to the Group’s active policy over the last several years of reducing structural costs.

 

Research and Development Expenses.    Research and development expenses, which represent approximately 1% of net sales, decreased slightly in 2005, to € 123 million from € 129 million in 2004.

 

Other Income and Expense.    Other expense amounted to € 171 million in 2005 compared to € 229 million in 2004. Other expense is composed of the following items:

 

     Year ended December 31,

     2004

   2005

     (€ in millions)

Employee profit sharing

   115    116

Stock options

   28    23

Other

   86    32
    
  

Total

   229    171

 

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The item “Other” includes mainly restructuring costs and the gain or loss on the sale of assets.

 

Trading Operating Income.    Trading operating income increased by € 130 million, from € 1,608 million in 2004 to € 1,738 million in 2005.

 

Trading operating margin increased by 25 basis points, from 13.10% in 2004 to 13.35% in 2005. This increase, which included approximately 51 basis points from the Group’s operating performance and approximately 44 basis points from changes in the scope of consolidation, occurred in spite of significant increases in transport costs and raw materials costs, mainly plastics, and the negative impact of changes in the mix-countries.

 

The Group’s trading operating income and margin under IFRS are calculated before certain items such as capital gains and losses on disposals of consolidated activities and impairment charges in relation to long-lived assets of subsidiaries. For a discussion of the differences in presentation between IFRS and U.S. GAAP, see Note 2 to the Consolidated Financial Statements.

 

Other Operating (Expense) Income.    In 2005, other operating expense totaled € 32 million, consisting essentially of the € 53 million impairment charge on the Group’s HOD water activities in Canada, partially offset by the € 19 million gain realized on the sale of Italaquae (Beverages in Italy).

 

In 2004, other operating expense totaled € 49 million, consisting essentially of the capital loss on the disposal of the Group’s biscuits subsidiaries in the United Kingdom (Jacob’s) and Ireland (Irish Biscuits).

 

Operating Income.    Operating income increased by € 147 million, from € 1,559 million in 2004 to € 1,706 million in 2005. Operating margin increased by 40 basis points, from 12.7% in 2004 to 13.1% in 2005.

 

Cost of Net Debt.    Cost of net debt increased from € 94 million in 2004 to € 101 million in 2005. Cost of net debt is composed of the following items:

 

     Year ended December 31,

 
         2004    

        2005    

 
     (€ in millions)  

Interest expense

   (149 )   (189 )

Interest income

   55     88  
    

 

Cost of net debt

   (94 )   (101 )

 

In 2005, the increase in interest expense resulted mainly from the € 13 million charge related to the early redemption of convertible bonds and an increase in the average cost of debt. The increase in interest income resulted mainly from an increase in the average amount of cash equivalents.

 

Other Financial Income and Expenses.    Other financial expenses amounted to € 9 million in 2005. In 2004, other financial income amounted to € 104 million and included primarily capital gains on the sale of non-consolidated investments for € 47 million and an earn-out received on the disposal of BSN Glasspack in the amount of € 71 million.

 

Income Taxes.    The Group’s income taxes increased from € 428 million in 2004 to € 473 million in 2005. The effective tax rate increased from 27.3% in 2004 to 29.6% in 2005, due to the application of specific tax rates to capital gains and losses and impairment charges. See Note 24 to the Consolidated Financial Statements for a reconciliation of the French tax rate and the Group’s effective tax rate.

 

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Net Income of Affiliates.    Net income of affiliates is detailed as follows:

 

     Year ended December 31,

 
         2004    

        2005    

 
     (€ in millions)  

Group’s share in net income

   58     69  

Impairment charge

   (608 )   (51 )

Gain on disposal

   —       26  
    

 

Total

   (550 )   44  

 

In 2005, the item “Impairment charge” includes impairment charges related to the minority interest in Bakoma (Fresh Dairy Products in Poland). The item “Gain on disposal” includes primarily (i) the net capital loss of € 313 million from the disposal of the HOD water activities in the United States, (ii) the net capital gain of € 292 million from the disposal of Mahou (Beer in Spain) and (iii) the net capital gain of € 22 million from the disposal of Galletas Noël (Biscuits in Colombia).

 

In 2004, the item “Impairment charge” includes provision and impairment charges related to the Group’s investments in DS Waters LP and The Danone Springs of Eden BV.

 

Net Income from Discontinued Operations.    This item includes net income from the sauces activities and the capital gain of € 473 million from the disposal of the sauces activities in the United Kingdom and the United States.

 

Net Income Attributable to the Group.    In 2005, net income attributable to the Group amounted to € 1,464 million compared to € 449 million in 2004. The reconciliation of Group share in net income to Group share in current net income is presented in the table below:

 

     Year ended December 31,

 
         2004    

        2005    

 
     (€ in millions)  

Net income attributable to the Group

   449     1,464  

Non-current net income from continuing operations

   508     71  

Net income from discontinued operations

   (47 )   (504 )
    

 

Current net income attributable to the Group

   910     1,031  

 

Non-current net income from continuing operations primarily consists of elements reflected in the item “Other operating (expense) income”, as well as impairment charges and gains and losses from disposals relating to entities accounted for under the equity method.

 

Net Income per Share.    The diluted net income per share attributable to the Group increased significantly from € 1.79 in 2004 to € 5.87 in 2005. Excluding non-current items recorded in 2004 and 2005, net income per share attributable to the Group would have increased by approximately 16%, from € 3.57 in 2004 to € 4.14 in 2005.

 

Net Sales, Trading Operating Income and Trading Operating Margin by Main Business Line

 

Fresh Dairy Products.    Net sales of fresh dairy products increased from € 6,510 million in 2004 to € 7,184 million in 2005, a 10.4% increase. At constant exchange rates and scope of consolidation, net sales increased by 7%. This internal growth was reinforced by positive effects of changes in the scope of consolidation, primarily related to the consolidation of Al Safi Danone Company (Saudi Arabia), of which the Group obtained control in July 2005. Variations in exchange rates also had a positive impact on growth of net sales, in the amount of 2.3%. Sales of yogurt and similar products, which represent close to 95% of the segment’s sales, showed an increase in net sales of 11%.

 

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The 2005 results once again reflect the segment’s ability to innovate and expand the scope of its brands and key products, whether geographically or through the introduction of new products. The probiotic line Activia continued to show growth rates in sales of close to 36% at constant exchange rates and scope of consolidation and represented net sales of approximately € 845 million. Similarly, sales of Actimel recorded growth of close to 20% at constant exchange rates and scope of consolidation and represented net sales of approximately € 890 million in 2005. Sales of the low-fat product line Taillefine/Vitalinea, which totaled approximately € 900 million in 2005, had a growth rate of approximately 2% at constant exchange rates and scope of consolidation.

 

Trading operating income improved 11.1% from € 917 million in 2004 to € 1,019 million in 2005, and trading operating margin increased from 14.1% to 14.2%. In addition to the negative effect related to the increase in the cost of plastics and transport, trading operating margin was impacted by the difficulties encountered in markets with higher margins, such as France, as well as strong growth in countries with lower margins.

 

Beverages.    Net sales of beverages increased from € 3,201 million in 2004 to € 3,473 million in 2005, an increase of 8.5%. At constant exchange rates and scope of consolidation, net sales of beverages increased 10% in 2005. This increase was partially offset by a 2.6% negative impact from changes in the scope of consolidation related in particular to the disposal of the bottled water activities in Italy. Innovation was again a key factor in the growth of this segment, in particular with the launch of new flavored and functional beverages, such as Taillefine Fiz in France and Smakolyk in Poland.

 

Trading operating income for beverages decreased by approximately 4% from € 493 million in 2004 to € 474 million in 2005 and trading operating margin decreased from 15.4% in 2004 to 13.7% in 2005. The decrease in trading operating margin resulted primarily from (i) negative effects related to the increase in the cost of transport and the cost of raw materials, in particular plastics, and (ii) stronger growth in countries with lower margins. On the other hand, the disposal of the water activities in Italy had a positive impact on trading operating margin.

 

Biscuits and Cereal Products.    Net sales of biscuits and cereal products decreased from € 2,562 million in 2004 to € 2,367 million in 2005, a decrease of 7.6%. This decrease is primarily due to a negative impact from changes in the scope of consolidation of 10.1% related to the disposal of the biscuits activities in the United Kingdom and Ireland, as well as the deconsolidation of the biscuits activities in Latin America. At constant exchange rates and scope of consolidation, net sales of biscuits and cereal products increased 1.5% in 2005. In 2005, this increase was again driven by Asia (particularly India and Indonesia). In Europe, sales decreased slightly, due to strong competitive pressure from local actors.

 

Trading operating income for biscuits and cereal products increased from € 278 million in 2004 to € 343 million in 2005. Trading operating margin increased significantly, from 10.9% in 2004 to 14.5% in 2005. This increase reflects the Group’s efforts to improve profitability in the biscuits segment. Margin was also positively impacted by changes in the scope of consolidation, notably the disposal of Jacobs and Irish Biscuits in 2004 and the deconsolidation of the activities in Latin America as of January 1, 2005.

 

Net Sales, Trading Operating Income and Trading Operating Margin by Geographic Area

 

Europe.    Net sales in Europe increased from € 8,096 million in 2004 to € 8,179 million in 2005, an increase of 1.0%. At constant exchange rates and scope of consolidation, net sales increased by 2.8%, despite a slight decrease in France, which represented € 2,833 million, or 35.3% of the region. The growth in Europe was primarily driven by the strong performances of Russia, Turkey, the United Kingdom and Germany.

 

Trading operating income for Europe increased from € 1,209 million in 2004 to € 1,266 million in 2005 and trading operating margin increased from 14.9% in 2004 to 15.5% in 2005. This increase was mainly the result of an improvement in operational performance as well as changes in the scope of consolidation (disposals of the

 

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water businesses in Italy as well as the biscuits businesses in the United Kingdom and Ireland). It was partially offset by the increase in the price of certain raw materials, particularly plastics, as well as a decrease in profitability in France.

 

Asia.    Net sales in Asia increased from € 1,965 million in 2004 to € 2,235 million in 2005, an increase of 13.8%. At constant exchange rates and scope of consolidation, net sales increased by 12.9% in 2005, with a large contribution from Indonesia and China.

 

Trading operating income for Asia decreased from € 259 million in 2004 to € 256 million in 2005 and trading operating margin decreased from 13.2% in 2004 to 11.5% in 2005, principally due to the large negative impact of the increase in the cost of transport and the price of plastics.

 

Rest of the World.    Net sales in this region, which primarily includes the activities of the Group in the Americas and South Africa, increased from € 2,212 million in 2004 to € 2,610 million in 2005, an increase of 18%. At constant exchange rates and scope of consolidation, net sales increased by 15.6% in 2005, with high levels of growth in every country in the region.

 

Trading operating income for the Rest of the World increased from € 220 million in 2004 to € 314 million in 2005 and trading operating margin increased from 10.0% in 2004 to 12.0% in 2005, due to the growth of the business and the deconsolidation of the biscuits activities in Latin America.

 

Liquidity and Capital Resources

 

Net Debt

 

Danone’s consolidated net debt is defined as current and non-current financial liabilities less cash, cash equivalents and marketable securities. Danone’s management uses net debt and total equity as an internal liquidity indicator. Danone believes this information will be useful to investors since it is used as a performance measure by credit rating agencies. A table of changes in net debt with a reconciliation of net debt to total debt is provided below.

 

     At December 31,

    

At December 31,

2004


  

Change for

the year


   

Transfer to

current portion


   

Translation

adjustments


   Other

   

At December 31,

2005


     (€ in millions)

Cash and cash equivalents

   466    57     —       53    —       576

Marketable securities

   2,200    210     —       3    —       2,413
    
  

 

 
  

 

Total cash and cash equivalents

   2,666    267     —       56    —       2,989

Current financial liabilities

   527    (191 )   520     20    (7 )   869

Non-current financial liabilities

   6,677    (715 )   (520 )   59    191     5,692
    
  

 

 
  

 

Total financial liabilities

   7,204    (906 )   —       79    184     6,561
    
  

 

 
  

 

Net debt

   4,538    (1,173 )   —       23    184     3,572
    
  

 

 
  

 

 

Other changes in net debt correspond primarily to the revaluation of the put options granted to minority stockholders.

 

Cash, Cash Equivalents and Marketable Securities

 

Marketable securities, which are treated as trading securities, include mainly negotiable debt instruments (€ 670 million at December 31, 2005 compared to € 765 million at December 31, 2004) and money market funds (€ 1,743 million at December 31, 2005 compared to € 1,435 million at December 31, 2004).

 

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Marketable securities are usually purchased from major financial institutions.

 

Financial Debt

 

Financial debt is composed of the following:

 

     At December 31,

         2004    

       2005    

     (€ in millions)

Convertible bonds

   605    70

Equity-linked notes

   130    —  

Bank loans, other debt and employee profit-sharing debt

   3,326    3,465

Financial liabilities linked to options granted to minority stockholders

   2,440    2,626

Financial liabilities linked to securitized receivables

   703    400
    
  

Total debt

   7,204    6,561
    
  

Including short-term portion

   527    869

Including long-term portion

   6,677    5,692

 

The line item “Bank loans, other debt and employee profit-sharing debt” mainly comprises (i) Euro Medium-Term Notes (EMTN) denominated in euro or in foreign currencies, which were issued as part of the € 5 billion annual program established by the Company and its subsidiary Danone Finance, and (ii) treasury notes.

 

The line item “Financial liabilities linked to options granted to minority stockholders” corresponds to the exercise price of the put options granted to minority stockholders in certain consolidated companies. The main commitments relate to Danone Spain (for € 2,043 million) and Danone Asia (for € 70 million). The majority of these options are exercisable at any time. No significant financial investment is currently considered probable regarding these options, except the exercise in 2006 of options relating to Danone Asia, Danone Romania (Fresh Dairy Products in Romania) and Bolshevik (Biscuits in Russia). At December 31, 2005, the financial liabilities related to these three options were classified as current financial liabilities in an amount of € 120 million.

 

The decrease in financial debt between December 31, 2004 and December 31, 2005 resulted primarily from the early redemption of a portion of the convertible bonds, the full repayment of the equity-linked notes and a reduction in the amount of securitized receivables, partially offset by a revaluation of the debt related to put options granted to minority interests.

 

Consolidated Cash Flows

 

The Group believes that the liquidity from its operations, cash, cash equivalents and marketable securities and the amounts available through its credit lines will be sufficient to finance its operating expenses, capital investment needs, debt service and dividend payments.

 

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The table below presents information related to the consolidated cash flows for the years ended December 31, 2004 and 2005.

 

     Year ended December 31,

 
         2004    

        2005    

 
     (€ in millions)  

Cash flows provided by operating activities

   1,694     1,847  

Capital expenditures (net of disposals)

   (490 )   (544 )

Free cash flow(1)

   1,204     1,303  

Financial investments (net of disposals)

   522     955  

Net changes in long-term loans and other assets

   130     (134 )

Cash flow from discontinued operations

   52     30  

Dividends paid

   (456 )   (489 )

Share repurchases (net of disposals)

   (213 )   (558 )

Increase in capital and additional paid-in capital

   38     61  
    

 

Net financing surplus (requirements)

   1,277     1,168  

(1)   Free cash flow equals cash flows from operating activities minus capital expenditures net of disposals. Danone management uses free cash flow as an internal liquidity indicator. Danone believes this information will be useful to investors since it is used as a performance measure by credit rating agencies. Free cash flow does not represent the residual cash flow available for discretionary expenditures, as other commitments have not been deducted.

 

Cash Flows Provided by Operating Activities

 

Cash flows provided by operating activities reflects the difference between cash generated from operations and net changes in current working capital. In general, cash flow is lower in the first half of any given year compared to the second half of that year because of higher working capital needs in the beginning of the year due to (i) increased production in preparation for reduced plant activity and temporary plant closures during the summer vacation months, (ii) the build-up of beverages inventory for stronger consumption in the summer and (iii) outstanding accounts receivable from sales realized in May and June as a result of seasonal variations.

 

The increase in cash flows provided by operating activities resulted from (i) a 9% increase in cash provided by operations, which increased from € 1,574 million in 2004 to € 1,716 million in 2005 and (ii) the optimization of net changes in working capital, which amounted to € 131 million in 2005 compared to € 120 million in 2004.

 

Capital Expenditures.    Capital expenditures amounted to € 607 million in 2005 compared to € 520 million in 2004, representing 4.7% and 4.2% of net sales, respectively. See “—Overview—Acquisitions and Investments.” Disposals of industrial assets amounted to € 63 million in 2005, compared to € 30 million in 2004.

 

Financial Investments.    Financial investments totaled € 636 million in 2005 compared to € 98 million in 2004. For additional information on the Group’s acquisitions and divestitures, see above “—Overview—Acquisitions and Investments” and “—Recent Events.”

 

Proceeds from the sale of assets amounted to € 1,659 million in 2005. They were primarily related to the disposals of the bottled water businesses in Italy (over € 80 million), the sauces businesses in the United Kingdom and the United States (approximately € 650 million) and the investment in the Spanish brewery Mahou (over € 600 million).

 

Share Repurchase.    In 2005, the Company repurchased 9,125,430 of its own shares, for a total amount of € 685 million, compared to 3,396,387 shares, for a total amount of € 226 million in 2004.

 

Other Financing

 

At December 31, 2005, the Group’s non-consolidated investments included investments in listed companies with a market value of € 263 million, as is reflected in the balance sheet. These non-consolidated investments mainly consist of investments in Wimm Bill Dann, ONA, Shanghai Bright Dairy and Scottish & Newcastle plc. On February 28, 2006, all of the investments in Scottish & Newcastle plc were sold.

 

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Marketable securities include mainly negotiable debt instruments and money market funds with major financial institutions, with respect to which the Group’s exposure is limited. In addition, other financial assets include marketable securities in the amount of € 214 million held as security for the Group’s damage and healthcare provisions as well as other securities to be held until maturity.

 

The Group’s pension fund had a market value of € 150 million at December 31, 2005, of which approximately 38% was invested in equity securities, pursuant to the policy adopted by the trustees who manage these funds. See Note 17 to the Consolidated Financial Statements.

 

At December 31, 2005, long-term loans included a € 306 million loan granted to the investment funds as part of the divestiture of the cheese and cured meats activities of Galbani in 2002. The repayment of this loan depends on the future value of Galbani and, following the disposal of Galbani in January 2006 by the fund which acquired this company from the Group, the Company believes that the loan will be fully repaid, probably before its maturity in 2013.

 

Financial Condition

 

Danone’s consolidated net debt (defined as current and non-current financial liabilities less cash, cash equivalents and marketable securities) decreased to € 3,572 million at December 31, 2005 from € 4,538 million at December 31, 2004, corresponding to ratios of net debt to total equity of 63.5% in 2005 (16.8% excluding financial liabilities related to the put options granted to minority stockholders) and 100.7% in 2004 (46.6% excluding financial liabilities related to the put options granted to minority stockholders). Danone’s management uses the net debt to total equity ratio as an internal liquidity indicator. Danone believes this information will be useful to investors since it is used as a performance measure by credit rating agencies.

 

The Company’s long-term debt is rated A1 stable by Moody’s and A+ stable by Standard & Poor’s, and its commercial paper is rated A-1 by Standard & Poor’s. The Group’s financial objective includes the use of debt financing to lower the average cost of capital, while maintaining reasonable levels of indebtedness to protect its financial flexibility.

 

Danone maintains (at the parent company level and at the level of its finance subsidiaries) credit lines with banks and other financial institutions to ensure the availability on an as-needed basis of medium-term credit lines. At December 31, 2005, Danone had credit lines totaling € 2,875 million (€ 3,050 million at December 31, 2004). Operating subsidiaries had credit lines of € 146 million at December 31, 2005. Moreover, at December 31, 2005, the Group had cash and cash equivalents and marketable securities of € 2,989 million (compared to € 2,666 million at December 31, 2004) to meet working capital needs and to take advantage of expansion opportunities.

 

Off-balance Sheet Arrangements and Aggregate Contractual Obligations

 

Aggregate Contractual Obligations

 

The following table sets forth the contractual obligations of the Group at December 31, 2005:

 

     Payment due by period

 
     Total

   2006

   2007

   2008

   2009

   2010

   2011 and
after


 
     (€ in millions)  

Financial liabilities(1)(2)

   6,668    906    1,347    915    131    146    3,223 (3)

Capital lease commitments(2)

   38    23    2    2    1    1    9  

Operating lease commitments

   359    119    71    58    31    20    60  

Commitments to purchase goods, services and investments

   507    391    37    22    17    12    28  

Commitments related to financial investments

   84    73    11    —      —      —      —    

(1)   Excluding financial liabilities linked to capital leases.
(2)   Including financial interest.
(3)   Consists primarily of the financial liabilities related to options granted to minority stockholders, which can be exercised at any time.

 

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Other Commitments

 

     Amount of obligation by date of expiration

     Total

   2006

   2007

   2008

   2009

   2010

   2011 and
after


     (€ in millions)

Commitments granted

                                  

Guarantees and pledges given

   95    77    —      3    —      1    14

Other commitments given

   62    25    7    4    3    2    21

Commitments received

                                  

Credit lines

   3,021    217    450    501    1,650    200    3

Guarantees and pledges received

   54    45    1    —      —      —      8

Other commitments received

   53    35    12    2    1    —      3

 

Commitments Related to Investments in Affiliates

 

The Group is committed to acquiring the shareholdings owned by third parties in some of the Group’s affiliates, should these third parties wish to exercise their put options. The exercise prices of these put options are usually based on the profitability and the financial position of the entity as of the exercise date. As of December 31, 2005, the Group’s commitments with regards to these options were estimated at approximately € 240 million. These commitments mainly relate to The Danone Springs of Eden BV, in an amount of approximately € 150 million. As part of the creation of the company, the Group granted a put option and was granted a call option on the 33.1% interest in the company it does not already own, directly or indirectly. These options can be unconditionally exercised in 2008 and, when certain conditions are met, before 2008.

 

Guarantees and Pledges

 

In addition, the Company and its subsidiaries are parties to a variety of legal proceedings arising out of the normal course of business, including in connection with certain warranties given as part of the divestitures completed between 1997 and 2005. In some cases, damages are sought and liabilities are accrued for when a loss is probable and can be reasonably estimated.

 

Impact of Changes in Exchange Rates

 

The Group publishes its consolidated financial statements in euro. In 2005, approximately 51% of the Group’s net sales and 60% of its trading operating income were realized in euro. However, a substantial portion of the Group’s assets, liabilities, sales and earnings are denominated in currencies other than the euro, particularly the Chinese yuan, the U.S. dollar and U.S. dollar-influenced currencies, the British pound or the Polish zloty. As a result, the Group is exposed to fluctuations in the values of such currencies against the euro with respect to the translation into euro of amounts to be reflected in its consolidated financial statements. In particular, the appreciation of the euro in relation to other currencies decreases the euro value of the contribution to the Group’s consolidated results and financial condition of subsidiaries that maintain their financial accounts in such other currencies.

 

Both the sales and expenses of the Group’s subsidiaries are denominated principally in the currencies of their home countries, except for imports, exports and financial transactions, which are hedged. As a result, the Group believes that its exposure to currency fluctuations has been, and will continue to be, limited locally. As a result of the Group’s strategy of international expansion, however, the proportion of the Group’s consolidated net sales, operating income and net income represented by international operations is expected to continue to increase.

 

For the purpose of preparing its consolidated financial statements, the Group uses the exchange rate applicable at the end of the year for the conversion of balance sheets (except if high local inflation rates call for a

 

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different method) and the average exchange rate for the year (calculated by averaging the applicable rate at the end of each month during the year) for conversion of income statements and cash flow changes.

 

In accordance with the Group’s accounting policies, differences resulting from translation into euro of the financial statements of foreign subsidiaries are accounted for under stockholders’ equity until such time as the foreign investments to which such differences relate are sold or liquidated. See “Item 3: Key Information—Risk Factors—The Group’s results of operations and financial condition could be harmed by changes in exchange rates.”

 

In 2005, approximately 49% of the Group’s net sales (47% in 2004) and 40% of the Group’s trading operating income (33% in 2004) were outside the euro zone and therefore subject to exchange rate risk.

 

     2004

    2005

 
    

In millions of

euro


  

As a % of

Group figures


   

In millions

of euro


  

As a % of

Group figures


 

Net sales:

                      

of subsidiaries located in euro zone

   6,505    53 %   6,642    51 %

of subsidiaries located outside euro zone

   5,768    47 %   6,382    49 %
    
  

 
  

Group total net sales

   12,273    100 %   13,024    100 %
    
  

 
  

Trading operating income:

                      

of subsidiaries located in euro zone

   1,077    67 %   1,043    60 %

of subsidiaries located outside euro zone

   531    33 %   695    40 %
    
  

 
  

Group total trading operating income

   1,608    100 %   1,738    100 %
    
  

 
  

 

Item 6.    Directors, Senior Management and Employees

 

Directors and Senior Management

 

In accordance with French law governing a société anonyme, a form of limited liability company, the Company’s activities are managed by its board of directors, or conseil d’administration, and by its Chairman and Chief Executive Officer, who has full executive authority to manage the activities of the Company, subject to the prior authorization of the board of directors or of the Company’s shareholders for certain decisions specified by law or by the charter of the board of directors.

 

Under French company law, the board of directors may elect one person to assume the position of Chairman and Chief Executive Officer or split these functions between two different persons (either the Chairman of the Board or another natural person bearing the title of Chief Executive Officer or Directeur Général). The Company’s bylaws were modified at the extraordinary shareholders’ meeting of April 25, 2002 to provide for such a choice. According to the Company’s bylaws, the choice is made by the board of directors deciding with a majority of all its members. On April 25, 2002, the board of directors decided not to split these two functions, which are currently performed by the same person.

 

French law and the Company’s bylaws permit the board of directors to delegate general or specific powers to up to five people (Directeurs Généraux Délégués or Assistant Managing Directors). The Chief Executive Officer proposes the appointment of the Directeurs Généraux Délégués or Assistant Managing Directors to the board of directors and the board of directors determines their specific management powers and responsibilities. Under French law, an Assistant Managing Director, like the Chief Executive Officer, has broad powers to represent and bind the Company in dealings with third parties. An Assistant Managing Director may be removed by the board of directors at any time upon proposal by the Chief Executive Officer. An Assistant Managing Director may be held individually responsible for his/her actions if they are deemed contrary to the Company’s interests.

 

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Pursuant to the Company’s bylaws, in addition to the appointment of Directeurs Généraux Délégués, the board of directors can appoint one or more Vice-Chairmen. The Vice-Chairman’s seat comprises no particular powers other than chairing board meetings and general meetings if either the Chairman or the director temporarily acting for the latter, in compliance with law, is absent.

 

In consideration for their services on the board, directors are entitled to receive jetons de présence (“directors’ fees”). The total annual amount of jetons de présence is fixed at the shareholders’ meeting, but the board determines their allocation among the directors. In addition, remuneration may be granted to directors on a case-by-case basis for special assignments. Subject to one exception below, a director may not vote for his or her own remuneration. If he or she does vote, the decision is void. The board may also authorize the reimbursement of travel and accommodation expenses as well as other expenses incurred by directors in the corporate interest. The Chairman of the Board, Chief Executive Officer and Assistant Managing Directors are entitled to receive remuneration or other amounts in addition to jetons de présence under certain circumstances. Any additional remuneration is determined by the board of directors and therefore, in this case only, the Chairman of the Board, Chief Executive Officer and Assistant Managing Directors may vote on resolutions concerning their remuneration.

 

Board of Directors

 

Under French law, the board of directors prepares and presents yearly financial statements to the shareholders and calls the shareholders’ meeting. In addition, the board of directors determines the direction of the Company’s activities and oversees the implementation of its decisions.

 

Meetings of the board of directors, which are held as often as required by the corporate interest, are normally convened and presided over by the Chairman. According to French company law, if the board of directors has not met for over two months, at least one-third of the members of the board may request that the Chairman convene the board regarding matters listed in the agenda for the meeting. A quorum is at least one-half of the members of the board, and decisions are taken by a vote of the majority of the members present, deemed to be present, or represented by other members of the board of directors. The Company’s bylaws permit that certain decisions be taken by the board of directors by means of a conference call or video communication. A director may give a proxy to another director by any written or electronic means, but a director cannot represent more than one other member at any particular meeting. Members of the board of directors represented by another member at meetings do not count for purposes of determining the existence of a quorum. A director may not vote for an arrangement or contract in which he or she is materially interested. If he or she does vote, the decision will be void.

 

Under French law and the Company’s bylaws, the board of directors must give prior authorization for any security, pledge or guarantee by the Company. This authorization is generally granted for a period of one year. If the security, pledge or guarantee has not been previously authorized by the board of directors, it shall have no effect with regard to the Company.

 

Pursuant to French law and the Company’s bylaws, the board of directors may consist of 3 to 18 directors. The Company’s bylaws provide that each director is elected by the shareholders at an ordinary general meeting of shareholders for a three-year term and is eligible for reelection upon expiration of such term. The shareholders’ meeting of April 11, 2003 passed a resolution increasing the aggregate amount of directors’ fees to € 500,000. According to the Group’s rules in effect, directors who are also members of the executive committee do not receive directors’ fees. In 2005, directors were paid a total of approximately € 344,000 in directors’ fees for their attendance at board meetings. A director who attended all six meetings of the board of directors in 2005 received € 22,000 in director’s fees, with a fixed portion of € 10,000 and a variable portion of € 2,000 per meeting. In addition, the members of the Audit Committee and Compensation and Nomination Committee received compensation of € 4,000 per meeting. The compensation of the chairmen of these committees is double these amounts. Each director must own at least 2,000 shares of the Company throughout his term of office. In 2005, the board of directors of the Company held six meetings and the attendance rate was approximately 92%.

 

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The Company’s bylaws provide for the retirement age of the directors. Directors cannot be appointed if they are over 70 years old. The term of such director will automatically terminate at the end of the ordinary general meeting of shareholders held in the year during which the director has reached the age of 70. However, according to the Company’s bylaws, the general shareholders’ meeting may resolve that this age limit shall not apply to one or more directors who remain in office or may be re-appointed, provided the number of directors concerned by this provision does not exceed one-quarter of the directors in office.

 

In addition, according to the Company’s bylaws, the Chairman of the Board, the Chief Executive Officer (if applicable) and Assistant Managing Directors may not be more than 65 years old.

 

The French Commercial Code (Code de Commerce) strictly forbids loans by the Company to its directors. In addition, no company may provide overdrafts for directors or guarantee any director’s obligations. This prohibition also applies to specified executive officers, Assistant Managing Directors, permanent representatives of companies on the board of directors, spouses or heirs of such persons, and other intermediaries.

 

The French Commercial Code and the Company’s bylaws require any director, the Chief Executive Officer, any Assistant Managing Directors and any of the Company’s shareholders holding the voting rights greater than 10%, or if a shareholder company, the company controlling it, that are considering, either directly or indirectly, personally or through an intermediary, entering into an agreement with the Company, to inform the Company’s board of directors as well as its auditors before the transaction is consummated. French law also requires such an agreement to be authorized by the board of directors, and the director in question or person concerned may not vote on the issue. French law further requires such an agreement to be submitted to an ordinary general meeting of shareholders for approval once entered into, upon presentation of a special report from the Company’s auditors. Any agreement entered into in violation of these requirements may be declared void by the Commercial Court at the request of the Company or of any shareholder, if such agreement is contrary to the interests of the Company. Moreover, French law also states that agreements which are entered into in the ordinary course of business and with terms and conditions which are not out of the ordinary are not subject to the prior authorization of the board of directors. Nevertheless, such agreements must be disclosed by the interested party to the Chairman of the board of directors unless they are not significant for any party in terms of purpose or financial impact. The list and purpose of such agreements must be communicated by the Chairman of the board to the board of directors and to the statutory auditors.

 

Under French law, directors are liable for violations of French legal or regulatory requirements applicable to sociétés anonymes, violation of the bylaws or mismanagement. A director may be held liable for such actions both individually and jointly with the other directors.

 

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The following table sets forth the names and ages of the directors of the Company, their principal occupation or employment, the dates of their initial election as directors and the years of expiration of their terms:

 

Name


   Age

  

Principal Occupation or Employment


   Director
Since


   Term
Expires


 

Franck Riboud

   50   

Chairman and Chief Executive Officer (“Président Directeur Général”).

Director: L’Oreal SA, Renault, Sofina, ONA, Quicksilver; Member of Supervisory Board: Accor.

   1992    2007  

Jacques Vincent

   60   

Vice-Chairman, Directeur Général Délégué.

Chairman of the Board of Directors: Ecole Normale Supérieure de Lyon; Director: Centrale Laitière, Syngenta.

   1997    2008  

Bruno Bonnell(1)

   47    Chairman of the Board of Directors: Infogrames Entertainment; Director: Olympique Lyonnais; Member of the Supervisory Board: Pathe, Eurazeo.    2002    2008  

Michel David-Weill

   73    President of Supervisory Board: Eurazeo; Member of Supervisory Board: Publicis Groupe.    1970    2008  

Emmanuel Faber

   42   

Executive Vice-President—Asia-Pacific.

Director: Ryanair Holdings Plc; Member of the Supervisory Board: Legris Industries.

   2002    2007  

Richard Goblet d’Alviella(1)

   57    Chief Executive Officer (“Administrateur Délégué”): Sofina S.A.; Director: Delhaize Groupe, Suez, Suez-Tractebel, Caledonia Investements, Finasucre SA, Glaces de Moustier sur Sambre, Henex S.A., Société de Participations Industrielles SA; Member of the Supervisory Board: Eurazeo.    2003    2009 (2)

Hirokatsu Hirano

   68    Advisor of the International Business division, Yakult Honsha.    2004    2008  

Bernard Hours

   49   

Executive Vice-President—Fresh Dairy Products.

Director: Colombus Café, Flam’s.

   2005    2008  

Christian Laubie(1)

   67    Member of the Haut Conseil du Commissariat aux Comptes.    1985    2009 (2)

Jean Laurent(1)

   61    Chairman of the Board of Directors: Calyon S.A., Institute Europlace de Finance; Director: M6; Member of the Supervisory Board: Eurazeo.    2005    2009 (2)

Hakan Mogren(1)

   61    Deputy Chairman: AstraZeneca Plc; Vice-Chairman: Gambro AB; Board Member: Remy Cointreau, Investor AB, Sweden America Foundation.    2003    2009 (2)

Jacques Nahmias(1)

   58    Chairman: Pétrofrance Chimie SA, Terminales Portuarias S. L., Vice-Chairman: Mercury Oil & Shipping Corporation, Petrofrance Inc.    1981    2008  

Benoît Potier(1)

   48    Chairman of the Management Board: Air Liquide SA; Chairman and Chief Executive Officer: Air Liquide International; Member of the Supervisory Board: Michelin.    2003    2009 (2)

(1)   Independent director as determined by the board of directors.
(2)   Subject to the approval of the shareholders’ meeting of April 27, 2006.

 

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The Company’s board also includes three honorary directors who serve in an advisory role: Daniel Carasso (Honorary Chairman), Yves Boël and Jean-Claude Haas.

 

The Company has implemented a charter, which outlines the rights and responsibilities of directors and the principles governing the conduct of its executive officers. These guidelines were adopted at the directors’ meeting held on April 25, 2002. In 2003, further to the recommendations of the Nomination Committee and following the Bouton Report, a report issued in France to promote better corporate governance practices for listed companies, the board of directors evaluated its operating practices and decided to modify the charter relating to directors of the Company to link the payment of a portion of the directors’ fees to participation in meetings of the board and its committees, and also to define the operations of the Group that are subject to prior approval of the board.

 

The board of directors applied the recommendations of the Bouton Report to evaluate the independence of the directors according to criteria that are different from those adopted by the New York Stock Exchange. However, the board of directors decided to progressively implement the recommendation of the Bouton Report relating to directors who have served as such for over 12 years and provide for the development of the board accordingly. The board of directors also noted that the roles as directors that Mr. Bonnell and Mr. Goblet d’Alviella occupy in companies in which Mr. Franck Riboud was also a director did not affect their independence. As a result of these decisions, the board reviewed the position of each of its directors and qualified seven of the thirteen directors as independent. The Company believes that seven of the thirteen directors are also independent under the independence criteria adopted by the New York Stock Exchange.

 

Significant Differences from NYSE Corporate Governance Requirements

 

Although Groupe Danone, as a foreign private issuer, is exempt from most of the corporate governance requirements of the New York Stock Exchange applicable to U.S. companies, Groupe Danone currently complies with substantially all such corporate governance requirements except that Groupe Danone’s non-management directors do not currently meet without management and Groupe Danone’s Compensation and Nomination Committee is not composed wholly of independent directors and does not have a written charter.

 

Executive Committee

 

Under the authority of Mr. Franck Riboud, the executive officers comprising the executive committee ensure the operational management of the Group. The executive officers implement the Group’s strategies as defined by the board of directors, approve the budgets, coordinate the planning and execution of the missions of each of the subsidiaries and business lines and, depending on the results achieved, determine action plans to be implemented. The executive officers meet in committee at least once a month.

 

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The following table sets forth the names and ages of the executive officers of the Company and their current positions with the Company:

 

Name


   Age

  

Position


   Executive Officer Since

Franck Riboud

   50    Chairman and Chief Executive Officer (Président Directeur Général)    1996

Jacques Vincent

   60    Vice-Chairman and Directeur Général Délégué    1996

Georges Casala

   64    Executive Vice-President—Biscuits and Cereal Products    2000

Emmanuel Faber

   42    Executive Vice-President—Asia-Pacific    2000

Antoine Giscard d’Estaing

   45    Executive Vice-President—Finance, Strategy and Information Systems (Chief Financial Officer)    2005

Bernard Hours

   49    Executive Vice-President—Fresh Dairy Products    2001

Simon Israël

   52    Non-Executive Vice-President—Asia/Pacific    1997

Philippe Loïc Jacob

   41    Secretary General    2005

Thomas Kunz

   48    Executive Vice-President—Beverages    2004

Franck Mougin

   48    Executive Vice-President—Human Resources    2002

Sven Thormahlen

   49    Executive Vice-President—Research and Development    2005

 

Franck Riboud, 50, has been Chairman and Chief Executive Officer (Président Directeur Général) since 1996. Mr. Riboud joined the Group in 1981 and has held several positions, including General Manager of Evian in 1990 and General Manager of Corporate Business Development in 1994 when he was responsible particularly for the internationalization of the Group. Prior to being appointed to his current position, he was Vice-President and General Manager and Member of the board of directors from 1994. Mr. Riboud holds a degree in engineering from Ecole Polytechnique in Lausanne.

 

Jacques Vincent, 60, was appointed Vice-Chairman and Directeur Général Délégué in 1998. Prior to this, he was Vice-President—Fresh Dairy Products. Having spent most of his career with the Group, he occupied various positions as general manager of certain of its subsidiaries in France, Germany, Italy and the United States in the water and dairy businesses. Mr. Vincent holds a Master of Science degree from Stanford University, an engineering degree from the Ecole Centrale de Paris and a degree in economics.

 

Georges Casala, 64, is Executive Vice-President—Biscuits and Cereal Products Worldwide. He began his career in General Foods and joined Danone in 1973. Since then, he has held such positions as President and Chief Executive Office of the Dannon Company in the United States from 1982 to 1989, Vice-President of Danone France since 1989 and Executive Vice-President—Northern Europe since 1995. Mr. Casala is a graduate of the Ecole Supérieure de Commerce de Paris and holds a degree in economics.

 

Emmanuel Faber, 42, is Executive Vice-President—Asia-Pacific. He joined the Group in 1997 as Director of Development and Strategy and has held his current position since 2000. He began his career as a consultant with Bain & Co. then worked for Banque Baring Brothers in 1988. Subsequently, he became financial director and head of strategy of the Legris Industries Group in 1993 and later a member of the board of directors in 1994 and Managing Director of the Group in 1997. Mr. Faber is a graduate of the Ecole des Hautes Etudes Commerciales (HEC).

 

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Antoine Giscard d’Estaing, 45, is Executive Vice-President—Finance, Strategy and Information Systems (Chief Financial Officer). He began his career as a finance inspector in the French civil service. He then joined Lyonnaise des Eaux, where he held a number of positions within the Finance Department and at subsidiary Elyo. From October 1995 to May 1999, Mr. Giscard d’Estaing served as Senior Vice President, Finance for Lyonnaise des Eaux, which merged with Suez to become Suez Lyonnaise des Eaux in 1997. In June 1999, he joined Schneider Electric as Executive Vice-President, Finance and Control and a member of the Executive Committee. Antoine Giscard d’Estaing is a member of the Board of the French stock market authority, Autorité des Marchés Financiers (AMF). He is a graduate of the Ecole des Hautes Etudes Commerciales (HEC) and the Ecole Nationale d’Administration (ENA).

 

Bernard Hours, 49, is Executive Vice-President for Fresh Dairy Products Worldwide. He joined the Group in 1987 following a career at Unilever. Since then, he held various positions within the Group, including several marketing positions at Kronenbourg, Evian and Danone France. He was also General Manager of subsidiaries in the fresh dairy products division (Hungary and Germany) and in the biscuits division (France). Mr. Hours is a graduate of the Ecole des Hautes Etudes Commerciales.

 

Simon Israël, 52, a New Zealand national, has served as Executive Vice-President—Asia/Pacific since 1999. Prior to joining the Group, he was President Asia Pacific for Sara Lee and held several managing and executive positions with Sara Lee in Indonesia, the Philippines and Japan.

 

Philippe Loïc Jacob, 41, is Secretary General of Groupe Danone (covering the Legal Department, Public Affairs Department, Quality Department and Risk Management Department). He started his career in 1986 in various marketing positions for Evian and for Brasseries Kronenbourg. In 1993 he was appointed Director of Acquisitions within the Corporate M&A Department. In 1996 he moved to Argentina as General Manager of Villa del Sur before being appointed General Manager of the Mercosur Water Business. In 2000 he was appointed Director of Strategy and Acquisitions for the Water Worldwide Business Unit. Philippe-Loïc Jacob is a French and Canadian citizen and holds a diploma from the Lyon School of Management (EM Lyon).

 

Thomas Kunz, 48, is Executive Vice-President—Beverages. He joined the Group in 1990 as Marketing Director of Gervais Danone AG, Germany. In 1995, he was appointed General Manager of Danone Mexico, and in 1998, he was appointed General Manager of Bagley, Argentina. In 1999, he was appointed General Manager of the Dairy North America business. Mr. Kunz graduated from the Saint Gall University in Switzerland with a degree in economics.

 

Franck Mougin, 48, is Executive Vice-President—Human Resources. He has spent his entire career working in human resources, for several industrial groups. Mr. Mougin began his career with CGEE-Alsthom in 1981, before joining the Luchaire group. In 1983, he joined Matra Electronique as Human Resources Manager. From 1989 to 1995, he held the position of Human Resources Manager with Fruehauf France, and then with the Fruehauf-Trailor Group. Since 1995, he held successive positions as Human Resources Manager for Placoplatre, and then for the British Plaster Board Group (BPB) in London. Mr. Mougin holds a Master’s degree in social law.

 

Dr. Sven Thormahlen, 49, is Executive Vice-President—Research and Development. He received his doctorate in organic synthetic chemistry from the University of Hamburg and held different positions in the research and development organizations of leading healthcare and consumer goods companies. He has worked in Germany, in the United States and in France. His experience covers product research, product development, clinical studies and quality assurance.

 

Directors’ and Executive Officers’ Compensation

 

In 2005, the aggregate amount of compensation paid by Danone to its executive officers and directors as a group (20 persons in all) for services in all capacities was € 11.2 million, including € 10.9 million to executive

 

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officers of which € 5.4 million was bonus compensation. The aggregate amount paid by Danone for pension, retirement or similar benefits for the same executive officers and directors as a group in respect of the 2005 fiscal year was € 0.6 million.

 

Executive officers’ compensation amounts include a fixed element and a variable element representing between 40% and 60% of total compensation. The variable element is based on economic and individual objectives. For all executive officers, the variable element is based on economic objectives, to which is added a qualitative evaluation of the strategy developed over the course of the year. For the Chairman and Vice-Chairman, the variable economic element is calculated with reference to Group objectives, in terms of net sales, trading operating margin, free cash flow and current net earnings per share, as communicated to the financial markets. For executive officers who manage a business line, the variable economic element is based on objectives set in the budget of the business line in terms of net sales, trading operating income, free cash flow and trading operating margin. For the other executive officers, the variable economic element is calculated based on the Group’s objectives set in the budget in terms of trading operating income, current net earnings per share and operating costs. The compensation of the Chairman and Vice-Chairman are determined by the board of directors on the basis of recommendations made by the Compensation and Nomination Committee. The compensation policy for the other members of the executive committee is presented annually to the Compensation and Nomination Committee.

 

In 2004 and 2005, the aggregate amount of compensation for services awarded to the directors was:

 

     Compensation and Other
Benefits(1)


Name


   2004

   2005

     (in euro)

Franck Riboud

   2,426,860    2,485,540

Jacques Vincent

   1,511,140    1,544,620

Bruno Bonnell

   14,000    20,000

Michel David-Weill

   36,000    32,000

Emmanuel Faber

   786,430    966,058

Richard Goblet d’Alviella

   48,000    54,000

Hirokatsu Hirano

   15,500    20,000

Bernard Hours(2)

   —      941,408

Christian Laubie

   48,000    54,000

Jean Laurent(3)

   —      20,000

Hakan Mogren

   14,000    16,000

Jacques Nahmias

   20,000    22,000

Benoît Potier

   24,000    66,000

(1)   Compensation includes gross salary, bonuses, indemnities and directors’ fees granted by the Company and its subsidiaries for the financial period. In 2005, the variable portion of compensation was € 1,490,000 for Franck Riboud, € 780,000 for Jacques Vincent, € 501,438 for Emmanuel Faber and € 471,788 for Bernard Hours. In addition, benefits in kind were granted to each director member of the executive committee in the amount of € 4,620.
(2)   Bernard Hours was appointed director by the general shareholders’ meeting of April 22, 2005.
(3)   The cooptation of Jean Laurent as director was ratified by the general shareholders’ meeting of April 22, 2005.

 

Employees at Groupe Danone benefit from the Groupe Danone standard employment contracts. However, while Franck Riboud and Jacques Vincent hold their positions as Président Directeur Général and Directeur Général Délégué, respectively, their service contracts with the Company are suspended. In the event that either of these two individuals no longer holds his position, his service contract with the Company will be reinstated, (i) taking into account the length of his terms as Président Directeur Général or Directeur Général Délégué, respectively, for purposes of seniority and benefits, (ii) at a position comparable to that currently held in the executive committee and (iii) at an annual level of compensation no less than the average for all the members of the executive committee during the twelve months prior to such reinstatement. Emmanuel Faber and Bernard Hours continue to benefit from their service contracts without interruption. In addition, if Messrs. Riboud and

 

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Vincent are removed from their current positions, they will be entitled to a severance payment of two times the compensation (including bonus compensation and benefits) received during the preceding twelve months. A similar provision also applies to Mr. Faber and all members of the executive committee who hold a service contract under French law.

 

Senior managers of the Group who were under the French pension system at December 31, 2003 benefit from a defined benefit pension plan. This plan pays a pension based on years of service and the amount of the last salaries, under the condition that the employee is still with the Group at the time of retirement. The pension is paid after deducting pensions paid by other mandatory plans and may reach a maximum of 65% of the last salary. In the event of retirement before the age of 55 or in the event of death before retirement, the employee loses all benefits under this plan. This pension plan was closed to new participants on December 31, 2003. The amount provisioned for this plan represents the obligation of the Group at December 31, 2005 for the payment of annuities calculated on the basis of life expectancies based on mortality tables. At December 31, 2005, the total amount of the Group’s pension obligations for directors was €39 million.

 

Committees of the Board of Directors

 

The board of directors has established two committees: the Audit Committee and the Compensation and Nomination Committee, as described below. The administrative organization of the committees differs from that required of U.S. companies listed on the New York Stock Exchange.

 

Audit Committee

 

The Audit Committee, which met nine times in 2005, reviews and comments on the Company’s statutory and consolidated financial statements prior to their approval by the board of directors. In addition, the Audit Committee ensures that (i) management has ensured the reliability and integrity of the Company’s adopted accounting policies, especially those requiring judgments and estimations, and (ii) management has established internal control procedures that are sufficient to assure quality and compliance with all applicable laws, regulations and corporate policies concerning financial reporting. The Committee also reviews internal and external audit activities and results, as well as specific assignments given to the auditors by the board of directors. It gives recommendations regarding the fees of the independent accountants.

 

In 2005, the Audit Committee in particular examined:

 

    the impact on the Group of the application of the international accounting standards (IFRS),

 

    the procedures put in place for the valuation of long-term assets, in particular, those related to the HOD water activities in the United States, Europe and Canada,

 

    the status of the work required to comply with the Sarbanes-Oxley Act of 2002,

 

    the procedures for risk assessment, and

 

    the approval of internal and external audit plans.

 

The written minutes of the Audit Committee meetings were circulated to the directors and commented on during the meetings of the board of directors.

 

The members of the Audit Committee are Benoît Potier (Chairman), Richard Goblet d’Alviella and Christian Laubie, who are all independent.

 

Mr. Christian Laubie is the “financial expert” of the Audit Committee, due to his knowledge of generally accepted accounting principles, procedures of internal control and the roles of the Audit Committee. Mr. Laubie was the Chief Financial Officer for Groupe Danone from 1980 to 2000, and he participates in the organization that regulates statutory audit professionals in France.

 

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Compensation and Nomination Committee

 

The board of directors decided to merge the Compensation Committee and the Nomination Committee into a single committee called the Compensation and Nomination Committee, effective April 22, 2005. This committee makes recommendations to the board of directors with respect to its organization, the nomination of new directors and compensation paid and options granted to executive officers. The Committee met one time during 2005 and in particular recommended the adoption of a variable compensation system in the form of Group Performance Units (GPU). The members of the Compensation and Nomination Committee are Mr. Michel David-Weill (Chairman), Mr. Jean Laurent (independent director) and Mr. Hakan Mogren (independent director).

 

Share Ownership

 

As of December 31, 2005, the total number of shares owned by the Company’s directors and executive officers as a group (20 persons) was 309,500 or 0.11% of the outstanding shares of the Company, not including 9,716,486 shares held by Eurazeo, in which Mr. Michel David-Weill, a director of the Company, has direct and/or indirect interests. None of the Company’s directors or executive officers owns more than 1% of the Company’s outstanding shares.

 

Options

 

As of December 31, 2005, a total of 8,243,382 options to purchase existing shares was outstanding, of which 1,947,168 were held by the executive officers. During 2005, the grants and exercise of options by directors were as follows:

 

     Options Granted(1)

   Options Exercised

Board Directors


  

Number of

Options


  

Expiration

Date


  

Exercise

Price


  

Number of

Options


   

Exercise

Price


Franck Riboud

   100,000    04/22/2013    75.11    40,000     38.99
          04/22/2013           60,000     58.09

Jacques Vincent

   53,333    04/22/2013    75.11    100,000     58.09

Emmanuel Faber

   26,667    04/22/2013    75.11    24,000     58.09

Bernard Hours

   26,667    04/22/2013    75.11    4,000 (2)   58.09

(1)   Option Plan of April 11, 2003.
(2)   Mr. Bernard Hours exercised 4,000 options on March 8, 2005, before being appointed director of the Company by the general shareholders’ meeting of April 22, 2005.

 

These options were granted by the board of directors pursuant to employee stock option plans adopted at general shareholders’ meetings. Pursuant to each option plan, the board was authorized to issue options exercisable in the aggregate for up to 1.0% of the Company’s outstanding share capital at the date of issuance (plans adopted in May 1995 and May 1997), up to four million shares at the date of issuance (plans adopted in May 1999, May 2001 and April 2003) or up to three million shares at the date of issuance (plan adopted in April 2005), including all options already outstanding under the current and previous plans. Since March 1999, the exercise price for the options should be at least equal to the average price quoted for the shares on Euronext Paris during a period of 20 business days prior to the date of granting by the board. The options may only be exercised two years after their granting, unless an exception is available.

 

In 2005, a total of 156,301 options to purchase existing shares issued under the April 11, 2003 plan were granted at a weighted average exercise price of € 75.78 to the ten employees of the Group, excluding directors, who received the largest number of options, of which 127,501 were granted to six members of the Company’s executive committee.

 

During the same period, a total of 414,800 options were exercised at a weighted average exercise price of € 58.34 by the ten employees of the Group, excluding directors, who subscribed or purchased the largest number of shares, of which 60,000 options were exercised by two members of the executive committee.

 

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The following table sets out certain information relating to the various option plans as of December 31, 2005. Numbers have been restated to give effect to the 2 for 1 stock splits effected by the Company in June 2000 and June 2004.

 

Options Plan


  Options
Issuable


   

Meetings

of

the Board

of

Directors

and Grant

dates


    Options
Granted


  Expiration
Date


  Exercise
Price of
Options
per
Ordinary
Share


 

Number

of

Options
cancelled

at
December 31,
2005


 

Number

of

Ordinary
Shares
purchased

by
December 31,
2005


 

Balance of
Ordinary
Shares to

be
purchased


  Of which:
Ordinary
Shares
Issuable to
Members
of the
Executive
Committee


  Of which:
Number of
Members
of the
Executive
Committee
who can
exercise
the
Options


May 14, 1997

  3,098,340 (1)   09/09/1997     640,000   09/09/2005   33.38   103,600   536,400   —     —      
          01/28/1998     160,000   01/28/2006   38.99   —     160,000   —     —      
          03/18/1998     778,000   03/18/2006   44.25   8,000   614,676   155,324   30,000    
          05/19/1998     10,000   05/19/2006   51.07   —     4,000   6,000   —      
          09/15/1998     274,000   09/15/2006   58.08   12,000   166,000   96,000   —      
          01/26/1999     279,200   01/26/2007   55.75   30,000   159,838   89,362   —      
          03/17/1999     160,800   03/17/2007   56.75   20,000   116,800   24,000   —      
          05/19/1999     378,040   05/19/2007   61.98   41,200   164,240   172,600   8,000    
                2,680,040             214,800   1,921,954   543,286   38,000   5

May 19, 1999

  4,000,000 (2)   06/15/1999     414,000   06/15/2007   64.19   44,200   158,840   210,960   1,400    
          09/14/1999     39,400   09/14/2007   60.15   —     25,600   13,800   —      
          01/26/2000     666,680   01/26/2008   58.09   17,600   439,880   209,200   63,200    
          03/15/2000     449,600   03/15/2008   51.53   32,800   240,760   176,040   27,600    
          05/22/2000     83,200   05/22/2008   63.50   38,400   28,000   16,800   —      
          09/13/2000     241,400   09/13/2008   77.91   38,400   26,600   176,400   —      
          10/17/2000     4,800   10/17/2008   76.90   —     2,400   2,400   —      
          03/14/2001     1,488,500   03/14/2009   73.57   230,000   199,700   1,058,800   304,000    
                3,387,580             401,400   1,121,780   1,864,400   396,200   7

May 29, 2001

  4,000,000 (3)   10/08/2001     311,300   10/08/2009   70.81   44,000   46,300   221,000   —      
          04/25/2002     1,313,600   04/25/2010   69.40   78,300   156,380   1,078,920   260,400    
          10/17/2002     234,600   10/17/2010   60.76   33,600   62,952   138,048   18,000    
          04/11/2003     1,843,650   04/11/2011   59.07   166,700   246,830   1,430,120   404,300    
                3,703,150             322,600   512,462   2,868,088   682,700   8

April 11, 2003

  4,000,000 (4)   10/15/2003     61,200   10/15/2011   65.79   14,000   2,800   44,400   —      
          04/15/2004     1,875,680   04/15/2012   67.41   145,600   —     1,730,080   471,300    
          10/13/2004     44,300   10/13/2012   64.05   2,000   —     42,300   20,000    
          04/22/2005     1,137,728   04/22/2013   75.11   13,700   —     1,124,028   324,168    
                3,118,908             175,300   2,800   2,940,808   815,468   8

April 22, 2005

  3,000,000     08/08/2005 (5)   14,000   08/08/2013   82.57   —     —     14,000   14,000    
          10/18/2005     12,800   10/18/2013   90.15   —     —     12,800   —      
                26,800             —     —     26,800   14,000   1

Total

              12,916,478             1,114,100   3,558,996   8,243,382   1,947,168    

(1)   Of a total of 3,098,340 options issuable under the May 1997 Option Plan, 418,300 options were not granted and ceased to be issuable on May 19, 1999.
(2)   Of a total of 4,000,000 options issuable under the May 1999 Option Plan, 612,420 options were not granted and ceased to be issuable on May 29, 2001.
(3)   Of a total of 4,000,000 options issuable under the May 2001 Option Plan, 296,850 options were not granted and ceased to be issuable on April 11, 2003.
(4)   Of a total of 4,000,000 options issuable under the April 2003 Option Plan, 881,092 options were not granted and ceased to be issuable on April 22, 2005.
(5)   On July 20, 2005, the board of directors authorized the grant of 14,000 options and this grant was made by delegation on August 5, 2005.

 

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Employees

 

At December 31, 2005, Danone had a total of 88,184 employees worldwide. The table below shows the total number of employees at year-end and the percentage of such employees by geographic area and business line at December 31, 2005 and 2004.

 

     2004

    2005

 

Total number of employees

   89,449     88,184  

By Geographic Area:

            

France

   13.8 %   13.7 %

Rest of Europe

   23.6 %   22.9 %

China

   27.2 %   26.8 %

Rest of Asia-Pacific

   18.7 %   19.8 %

North and South America

   16.3 %   13.8 %

Africa and Middle East

   0.4 %   3.0 %
    

 

Total

   100.0 %   100.0 %
    

 

By Business Line:

            

Fresh dairy products

   26.7 %   30.0 %

Beverages

   43.7 %   44.4 %

Biscuits and cereal products

   24.4 %   21.3 %

Other food businesses(1)

   2.8 %   2.6 %

Corporate functions

   2.4 %   1.7 %
    

 

Total

   100.0 %   100.0 %
    

 


(1)   Corresponds to the employees of Amoy foods Ltd and Shanghai Amoy Foods, sold in January 2006.

 

Employee Profit Sharing

 

The Company’s employees benefit from a triennial profit sharing plan, renewed in 2003, based on the Group’s results. In addition, the subsidiaries generally have in place profit sharing plans for their employees based on their own results. In 2005, recorded charges relating to profit sharing plans amounted to € 116 million (€ 115 million in 2004).

 

Group Performance Units

 

The Group has put in place a new system of variable compensation, in the form of Group Danone Performance Units (“GPU”), for which members of the executive committee and managers are eligible, totaling approximately 900 people worldwide.

 

The value of the GPUs, which can vary between € 0 and € 30, is calculated over a sliding period of three years based on the Group’s performance measured based on objectives communicated to the financial market. Each year, the board of directors of the Company, considering the recommendations of the Compensation and Nomination Committee, sets the performance objectives for the next year and evaluates the achievement of the previous year’s objective for each GPU plan.

 

This three-year variable compensation program, based on performance objectives announced to the financial market, increases the unity and commitment of managers with the objective of strengthening the Group’s positions in the markets and improving its operational performance.

 

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General Policy

 

Danone’s corporate culture is based on two goals: economic and social. As a result, the Group’s human resources policy is founded on two principles: a full and complete involvement in operating decisions and the determination to meet demanding social commitments. The Direction du Développement Durable et de la Responsabilité Sociale (Management of Sustainable Development and Social Responsibility) coordinates and implements the sustainable development policy, in connection with the various functional departments of the Group and its subsidiaries.

 

Operational decisions are effected by a human resources organization that is simple and close to the needs of the business. Human resources are organized by division and rely on group-wide structures in key areas such as compensation, organization and know-how, integration of acquisitions, recruitment and senior management. As a result, to attract talent from all over the world, the Group has developed an institutional communication campaign presented on the Internet by the website “danonepeople.com.” The development of human resources is ensured by training and quality management, for example, through tools such as “360°” personal assessments and coaching. Furthermore, human resources promotes the Group’s international development through (i) a global recruitment policy, (ii) encouraging the movement of managers around the world through a dedicated team that manages the administrative, financial and personal aspects of transfers and rotations and (iii) the integration of newly acquired companies.

 

Social Policy

 

The Group’s core principles are based on International Labor Organization conventions relating to the prohibition of child labor, forced labor, discriminatory practices, safety and working conditions, working hours, the application of national laws to the minimum wage, freedom of association and expression of employees and the right to collective bargaining. These principles are minimum requirements to be met by all Group companies, related companies, partners and suppliers. The implementation of a human resource and social policy is only valid insofar as the basic requirements are fulfilled by the employees of the Group and its partners. These requirements relate to safety and working conditions, welfare and wages.

 

Safety and Working Conditions.    Group policies regarding safety and working conditions apply to all employees, including temporary staff, interns and apprentices, who are all included in statistics, and to all Group companies, whether recently acquired or not.

 

Welfare.    The Group has developed a welfare policy in accordance with the economic situation of the environment in which the subsidiaries operate. Welfare takes into account the fundamental needs for social protection of employees and their families. It covers areas as diverse as pensions, workplace accidents, access to medical care and insurance for business travel.

 

Wages.    The Group’s objective is to be attractive in the countries in which it is present. Wages are a key factor in the Group’s human resource policies which offer the continued acquisition of skills and career opportunities. The Group’s objective is to better attract and motivate employees, and the Group seeks to be competitive with comparable leading international companies in each country where it operates. Each subsidiary is encouraged to develop a formal compensation policy and to communicate it to managers and management committees.

 

In 2001, the Group introduced a worldwide classification system for all managers, enabling them to identify their precise ranking and related responsibilities. The individual contribution of each manager is evaluated in an annual interview or Development and Performance Review (RDP).

 

In 2005, the Group’s personnel expenses, including social expenses, amounted to € 1,793 million compared with € 1,729 million in 2004. In addition, € 116 million was paid to the employees of the Group in 2005 as part of the incentive and profit sharing schemes, compared with € 115 million in 2004.

 

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Dialogue with Unions.    In 70% of the Group’s subsidiaries, collective bargaining agreements are negotiated with unions or workers’ representatives: the topics most often covered are compensation, work hours and conditions and work safety. Since 1996, the Group’s Information and Consultation Committee has met once a year and is composed of Group union members and permanent national unions on the one hand and Danone human resources and operational managers on the other. It also has observer members from the International Union of Food Workers (IUF). Regular dialogue has existed since 1985 with the IUF, which has led to the implementation of six common programs since 1988 relating to equal opportunities in the workplace, the availability of economic and social information, the recognition of union rights and informing representatives of the personnel in the event of a modification of the business which may affect jobs and working conditions and the restructuring of the biscuits segment, programs that have been concluded since 1988 by six agreements which were revised in 2005 to facilitate worldwide application. These agreements are widely distributed within the Group’s subsidiaries and published in 20 languages in order to be more easily understood and put in place.

 

Training.    More than ten years ago, the Company put in place a series of training programs in areas such as purchasing, marketing, human resources and financing that are run by professionals from various companies within the Group with the assistance of outside specialists, in the form of educational partnerships with universities.

 

Leading Social and Environmental Responsibility.    In conducting business, the “Danone Way” is both a business conduct policy and a tool designed to assist the Group’s subsidiaries in addressing a number of ethical areas, such as social policy, environmental, food safety and nutrition issues. These guidelines reflect the perspectives and particular concerns of key categories of stakeholders such as employees, consumers and clients, suppliers, stockholders, the community in general and the environment. Management has assigned specific objectives to the “Danone Way”: to spread, share and enrich the values and culture of the Group in each country where it operates, to allow subsidiaries to perform self-evaluations with respect to observable and measurable criteria and to have available at the Group level a collection of effective practices.

 

For each stakeholder, each of the subsidiaries’ teams performs self-evaluations on the basis of a set of practices as defined by the Group. Working groups bringing together individuals from different backgrounds are asked to contribute to the evaluation process. At the end of the process, the results are approved and endorsed by executives of each responsible subsidiary. Thus, the “Danone Way” has enabled each subsidiary to identify strong and weak points in different areas. It has also allowed them to prioritize and implement plans for improvement.

 

For example, in the context of its social policies, evaluation of management and of the Group’s human resource policy is based on 26 criteria set out in several themes: compliance with the law, respect for individuals, progress for organizations and employees, implementing values, and open communication with employees and their representatives, conditions for social dialogue and respect for rules of ethics.

 

The “Danone Way” was first introduced in 2000, tested in 2001 in approximately 10 subsidiaries and is being deployed worldwide. As of today, 94% of the Group’s subsidiaries have implemented the “Danone Way” and independent reviews have been carried out in 28 subsidiaries by PricewaterhouseCoopers and Mazars to validate their self-evaluations. The audit results show that there are no significant anomalies in the self-evaluations with respect to the procedures defined by the Group. These results are the subject of an opinion in the Social Responsibility Report which covers the published consolidated results.

 

The results of the self-evaluations show high-level practices in areas relating to employees, shareholders, customers and suppliers. The results in areas relating to the environment and local communities are weaker because they are less directly related to the market and correspond to less established practices in certain countries where the Group operates. The implementation of the “Danone Way” shows its effectiveness in maintaining and promoting the Groupe Danone culture in a context of strong internationalism. Over 700 improvement measures are underway in all subsidiaries covering all areas.

 

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Local economic impact on emerging economies.    The Group has set up operations in many emerging countries, with local production to meet domestic demand. The subsidiaries in developing countries benefit from training programs, technology transfer and modern industrial equipment. Knowledge transfer is facilitated by the Danone Vitapole Research Center, which works in collaboration with local teams. The effort is aimed at products, quality control and production processes.

 

The Group’s activities in a country bring work to numerous local producers and suppliers of industry and services, with which the Group seeks to form long-term relationships to ensure supplies that meet its standards in quantity and quality. In addition, the Group’s industrial activities cause suppliers of specialized equipment (packaging machines, etc.) to establish a permanent presence in the countries where the Group operates and facilitate the formation of teams that work, for example, with milk producers on the feeding of livestock, cultivation methods, etc.

 

Corporate citizenship.    Involvement in the community is both a necessity and a founding principle of the Group’s corporate culture. Generally speaking, the Group is involved in offering support for public bodies, NGOs and local non-profit associations and communities.

 

Publications.    Danone has been publishing a Social Responsibility Report since 1998, which presents the social and environmental impacts of the Group’s activities. This report is available at Groupe Danone, 17, Boulevard Haussmann, 75009 Paris and on the internet site of the Group, under Durable Development.

 

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Item 7.    Major Shareholders and Related Party Transactions

 

Major Shareholders

 

The following table sets forth certain information with respect to the beneficial ownership of shares and voting rights by principal shareholders, as of December 31, 2005.

 

Name


   Number of
Shares
Beneficially
Owned


   Percentage
of Shares
Owned


    Number of
Voting Rights


   Percentage
of Voting
Rights(1)


 

Eurazeo

   9,716,486    3.7 %   19,432,972    7.3 %

Caisse des Dépôts et Consignations

   9,142,996    3.5 %   9,142,996    3.4 %

Sofina and Glaces de Moustier

   5,200,000    2.0 %   7,800,000    2.9 %

Predica

   4,405,629    1.7 %   4,405,629    1.7 %

FCPE “Fonds GROUPE DANONE”

   3,819,977    1.4 %   7,260,525    2.7 %

Public

   212,234,273    80.2 %   218,204,866    82.0 %

The Company and its subsidiaries(2)

   19,715,829    7.5 %   —      —    
    
  

 
  

Total

   264,235,190    100.00 %   266,246,988    100.00 %
    
  

 
  


(1)   Double voting rights have been granted for each share fully subscribed, paid for, and beneficially owned by the same individual or entity for at least two years.
(2)   Including 2,882,060 shares (i.e., 1.09% of the capital) indirectly held.

 

To the best of the Company’s knowledge there are no shareholders whose beneficial ownership represents 5% or more of the Company’s share capital and voting rights. However, certain financial institutions, mutual funds, may manage funds that collectively hold more than 5% of the capital of the Company. There is no clause in the Company’s bylaws giving preferential rights for the acquisition or sale of shares. Furthermore, at December 31, 2005, existing pledges on shares of the Company in registered form on the books of the Company (nominatif pur) and in registered form on the books of a financial intermediary (nominatif administré), respectively, amounted to 1,932 shares held by four shareholders and 28,276 shares held by eleven shareholders.

 

As of December 31, 2005, pursuant to authorizations granted by the general shareholders’ meeting of April 22, 2005 or prior authorizations, the Group owned, directly and through its Spanish subsidiary, Danone SA, 19,715,829 shares of Groupe Danone, representing 7.46% of its share capital.

 

For a description of the Company’s share repurchase program, see “Item 10. Additional Information—Purchase by the Company of its Own Shares.”

 

Significant Changes

 

Shareholdings

 

The Caisse des Dépôts et Consignations reported having exceeded 3% of the Company’s voting rights on March 2, 2005, and that it held 3.20% of the capital and 3.13% of the Company’s voting rights.

 

To the Company’s knowledge, there were no other significant shareholding changes during the past three years.

 

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On December 31, 2005, the Company conducted a survey of its nominative shares, which revealed the following distribution of the Company’s shareholders:

 

Institutional investors

      

–     France

   28 %

–     United States

   11 %

–     United Kingdom

   9 %

–     Other

   17 %

Individual shareholders

   20 %

Shareholders represented at the Board of Directors

   6 %

Treasury shares and FCPE “Fonds GROUPE DANONE”

   9 %
    

Total

   100 %

 

At December 31, 2005, the Company estimates that there were approximately 1,000 institutional investors and approximately 200,000 individual shareholders.

 

Stock option and stock purchase plans

 

Stock option and stock purchase plans have been granted to the Company’s senior management, usually on a bi-annual basis.

 

The duration of these plans is from eight to ten years. The exercise price for the options must amount to at least the average price for the 20 trading days preceding the board of directors’ meeting which grants the options and generally may not be exercised for two years after the grant date.

 

The general meeting of shareholders, by successive authorizations, authorized the board of directors to grant, once or multiple times, over a maximum period of 26 months, options to subscribe for or purchase shares of the Company subject to a limit of 1% of the Company’s share capital for the May 1995 and 1997 plans, a limit of four million shares for the May 1999, May 2001 and April 2003 plans (after taking into account the two-for-one stock split on June 15, 2004) and a limit of three million shares for the April 2005 plan.

 

Pursuant to these authorizations, the board of directors granted to the Company’s senior management stock options to acquire a total of 8,243,382 existing shares and had authority to grant 2,973,200 stock purchase options at December 31, 2005. See “Item 6. Directors, Senior Management and Employees—Directors and Senior Management—Options.”

 

In addition, the annual shareholders’ meeting of April 22, 2005 authorized the board of directors to grant, once or multiple times, over a maximum period of 26 months, existing or newly issued shares of the Company free of charge in an amount of up to 0.4% of the Company’s share capital, i.e., one million shares.

 

Shareholders’ Agreements

 

To the Company’s knowledge, there is no shareholder holding more than 5% of the capital or voting rights of the Company and there are no shareholders’ agreements.

 

Shares Held in the United States

 

For information on shares held in the United States, see “Item 9. The Offer and Listing—Price History of Shares.”

 

Related Party Transactions

 

In June 1998, the Company, Sofina, its wholly owned subsidiary Interamerican Finance and Danasia Participations, an affiliate of Sofina, entered into a memorandum of understanding regarding their respective

 

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ownership interests in Danone Asia Pte Ltd, a holding company for Groupe Danone’s investments in the Asia Pacific region. At December 31, 2005, Groupe Danone owned 96.78% of Danone Asia Pte Ltd. Under the terms of the memorandum of understanding, Sofina, Interamerican and Danasia have an option to sell to the Company, and the Company has an option to buy from them, their entire ownership interest in Danone Asia Pte Ltd. These options are exercisable in thirds, beginning, respectively, on January 1, 2003, January 1, 2005 and July 1, 2006, at a price to be determined based on an agreed upon formula, taking into account the then current market value of the shares. At the end of 2002, Danone confirmed its intention to exercise its purchase option, and an independent expert was charged with completing an evaluation of Danone Asia Pte Ltd. The interest of the Group in this company increased from 90.34% at December 31, 2002 to 93.56% at December 31, 2003, and further increased to 96.78% in January 2005. In addition, in December 2001, the Company granted to Union Financière Boël preemptive acquisition rights exercisable at market value with respect to Sofina shares held by a subsidiary of the Company. In December 2004, the Group sold its interests in Sofina. Mr. Yves Boël, one of the Company’s directors until April 2002, was the Chairman of Sofina and the delegated Chairman (“administrateur délégué”) of Union Financière Boël, and Mr. Richard Goblet d’Alviella, one of the Company’s current directors, is a delegated director of these two companies. In addition, Mr. Franck Riboud is a director of Sofina. See “Item 6. Directors, Senior Management and Employees—Directors and Senior Management—Board of Directors.”

 

In July 2002, the Company entered into an agreement with Suez Industrial Solutions, a subsidiary of the Suez Group, for the energy management and industrial wastewater processing of the Group’s subsidiaries. Mr. Jean Gandois, one of the Company’s directors until April 2005, is Vice-Chairman of the board of Suez.

 

Each of the above-referenced transactions was entered into on an arm’s-length basis according to the Company’s normal business practices.

 

No loans or guarantees were granted or made by the Company or its subsidiaries to any member of the executive committee.

 

Sales by Directors (“mandataires sociaux”) of the Company’s shares

 

Mr. Jacques Vincent declared that on April 21, 2005 he exercised 100,000 options at a price per share of € 58.09 and sold 100,000 shares at a price per share of € 75. In addition, Mr. Franck Riboud declared that on February 16, 2005 and May 3, 2005, he had exercised 40,000 and 60,000 options, respectively, at prices per share of € 38.99 and € 58.09, respectively, and sold 40,000 and 60,000 shares at prices per share of € 72.02 and € 73.825, respectively. Mr. Emmanuel Faber declared that on February 23, 2005, he had exercised 24,000 options at a price per share of € 58.09 and sold 24,000 shares at a price per share of € 73.36.

 

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Item 8.    Financial Information

 

Consolidated Statements and Other Financial Information

 

See “Item 18. Financial Statements,” for a list of the financial statements filed with this annual report.

 

Dividend Policy

 

The declaration and amount of dividends to be paid on the shares in respect of any period are subject to the decision by the Company’s shareholders at an ordinary general meeting of shareholders. Pursuant to French law, payment of dividends must be made within nine months following the end of the fiscal year to which they relate.

 

Under French law and the Company’s bylaws, the Company’s unconsolidated statutory net income in each fiscal year, as increased or reduced, as the case may be, by any profit or loss of the Company carried forward from prior years, less any contributions to legal reserves, is available for distribution to the shareholders of the Company as dividends, subject to other applicable requirements of French law and the Company’s bylaws.

 

Pursuant to the Company’s bylaws, the Company’s shareholders may determine at an ordinary meeting the portion, if any, of dividends that each shareholder may elect to receive in shares. For dividends distributed in respect of the years 1989 through 1995, each of the Company’s shareholders was given the option of receiving dividends in the form of cash or shares. Applications for dividend payments in the form of shares shall be submitted no later than three months after the date on which the general shareholders’ meeting is held. The board of directors does not intend to recommend a stock dividend in the near future.

 

Dividends paid to holders of shares or ADSs who are not residents of France generally will be subject to French withholding tax at a rate of 25%. Under certain tax treaties entered into between France and other countries, such withholding tax may be reduced to 15% for holders of shares who qualify for the benefits of these treaties, subject to certain procedures and exceptions. Under the Treaty between France and the United States for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital signed on August 31, 1994 (the “Treaty”), such reduced withholding tax may apply to holders of shares and also to holders of ADSs, who are residents of the United States as defined by the provisions of the Treaty, subject to certain procedures and exceptions.

 

French individual residents are entitled to a tax credit with respect to dividends paid to them since January 1, 2005, which is equal to 50% of the distributed dividends, capped at €230 or €115 depending on the marital status of the recipient. Under certain tax treaties entered into between France and other countries this French tax credit attached to dividends may, in certain circumstances, be paid, net of withholding tax, to non-French resident individual shareholders. In addition, under the Treaty, such payment of French tax credit, net of withholding tax, may have been available not only to certain individual holders of shares but also to certain individual holders of ADSs, qualifying as U.S. residents under the Treaty, subject to certain exceptions and procedures. See “Item 10. Additional Information—Taxation—French Taxation—Taxation of Dividends” and “Item 10. Additional Information—Taxation—Taxation of U.S. Investors—Taxation of Dividends.”

 

Dividends paid to holders of ADSs are converted from euro to dollars and subjected to a charge by the depositary for any expenses incurred by the depositary in such conversion.

 

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The following table sets forth the total dividends paid per share and per ADS for each year indicated, with and without the French tax credits attached to dividends and before deduction of any French withholding tax, taking into account the two-for-one stock split effected by the Company in June 2004.

 

     Dividends
Per Share


   Dividends Per
Share Including
French Tax Credit
Calculated at the
Rate of 50%(2)


   Dividends
Per ADS


   Dividends Per
ADS Including
French Tax Credit
Calculated at
the Rate of 50%(2)


Year to Which Dividend Relates(1)


   (€)

   (€)

   ($)(3)(4)

   ($)(3)(4)

2001

   1.03    1.55    0.19    0.29

2002

   1.15    1.73    0.26    0.39

2003

   1.23    1.84    0.29    0.43

2004

   1.35    1.35    0.34    0.34

2005(5)

   1.70    1.70    0.40    0.40

(1)   Pursuant to French law, payment of dividends must be made within nine months following the end of the fiscal year to which they relate.
(2)   A French tax credit (known as the avoir fiscal) was attached to distributions of dividends made before December 31, 2004. Its amount ranged from 10% to 50% of the dividends depending on the nature of the recipient. For simplification purposes, the avoir fiscal included in the dividend per share in the chart above were calculated at the rate of 50%. From 2005 on, the avoir fiscal has been abolished and partially replaced by a French tax credit benefiting only individuals. Such French tax credit is equal to 50% of the dividends distributed, but capped at €230 or €115 per year depending on the marital status of the recipient. Any payment equivalent to French tax credits, less applicable French withholding tax, is made only following receipt by the French Tax Administration of a claim for such payment filed by shareholders entitled to such payment, and is generally not expected to be paid before 12 months after the filing of such claim, and after the close of the calendar year in which the respective dividends are paid. See “Item 10. Additional Information—Taxation—French Taxation” and “Item 10. Additional Information—Taxation—Taxation of U.S. Investors.”
(3)   Periods prior to 2004 translated solely for convenience from euro into dollars at the Noon Buying Rates on the respective dividend payment dates, or on the following business day if such date was not a business day in France or the United States. For convenience only, avoir fiscal amounts have been translated into dollars at the Noon Buying Rates on such dates although such amounts are paid subsequent to such payment dates. The Noon Buying Rates may differ from the rate that may be used by the Depositary to convert euro to dollars for purposes of making payments to holders of ADSs. Figures for 2005 translated solely for convenience at the Noon Buying Rate on December 30, 2005 of $ 1.1842 per € 1.00.
(4)   As each ADS represents one-fifth of one share, the amount of dividends per share has been divided by five to obtain the historical dividends declared per ADS.
(5)   Dividends to be proposed at the shareholders’ meeting to be held on April 27, 2006.

 

Legal Proceedings

 

On December 5, 2001, the European Commission concluded that anti-competitive practices in the beer market in Belgium had occurred and imposed a fine of € 44.6 million on the Company. The entire amount was provisioned in the Group’s accounts at December 31, 2001 and was paid in 2002. In February 2002, the Company launched a procedure seeking to recover the amount paid. In October 2005, the Court of First Instance confirmed the decision of the European Commission. However, the Court decided to slightly reduce the amount of the fine imposed, from € 44.04 to € 42.41 million, finding that the Commission had incorrectly determined that an aggravating circumstance existed. The Company has appealed this decision to the European Court of Justice.

 

The Group is not presently party to litigation or arbitration that could have or has had, in the recent past, a significant effect on its financial condition, activities or results.

 

The Company and its subsidiaries are parties to a variety of legal proceedings arising out of the normal course of business, including in relation to certain warranties given as part of the divestitures completed between 1997 and 2005. In some cases, damages are sought and liabilities are accrued for when a loss is probable and can be reasonably estimated. See Note 18 to the Consolidated Financial Statements.

 

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Item 9.    The Offer and Listing

 

Price History of Shares

 

The principal trading market for the Company’s shares is the Euronext Paris SA, or Euronext Paris, the French integrated national dealing system through which trading in all French listed securities occurs. The Company’s shares are traded on Eurolist by Euronext (ISIN Code: FR0000120644) and are included in the CAC 40 Index, the principal stock exchange index published by Euronext Paris, the market enterprise which manages and operates the French stock exchange markets and are included in the Dow Jones Eurostoxx and Dow Jones Stoxx. Since September 25, 2000, the Company’s shares are eligible for deferred settlement service. The Company’s shares have been included in the Eurostoxx 50 index and Dow Jones Sustainability World Index since September 2000.

 

In the first half of 2004, the Company delisted its shares from the London Stock Exchange and the Brussels Stock Exchange, due to the low liquidity of the shares on these exchanges. The delisting from the London Stock Exchange occurred on March 24, 2004 and the delisting from the Brussels Stock Exchange occurred on May 11, 2004.

 

Since December 1990, the Company has sponsored an American Depositary Receipts, or ADRs, program in the United States with Citibank, N.A., as depositary. The American Depositary Shares, or ADSs, issued pursuant to such program have been registered with the Securities and Exchange Commission under a Registration Statement on Form F-6. Each such ADS represents one-fifth of one share. Since November 20, 1997, the ADSs have been listed on the New York Stock Exchange under the symbol “DA.” Groupe Danone has reached its current filing limit for ADRs. As a result, Citibank, N.A., as depositary, will no longer accept deposits of ordinary shares for the issuance of ADRs for Groupe Danone until further notice. The Groupe Danone ADR Program remains open for the cancellation of ADRs.

 

As of December 31, 2005, 24,287,065 ADSs were outstanding, representing approximately 1.84% of the Company’s outstanding shares, and there were 155 holders of record of ADSs, 4 of which had addresses outside the United States.

 

The table below sets forth the reported high and low sales prices for the Company’s shares reported by Euronext Paris and for the ADSs on the New York Stock Exchange for the periods indicated.

 

     Euronext Paris

  

New York

Stock Exchange


Calendar Period


   High

   Low

   High

   Low

     (in €)

   (in $)

Monthly

                   

April 2006 (through April 19, 2006)

   102.2    96.60    26.50    25.05

March 2006

   101.8    95.10    26.40    23.65

February 2006

   97.80    87.80    25.13    22.12

January 2006

   90.80    85.20    22.70    20.89

December 2005

   90.10    86.60    21.64    20.34

November 2005

   88.45    83.40    20.69    19.48

October 2005

   91.35    81.40    21.86    19.88

Quarterly

                   

2005

   96.3    67.8    23.2    17.2

First quarter

   77.0    67.8    20.4    17.7

Second quarter

   77.1    71.2    20.0    17.3

Third quarter

   96.3    72.0    23.2    17.2

Fourth quarter

   91.4    81.4    21.9    19.5

 

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     Euronext Paris

  

New York

Stock Exchange


Calendar Period


     High  

     Low  

     High  

     Low  

     (in €)

   (in $)

2004

   73.4    62.2    18.5    15.4

First quarter

   71.1    64.3    17.8    15.9

Second quarter

   73.4    66.3    17.9    16.2

Third quarter

   72.7    62.8    17.5    15.5

Fourth quarter

   69.0    62.2    18.5    15.4

Yearly

                   

2003

   68.5    52.1    16.2    11.6

2002

   75.2    54.7    13.9    11.1

2001

   81.7    62.5    15.1    11.2

Sources: Euronext Paris S.A. and Bloomberg.

 

On April 19, 2006, the last reported listed price of the Company’s shares on Euronext Paris was € 99.40 per share and the last reported listed price of the Company’s ADSs on the New York Stock Exchange was $26.03 per ADS.

 

Plan of Distribution

 

Not applicable.

 

Nature of Trading Market

 

Generals

 

Euronext N.V. has been listed on the Premier Marché of Euronext Paris since July 2001. In January 2002, Euronext N.V acquired the London International Financial Futures and Options Exchange (LIFFE), London’s derivatives market. The combination of LIFFE and Euronext N.V. will, among other things, triple the volume of derivatives business conducted through the LIFFE CONNECT trading platform.

 

Since February 6, 2002, Bolsa de Valores de Lisboa e Porto (BVLP) has become a wholly owned subsidiary of Euronext N.V. and has therefore been renamed Euronext Lisbon.

 

Securities quoted on exchanges participating in Euronext cash markets are traded and cleared over common Euronext platforms. NSC is the common platform for trading, Clearing 21 is the platform for clearing, and LIFFE CONNECT, the LIFFE trading platform, is already used for all Euronext futures and options trading. In addition, Euronext Paris anticipates the implementation of central clearinghouse, settlement and custody structures over a common system. However, these securities will remain listed on their local exchanges. As part of Euronext, Euronext Paris retains responsibility for the admission of shares to Euronext Paris’ trading markets as well as the regulation of those markets.

 

Euronext Paris

 

As from February 21, 2005, all securities currently traded on the Premier, Second and Nouveau Marchés are listed and traded on a single market, Eurolist by Euronext, which is operated by Euronext Paris. In accordance with Euronext Paris rules, the shares issued by domestic and other companies are classified in capitalization compartments. The shares of listed companies are distributed between three capitalization compartments, according to the criteria set by Euronext Paris:

 

    Compartment A comprises the companies with market capitalizations above € 1 billion;

 

    Compartment B comprises the companies with market capitalizations from € 150 million and up to and including € 1 billion;

 

    Compartment C comprises the companies with capitalizations below € 150 million.

 

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The Company’s shares have been classified in Compartment A of the Eurolist by Euronext market.

 

In addition, securities of certain other companies are traded on a non-regulated over-the-counter market, the Marché Libre OTC, which is also operated by Euronext Paris.

 

Securities listed on Euronext Paris are placed in one of two categories, Continu (continuous trading) or Fixing (call auctions), depending on the volume of transactions. The Company’s shares are listed in the category known as Continu, which includes the most actively traded securities. The minimum yearly trading volume required for a security to be placed in Continu is 2,500 trades.

 

Securities listed on Eurolist by Euronext are traded through authorized financial institutions that are members of Euronext Paris. Trading on Eurolist by Euronext takes place continuously on each business day from 9:00 a.m. to 5:25 p.m. (Paris time), with a pre-opening session from 7:15 a.m. to 9:00 a.m. and a post-closing session from 5:25 p.m. to 5:30 p.m. during which transactions are recorded but not executed, a closing auction at 5:30 p.m. and a “trading at last phase” from 5:30 p.m. to 5:40 p.m. Any trade of securities effected after the close of a stock exchange session is recorded on the next Euronext Paris trading day at the previous session’s closing price for the relevant security. Euronext Paris publishes a daily official price list that includes price information concerning listed securities. Euronext Paris has introduced continuous electronic trading during trading hours for most actively traded securities.

 

Trading in the listed securities of an issuer may be suspended by Euronext Paris if quoted prices exceed certain price limits defined by the regulations of Euronext Paris. In particular, if the quoted price of a Continu security, such as the Company’s shares, varies by more than 10% from the previous day’s closing price or once trading has begun, Euronext may suspend trading for up to four minutes. Once trading has commenced, further suspensions for up to four minutes are also possible if the price again varies by more than 10% from a new reference price equal to the price which caused the first trading suspension. Euronext Paris may also suspend trading for a four-minute period if trades are bound to breach the so-called “dynamic” thresholds, set at 2% plus or minus the last trade price. Euronext Paris may also suspend trading of a listed security in certain other circumstances, including, for example, the occurrence of unusual trading activity in such security. In addition, in exceptional cases, the Autorité des Marchés Financiers (the “AMF”) may also suspend trading.

 

All trades of securities listed on Eurolist by Euronext™ are performed on a cash-settlement basis on the third trading day after the trade. However, market intermediaries are also permitted to offer investors a deferred settlement service (Service à Règlement Différé or SRD) for a fee. The SRD allows investors who elect this service to benefit from leverage and other special features of the monthly settlement market. The SRD is reserved for securities which have a total market capitalization of at least € 1 billion and represent a minimum daily trading volume of € 1 million and which are normally cited on a list published by Euronext Paris. The Company’s shares are eligible for the deferred settlement service. Investors can elect on the determination date (date de liquidation), which is, at the latest, the fifth trading day before the end of the month, either to settle the trade by the last trading day of the month or to pay an additional fee and postpone the settlement decision to the determination date of the following month.

 

Prior to any transfer of securities held in registered form on Eurolist by Euronext, the securities must be converted into bearer form and accordingly inscribed in an account maintained by an accredited intermediary with Euroclear France S.A., a registered clearing agency. Securities transactions are initiated by the owner giving instructions (through an agent, if appropriate) to the relevant accredited intermediary. Trading securities listed on Eurolist by Euronext are cleared and settled through Clearing 21 and Euroclear France S.A. using a continuous net settlement system. A fee or a commission is payable to the broker-dealer or other agent involved in the transaction.

 

Ownership of equities traded on a deferred settlement basis is considered to have been transferred only after the equities have been registered in the purchaser’s account. Under French securities regulations, any sale of

 

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securities executed on a deferred settlement basis during the month a dividend is paid is deemed to occur after the dividend has been paid. If the sale takes place before, but during the month of, a dividend payment date, the purchaser’s account will be credited with an amount equal to the dividend paid, and the seller’s accounts will be debited by the same amount.

 

Selling Shareholders

 

Not applicable.

 

Dilution

 

Not applicable.

 

Expenses of the Issue

 

Not applicable.

 

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Item 10.    Additional Information

 

Share Capital

 

Not applicable.

 

Memorandum and Articles of Association

 

For the Company’s registry and number, please see “Item 4. Information on Groupe Danone—History and Development,” and for the Company’s corporate purpose, refer to Article 2 of the Company’s bylaws. An unofficial English translation of the bylaws is included as an exhibit to this annual report.

 

The section below is a summary of the material information concerning the Company’s share capital, together with material provisions of applicable French law and the Company’s bylaws. Such description of the Company’s share capital and information does not purport to be complete and is qualified in its entirety by reference to the Company’s bylaws. You may obtain copies of the Company’s bylaws in French from the Greffe du Registre du Commerce et des Sociétés de Paris, France or by writing to Groupe Danone, Direction Relations Investisseurs, 17, Boulevard Haussmann, 75009 Paris, France. Please refer to those full documents for additional details.

 

Board of Directors

 

For a complete description of directors’ powers under French law and Danone’s bylaws, see “Item 6. Directors, Senior Management and Employees—Directors and Senior Management—Board of Directors.”

 

Share Capital

 

At March 31, 2006, the Company’s share capital totaled € 132,117,595 divided into 264,235,190 outstanding common shares of the same class with a nominal value of € 0.5 per share. The nominal value per share was decreased from € 1.0 to € 0.5 on June 15, 2004. All the outstanding shares are fully paid. The Company’s bylaws provide that shares may be held in registered or bearer form, at the option of the shareholder.

 

Shareholders’ Meetings and Voting Rights

 

General

 

In accordance with French law, there are two types of shareholders’ general meetings: ordinary and extraordinary.

 

Ordinary general meetings of shareholders are required for matters such as:

 

    electing, replacing and removing directors,

 

    allocating fees to the board of directors,

 

    appointing statutory auditors,

 

    approving the annual and consolidated financial statements,

 

    declaring dividends and authorizing dividends to be paid in shares, and

 

    approving regulated agreements.

 

Extraordinary general meetings of shareholders are required for the approval of matters such as:

 

    amending the Company’s bylaws, in particular the corporate purpose and/or the name of the Company,

 

    approving mergers in which the Company is not the surviving entity or in which the Company is the surviving entity but in connection with which the Company is issuing a portion of its share capital to the acquired entity,

 

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    increasing or decreasing the Company’s share capital,

 

    creating a new class of equity securities (common or preferred shares),

 

    authorizing or approving the issuance of any securities giving rights to equity securities, and

 

    the voluntary liquidation of the Company prior to the end of its statutory term.

 

Special meetings of shareholders of a certain category of shares or of securities giving access to the Company’s share capital are required for any modification of the rights derived from such category of shares or for any modification of the terms and conditions (“contrat d’émission”) for such securities giving access to the Company’s share capital. The resolutions of the shareholders’ general meeting affecting these rights are effective only after the approval by the relevant special meeting.

 

Annual Ordinary Meetings

 

French law requires the board of directors to convene an annual ordinary general meeting of shareholders to approve the annual and consolidated financial statements. This meeting must be held within six months of the end of the Company’s fiscal year. This period may be extended by an order of the President of the Tribunal de Commerce. The board of directors may also convene an ordinary or extraordinary general meeting of shareholders upon proper notice at any time during the year. If the board of directors fails to call such a meeting, the Company’s statutory auditors may call the meeting. In case of a bankruptcy, the liquidator or the court-appointed agent may also call a shareholders’ meeting in some instances. Any of the following may request the president of the Tribunal de Commerce to appoint an agent to call a shareholders’ meeting:

 

    one or several shareholders holding at least 5% of the Company’s share capital,

 

    the auditors,

 

    the worker’s committee in cases of urgency,

 

    any interested party in cases of urgency,

 

    certain duly qualified associations of shareholders who hold their shares for at least two years in registered form and who together hold a specified percentage of the voting rights of the Company, and

 

    majority shareholders in share capital or voting rights after a public tender offer or the acquisition of a controlling block of shares.

 

Notice of Shareholders’ Meetings

 

The Company must announce general meetings of shareholders at least 30 days in advance by means of a preliminary notice (avis de réunion) which is published in France in the Bulletin des annonces légales obligatoires, or BALO. This preliminary notice must be sent to the AMF. It must contain, among other things, the time, date and place of the meeting, the agenda of the meeting and a draft of the resolutions to be submitted to the shareholders, a description of the procedures that holders of bearer shares must follow to attend the meeting and the procedure for voting by mail.

 

At least 15 days prior to the date set for a general meeting of shareholders on first call, and at least six days before any second call, the Company must send a final notice (avis de convocation) containing, among other things, the final agenda and other information for the meeting. This notice must be sent by mail to all holders of registered shares who have held such shares for more than one month prior to the issuance of the notice and published in a newspaper authorized to publish legal announcements in the local administrative department (département) in which the Company is registered, as well as in the BALO, with prior notice having been given to the AMF.

 

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Additional resolutions to be submitted for approval by the shareholders at such meeting may be proposed to the board of directors within ten days of the publication of the preliminary notice in the BALO by:

 

    one or several shareholders holding a specified percentage of share capital,

 

    a duly qualified association of shareholders who have held their shares in registered form for at least two years and who together hold a specified percentage of the Company’s voting rights, or

 

    the worker’s committee.

 

The board of directors must submit these resolutions to a vote of the shareholders.

 

During the 15 days preceding a shareholders’ meeting, any shareholder may submit to the board of directors written questions relating to the agenda for the meeting. The board of directors must respond to these questions.

 

In general, shareholders can only take action at a shareholders’ meeting on matters listed on the agenda for the meeting. In exception to this rule, shareholders may take action with respect to the dismissal of directors and to the appointment of new directors even though these actions have not been included on the agenda.

 

Attendance and Voting at Shareholders’ Meetings

 

Attendance and exercise of voting rights at ordinary general meetings of shareholders and extraordinary general meetings of shareholders are subject to certain conditions specified by French law and the Company’s bylaws. There is no requirement that a shareholder have a minimum number of shares in order to attend or to be represented at an ordinary or extraordinary general meeting of shareholders or to vote by videoconference or any other means of telecommunication which allows the shareholders to be identified.

 

In order to participate in any general meeting of shareholders, French law requires that a holder of shares held in registered form must have its shares registered in its name in a shareholder account maintained by or on behalf of the Company by an agent appointed by the Company prior to a date that is no earlier than five days before the date set for the meeting (the Company has set this date at least one day before the 2006 general shareholders’ meeting).

 

A holder of shares in bearer form must obtain a certificate from the accredited financial intermediary (intermédiaire financier habilité) with whom such holder has deposited its shares. This certificate must indicate the number of bearer shares owned by such holder and must state that such shares are not transferable until the time fixed for the meeting. According to French law, the holder must deposit this certificate at the place specified in the notice of the meeting prior to a date that is no earlier than five days before the meeting (the Company has set this date at least three days before the 2006 general shareholders’ meeting for deposit at accredited financial intermediaries and at least one day prior to the meeting for deposit at the Company’s registered office).

 

According to French law and the Company’s bylaws, any shareholder voting by correspondence or by proxy and presenting a certificate issued by the intermediary attesting that the shares are blocked may nevertheless transfer all or part of the shares with which the shareholder voted by correspondence or for which the shareholder appointed a proxy, upon the condition that the shareholder provide the Company’s authorized agent with details enabling the shareholder to cancel its vote or proxy and change the number of shares and corresponding votes no later than the day before the general shareholders’ meeting.

 

Proxies and Votes by Mail

 

In general, all shareholders who have properly registered their shares or duly presented a certificate from their accredited financial intermediary have the right to participate in general meetings of shareholders.

 

Shareholders may vote either by proxy, by mail or by any means provided for in the Company’s bylaws, including by remote data transmission to the Company (Internet) of the correspondence ballot papers or a proxy form pursuant to applicable laws and regulations.

 

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Proxies will be sent to all registered shareholders and, on request, to any holder of shares in bearer form. Under French law, in order to be counted, such proxies must be received at the Company’s registered office or at such other address indicated on the notice convening the meeting prior to the date of the meeting (the Company requires proxies to be received at least three days before the 2006 general shareholders’ meeting). A shareholder not domiciled in France as defined by the French Civil Code (Code Civil) may be represented at a shareholders’ meeting by an intermediary registered under the conditions set forth by the French legal and regulatory provisions in force. This shareholder will therefore be considered to be present at the meeting for the computation of the quorum and the majority. A shareholder may grant proxies to his or her spouse or to another shareholder. A shareholder that is a corporation may grant proxies to a legal representative. Alternatively, the shareholder may send the Company a blank proxy without nominating any representative. In this case, the chairman of the meeting will vote the blank proxies in favor of all resolutions proposed by the board of directors and against all others.

 

With respect to votes by mail, the Company must send a voting form to all registered shareholders and, on request, to any holder of shares in bearer form. Votes by mail must be received at such address at least three days prior to the date of the meeting. The deadline for the Company to receive proxy forms for votes by mail or by proxy is determined by the board of directors and published in the notice of the meeting in the BALO. For the 2006 general shareholders’ meeting, the deadline for the Company to receive proxy forms for votes by mail has been set at least three days before the meeting.

 

The board of directors may decide that votes submitted during the general meetings of shareholders may be sent by remote data transmission pursuant to applicable regulations.

 

Subject to the limitations described below, each share confers on the shareholder the right to one vote. Under French law, shares of a company held by entities controlled directly or indirectly by that company are not entitled to voting rights and are not counted for quorum or majority purposes.

 

The Company’s bylaws provide that each registered and fully paid-up share held in the same name for at least two years shall entitle the holder thereof to double voting rights at a meeting of shareholders, although the right is extinguished if the shares are held in bearer form. The Company’s bylaws also provide that no shareholder shall be able to exercise, directly or indirectly, more than 6% of the total number of voting rights represented by the outstanding shares of the Company as of the date of the meeting. However, a shareholder may exercise up to 12% of the total number of voting rights to the extent such voting rights result from double voting rights.

 

The foregoing limitations on voting rights shall no longer apply in the event any person or persons acting alone or in concert were to come into possession of at least two-thirds of the Company’s shares in a public tender offer for the totality of the Company’s shares.

 

Quorum

 

French law requires that shareholders having at least 20% of the shares entitled to voting rights must be present in person or voting by mail or by proxy or by any means provided for in the bylaws including by remote data transmission, in accordance with the applicable laws and regulations to fulfill the quorum requirement for:

 

    an ordinary general meeting of shareholders, and

 

    an extraordinary general meeting of shareholders where an increase in the Company’s share capital is proposed through incorporation of reserves, profits or share premium.

 

The quorum requirement is at least 25% of the shares entitled to voting rights, on the same basis, for any other extraordinary general meeting of shareholders.

 

If a quorum is not present at a meeting, the meeting is adjourned. When an adjourned ordinary shareholders’ meeting is reconvened, there is no quorum requirement. No quorum is required when an adjourned extraordinary

 

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general meeting of shareholders is reconvened only to approve an increase in the Company’s share capital through incorporation of reserves, profits or share premium. In the case of any other reconvened extraordinary general meeting of shareholders, shareholders having at least 20% of outstanding voting rights must be present in person or voting by mail or by proxy or by any means, including by remote data transmission, in accordance with the applicable laws and regulations, for the quorum to be met. If a quorum is not present, the reconvened meeting may be adjourned for a maximum of two months. No deliberation by the shareholders may take place without a quorum. However, only questions which were on the agenda of the adjourned meeting may be discussed and voted upon at any reconvened meeting.

 

Majority

 

At an ordinary general meeting of shareholders or an extraordinary general meeting of shareholders deciding upon any capital increase by incorporation of reserves, profits or share premium, a simple majority of the votes cast is required to pass such a resolution. At any other extraordinary general meeting of shareholders, a two-thirds majority of the votes cast is required.

 

However, a unanimous shareholder vote is required to increase liabilities of shareholders.

 

Abstention from voting by those present in person or present by any means, including by remote data transmission in accordance with applicable laws and regulations or represented by proxy or voting by mail, is counted as a vote against the resolution submitted to a shareholder vote.

 

Financial Statements and Other Communications with Shareholders

 

In connection with any shareholders’ meeting, the Company is required to provide to any shareholder who so requests a set of documents, including the Company’s annual report and a summary of the results of the five previous fiscal years.

 

French law also requires that a special report must be provided to the general shareholders’ meeting regarding the stock options authorized and/or granted by the Company.

 

Pursuant to a French act of August 1, 2003 (loi de sécurité financière), the Chairman of the Company’s board of directors is required to deliver a special report to the ordinary shareholders’ meeting regarding the status of the preparation and organization of the work of the board of directors, the status of the internal control procedures implemented by the Company and on the restrictions, if any, that the board of directors has placed on the powers granted to the Chief Executive Officer. In general, this report describes the objectives of the Company’s internal controls, the organization of the participants in the Company’s internal controls and the internal control procedures that are currently in place. This report will be presented to the combined extraordinary and ordinary general shareholders’ meeting of April 27, 2006.

 

Dividends

 

The Company may distribute dividends out of “distributable profits,” plus any amounts held in the Company’s reserves that the shareholders decide to make available for distribution, other than those reserves which are specifically required by French law and the Company’s bylaws.

 

“Distributable profits” consist of unconsolidated statutory net profit in each fiscal year, as increased or reduced, as the case may be, by any profit or loss of the Company carried forward from prior years, and as reduced by the legal reserve fund allocation described below.

 

Legal Reserve

 

French law provides that French sociétés anonymes are each required to allocate 5% of their unconsolidated statutory net profits in each fiscal year to a legal reserve fund before dividends may be paid with respect to that

 

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year. Funds must be allocated until the amount in such legal reserve fund is equal to 10% of the aggregate nominal amount of the issued and outstanding share capital. The legal reserve fund constitutes a legal guarantee for third parties dealing with the Company and, in this respect, may not be distributed to shareholders. As of December 31, 2005, the Company’s legal reserve was € 15 million. This legal reserve may be distributed only upon liquidation of the relevant entity.

 

Approval of Dividends

 

According to French law, the board of directors may propose a dividend for approval by the shareholders at the annual general meeting of shareholders. The Company’s bylaws provide that, to the extent the distributable profits are sufficient, a first dividend will be paid to the shareholders each year equivalent, subject to certain adjustments, to 6% interest per annum on the paid and nonredeemed amounts of their shares.

 

If the Company has earned distributable profits since the end of the preceding fiscal year as reflected in an interim income statement certified by the Company’s auditors, the board of directors may distribute interim dividends to the extent of the distributable profits for the period covered by the interim income statement. The board of directors may declare such dividends, subject to French law, and may do so, for interim dividends paid in cash, without obtaining shareholder approval. For interim dividends paid in shares, prior authorization by a general shareholders’ meeting is required.

 

Distribution of Dividends

 

Dividends are distributed to shareholders pro rata according to their respective holdings of shares. Dividends are payable to holders of shares outstanding on the date of the shareholders’ meeting approving the distribution of dividends. In the case of interim dividends, distributions are made to shareholders on the date of the board of directors’ meeting approving the distribution of interim dividends. The actual dividend payment date is decided by the shareholders in an ordinary general meeting of shareholders or by the board of directors in the absence of such a decision by the shareholders. The Company’s bylaws provide that the shareholders’ meeting may decide to give each shareholder the option of receiving its dividend in the form of cash or of shares.

 

Timing of Payment

 

According to French law, the Company must pay any dividends within nine months of the end of the Company’s fiscal year, unless otherwise authorized by a court order. Dividends not claimed within five years of the date of payment revert to the French State.

 

Changes in Share Capital

 

Increases in Share Capital

 

Pursuant to French law, the share capital of the Company may be increased only with the approval of the shareholders at an extraordinary general meeting of shareholders. Increases in the Company’s share capital may be effected by:

 

    issuing common or preferred shares,

 

    issuing a new class of equity securities, or

 

    increasing the nominal value of the existing shares.

 

Increases in share capital by issuing common or preferred shares may be effected by issuing such securities:

 

    for cash,

 

    for assets contributed in kind,

 

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    by conversion, exchange or redemption of debt securities previously issued,

 

    by exercise of any such rights attached to other securities giving rights to common or preferred shares, including warrants or stock options,

 

    by capitalization of profits, reserves or share premiums,

 

    subject to various conditions, in satisfaction of debt incurred by the Company, or

 

    any combination of the above.

 

Decisions to increase the share capital through the capitalization of reserves, profits and/or share premiums require the approval of an extraordinary general meeting of shareholders, acting under the quorum and majority requirements applicable to ordinary general shareholders’ meetings. Increases effected by an increase in the nominal value of shares require unanimous approval of the shareholders, unless effected by capitalization of reserves, profits or share premiums. All other capital increases require the approval of an extraordinary general meeting of shareholders. See “—Shareholders’ Meeting and Voting Rights.”

 

Since the ordinance n° 2004-604 of June 24, 2004, the shareholders, at an extraordinary general meeting, may delegate the authority, subject to certain conditions, or the powers to carry out certain increases in the Company’s share capital to the board of directors. The board of directors may further delegate this right to the Chairman and Chief Executive Officer and with his agreement, to one or several Assistant Managing Directors.

 

Whenever the shareholders approve a capital increase or approve the delegation to the Company’s board of directors of the right to implement a capital increase (except when it results from an earlier issue of securities giving right to shares), they must also consider whether an additional capital increase should be reserved for the Company’s employees and its subsidiaries or whether to delegate to or to authorize the Company’s board of directors the right to carry out such reserved capital increase.

 

The combined extraordinary and ordinary general shareholders’ meeting of April 22, 2005 adopted the following resolutions:

 

(i) to delegate to the board the authority for a period of 26 months to increase the Company’s share capital by issuing, with preemptive subscription rights, shares and other securities giving right to the Company’s share capital, up to a maximum amount of € 45,000,000,

 

(ii) to delegate to the board the authority for a period of 26 months to increase the Company’s share capital by issuing, without preemptive subscription right, shares and other securities giving right to the Company’s share capital, up to a maximum amount of € 33,000,000,

 

(iii) to delegate to the board the authority for a period of 26 months to increase the Company’s share capital through the incorporation of reserves, profits, share premiums or any other amounts that may be capitalized up to a maximum amount of € 33,000,000,

 

(iv) to authorize the board of directors for a period of 26 months to increase the capital in favor of employees of the Company or the companies of the Group, with corresponding waiver of preemptive subscription rights up to a maximum amount of € 2,000,000, and

 

(v) to authorize the board of directors for a period of 26 months to allocate existing ordinary shares or ordinary shares of the Company to be issued, free of charge in an amount of up to 0.4% of the Company’s share capital, i.e., one million shares as at the date of this extraordinary general shareholders’ meeting.

 

Resolutions will be submitted for approval at the combined extraordinary and ordinary general shareholders’ meeting of April 27, 2006 to authorize the board of directors for a period of 26 months to increase the capital in favor of employees of the Company or the companies of the Group, with corresponding waiver of preemptive subscription rights up to a maximum amount of € 3,000,000. This resolution would replace the corresponding resolution adopted by the shareholders’ meeting held on April 22, 2005 described in clause (iv) above.

 

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Decreases in Share Capital

 

According to French law, the share capital of the Company may be decreased only with the approval of the shareholders at an extraordinary general meeting of shareholders. In the case of a capital reduction, other than a reduction to absorb losses or a reduction as part of a program to purchase the Company’s shares, all shareholders must be offered the possibility to participate in such a reduction. The Company’s share capital may be reduced either by decreasing the nominal value of the shares or by reducing the number of outstanding shares. The number of outstanding shares may be reduced either by an exchange of shares or by the repurchase and cancellation of shares. Holders of each class of shares must be treated equally unless affected shareholders agree otherwise.

 

Preemptive Subscription Rights

 

According to French law, if the Company issues securities for cash giving right either immediately or at a later date to subscribe to the Company’s new shares, current shareholders will have preemptive subscription rights to these securities on a pro rata basis. These preemptive subscription rights require the Company to give priority treatment to those shareholders. The rights entitle the individual or entity that holds them to subscribe to an issue of any securities that may increase the share capital of the Company by means of a cash payment or a settling of cash debts. Preemptive subscription rights are transferable during the subscription period relating to a particular offering. These rights may also be listed on Euronext Paris.

 

A two-thirds majority of the shares entitled to vote at an extraordinary general meeting of shareholders may vote to waive preemptive subscription rights with respect to any particular offering. French law requires that the board of directors and the Company’s independent auditors present reports that specifically address any proposal to waive preemptive subscription rights. In the event of a waiver, the issue of securities must be completed within the period prescribed by French law. The shareholders may also decide at an extraordinary general meeting of shareholders to give the existing shareholders a non-transferable priority right (délai de priorité) to subscribe to the new securities, during a limited period of time. Shareholders may also notify the Company that they wish to waive their own preemptive subscription rights with respect to any particular offering if they so choose.

 

Form, Holding and Transfer of Shares

 

Form of Shares

 

The Company’s bylaws provide that the shares must be held in registered or bearer form.

 

Holding of Shares

 

In accordance with French law concerning dematerialization of securities, shareholders’ ownership rights are not represented by share certificates but by book entries.

 

The Company maintains a share account with Euroclear France, or Euroclear, with respect to all shares in registered form (the “Company Share Account”), which in France is administered by Lazard Frères Banque acting on behalf of the Company as its agent. In addition, Lazard Frères Banque, on behalf of the Company, maintains separate accounts in the name of each shareholder (a “Shareholder Account”) either directly or, at a shareholder’s request, through the shareholder’s accredited intermediary. Each Shareholder Account shows the name of the holder and his shareholdings and, in the case of shares held through an accredited intermediary, shows that they are so held. Lazard Frères Banque, as a matter of course, issues confirmations as to the shares registered in the Shareholder Accounts. However, these confirmations do not constitute documents of title.

 

Shares held in bearer form are held on the shareholder’s behalf by an accredited intermediary and are registered in an account maintained by such accredited intermediary with Euroclear. The account is held separately from the Company’s share account with Euroclear. Each accredited intermediary maintains a record of

 

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shares held through it and will issue certificates of registration in respect thereof. Transfers of shares held in bearer form may only be effected through accredited intermediaries and Euroclear.

 

The Company’s bylaws allow the Company to request that Euroclear provide the Company, at any time, with, among other things, the identity of holders of shares or other securities, held in bearer form, conferring immediate or eventual voting rights at its shareholders’ meetings along with the number of securities held by each of them and, if applicable, the restrictions relating to such securities.

 

French law states that shares held by any non-French resident may be held on the shareholder’s behalf in a collective account or in several individual accounts by the intermediary.

 

According to French law, the intermediary must declare his position as an intermediary holding shares on behalf of the beneficial owner. Consequently, the owner of shares recorded in the collective account or in several individual accounts by an intermediary will be represented in the general shareholders’ meetings by this intermediary.

 

Transfer of Shares

 

The Company’s bylaws do not contain any restrictions relating to the transfer of the shares.

 

Registered shares must be converted into bearer form before being transferred on Euronext Paris and, accordingly, must be registered in an account maintained by an accredited intermediary. A shareholder may initiate a transfer by giving instructions to the relevant accredited intermediary.

 

Dealings in shares are initiated by the owner giving instructions (through his agent, if appropriate) to the relevant accredited intermediary. For dealings on Euronext Paris, an impôt sur les opérations de bourse, or tax assessed on the price at which the securities were traded, is payable at the rate of 0.3% on transactions up to € 153,000 and at a rate of 0.15% thereafter. The tax is subject to a rebate of € 23 per transaction and a maximum assessment of € 610 per transaction. Non-residents of France are generally not subject to the payment of such impôt sur les opérations de bourse.

 

In addition, a fee or commission is payable to the broker involved in the transaction, regardless of whether the transaction occurs within or outside France. No registration duty is normally payable in France, unless a transfer instrument has been executed in France.

 

See “—Taxation—French Taxation.”

 

Liquidation Rights

 

In the event that the Company is liquidated, the assets of the Company remaining after payment of its debts, liquidation expenses and all of its remaining obligations, if any, will be distributed first to repay in full the nominal value of the shares. Any surplus will be distributed pro rata among the holders of shares in proportion to the nominal value of their shareholdings.

 

Requirements for Holdings Exceeding Certain Percentages

 

French law provides that any individual or entity, acting alone or in concert with others, that becomes the owner of, directly or indirectly, more than one-twentieth, one-tenth, three-twentieths, one-fifth, one-fourth, one-third, one-half, two-thirds, eighteen twentieths or nineteen-twentieths of the outstanding shares or the voting rights of any French listed company or that increases or decreases its shareholding or voting rights above or below any of these thresholds, must notify such company within five trading days of exceeding or falling below such level. The individual or the entity must also notify the AMF, within five trading days of such date, of the number of equity securities it holds and the voting rights attached thereto. The AMF then makes this information public.

 

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French law imposes additional reporting requirements on persons who acquire more than 10% or 20% of the outstanding shares or voting rights of a company listed on a regulated market. These persons must file a report with the company and the AMF within ten trading days of the date they cross the threshold. In the report, the acquirer must specify its intentions for the following 12-month period, including whether or not it intends to continue its purchases, to acquire control of the company in question or to seek nomination to the board of directors. The AMF makes the notice public. The acquirer must also publish a press release stating its intentions in a financial newspaper of national circulation in France. The acquirer may amend its stated intentions, provided that it does so on the basis of significant changes in its own situation or that of other shareholders. Upon any changes of intention, it must file a new report. These requirements also apply to registered intermediaries who hold shares on behalf of shareholders who are not French residents.

 

Under the regulations of the AMF, subject to limited exemptions, any person or persons acting in concert who come to own more than 33 1/3% of the share capital or voting rights of a French-listed company must initiate a public tender offer for the balance of the share capital and for the balance of the securities giving access to the share capital of such company.

 

In addition, the Company’s bylaws provide that any individual or entity acting alone or in concert who holds a fraction equivalent to 0.5% or any multiple thereof of the voting rights outstanding at any time must, within five trading days of reaching such threshold, notify the Company of the total number of shares or securities giving access to the capital and the total number of voting rights that he or she holds thereof by registered letter incorporating a proof of delivery slip.

 

Pursuant to the Company’s bylaws, this declarative obligation is also required of the intermediary registered on behalf of the owners of shares which do not have their domicile in the French territory. According to the Company’s bylaws, in the event of the failure to comply with this notification requirement, and upon the request of any holder or holders of 5% or more of the voting rights, such non-complying shareholder will be deprived of its voting rights in excess of the fraction which should have been declared for a period of two years following its compliance with the notification requirements.

 

In order to permit the shareholders or intermediaries to give the notice required by law, the Company must publish in the BALO information with respect to the total number of voting rights as of the date of the annual general meeting of shareholders not later than 15 calendar days after such meeting. In addition, if the number of voting rights changes by 5% or more between two ordinary general meetings of shareholders, the Company is required to publish in the BALO, within 15 calendar days of such change, the number of voting rights and provide the AMF with a written notice. This information is made public by the AMF pursuant to its regulations. In order to facilitate compliance with the notification requirements provided for under French law, a holder of ADSs may deliver any such notification to the Depositary with respect to shares represented by ADSs and the Depositary shall immediately forward such notification to the Company and the AMF.

 

In addition, any shareholder (including a holder or beneficial owner of ADSs) who fails to comply with the above requirements may have all or part of its voting rights suspended for up to five years by the Commercial Court at the request of the Company’s Chairman and Chief Executive Officer, any shareholder or the AMF, and may be subject to a € 18,000 fine.

 

Purchase by the Company of its Own Shares

 

In accordance with French law, the Company may not subscribe for its own shares. However, pursuant to the European regulations, French law and the AMF’s regulations, the Company may, either directly or through a financial services intermediary (prestataire de services d’investissement) purchase its own shares in an amount of up to 10% of its share capital. Pursuant to AMF regulations, the Company, prior to the completion of a repurchase program, must make public a report containing a description of the program. However, the publication of a description is not required if an equivalent description is provided, either (i) in the special report to the annual shareholders’ meeting concerning the completion of the repurchase program during the previous fiscal year or (ii) in the Company’s document de référence.

 

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The Company may not repurchase an amount of shares that would result in the Company’s holding, directly or through a person acting on the Company’s behalf, more than 10% of the Company’s outstanding share capital, or if the Company has different classes of shares, 10% of the shares in each class.

 

Repurchased shares held by the Company must be held in registered form. These shares must be fully paid up. Such shares are deemed to be outstanding under French law but are not entitled to dividends (these are carried forward to the next fiscal year as distributable profits) or voting rights and the Company may not exercise preferential subscription rights.

 

The shareholders, at an extraordinary general meeting of shareholders, may decide not to take such shares into account in determining the preferential subscription rights attached to the other shares. However, if the shareholders decide to take them into account, the Company must either sell the rights on the market before the end of the subscription period or distribute them to the other shareholders on a pro rata basis.

 

The general shareholders’ meeting of April 15, 2004 authorized the board of directors for a period of 18 months to repurchase and dispose of up to 18,000,000 of the Company’s shares at a maximum purchase price of € 100 and a minimum sale price of € 60. This share repurchase program is described in the share repurchase program prospectus (note d’information) which received approval (visa) no. 04-137 of the AMF on March 9, 2004.

 

This authorization was replaced by a new authorization of 18 months granted by the general shareholders’ meeting of April 22, 2005, to repurchase and dispose of up to 18,000,000 of the Company’s shares at a maximum purchase price of € 100 and a minimum sale price of € 60. This share repurchase program is described in the share repurchase program prospectus (note d’information) which received approval (visa) no. 05-161 of the AMF on March 18, 2005.

 

Pursuant to the authorizations granted by the shareholders at the general meeting of shareholders on April 15, 2004 and on April 22, 2005, the Company completed share repurchases during 2005 as detailed in “Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”

 

The Company’s board of directors will submit to the next general shareholders’ meeting, which will be held on April 27, 2006, a resolution to authorize the Company’s board of directors to repurchase up to 18,000,000 of the Company’s shares at a maximum purchase price of € 120 (a maximum aggregate amount of € 2.16 billion). The purposes of the share repurchase program are the following:

 

    the allocation of options for the purchase of shares to the employees and officers,

 

    the free allocation of shares to employees and/or officers,

 

    the delivery of securities upon the exercise of rights attached to securities giving right to share capital,

 

    the delivery of shares for payment or exchange notably in regards to acquisitions, and

 

    the cancellation of shares to adjust the Company’s financial structure.

 

At March 31, 2006, the Company held, directly or indirectly, 20,060,680 shares (19,715,829 at December 31, 2005) of which 8,470,8661 were for share option purchase plans and equity-linked securities, 3,298,998 were held for cancellation and 5,408,756 were related to acquisitions.

 

Cancellation of Shares and Capital Decreases Following Share Repurchases

 

The general meeting of shareholders of April 22, 2005 granted an authorization to the board of directors for 24 months to cancel shares repurchased in the context of a share repurchase program and decrease the share

 


1   Of which 707,774 shares were previously held to cover bonds convertible or exchangeable into shares which were redeemed in January 2006, and which have been reallocated to cover share purchase options that will be granted by the board of directors of the Company on April 27, 2006.

 

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capital subject to a limit of 10% of the existing share capital on the day of the meeting. Pursuant to this authorization, 4,600,000 shares were cancelled on April 22, 2005, which reduced the capital by € 2.3 million.

 

Trading by the Company in its Own Shares

 

Pursuant to the regulations of the European Union and the AMF, the Company may not trade in its own shares for the purpose of manipulating the market. Pursuant to these regulations, there are certain requirements for trades by a company to be considered valid:

 

    the issuer may not, when executing trades under a share repurchase program, purchase shares at a price higher than the highest price of the last independent trade or the highest current independent bid on the trading venues where the purchase is carried out;

 

    when the issuer carries out the purchase of its own shares through derivative financial instruments, the exercise price of such derivative financial instruments shall not be above the higher of the price of the last independent trade or the highest current independent bid;

 

    the issuer may not purchase more than 25% of the average daily volume of the shares in any one day on the regulated market on which the purchase is carried out. The average daily volume figure is to be based on the average daily volume traded in the month preceding the month of public disclosure of the program and fixed on that basis for the authorized period of the program. Where the program makes no reference to that volume, the average daily volume figure must be based on the average daily volume traded in the 20 trading days preceding the date of purchase.

 

In addition, in order to benefit from the exemption provided by the regulations of the European Union and the AMF, a company shall not, during its participation in a share repurchase program, engage in the following trading:

 

    selling of its own shares during the life of the program;

 

    trading where the company becomes aware of information that, if disclosed, would have a significant impact on the market price of its securities;

 

    trading during a 15-day period before the date on which the company makes its consolidated, annual and intermediary accounts public.

 

However, these requirements do not apply if:

 

    the issuer has in place a time-schedule share repurchase program; or

 

    the share purchase program is lead-managed by an investment firm or a credit institution which makes its trading decisions in relation to the issuer’s shares independently of, and without influence by, the issuer with regard to the timing of the purchases.

 

Pursuant to the General Regulation of the AMF and its instructions, the Company must publicly disclose any transactions carried out pursuant to an ongoing share repurchase program by way of a press release posted on the AMF’s website, no later than the seventh trading day following the date of execution of any such transactions.

 

In addition, as the case may be, the Company will disclose, at least once a month, specified information regarding transactions.

 

Exchange Controls

 

Ownership of ADSs or Shares by Non-French Residents

 

Under French law, there is no limitation on the right of non-French residents or non-French shareholders to own or, when applicable, to vote securities of a French company.

 

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A French law dated February 14, 1996 abolished the requirement that a person who is not a resident of the European Union obtain an autorisation préalable (prior authorization) prior to acquiring a controlling interest in a French company.

 

However, pursuant to the French Decree no. 2005-1739 of December 30, 2005, the acquirer/investor must file a déclaration administrative (administrative notice) with French authorities in connection with certain cases of foreign investments, direct investments and indirect foreign investments in any French company. Under existing administrative rulings, ownership of more than 33.33% of a French company’s share capital or voting rights is regarded as a direct investment subject to a déclaration administrative. In addition, this decree provides for a list of business sectors in which certain investments must be authorized by French authorities.

 

Exchange Controls

 

Under current French exchange control regulations, there are no limitations on the amount of payments that may be remitted by a French company to non-French residents. Laws and regulations concerning foreign exchange controls do require, however, that all payments on transfers of funds made by a French resident to a non-resident be handled by an authorized accredited intermediary. In France, all registered banks and substantially all credit establishments are accredited intermediaries.

 

Other

 

For other limitations affecting shareholders, see “—Form, Holding and Transfer of Shares” and “—Requirements for Holdings Exceeding Certain Percentages.”

 

Taxation

 

French Taxation

 

The following is a general summary of the material French tax consequences of owning and disposing of shares by a holder that is not a resident of France and does not hold the shares in connection with a business conducted in France. The statements relating to French tax laws set out below are based on the laws in force as of the date hereof, and are subject to any changes in applicable French tax laws or in any applicable double taxation conventions or treaties with France occurring after such date.

 

This discussion is intended only as a descriptive summary and does not purport to be a complete analysis or list of all potential tax effects of the purchase or ownership of the shares.

 

Potential purchasers of shares are urged to consult their own tax advisors concerning the consequences of ownership and disposal of shares.

 

Taxation on Sale or Disposal of Shares

 

Subject to more favorable provisions of any relevant double tax treaty, persons who are not French residents for the purpose of French taxation (as well as, under certain conditions, foreign states, international organizations and certain foreign public bodies) and who have held, alone or with relatives, not more than 25%, directly or indirectly, of the dividend rights (bénéfices sociaux) of the Company at any time during the preceding five years, are not generally subject to any French income tax or capital gains tax on any sale or disposal of shares.

 

If a share transfer is evidenced by a written agreement signed as of January 1, 2006, such share transfer agreement is, in principle, subject to registration formalities and therefore to a 1.1% registration duty assessed on the higher of the purchase price and the market value of the shares (subject to a maximum assessment of € 4,000 per transfer, provided that, under certain circumstances, no duty is due if such written share transfer agreement is executed outside France).

 

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Taxation of Dividends

 

In France, dividends are paid out of after-tax income.

 

With respect to dividends paid since January 1, 2005, French individual shareholders are entitled to a tax credit equal to 50% of the dividend paid, capped at € 230 or, as the case may be, € 115, depending on the marital status of the individual shareholder. Non-individual shareholders are not entitled to this tax credit.

 

Under French domestic law, dividends paid to non-residents are normally subject to a 25% French withholding tax and non-residents are not eligible for the benefit of the French tax credit mentioned above.

 

Under most tax treaties entered into between France and other countries, such withholding tax may, subject to certain conditions, be reduced and give rise in such other country to a tax credit of the amount of the tax or, in the case of certain tax treaties, be eliminated.

 

Certain tax treaties further provide for a refund of the French tax credits attached to dividends to certain non-residents. The French tax authorities have indicated that non-resident individual shareholders benefiting from a tax treaty providing for the refund of the French tax credits attached to dividends are entitled to the refund of the above-mentioned French tax credit, net of the applicable withholding tax.

 

The following countries and Territoires d’Outre-Mer have entered into treaties with France whereby tax residents of such countries and territories may, under certain circumstances, obtain from the French tax authorities a reduction (generally reducing the withholding tax rate to 15%) of all or part of such withholding tax and a refund of the French tax credits attached to dividends (net of applicable withholding tax).

 

Australia

 

India

 

Mexico

 

Switzerland

Austria

 

Israel

 

Namibia

 

Togo

Belgium

 

Italy

 

Netherlands

 

Turkey

Bolivia

 

Ivory Coast

 

New Zealand

 

Ukraine

Brazil

 

Japan

 

Niger

 

United Kingdom

Burkina Faso

 

Latvia

 

Norway

 

United States

Canada

 

Lithuania

 

Pakistan

 

Venezuela

Estonia

 

Luxembourg

 

Senegal

 

Territoires d’Outre-

Finland

 

Malaysia

 

Singapore

 

Mer and Other:

Gabon

 

Mali

 

South Korea

 

Mayotte

Ghana

 

Malta

 

Spain

 

New Caledonia

Iceland

 

Mauritius

 

Sweden

 

Saint-Pierre et Miquelon

 

As to dividends paid in 2005 by the Company, non-resident shareholders benefiting from a treaty may have been subject, on the date of payment, to the withholding tax at the reduced rate provided for by such treaty, rather than to the French withholding tax at the rate of 25% to be later reduced to the treaty rate, if the shareholder established entitlement to such reduced rate before the date of payment by providing the paying agent with a certificate (the Simplified Certificate) based on the draft provided by the French Tax Authorities in their Administrative Guidelines 4 J-1-05, dated February 25, 2005.

 

If the non-resident shareholder did not file the Certificate before the dividend payment date, the Company withheld the French withholding tax at the rate of 25%. This non-resident may claim a refund of the excess withholding tax by completing and providing the paying agent with the relevant form before December 31, 2007.

 

Furthermore, if a shareholder is entitled to a refund of the French tax credits attached to dividends under the relevant tax treaty, such shareholder can file a claim for the refund of the French tax credit of 50% (capped at € 230 or € 115) on distributions made by the Company in 2005, net of the applicable withholding tax, but only to the extent that the shareholder is an individual.

 

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The French tax authorities have not detailed yet the filing formalities that have to be completed in order to obtain the refund of the French tax credit described above with respect to distributions paid since January 1, 2005.

 

Estate and Gift Tax

 

France imposes estate and gift tax on shares of French companies acquired by inheritance or gift from a non-resident of France.

 

France has entered into estate and gift tax treaties with a number of countries pursuant to which, assuming certain conditions are met, residents of the treaty countries may be exempted from such tax or obtain a tax credit. Prospective investors in shares should consult their own advisors concerning the applicability of French estate and gift tax to their shareholding in the Company and the availability of, and the conditions for claiming exemption under, such a treaty.

 

Wealth Tax

 

In the absence of a more favorable tax treaty, the French wealth tax (impôt de solidarité sur la fortune) does not apply to the shares of non-French resident individual investors owning directly or indirectly less than 10% of the Company’s share capital, assuming such shares do not enable such individual to exercise influence on the Company.

 

Taxation of U.S. Investors

 

The following is a general summary of the material U.S. federal income tax and French tax consequences to U.S. Holders. A “U.S. Holder” is a beneficial owner of one or more shares or ADSs (a) who owns (directly, indirectly or by attribution) less than 10% of the share capital or voting power of the Company; (b) who is (i) a citizen or individual resident of the United States for U.S. federal income tax purposes, (ii) a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any state thereof, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of the substantial decisions of the trust; (c) who is entitled to the benefits of the Convention between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed August 31, 1994, and any protocols thereto (the “Treaty”) under the “Limitation on Benefits” article of that Treaty; (d) who holds the shares or ADSs as capital assets and (e) whose functional currency is the U.S. dollar.

 

If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) holds shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner in a partnership that holds shares or ADSs, he or she should consult his or her tax advisor regarding the specific tax consequences of owning and disposing of its shares or ADSs.

 

Special rules may apply to U.S. expatriates, insurance companies, tax-exempt entities, banks, regulated investment companies, financial institutions, persons subject to the alternative minimum tax, securities broker-dealers, traders in securities who elect to apply a mark-to-market method of accounting, persons holding the shares or ADSs as part of a straddle, hedging or conversion transaction, and persons who acquired their shares or ADSs pursuant to the exercise of employee stock options or otherwise as compensation. Those special rules are not discussed below. Because this is a general summary, Holders are advised to consult their tax advisors concerning the specific U.S. federal, state and local tax consequences relating to the ownership and disposition of shares and ADSs applicable in light of their particular situations, as well as any consequences arising under the laws of any other relevant taxing jurisdiction.

 

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This summary is based upon applicable United States tax laws, including the United States Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), final, temporary and proposed Treasury Regulations promulgated thereunder, rulings, judicial decisions, administrative pronouncements, the Treaty, French laws, and the practice of the French tax authorities, all as currently in effect, and all of which are subject to change or changes in interpretation, possibly with retroactive effect. The statements of United States and French tax laws set forth below assume that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. Further information as regards French taxation may be found under “Item 10. Additional Information—Taxation—French Taxation.”

 

Taxation of Dividends

 

Under the Treaty, the rate of French withholding tax on dividends paid to a U.S. Holder whose ownership of the ADSs or shares is not effectively connected with a permanent establishment or a fixed base in France is reduced to 15%. Dividends paid to such U.S. Holder are immediately subject to the reduced rate of 15% on the date of payment of such dividends, provided that the U.S. Holder establishes before the date of payment that he or she is a resident of the United States under the Treaty in accordance with the procedures described below.

 

Subject to certain conditions and filing formalities, an individual U.S. Holder would also be entitled to a payment equal to the French tax credit of 50% attached to dividends paid in 2005 by the Company (capped at € 230 or € 115, depending on the marital situation of the U.S. Holder), net of the 15% withholding tax, if he or she attests that he or she is subject to U.S. federal income taxes on the payment of the dividend and the related French tax credit (an “Eligible U.S. Holder”).

 

U.S. Holders, other than Eligible U.S. Holders, are not entitled to the payment of any French tax credit in respect of dividends paid in 2005.

 

Generally, dividends paid to a U.S. Holder in 2005 were subject to the reduced withholding tax rate of 15% at the time the dividend was paid if the U.S. Holder provided the paying agent before the dividend payment date with a certificate (the “Certificate”) based on the draft provided by the French tax authorities in their Administrative Guidelines 4 J–1–05, dated February 25, 2005.

 

If a U.S. Holder entitled to a reduced withholding tax rate did not file a completed Certificate before the dividend payment date, the Company withheld the French withholding tax at the rate of 25%. Such U.S. Holder may claim a refund of the excess withholding tax by completing and providing the paying agent with the Treasury Form RF1 A EU-No. 5052 (or any other form that may replace such Treasury Form) before December 31, 2007.

 

In all cases, any French withholding tax refund is generally expected to be paid to U.S. Holders within 12 months of filing the Form, but not before January 15th following the end of the calendar year in which the related dividend is paid.

 

The Certificate or, where applicable, the Treasury Form RF1 A EU-No. 5052, together with their respective instructions, are provided by the Depositary to all U.S. Holders of ADSs registered with the Depositary and are also available from the United States Internal Revenue Service (the “IRS”). The Depositary shall arrange for the filing with the French tax authorities of all Certificates, or Forms as the case may be, provided that they are completed by U.S. Holders of ADSs and returned to the Depositary in sufficient time.

 

For U.S. federal income tax purposes, the gross amount of any dividend (including the related French tax credit paid to a U.S. Holder, including any French withholding tax thereon) will be included in gross income as ordinary dividend income on the date each such payment is actually or constructively received (which, in the case of a U.S. Holder of ADSs, will be the date of receipt by the Depositary). Corporate U.S. Holders will not be eligible for the dividends received deduction in respect of dividends paid by the Company. Dividends generally

 

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will constitute foreign source “passive income” or (in the case of certain U.S. Holders) “financial services income” for foreign tax credit purposes. Under recently enacted legislation, for taxable years beginning January 1, 2007, dividend income generally will constitute “passive category income” or, in the case of certain U.S. Holders, “general category income.” The amount of any dividend paid in euro, including the amount of any French taxes withheld therefrom, will be equal to the U.S. dollar value of the euro amount calculated by reference to the spot rate in effect on the date such dividend is includible in income (which, for a U.S. Holder of ADSs, will be the date of receipt by the Depositary), regardless of whether the payment is in fact converted into U.S. dollars. A U.S. Holder who converts the euro amount into U.S. dollars on the date of receipt generally should not recognize any exchange gain or loss. A U.S. Holder who does not convert the euro amount into U.S. dollars on the date of receipt generally will have a tax basis in the euro amount equal to its U.S. dollar value on the date of receipt and generally will be required to recognize any exchange gain or loss realized on a subsequent conversion or other disposition of the euro amount, which will be treated as U.S. source ordinary income or loss. Moreover, a U.S. Holder may be required to recognize foreign currency gain or loss, which generally will be U.S. source ordinary income or loss, upon the receipt of a refund of amounts, if any, withheld from a dividend in excess of the Treaty rate of 15%. Special rules govern the manner in which accrual method taxpayers are required (or may elect) to determine the U.S. dollar amount includible in income in the case of taxes withheld in a foreign currency. Certain of these rules have changed effective January 1, 2005. Accrual basis taxpayers therefore are urged to consult their own tax advisors regarding the requirements and elections available in this regard.

 

French withholding tax imposed at the Treaty rate of 15% on dividends paid by the Company and on the payment of any related French tax credit is treated as payment of a foreign income tax and, subject to certain conditions and limitations, may be taken as a credit against a U.S. Holder’s U.S. federal income tax liability. Alternatively, a U.S. Holder may claim foreign taxes paid in a particular year as an itemized deduction. A deduction does not reduce U.S. tax on a dollar-for-dollar basis like a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax credits. Each U.S. Holder is urged to consult its own tax advisor concerning whether the Holder is eligible for benefits under the Treaty, and whether, and to what extent, a foreign tax credit will be available.

 

Certain U.S. Holders (including individuals and some trusts and estates) are eligible for reduced rates of U.S. federal income tax at a maximum rate of 15% in respect of “qualified dividend income” received in taxable years beginning before January 1, 2009. For this purpose, qualified dividend income generally includes dividends paid by a non-U.S. corporation if, among other things, the U.S. Holders meet certain minimum holding periods and the non-U.S. corporation satisfies certain requirements, including that either (i) the shares (or ADSs) with respect to which the dividend has been paid are readily tradable on an established securities market in the United States, or (ii) the non-U.S. corporation is eligible for the benefits of a comprehensive U.S. income tax treaty (such as the Treaty) which provides for the exchange of information. The Company currently believes that dividends paid with respect to its shares and ADSs will constitute qualified dividend income for U.S. federal income tax purposes, and the Company anticipates that its dividends will be reported as qualified dividends on Forms 1099-DIV delivered to U.S. holders. Each individual U.S. Holder of shares or ADSs is urged to consult its own tax advisor regarding the availability of the reduced dividend tax rate in light of its own particular situation and regarding the computation of its foreign tax credit limitation with respect to any qualified dividend income paid by the Company, as applicable.

 

The United States Treasury has expressed concerns that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits or reduced tax rates in respect of qualified dividends by U.S. Holders of ADSs. Accordingly, the discussion above regarding the creditability of French withholding tax or the availability of qualified dividend treatment could be affected by future actions that may be taken by the United States Treasury with respect to ADSs.

 

Taxation of Capital Gains

 

In general, a U.S. Holder who is a resident of the United States as defined pursuant to the provisions of the Treaty will not be subject to French tax on any capital gain from the sale or other disposal of shares or ADSs

 

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unless the shares or ADSs form part of the business property of a permanent establishment or fixed base that the U.S. Holder has in France. Special rules apply to individuals who are residents of more than one country.

 

In general, for U.S. federal income tax purposes, a U.S. Holder will recognize capital gain or loss on the sale or other taxable disposition of shares or ADSs equal to the difference between the U.S. dollar value of the amount realized on the disposition and the U.S. Holder’s tax basis (determined in U.S. dollars) in the shares or ADSs. Such gain or loss, if any, generally will be U.S. source gain or loss, and will be treated as a long-term capital gain or loss if the holding period in the shares or ADSs exceeds one year at the time of the disposition. In the case of a U.S. Holder who is an individual, any capital gain generally will be subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met. The deductibility of capital losses is subject to significant limitations.

 

The deposit or withdrawal of shares in exchange for ADSs by a U.S. Holder under the deposit agreement will not be subject to U.S. federal income tax.

 

Passive Foreign Investment Company Status

 

A non-U.S. corporation will be classified as a Passive Foreign Investment Company (a “PFIC”) for any taxable year if at least 75% of its gross income consists of passive income (such as dividends, interest, rents or royalties (other than rents or royalties derived in the active conduct of a trade or business and received from an unrelated person), or gains on the disposition of certain minority interests), or at least 50% of the average value of its assets consist of assets that produce, or are held for the production of, passive income. The Company currently believes that it did not qualify as a PFIC for the 2005 taxable year for U.S. federal income tax purposes. If the Company were to become a PFIC in any taxable year (which conclusion is a factual determination that must be made as of the close of the taxable year), the tax on distributions on its shares or ADSs and on any gain realized by a U.S. Holder upon the disposition of shares or ADSs may be less favorable than as described herein. Furthermore, dividends paid by the Company would not be “qualified dividend income” and would be taxed at the higher rates applicable to other items of ordinary income. U.S. Holders should consult their own tax advisors regarding the application of the PFIC rules to their ownership of shares or ADSs.

 

French Estate and Gift Taxes

 

Under “The Convention Between the United States of America and the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritance and Gifts of November 24, 1978,” a transfer of shares or ADSs by gift or by reason of the death of a U.S. Holder will not be subject to French tax unless (i) the donor or the transferor is domiciled in France at the time of making the gift, or at the time of his or her death, or (ii) the shares or ADSs were used in, or held for use in, the conduct of a business through a permanent establishment or fixed base in France.

 

French Wealth Tax

 

The French wealth tax does not generally apply to the shares or ADSs owned by a U.S. Holder who is a resident of the United States as defined pursuant to the provisions of the Treaty.

 

U.S. Information Reporting and Backup Withholding

 

Dividend payments made to Holders, and proceeds paid from the sale, exchange, or other disposition of shares or ADSs may be subject to information reporting to the IRS and possible U.S. federal backup withholding at a current rate of 28%. Backup withholding will not apply to a Holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification, or who is otherwise exempt from backup withholding. U.S. persons required to establish their exempt status generally must furnish IRS Form W-9 (Request for Taxpayer Identification Number and Certification). Non-U.S. Holders

 

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generally will not be subject to U.S. information reporting or backup withholding. However, such Holders may be required to provide certification of non-U.S. status (generally on IRS Form W-8BEN) in connection with payments received in the United States or through certain U.S.-related financial intermediaries.

 

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a Holder’s U.S. federal income tax liability and a Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS in a timely manner and furnishing any required information.

 

Dividends and Paying Agents

 

Not applicable.

 

Statements by Experts

 

Not applicable.

 

Documents on Display

 

The documents referred to in this annual report can be read at the U.S. Securities and Exchange Commission’s public reference facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Investors can obtain information on the operation of the public reference facilities by calling the Commission at 1-800-SEC-0330 or 1-202-942-8090. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports and other information regarding issues that file electronically with the SEC. These SEC filings are also available to the public from commercial document retrieval services. Material filed by the Company with the SEC can also be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005.

 

Subsidiary Information

 

Not applicable.

 

Risks Related to the Company’s ADSs

 

    The ADSs trade in U.S. dollars. As the principal trading market for the shares underlying the ADSs is the Eurolist by Euronext, where the shares trade in euro, the value of the ADSs will likely fluctuate as the U.S. dollar/euro exchange rate fluctuates. If the value of the euro decreases against the U.S. dollar, the price at which the ADSs trade will decrease. In addition, since any dividends that the Company may declare will be denominated in euro, exchange rate fluctuations will affect the U.S. dollar equivalent of dividends received by holders of ADSs. See “Item 3. Key Information—Exchange Rate Information” above.

 

    Under French law, shareholders have preferential subscription rights (droits préférentiels de souscription) to subscribe for cash for issuances of new shares or other securities giving rights, directly or indirectly, to acquire additional shares on a pro rata basis. U.S. Holders of ADSs may not be able to exercise preferential subscription rights for the shares underlying their ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended, is effective with respect to such rights or an exemption from the registration requirements thereunder is available. If preferential subscription rights cannot be exercised by an ADS holder, Citibank N.A., as depositary, will, if possible, sell such holder’s preferential subscription rights and distribute the net procee