20-F 1 rhodia20f.htm RHODIA FORM 20-F Rhodia - Annual Report Form 20-F 2005

As filed with the Securities and Exchange Commission on April 10, 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


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

OR


SHELL COMPANY REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 1-14838

 


(Exact name of Registrant as specified in its charter)

 

  Not applicable
(Translation of Registrant’s name into English)
  French Republic
(Jurisdiction of incorporation or organization)
 

Immeuble Coeur Défense, Tour A

110 Esplanade Charles de Gaulle

92400 Courbevoie, France

(Address of principal executive offices)

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, each representing
one Ordinary Share nominal value €1 per share
Ordinary Shares, nominal value €1 per share*

 

New York Stock Exchange

* Listed not for trading or quotation purposes, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

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

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

7.625% Senior Notes due 2010 (dollar denominated)

8.000% Senior Notes due 2010 (euro denominated)

8.875% Senior Subordinated Notes due 2011 (dollar denominated)

9.250% Senior Subordinated Notes due 2011 (euro denominated)

10.25% Senior Notes due 2010 (dollar denominated)

10.5% Senior Notes due 2010 (euro denominated)

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:

Ordinary Shares: 1,176,716,541

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

Yes    No 

If this 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 

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    No 

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

 

  Large accelerated filer

Accelerated filer 

Non-accelerated filer 

 

Indicate by check mark which financial statement Item the registrant has elected to follow.

Item 17    Item 18 

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 

 



Table of contents

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

p. 3

 

 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

p. 5

Item 2. Offer Statistics and Expected Timetable

p. 5

Item 3. Key Information

p. 5

Item 4. Information About Rhodia

p. 19

Item 4A. Unresolved Staff Comments

p. 36

Item 5. Operating and Financial Review and Prospects

p. 37

Item 6. Directors, Senior Management and Employees

p. 60

Item 7. Major Shareholders and Related Party Transactions

p. 77

Item 8. Financial Information

p. 80

Item 9. The Offer and Listing

p. 86

Item 10. Additional Information

p. 90

Item 11. Quantitative and Qualitative Disclosure About Market Risk

p. 117

Item 12. Description of Securities Other than Equity Securities

p. 119

PART II

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

p. 120

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

p. 120

Item 15. Controls and Procedures

p. 120

Item 16A. Audit Committee Financial Expert

p. 120

Item 16B. Code of Ethics

p. 120

Item 16C. Principal Accountant Fees and Services

p. 121

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

p. 122

PART III

 

Item 17. Financial Statements

p. 123

Item 18. Financial Statements

p. 123

Item 19. Exhibits

p. 123

   

INDEX TO FINANCIAL STATEMENTS



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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

The Consolidated Financial Statements for the two years ended December 31, 2005 and 2004 and at December 31, 2005 and 2004 (the “Consolidated Financial Statements”) contained in this report have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as adopted by the European Union. Such IFRS as applied to our Company are currently the same as the IFRS issued by the International Accounting Standards Board (“IASB”). The standards and interpretations adopted for the preparation of the 2005 Consolidated Financial Statements and the 2004 comparative Consolidated Financial Statements are those published in the Official Journal of the European Union (“OJEU”) at December 31, 2005 and whose application is mandatory as of this date and those standards and interpretations which we have chosen to apply early. Prior to January 1, 2005 , our Consolidated Financial Statements were prepared in accordance with French generally accepted accounting principles (“French GAAP”).

IFRS differs in certain significant respects from United States generally accepted accounting principles (“U.S. GAAP”). For a description of the principal differences between IFRS and U.S. GAAP, as they relate to us and to our consolidated subsidiaries, and for a reconciliation to U.S. GAAP of net income of the two years ended December 31, 2005 and 2004, and shareholders’ equity at December 31, 2005 and 2004, see Note 39 to the Consolidated Financial Statements.

As a result of the adoption of IFRS as our primary reporting standard, we realized that our previous U.S. GAAP treatment of certain revenues needed to be revised. Historically, we did not include in our net sales certain revenues from services, such as administrative services that we provide during a transition period after a divestiture, industrial services and raw materials and utilities purchasing services where we share industrial facilities, and tolling operations. These services were recorded as a reduction of costs.

For 2004, our U.S. GAAP total sales, previously reported as €4.833 million were revised to €5.442 million, of which €464 million of the increase relates to other revenue and €145 million relates to net sales. Our U.S. GAAP operating expenses, previously reported as €5,463 million were revised to €6.072 million. These revisions do not affect the previously reported U.S. GAAP net loss.

All financial data should be read in conjunction with “Item 5. Operating and Financial Review and Prospects”.

Our discussion and analysis of our results of operations includes information concerning the period-to-period comparison of our operating performance and our enterprises, such as:

 

changes in scope of consolidation (for example, as a result of acquisitions, divestitures, changes in consolidation and, with respect to comparisons of the results of operations at the enterprise or business level, transfers of businesses or activities between enterprises or businesses);

 

changes in exchange rates affecting the translation into euro of our sales, expenses and earnings and other income statement items that are denominated in currencies other than euro;

 

changes in average selling prices; and

 

changes in volumes.

We have developed these performance measures based on monthly reporting from our various businesses and use them for both our internal analysis and for our financial communications. In comparing the results of operations for two periods (the “prior” period and the “subsequent” period), we calculate the effect of these changes as follows:

 

We calculate the impact of “changes in scope of consolidation” by (i) in the case of acquisitions, including in the prior period’s results the activities included in our Consolidated Financial Statements for all or part of the subsequent period only for the same portion of such earlier period as they were included in the subsequent period, and (ii) in the case of divestitures, excluding from the results of the prior period any activities which were included in our Consolidated financial Statements during all or any portion of the earlier period but which were not included for any portion of the subsequent period.

 

 

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We calculate the impact of “changes in exchange rates” by adjusting the prior period’s results for the impact of the change in exchange rates on the translation into euro of items of our income statement denominated in currencies other than the euro at average exchange rates during the subsequent period.

 

We estimate the impact of changes in average selling prices by comparing the current weighted average net unit selling prices for each product in the subsequent period (for example, the euro cost per ton) against the weighted average net unit selling prices in the prior period, multiplied in both cases by volumes sold during the subsequent period.

 

We estimate the impact of changes in volumes by comparing quantities shipped in the subsequent period against quantities shipped in the prior period, multiplied in both cases by the weighted average net unit selling prices of the prior period.

We believe that these measures are useful tools for analyzing and explaining changes and trends in our historical results of operations. However, these measures are not measurements of performance under IFRS or U.S. GAAP. They should not be considered as an alternative to any measures of performance under IFRS or U.S. GAAP. Our method of calculating this information may differ from methods used by other companies.

For your convenience, 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 could be converted into U.S. dollars at the rates indicated or at any other rate.

Unless the context requires otherwise, the terms “Rhodia”, the “Company”, the “Group”, “we”, “our” or “us” refer to Rhodia and our consolidated subsidiaries. See “Item 4. Information about Rhodia—Corporate History—Formation of Rhodia”.

All references herein to “United States” or “U.S.” are to the United States of America, references to “dollars” or “$” are to the currency of the United States, references to “France” are to the French Republic, and references to “euro” and “€” are to the currency of the European Union member states (including France) participating in the European Monetary Union.

The brand names (indicated in capital letters) mentioned in this Annual Report are trademarks of Rhodia, its affiliates and/or associated companies or are used with permission under license agreements.

This Annual Report contains information about our markets and our competitive position therein, including market sizes and market share information. We are not aware of any exhaustive industry or market reports that cover or address all of our markets. Therefore, we assemble information on our markets through our enterprises, which in turn compile information on our local markets annually. They derive that information from formal and informal contacts with industry professionals (such as professional associations), published data (such as gross domestic product or client industry publications), Annual Reports of our competitors and market research by independent consultants. We estimate our position in our markets based on the market data referred to above.

We believe that the market share information contained in this Annual Report provides fair and adequate estimates of the size of our markets and fairly reflects our competitive position within these markets. However, our internal Company surveys and management estimates have not been verified by an independent expert, and we cannot guarantee that a third party using different methods to assemble, analyze or compute market data would obtain or generate the same results. In addition, our competitors may define their markets differently than we do.

 

 

4  

Form 20 - F 2005 - Rhodia



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PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

Selected Financial Data

The tables below set forth our selected consolidated financial data in IFRS for the two years during the period ended December 31, 2005 and at December 31, 2004 and 2005, and in U.S. GAAP for the five years ended December 31, 2005 and at December 31, 2001, 2002, 2003, 2004 and 2005. Financial data prepared in accordance with IFRS are derived from the Consolidated Financial Statements, which were audited by PricewaterhouseCoopers, an independent registered public accounting firm, and which have been prepared in accordance with IFRS. Since we are a non-U.S. company that is a first-time adopter of IFRS, the SEC has permitted us to present one year of comparative data instead of the normally required two years of comparative data. IFRS differs in certain significant respects from U.S. GAAP. For a description of the principal differences between IFRS and U.S. GAAP as they relate to us and to our consolidated subsidiaries, and for a reconciliation to U.S. GAAP of net income and shareholders’ equity for the two years ended December 31, 2005 and at December 31, 2004 and 2005, see Note 39 to the Consolidated Financial Statements. 

 

 

Form 20 - F 2005 - Rhodia  

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Year ended and as of December 31,

 

 

 


 

 

 

2005(1)
$

 

2005

 

2004(7)

 

 

 


 


 


 

 

 

(in millions, except for per share data)

 

Amounts in accordance with IFRS:

 

 

 

 

 

 

 

Income Statement Data:

 

 

 

 

 

 

 

Net sales

 

6,255

 

5,085

 

4,693

 

Other revenue

 

566

 

460

 

453

 

Cost of sales

 

(5,683

)

(4,620

)

(4,408

)

Administrative and selling expenses

 

(706

)

(574

)

(513

)

Research and development expenses

 

(153

)

(124

)

(138

)

Restructuring costs

 

(107

)

(87

)

(169

)

Goodwill impairment

 

 

 

(60

)

Other operating income/(expenses)

 

(53

)

(43

)

(46

)

Operating profit/(loss)

 

119

 

97

 

(188

)

Finance costs

 

(610

)

(496

)

(455

)

Finance income

 

156

 

127

 

121

 

Foreign exchange gains/(losses)

 

(82

)

(67

)

67

 

Share of profit/(losses) of associates

 

 

 

3

 

Loss before income taxes

 

(417

)

(339

)

(452

)

Income tax expense

 

(60

)

(49

)

(102

)

Loss from continuing operations

 

(477

)

(388

)

(554

)

Loss from discontinued operations

 

(279

)

(227

)

(78

)

Net loss

 

(756

)

(615

)

(632

)

Attributable to:

 

 

 

 

 

 

 

Equity holders of Rhodia SA

 

(757

)

(616

)

(641

)

Minority interests

 

1

 

1

 

9

 

Loss per share from continuing operations(2)

 

(0.74

)

(0.60

)

(1.19

)

Loss per share(2)

 

(1.17

)

(0.95

)

(1.36

)

Balance Sheet Data:

 

 

 

 

 

 

 

Working capital(3)

 

210

 

171

 

151

 

Property, plant and equipment (net book value)

 

2,626

 

2,135

 

2,245

 

   
 
 
 

Total assets

 

6,945

 

5,646

 

5,566

 

   
 
 
 

Non-current borrowings(4)

 

2,429

 

1,975

 

2,250

 

Current borrowings

 

1,278

 

1,039

 

721

 

   
 
 
 

Total borrowings(5)

 

3,707

 

3,014

 

2,971

 

   
 
 
 

Cash, cash equivalents and other current financial assets

 

1,138

 

925

 

617

 

Net borrowings(6)

 

2,569

 

2,089

 

2,354

 

Other non-current liabilities

 

2,025

 

1,646

 

1,360

 

Minority interests

 

32

 

26

 

25

 

   
 
 
 

Total shareholders’ equity

 

(851

)

(692

)

(546

)

   
 
 
 

Share capital and additional paid-in capital

 

2,149

 

1,747

 

1,435

 

Cash Flow Statement Data:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(312

)

(254

)

(221

)

 

 

6  

Form 20 - F 2005 - Rhodia



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Year ended and as of December 31,

 

 

 


 

 

 

2005(1)
$

 

2005

 

2004(7)

 

2003(7)

 

2002(7)

 

2001(7)

 

 

 












 

(in millions, except for per share data)

Amounts in accordance with U.S. GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales(7)(8)

 

6,300

 

5,122

 

4,661

 

4,384

 

4,692

 

5,113

 

Other revenue(7)(8)

 

550

 

447

 

441

 

437

 

388

 

346

 

Operating profit/(loss)(7)

 

(5

)

(4

)

(438

)

(275

)

212

 

(167

)

Income/(loss) from continuing operations(7)

 

(545

)

(443

)

(732

)

(808

)

62

 

(244

)

Income/(loss) from discontinued operations(7)

 

(248

)

(202

)

(33

)

(647

)

14

 

(19

)

Net income/(loss)(7)(8)

 

(793

)

(645

)

(765

)

(1,455

)

76

 

(263

)

Earnings/(loss) per share from continuing operations(2)(7)

 

(0.85

)

(0.69

)

(1.55

)

(4.51

)

0.35

 

(1.36

)

Earnings/(loss) per share from discontinued operations(2)(7)

 

(0.38

)

(0.31

)

(0.07

)

(3.60

)

0.08

 

(0.11

)

Earnings/(loss) per share (2)(7)(8)

 

(1

)

(1.00

)

(1.62

)

(8.11

)

0.43

 

(1.47

)

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital(3)

 

325

 

264

 

218

 

(777

)

(358

)

(463

)

Property, plant and equipment (net book value)

 

2,296

 

1,867

 

1,937

 

2,526

 

2,743

 

3,561

 

 

 


 


 


 


 


 


 

Total shareholders’ equity

 

(829

)

(674

)

(578

)

(223

)

1,457

 

1,973

 

 

 


 


 


 


 


 


 

 

______________

(1)

Translated for convenience purposes only as €1.00 = $1.23, the noon buying rate on April 5, 2006.

(2)

Basic and diluted. Earnings/(loss) per share for 2001, 2002, 2003, 2004 and 2005 has been calculated on the basis of 179,103,640 shares, 178,765,518 shares, 179,309,188 shares, 471,607,727 shares and 645,635,891 shares outstanding (less treasury stock) on average for such years, respectively (179,103,640 shares, 178,765,518 shares, 179,309,188 shares, 471,607,727 shares and 645,635,891 shares outstanding on average on a diluted basis, respectively).

(3)

Working capital is defined as total current assets minus total current liabilities.

(4)

Non-current borrowings includes the non-current borrowings relating to capitalized leases but do not include current borrowings.

(5)

Total borrowings are defined as non-current borrowings and current borrowings.

(6)

Net borrowings are defined as total borrowings minus cash and cash equivalents and other current financial assets.

(7)

Certain items have been reclassified in 2004 and prior years to conform to the presentation in 2005 relating to discontinued operations.

(8)

Revenue from services and other revenues, previously recorded as reductions of operating costs, are now presented in net sales or other revenue with a corresponding reclassification of cost of sales. The amounts of the reclassification of net sales for each of the four years ended December 31, 2001, 2002, 2003 and 2004 are €197 million, €102 million, €102 million and €145 million, respectively, and other revenue for each of the four years ended December 31, 2001, 2002, 2003 and 2004 are €346 million, €388 million, €437 million and €464 million, respectively.

 

 

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Exchange Rate Information

Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar price of our ADSs on the New York Stock Exchange and the U.S. dollar value of any dividends we may declare.

The table below sets forth the euro/U.S. dollar exchange rate for the periods indicated based on the Noon Buying Rate expressed in euro per U.S. dollars.

 

Month

 

Period-end rate

 

Average rate(1)

 

High

 

Low

 


 


 


 


 


 

Euro/Dollar(2)

 

 

 

 

 

 

 

 

 

April 2006 (through April 5)

 

€0.81

 

€0.82

 

€0.83

 

€0.81

 

March 2006

 

0.82

 

0.83

 

0.84

 

0.82

 

February 2005

 

0.83

 

0.84

 

0.84

 

0.83

 

January 2006

 

0.82

 

0.82

 

0.83

 

0.81

 

December 2005

 

0.84

 

0.84

 

0.85

 

0.83

 

November 2005

 

0.85

 

0.85

 

0.86

 

0.83

 

October 2005

 

0.83

 

0.83

 

0.84

 

0.82

 

Year

 

 

 

 

 

 

 

 

 

Euro/Dollar(2)

 

 

 

 

 

 

 

 

 

2006 (through April 5)

 

€0.82

 

€0.83

 

€0.84

 

€0.82

 

2005

 

0.84

 

0.81

 

0.86

 

0.74

 

2004

 

0.74

 

0.80

 

0.85

 

0.73

 

2003

 

0.79

 

0.88

 

0.97

 

0.79

 

2002

 

0.95

 

1.05

 

1.16

 

0.95

 

2001

 

1.12

 

1.12

 

1.19

 

1.05

 

 

______________

(1)

The yearly averages of the Noon Buying Rates for the euro were calculated using the average Noon Buying Rate on the last business day of each month during the relevant period. The monthly averages were calculated using the average of the daily Noon Buying Rates for the euro within each month.

(2)

Originally published as dollar/euro.

 

 

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Risk Factors

You should carefully consider the following risks and other information contained in this Annual Report. The risks described below are not the only risks facing our Company. Additional risks not presently known to us or which we consider immaterial based on information currently available to us may also materially adversely affect our Company. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results could be materially adversely affected.

This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks we face as described below and elsewhere in this Annual Report. See “Cautionary Note About Forward-looking Statements”.

Operational Risks

We are an international group of companies and are exposed to general economic, political and regulatory conditions and risks in the countries in which we have operations.

We operate in the global market and have customers in many countries. We currently operate facilities in Europe, North America, Latin America and the Asia/Pacific region, including China, where we are targeting expansion of our operations as a strategic priority. Many of our principal customers and suppliers are similarly global in scope. Consequently, our business and financial results are affected directly and indirectly by world economic, political and regulatory conditions.

Conditions such as the uncertainties associated with war, terrorist activities, political instability or the outbreak of major health risks in any of the countries in which we operate could affect us by causing delays or losses in the supply or delivery of raw materials and products, as well as increased security costs, insurance premiums and other expenses.

Our international operations expose us to a multitude of local commercial risks, and our overall success greatly depends on our ability to adapt to changes in economic, social and political conditions. We may not succeed in developing and implementing policies and strategies that are effective in each location where we do business. Moreover, changes in laws or regulations, such as changes in regulatory requirements (including with respect to taxation, tariffs and trade barriers, intellectual property regimes and import/export licensing requirements, among others) as well as varying tax regimes which could adversely affect our results or cash flows, including regulations relating to transfer pricing and withholding taxes on remittances and other payments by our subsidiaries and joint ventures, could increase the cost of doing business in these regions. Any of these conditions may have an adverse effect on our financial condition or results of operations. In addition, a number of companies in the chemicals industry have come under scrutiny by U.S. and EU regulators in connection with potentially anti-competitive practices. While we are unaware of any investigations concerning us, we are aware that a number of chemical companies have been subject to both criminal and civil claims involving a variety of products. Although we believe that we are in compliance with rules and regulations in respect of anti-competitive practices, regulatory focus on the industry increases the potential that we may become involved in an investigation. We cannot assure you that we will not become subject to government investigations or third-party claims, or that, in such a case, our compliance programs in respect of competition laws will have been adequate or that we will not be required to pay fines or damages.

The cyclicality in some of the industries we serve could have a material adverse effect on our business and financial condition.

Our results are affected by cyclicality in various industries we serve, either directly or indirectly, including the consumer, automotive, electronics, construction and textile industries. Although in 2005 we were able to increase prices so as to offset increases in the price of raw materials and energy our results of operations and financial condition in the past have been adversely affected by a

 

 

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decrease in demand in certain sectors. Fluctuations in price and demand within the sectors that we operate could continue, and we could continue to experience periods of overcapacity, declining prices and lower profit margins. Our efforts to refocus our activities on areas that are less affected by this cyclicality should reduce our exposure to these negative effects. In addition, external factors beyond our control, such as general economic conditions, competitors’ actions, international events and circumstances and governmental regulation in France, the United States, China and other jurisdictions, can cause volatility in raw material prices and product demand, as well as fluctuations in our prices, volumes and margins.

Certain markets in which we are involved are very competitive.

We face significant competition in certain of our markets. In the specialty chemicals industry, competition is based upon a number of considerations, principally product differentiation and innovation, product quality and quality of logistics, including distribution capabilities. While we were able to manage our operations and product portfolios, which allowed us to handle the competition, in some market segments, our products have been and could be subject to intense price competition due to factors such as overcapacity, competition from low-cost producers and consolidation among our customers and competitors. New products or technologies developed by competitors also may have a material adverse impact on our competitive position.

Sustained high raw materials prices increase our production costs and the cost of goods sold, so that the time it takes to pass on increases in such costs to our customers may reduce our operating income in the short term.

A significant portion of our raw materials costs are based on petroleum products, in particular, those derived from benzene. We are therefore indirectly exposed to any volatility in the price of oil that may result from any instability in oil-producing regions and are directly exposed to an increase in the price of benzene. We are also exposed to volatility in the price of our other principal raw materials, including natural gas. In 2005, raw material costs continued to be high, in particular petrochemical commodities prices. We were able in 2005 to offset part of this negative impact with price increases, unlike in 2004.

Implementation of our cost-reduction measures may continue to affect our financial results.

We have announced the implementation of significant cost-reduction plans. In October 2003, we announced a plan that targeted a reduction in operating costs of approximately €323 million per year, as compared with 2003, for a total implementation cost reevaluated at €281 million between 2004 and 2006. In November 2005, we announced additional measures to reduce operating costs by approximately €100 million per year compared with 2004, for a total cost estimated at €90 million.

These anticipated implementation costs and cost savings are based on our estimates, however, and actual costs and/or savings may vary significantly. In addition, our cost-reduction measures are based on current conditions and do not take into account any future cost increases that could result from changes in our industry or operations, including new business developments, wage and price increases or other factors. Restructuring, closures, and layoffs may harm our labor relations and public relations and have led and could lead to work stoppages and/or demonstrations. Our failure to successfully implement these planned cost-reduction measures, or the possibility that these efforts may not generate the level of cost savings we expect going forward or may result in higher than expected costs, could negatively affect our financial results as well as our ongoing operations.

Several of our businesses face risks by operating as joint ventures in which we share control but do not own a controlling interest.

We face risks relating to joint ventures in which we share control but do not own a controlling interest and certain of which are also large customers and/or suppliers of our products. We have included a list of the joint venture entities that fall within the scope of our consolidation in Note 37 to our Consolidated Financial Statements.

 

 

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Under the governing or financing documents or agreements for certain of these entities, certain key matters such as new financing, capital expenditures, approval of business plans and decisions as to timing and amount of distributions of dividends require the agreement of our partners. There is a risk of disagreement or deadlock among shareholders of joint controlled entities and that decisions contrary to our interests will be made. In addition, our investments in joint ventures, both in general and as a result of our arrangements with our joint venture partners, may expose us to requirements for additional investment or to additional capital expenditure or financing requirements or to obligations to buy or sell holdings. For example, Nylstar, our joint venture with the Italian company SNIA, and a business activity that we have now classified under discontinued operations, has experienced financial difficulties in recent years, including significant losses and a broad restructuring program launched in 2003. These difficulties led Nylstar to renegotiate its loan arrangements on December 3, 2004. As major shareholders, we and SNIA converted a total of €88 million in loans to a capital contribution, of which we contributed €44 million, or 50%, in accordance with our shareholding. We have announced our intention to exit our investment in the European textile industry; however, we cannot guarantee the success of this plan.

The results of certain of our businesses are significantly dependent on long-term contractual arrangements with customers and suppliers.

The results of certain of our business activities depend on long-term or renewable contracts. Furthermore, we seek to procure certain requirements for key raw materials pursuant to medium- or long-term contracts. See “Item 4. Information About Rhodia—Raw Materials,” and “Item 5. Operating and Financial Review and Prospects”.

In certain cases, these contractual relationships may be with a relatively limited number of customers. Although most of our major customer relationships are typically the result of multiple contractual arrangements of varying terms, in any given year certain of these contracts come up for renewal. We cannot guarantee that we will be able to renew these contracts on acceptable terms, which could adversely affect our results of operations or financial condition. In addition, from time to time we enter into toll manufacturing agreements or other arrangements to produce minimum quantities of product for a certain number of years. If we experience delays in delivering product, we may be subject to indemnities, which could be significant. In connection with a specific toll manufacturing agreement that we entered into in relation to the divestiture of an intermediate business, we have had to pay contractual indemnities of €36 million in 2002, €24 million in 2003, €28 million in 2004 and €9 million in 2005, due to reliability issues concerning production. Additional costs and indemnities could be due to the extent these issues continue.

In general, we are not dependent on a sole supplier for the majority of our principal materials. Nevertheless, in the case of certain key raw materials, we depend on a few significant suppliers. We have put into place security measures so as to minimize the impact of any potential decreases or interruptions in supply.

We have liabilities with respect to our retirement and related benefits that are not fully financed.

We have obligations to our employees relating to retirement and other end-of-contract indemnities in the majority of countries in which we operate. In the United States and the United Kingdom, liabilities arise pursuant to labor agreements, pension schemes and plans and other employee benefit plans, some of which require us to maintain assets to fund our obligations. In France, retirement indemnities and related benefits arise pursuant to labor agreements, internal conventions and applicable local requirements. These obligations are funded from current cash flows, and there is no legal requirement to maintain assets. As of December 31, 2005, we had defined benefit obligations of €765 million with respect to our French retirement indemnities.

Our projected benefit obligations are based on certain actuarial assumptions that vary from country to country, including discount rates, long-term rates of return on invested plan assets and rates of increase in compensation levels. If actual results, especially discount rates and/or rates of return on plan assets, were to differ from these assumptions, or if we were to modify our assumptions, our pension, retirement and other post-employment costs would be higher or lower. In such case, our cash flows could be unfavorably affected from the funding of these obligations.

 

 

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We cannot assure you that we will not be required to make cash contributions to fund our obligations in the future. Any such payments could have an adverse effect on our financial condition and liquidity. With respect to our foreign plans, as of December 31, 2005, we had defined benefit obligations of €1,802 million, of which €163 million related to countries that, like France, do not require separate assets to fund benefit liabilities, and plan assets of €1,327 million. See Note 28 to the Consolidated Financial Statements.

Our business is subject to operational risks for which we may not be adequately insured.

Our plants and facilities store and/or use significant quantities of potentially hazardous materials and other items, which can be dangerous if mishandled. Any damage related to our facilities or injury to employees may negatively affect our operations and may result in a decrease in revenues and additional costs to replace or repair and insure our assets, which could negatively affect our operating results and financial condition. We cannot assure you that we will not incur losses beyond the limits of, or outside the coverage of, our insurance policies. From time to time, various types of insurance for companies in the chemical industry have not been available on commercially acceptable terms or, in some cases, have been unavailable. We cannot assure you that in the future we will be able to maintain existing coverage or that premiums will not increase substantially. See “Item 4. Information About Rhodia—Risk Management and Insurance”.

We are involved in litigation.

We are involved in litigation arising in the normal course of our business, involving primarily product liability claims, environmental claims, claims by the buyers of businesses previously sold by us and civil liability compensation claims related to chemical products sold in the marketplace. We are also involved in U.S. securities law claims. For additional information regarding our current litigation, please read “Item 8. Financial Information—Legal Proceedings” and Note 32 to the Consolidated Financial Statements.

Risks Related to our Financial Condition and Liquidity

Our substantial level of indebtedness could materially adversely affect our ability to fulfill our obligations under our debt agreements, our ability to react to changes and our ability to incur additional debt to fund future needs.

We have a substantial amount of debt. As of December 31, 2005, we had gross financial debt (non-current plus current borrowings) of €3,014 million. For details on our gross financial debt as of December 31, 2005, please refer to “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources”.

Our substantial debt has had important consequences in the past and may continue to do so in the future. These consequences could include:

 

requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development and other purposes;

 

increasing our vulnerability to adverse economic and industry conditions;

 

limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;

 

placing us at a competitive disadvantage compared with our competitors that have relatively less debt; and

 

limiting our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other purposes.

 

 

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Our ability to refinance debt maturing in the medium term depends on our ability to generate cash and secure new sources of financing.

Our ability to repay our indebtedness depends on our ability to generate cash. In light of our historic cash flow fluctuations, debts, continuing high raw material costs and the cash impact of our restructuring programs, we do not expect to generate positive cash flow from our industrial and commercial operations before 2007. Our Refinancing Credit Facility (“RCF”), which replaces our Refinancing Facilities Agreement (“RFA”), contains clauses that oblige us to respect certain financial ratios. We cannot guarantee that we will be able to comply with these ratios or our other financial covenants.

We believe that improved financial conditions in 2005 have reduced the risk of such an occurence. If we were unable to fulfill our obligations under these covenants or to finance our cash needs, we would have to refinance all or part of our debt, which we cannot be certain that we would be able to do. The breach of certain financial covenants could lead to the declaration of an event of default and/or acceleration of repayment under certain of our financing agreements. In such event, we cannot assure you that our assets would be sufficient to repay all of our obligations in full.

Our ability to access short-term funding has been affected by our deteriorated financial condition.

The monthly or quarterly divestment of some of our uncollected trade and other receivables is another important source of our financial liquidity. Trade receivables are among our most liquid assets and selling them reduces the availability of such assets to our creditors. Our access to this source of financing has been reduced in recent years, mostly as a result of lower volumes of receivables available for financing and to a lesser extent due to more strict requirements (such as eligibility criteria, over-collateralization requirements, repayment timing and facility sizes) imposed by the relevant financial institutions as a result of our financial condition.

Reduced access to the securitization market would require us to obtain capital from other sources, and the terms of such financing may not be as favorable as that available under such programs.

Restrictions imposed by our credit facilities and our other outstanding indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.

Our RCF (which replaces our RFA) and our other outstanding indebtedness, in particular, the indentures governing our existing High-Yield Notes, contain various covenants that limit, among other things, our ability and the ability of our subsidiaries to:

 

borrow money;

 

pay dividends on, redeem or repurchase our share capital;

 

make certain investments;

 

create or suffer to exist certain liens;

 

enter into sale and leaseback transactions;

 

engage in certain transactions with affiliates;

 

expand into unrelated businesses; and

 

consolidate, merge or sell all or substantially all of our or their assets.

In addition, most of our existing finance agreements contain cross-default provisions and/or cross-acceleration clauses, pursuant to which a payment default, payment acceleration or failure to respect a financial covenant under one agreement could in some cases cause a default on or acceleration of all or a significant portion of our debt. The RCF also contains financial covenants.

These restrictions could limit our ability to borrow funds and reduce our operating flexibility, as well as our ability to respond to industrial opportunities if economic slowdowns occur, compared with competitors who are not subject to the same constraints.

 

 

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Our public debt ratings can affect the cost of our debt.

Moody’s Investors Service and Standard & Poor’s, independent rating agencies, publicly rate certain of our outstanding debt instruments. These public debt ratings affect our ability to raise debt, our access to the commercial paper market, and our ability to engage in asset-based financing. These public debt ratings also affect the cost to us and terms and conditions of debt and asset-based financings. Moody’s Investors Service has attributed a rating of B3 to our Senior Unsecured Notes and a rating of Caa1 (with a stable outlook) to our Senior Subordinated Notes. Standard & Poor’s has attributed a rating of B to our long-term and short-term debt and a rating of CCC+ (with a stable outlook) to our senior subordinated debt. Rating downgrades, should they occur, would likely affect the availability of and/or cost of our future financings. We cannot guarantee that we will be successful in carrying out measures that strengthen or maintain our credit profile, nor can we guarantee that the rating agencies will regard the measures we do carry out as sufficient. In addition, factors that are not within our control, including factors relating to our industry or specific countries or regions in which we operate, may affect the rating agencies’ assessment of our credit profile. As a result, we cannot guarantee that the assessment of our public debt ratings will not be downgraded by the rating agencies.

Our structure as a holding company could adversely affect our ability to meet our obligations under our Notes.

Rhodia S.A. is a holding company with limited business operations, sources of income and assets, other than the shares of its subsidiaries. Notes are the obligations of Rhodia S.A. exclusively. Our subsidiaries will not guarantee the payment of principal or of interest on the Notes, and the Notes will therefore be structurally subordinated to the obligations of our subsidiaries as a result of our being structured as a holding company. In the event of insolvency, liquidation or other reorganization of any of our subsidiaries, our creditors (including the holders of the Notes) will not have any right to proceed against the assets of that subsidiary or to cause the liquidation or bankruptcy of such subsidiary under applicable bankruptcy laws. Creditors of such subsidiaries would be entitled to payment in full from their respective assets before we would be entitled to receive any distribution from such assets. Except to the extent that Rhodia may itself be a creditor with recognized claims against a subsidiary, claims of creditors of that subsidiary will have priority with respect to the assets and earnings of that subsidiary over the claims of Rhodia’s creditors, including claims under the Notes. As of December 31, 2005, our subsidiaries had €720 million of gross financial debt to third parties (€405 million net). Our subsidiaries are also subject to liabilities to other creditors as a result of obligations incurred in the ordinary course of business, which liabilities are also effectively senior to the Notes.

Rhodia S.A.’s principal source of cash flow is dividends from the subsidiaries of Rhodia S.A., which amounted to €21 million in 2005. In addition we financed the activities of our operating subsidiaries through capital contributions of €46 million in 2005. However, our subsidiaries are distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or to make any funds available therefore, whether by dividends, interest, loans, advances or other payments. Although we have the power to control decisions to pay dividends in the subsidiaries in which we are the majority owner, the payment of dividends and the making of loans, advances and other payments to us by our subsidiaries may be subject to statutory or contractual restrictions, are contingent upon the earnings of our subsidiaries and are subject to various business and other considerations. Such limitations include financial assistance rules, corporate benefit laws and other legal restrictions that, if violated, might require the recipient to refund unlawful payments. In particular, under company law (including the French Civil Code (Code civil) and the French Commercial Code (Code de commerce) and similar laws in other jurisdictions) our subsidiaries are generally prohibited from paying dividends except out of profits legally available for distribution.

We may not be able to repurchase the Notes upon a change of control.

Upon the occurrence of specific change of control events, we are required to offer to repurchase all outstanding Notes. It is possible, however, that we would not have sufficient funds at the time of such change of control to make the required repurchase of the Notes. See “Item 5. Operating and Financial Review and Prospects”.

 

 

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French insolvency laws differ from U.S. and other insolvency laws.

Rhodia S.A. is incorporated in France and, consequently, any insolvency proceeding involving Rhodia would proceed under the laws of France. In general, French insolvency legislation favors the continuation of a business and protection of employment over the payment of creditors. A law dated July 26, 2005 reforming French insolvency proceedings was adopted by the French Parliament (Loi n° 2005-845 du 26 juillet 2005 de sauvegarde des entreprises). This law came into effect on January 1, 2006 and applies to all procedures started as of January 1, 2006. See “Item 10. Additional Information” for a description of French insolvency legislation, based on currently applicable law. However, any changes in law may increase uncertainty with respect to bankruptcy proceedings in France.

Market Risks

Currency and interest rate fluctuations may have a material impact on our financial results.

A significant portion of our assets, liabilities, revenue, expenses and earnings are denominated in currencies other than the euro, mainly the U.S. dollar, the Brazilian real and, to a lesser extent, the pound sterling. The Group’s consolidated financial statements and a large part of its production and costs are denominated in euros. Variations in the exchange rates of these currencies against the euro have had and will have a significant impact on our financial position and operating earnings.

For further discussion of these matters and the measures we have taken to seek to protect our business against these risks, see “Item 11. Quantitative and Qualitative Disclosure About Market Risk” and Note 27.2 to the Consolidated Financial Statements.

Fluctuations on the market for CER credits could affect the value of our shares.

We have received approval for our projects to decrease carbon dioxide emissions with the UNFCCC (United Nations Framework Convention on Climate Change), which is the organization that regulates the Clean Development Mechanism as established by the Kyoto Protocol. The CER credits which we will receive in the context of these projects have value and are marketable and/or tradeable. Markets have been formed for the trading of such credits. However, no assurance can be given as to the liquidity and price levels on such markets. These markets have been and will continue to be affected by significant uncertainties regarding the levels of supply and demand for CER credits with the recent creation of quotas. Fluctuations in the price of these emission credits could affect the price of our shares.

Environmental Risks

We are subject to continually evolving environmental and health and safety laws and regulations at the national and international level. These laws and regulations expose us to the risk of costs, liabilities and claims that could have a material adverse effect on our business, financial condition and results of operations. In addition, the sector in which we operate exposes us to significant potential liability with respect to the environment.

We are subject to a broad range of extensive and evolving environmental and health and safety laws and regulations in each of the jurisdictions in which we operate, which impose increasingly stringent standards on us. Such laws relate to, among other things, air emissions, waste water discharges, the use and handling of or exposure to hazardous materials, waste disposal practices, and clean-up of environmental contamination. Compliance with health and safety and environmental laws and regulations has resulted in ongoing costs for us.

 

 

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Changes in these laws and regulations could restrict our ability to modify or expand our facilities or continue production or require us to install costly pollution control equipment or incur significant expenses, including remediation costs. A failure to comply with any such law or regulation could result in material fines and criminal penalties or the imposition of other sanctions. We could also incur significant expenses in the event that new laws, regulations, governmental policies or local authorities were to require, in particular that certain materials, particularly, low-grade radioactive material currently stored on-site in France, be characterized as waste and necessitate transfer and disposal at specialized and regulated off-site locations.

In addition, we have been and may in the future be liable under various laws, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), to contribute to the costs of clean up at third-party facilities to which we have sent waste for disposal. Under these laws, the owner or operator of contaminated properties and the generator of wastes sent to a contaminated disposal facility may be held jointly and severally liable for the remediation of such properties, regardless of fault.

We could also remain liable for contamination at some of our former sites, including some sites that have been divested, where we may retain environmental liability. Many of our current, former, discontinued or sold manufacturing sites have an extended history of industrial use. As is typical for such sites, soil and groundwater contamination has occurred in the past or at neighboring sites and might occur or be discovered at other sites in the future. We are continuing to investigate, remediate and monitor soil and groundwater contamination at or from certain of these sites.

We continue to make provisions on an annual basis in order to ensure our compliance with applicable rules and regulations. We regularly review our potential liabilities and the means to address them. We account for such risks when there is an actual or implicit legal obligation, the latter is taken into account where expenditures are likely and where estimates are reliable. We evaluate our provisions based on our knowledge of applicable regulations, the nature and extent of the pollutants, techniques for remediation and other available information.

As of December 31, 2005, our accrued provisions for environmental liabilities (including studies, surveys of underground water, remediation projects) amounted to €232 million, as opposed to €207 million in 2004. A net charge of €33 million was recognized during fiscal year 2005. Potential liabilities, estimated at €140 million at December 31, 2004, were reevaluated and amount to €145 million, at December 31, 2005. Environmental contingencies are presented in Note 29 to the Consolidated Financial Statements.

Based on information presently available, our accrued reserve for probable future remediation expenses, and the amount of indemnities that we have received or expect to receive, and our actual obligations with respect to currently applicable rules and regulations and our liability for clean-up at certain sites, we do not expect that our compliance costs will have a significant adverse effect on our operations, revenue or financial condition.

However, environmental, health and safety matters cannot be predicted with certainty, and the amounts we have set aside may not be adequate for all purposes. In addition, the development or discovery of new facts, events, circumstances or conditions, and other developments such as changes in the law or the interpretation or enforcement thereof, could result in increased costs and liabilities.

For example, the evolution of European law in the domain of ground pollution, and in particular the “Texaco” decision of the European Court of Justice of January 29, 2004, which seems to have ruled that all polluted soil, even if not excavated, must be treated as waste, if confirmed, may result in significant additional costs for us.

Future enforcement of European Directive n° 2000/60/EC of October 23, 2000 establishing a framework for community action in the field of water policy could also require us to incur significant additional costs.

In France, the implementation of two decrees that have recently been published may result in significant additional costs for us. Decree n° 2005-1130 dated September 7, 2005 regarding technological risk prevention plans (“TRPP”) concern measures for monitoring urbanization at the most hazardous sites. Responsibility for the costs generated by such measures remains to be clarified.

 

 

 

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A TRPP should be implemented before July 31, 2008 for approximately ten of the sites that we or one of our subsidiaries operate in France. Additionally, Decree n° 2005-1170 dated September 13, 2005 provides for new methods to determine the necessary remediation in case and at the time of the closure of a site. These methods could include, in some cases, remediation measures if a use of the site other than industrial use is imposed on us, which could require additional remediation costs. However, we have no current legal obligations to perform remediation.

Moreover, our industrial activities in most of the regions in which we operate are subject to obtaining permits, licenses, other authorizations or declarations. Chemical substances that appear on at least one of the following lists can usually be registered and exported without undergoing additional tests outside their country of origin: the European Inventory of Known Chemical Substances; the Toxic Substances Control Act; the U.S. Inventory of Chemical Substances; the Canadian Domestic Substance List; and the Handbook of Existing New Chemical Substances in Japan. However, certain administrative barriers may still exist. We work in close collaboration with the relevant authorities in the countries mentioned above in order to commercialize new products and chemical substances. The implementation of the future European regulation concerning the Registration, Evaluation and Authorization of Chemicals (REACH), a draft form of which was adopted by the European Commission on October 29, 2003, and which was the subject of a first reading by the European Parliament in November 2005 and a political agreement by the European Council in December 2005, could cause us to incur significant additional costs. Because we do not know when and in what form this potential new regulation may eventually be implemented, or the allocation of related costs among industry participants, we are not able to accurately assess what the compliance cost may be or when such costs may be incurred.

We operate several “Seveso” installations as defined under the European Union’s “Seveso” Directive 96/82/EC of December 9, 1996, or similar installations outside of Europe, where hazardous substances such as chlorine and phosgene are present, and which can generate major risks to the health and safety of neighboring populations and to the environment. These sites include 43 sites worldwide, of which 23 are in Europe and 14 are in France. As such, we are subject to liabilities and claims relating to personal injury (including exposure to hazardous substances used, produced, disposed of by us, located in our facilities or transported on our behalf), property damage or damage to natural resources.

In addition, we currently own or operate plants previously owned successively by Stauffer Chemicals and Rhône-Poulenc where asbestos was used as insulation in pipes, boilers and furnaces, but not in the manufacturing of products. As a consequence, we have received a limited number of claims relating to alleged asbestos exposure. Two of our sites in France have been registered on an official list prepared by French authorities as industrial sites that previously manufactured asbestos-containing materials, which give workers the right to claim early retirement and could give workers other rights. We cannot exclude the possibility that other sites may be included in the future. While it is not possible to determine the ultimate outcome of all claims that may be brought against us, we believe that our future risk related to asbestos exposure is limited based on available information and our experience with these claims.

Risks Related to our Shares and to our ADSs

You may not be able to exercise preferential subscription rights.

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. Shareholders may waive their preferential subscription rights specifically in respect of any offering, either individually or collectively, at an extraordinary general meeting. Preferential subscription rights, if not previously waived, are transferable during the subscription period relating to a particular offering of shares and may be quoted on the Eurolist market of Euronext Paris. U.S. holders of shares or ADSs may not be able to exercise preferential subscription rights unless a registration statement under the Securities Act of 1933 is effective with respect to such rights or an exemption from the registration requirements thereunder is available. We intend to evaluate at the time of any rights offering the costs and potential liabilities associated with any such registration statement, as well as the indirect benefits of enabling the exercise by the holders of U.S. of preferential subscription rights, and any other factors we consider appropriate at the time, and then to make a decision as to whether to file such a registration statement. If preferential

 

 

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subscription rights cannot be exercised by an ADS holder, Citibank, N.A., as depositary, will, if possible, sell such shareholder’s preferential subscription rights and distribute the net proceeds of the sale to the holder. If the depositary determines, in its discretion, that such rights cannot be sold, the depositary may allow such rights to lapse. In either case, ADS holders’ interest in us will be diluted and, if the depositary allows rights to lapse, holders of ADSs will not realize any value from the granting of preferential subscription rights.

Holders of ADSs may be subject to additional risks related to holding ADSs rather than shares.

Because holders of ADSs do not hold their shares directly, they are subject to the following additional risks:

 

In the event of a dividend or other distribution, if exchange rates fluctuate during any period of time when the depositary cannot convert a foreign currency into dollars, the ADS holder may lose some or all of the value of the distribution. There can be no assurances that the depositary will be able to convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a specified price, nor that any such transactions can be completed within a specified time period.

 

In order to vote at shareholders’ meetings, ADS holders who are not registered on the books of the depositary are required to transfer their ADSs for a certain number of days before a shareholders’ meeting into a blocked account established for that purpose by the depositary. Any ADS transferred to this blocked account will not be available for transfer during that time. ADS holders who are registered on the books of the depositary must give instructions to the depositary not to transfer their ADSs during this period before the shareholders’ meeting. ADS holders must therefore receive voting materials from the depositary sufficiently in advance in order to make these transfers or give these instructions. There can be no guarantee that ADS holders will receive voting materials in time to instruct the depositary to vote. It is possible that ADS holders, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote at all.

 

ADS holders may not receive copies of all reports from us or the depositary. You may have to go to the depositary’s offices to inspect any reports issued.

 

We and the depositary may amend or terminate the deposit agreement without ADS holders’ consent in a manner that could prejudice ADS holders.

Cautionary Note About Forward-looking Statements

Certain of the statements contained in this Annual Report that are not historical facts, including, without limitation, under the headings “Item 4. Information about Rhodia” and in “Item 5. Operating and Financial Review and Prospects” are statements of future expectations and other forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as “believe”, “expect”, “may”, “is expected to”, “will”, “will continue”, “should”, “would be”, “seeks”, “intends”, “plans”, “estimates” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. These statements are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those anticipated by such statements. Factors that could cause such differences in actual results include:

 

changes in raw material prices, in particular the price of oil and oil derivatives;

 

changes in interest rates and currency exchange rates in currencies other than the euro, principally in U.S. dollars, Brazilian reals and U.S. dollar-influenced currencies;

 

our ability to introduce new products and to continue to develop our production process;

 

customers and market concentration;

 

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

 

 

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changes in economic or technological trends;

 

potential environmental claims, costs, liabilities or other obligations;

 

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

 

optimizing the value of credits (CER) issued in regards to projects for the reduction of greenhouse gasses in South Korea and Brazil, developed within the framework of the Clean Development Mechanism (CDM) under the Kyoto Protocol.

Item 4. Information About Rhodia

We are a leading global manufacturer of a wide range of specialty chemical and other products that are sold in a broad spectrum of consumer and industrial markets, including cosmetics, detergents, pharmaceuticals, automotive, electronics, agrochemicals and construction. Our proprietary technologies and differentiated product portfolio enable us to develop and deliver high-performance, cost-effective solutions to our customers. Our technologies enhance our customers’ end products by, among other things, improving performance, enhancing core product characteristics, simplifying production processes, lowering costs and making products more environmentally friendly. We own and operate manufacturing facilities located in Europe, North America, the Asia/Pacific region and Latin America. In addition, we operate five multi-disciplinary and multi-enterprise centers across the world plus 35 technical development centers providing links between the research centers and enterprises, customers and local markets.

Corporate Information

The legal and commercial name (dénomination sociale) of our Company is Rhodia. We were incorporated in 1989 for a period of 99 years. The Company is a société anonyme, a form of limited liability company, domiciled in, incorporated under and governed by the laws of France—most notably art. L. 225.1 & seq. of the French Commercial Code. Our corporate governance structure is set out in our by-laws (statuts), which were last amended on December 20, 2005.

We are registered with the Register of Commerce and Companies of Nanterre (registration number 352 170 161). Our registered office is located at Immeuble Coeur Défense, Tour A, 110 Esplanade Charles de Gaulle, 92400 Courbevoie, and our phone number is +33 1-5356-6464. Until November 2, 2005, our registered office was 26, quai Alphonse-Le Gallo, 92512 Boulogne-Billancourt Cedex, France. Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.

Corporate History

Our origins date back to the nineteenth century to two chemical companies, the Société Chimique des Usines du Rhône and l’Entreprise de Produits Chimiques Etienne Poulenc. In 1928, they merged to form Rhône-Poulenc. Over the years, Rhône-Poulenc expanded into such areas as polyamide and polyester fibers and life sciences, and made many major acquisitions in the chemical industry. During the 1990s, Rhône-Poulenc divested many businesses and refocused its strategy on life sciences and specialty chemicals. From 1990 to 1997, it divested many businesses in basic chemicals. Rhône-Poulenc also applied its strategy of focusing on specialty products to its Fibers & Polymers division and gradually disposed of its polyester business.

The formation of Rhodia with our current name and organizational structure occurred on January 1, 1998, through a series of transactions carried out by Rhône-Poulenc and several of its subsidiaries. We became a public company on June 25, 1998, when Rhône-Poulenc sold a 32.7% stake in our Company to the public. In October 1999, Rhône-Poulenc carried out a two-part transaction in which it sold 39.1% of our outstanding shares and issued Notes exchangeable into our shares representing 25.9% of our share capital. In December 2002, Rhône-Poulenc (which had become Aventis) proceeded with the early redemption of these bonds, effectively canceling all outstanding bonds. On May 2, 2003, Aventis reduced its stake in our Company to 15.3% from 25.2% pursuant to a sale and purchase agreement with Crédit Lyonnais (now Crédit Agricole). As a result of capital increases we have carried out, Sanofi-Aventis, successor to Aventis, currently holds 8.2% of our share capital.

 

 

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Main Businesses

This section gives a description of the technologies, businesses and market conditions of the eight enterprises that existed in 2005.

In 2005 our operating activities were organized into eight enterprises.

 

Novecare, corresponding to our former enterprises Phosphorus, Phosphates and Food (PPF) and Home, Personal Care and Industrial Ingredients (HPCII);

 

Silcea, corresponding to our former enterprise Rare Earths, Silicones, Silica Systems (RE3S);

 

Coatis, corresponding to our former enterprise Performance Products for Multifunctional Coatings (PPMC);

 

Polyamide;

 

Acetow;

 

Eco Services;

 

Organics, corresponding to the former enterprise Perfumery, Performance and Agro (PPA);

 

Rhodia Pharma Solutions (RPS).

Novecare

Novecare recorded sales revenue of €935 million in 2005, or 19% of our consolidated sales.

The enterprise is involved in the cosmetic and detergent markets as well as in industrial markets (metal treatment, polymers, oil, and agrochemicals).

 

Products

 

Markets

 

Brand names

 

Competitors

 


 


 


 


 

Surfactants

 

Cosmetics, detergents, agrochemical formulations, lubricants, emulsions, polymerization, oil

 

Miranol, Dermalcare, Miracare, Soprophor, Lubrhophos, Supersol, Abex, Rhodafac, Geropon, Antarox, Supragil, Alkamuls, Igepal, Rhodacal

 

Akzo Nobel, BASF, Clariant, Cognis, Croda, Degussa, Dow, Huntsman, ICI, Sasol (Condea), Shell, Stepan

 

Phosphorous derivatives

 

Fine chemicals, agrochemicals, water treatment, fire protection, oil

 

Proban, Amgard, Tolcide, Briquest, Bricorr, Albrite, Aquarite

 

Bayer, Solutia, Cytec, Thermphos, Clariant, Ciba Hercules, Lamberti

 

Natural polymers

 

Cosmetics, detergents, agrochemical formulations, industrial formulations, oil

 

Jaguar, Rheozan,Rhodopol, Rhodicare

 

Hercules, Lamberti

 

Specialty polymers and monomers

 

Cosmetics, detergents, agrochemical formulations, industrial formulations, polymerization, emulsions

 

Geropon, Mirapol, Polycare, Carbomer, Alkasperse, Alkafloc, Glokill, Albritect, Repel-O-Tex, Sipomer

 

BASF, Arkema, ISP, Dow-Amerchol, Degussa, Clariant, Rohm & Haas

 


Surfactants are molecules made up of two distinct particles, one with a strong affinity for oils and the other for water. They are used as performance additives in formulations in a large number of industries.

Phosphorus derivatives are used in numerous applications, from water treatment to agrochemical products to fire protection.

Natural polymers and their derivatives are vegetable-based and water-dispersible. They have properties that are used to modify texture or rheology, emulsify oils, stabilize complex formulations and prolong product life, or even modify surfaces. They have applications in many markets such as cosmetics, agrochemical formulations, and oil drilling.

 

 

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Specialty polymers are obtained either by radicular polymerization or by condensation. The extremely wide range of these products meets needs that are highly diversified but also specific.

Specialty monomers, used in very small amounts, improve the performance of coatings and adhesives when put into emulsions, solutions, or included in the polymerization process.

Novecare successfully pursued the implementation of its multi-pronged strategic growth plan consisting of innovation, partnership with clients and geographic growth.

Novecare further ensured its growth in Asia at the end of 2004, by taking full control of the capital of its subsidiary Wuxi Chemicals Co. Ltd, and by increasing its production capacity for surfactants and specialty polymers, so as to respond to rapidly growing local demand.

Innovation and long-term partnerships with clients are two additional key areas of the business’ growth plan. In 2005, the business strengthened its relations with principal players on the markets it serves by delivering original solutions adapted to their particular industries and structures.

In terms of innovation, Novecare developed SSLs (Structured Surfactants Liquid), which are sophisticated structures that allow for a new generation of personal care products. Shampoos and shower gels that are pleasing to use, cleanse effectively, are mild and offer extended moisturizing, required new types of formulas that combined in a controlled and stable manner varying active ingredients while offering extended-release over time. SSLs make such formulas easy and effective to manufacture. Accordingly, SSLs have been used in the majority of such products that have recently been put on the market.

In the oil drilling sector, the business developed a new line of lubricants made with guar that are adapted to the particular conditions in wells and which can result in significant savings in of both time and labor, essential during periods of very high activity. These guar-based lubricants improve the output of wells. They are sensitive to the environment and meet users’ logistical reliability criteria.

In the field of agricultural chemistry, a new biodegradable bio-accelerator for glyphosate-based formulas with a favorable toxicity/environmental hazard profile has been approved by the Environmental Protection Agency. Because it brings together technical performance and respect for the environment, this product answers a strong existing need in the industry.

Silcea

Silcea recorded sales of €810 million in 2005, or 16% of our consolidated sales.

The Silcea enterprise combines three high value-added businesses: rare earths, silicones, and silicas, each with its own specific technology. Its products are aimed at a variety of markets (automotive, electronics, high performance coatings, medical comfort, paper and textile coating, etc.), including market segments undergoing significant growth such as automotive anti-pollution systems and “green” tires. For these different markets, Silcea has been the originator of numerous innovations, including: “three track” catalytic converters, low energy consumption tires, luminescence for new-generation flat screens, and high-performance coatings for airbags and technical textiles.

 

 

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Products

 

Markets

 

Brand names

 

Competitors

 


 


 


 


 

Products made from rare earths

 

Electronics: luminescence for new flat screens, optics, coloring, component polishing. Catalysis: automotive anti-pollution and industrial catalysts

 

Luminostar™, Cerox™, Opaline™, Superamic™, Eolys™, Actalys™, OPtalys™, Neolor™

 

AMR, DKK, Chinese manufacturers, Octel, Infineon

 

Silicones

 

Automotive, technical textiles, cosmetics, paramedical, dentistry, electronics, self-adhesives, construction, paints and coatings

 

Rhodorsil®, Rhodorseal®, Silcolease®, Rhodalis®, Silbione®, CAF®, Lyndcoat®

 

Dow Corning, GE, Shinetsu, Wacker

 

Silicas

 

Tires, elastomers, paper industry,nutrition, clothing

 

Siloa™, Zéosil®, Tixosil®, Tixolex®

 

Degussa, Huber, PPG

 


Rare earths are natural elements, like iron or oxygen, which are present in great quantities in the earth’s crust. We are involved in the processes of separating and finishing these elements to high degree of purity for use in high value-added compositions used in catalysis (automotive anti-pollution, etc.) and electronics (luminescence for LCD and plasma screens, polishing, passive electronic components, etc.).

Silicones are polymers made from silicon. Their mineral origin gives them stability and exceptional qualities such as resistance to temperature, UV, and ageing, as well as remarkable functional abilities, such as the adaptation of performance by physical chemistry. These properties allow for a very large number of applications: the coating of paper for self-adhesive tapes, coating textiles for airbags, waterproofing/sealing and gluing in construction, waterproofing/sealing of car engines, dental and artistic molding, the manufacture of high-performance elastomers used in making cables, as well as medical, industrial and consumer products. We believe that we hold leadership or joint leadership positions in high value-added market segments, such as paper and textile coatings, medical comfort, industrial sealing and gluing, and molding.

Silica is a mineral (sand) that can be used as a filler to strengthen polymers in the manufacture of rubbers and elastomers. Because of our expertise in surface chemistry, we regularly develop new products. We are a world leader in high performance silica precipitate technology and have developed products that are part of numerous innovations et developments such as high-performance, low energy consuming, “green” tires, nutritional support mediums, membranes for batteries, etc.

In 2005, we successfully launched new products, including:

 

third generation Eolys™: this soluble catalyst for particle filters makes maintenance-free operation through 250,000 km possible (which is the average lifespan of a diesel-fuel vehicle);

 

0ptalys™ products: these catalytic components made from rare earth greatly increase the efficiency and durability of catalytic converters;

 

Luminostar™ products: new products that play a key role in the field of luminescence (plasma screens, low energy lamps, lighting of liquid crystal screens, etc.);

 

new silicone elastomers for lining airbags: true marvels of technology, these products have allowed a decrease to the thickness of the protective layer without affecting performance, resulting in sizeable gains in terms of volume and weight of the airbag module;

 

new product line for coating textiles, in both sporting goods (ADVANTEX™) and architectural fabrics;

 

new range of silicones for taking dental impressions that has been approved in the U.S. Thanks to the “hydrophilic” technology developed that we developed, the product allows one to capture the finest details even in the presence of saliva;

 

SILOA™ products: top-of-the-line silicas that are between “precipitated” and “pyrogenic” silicas, designed for rubber and elastomer applications; and

 

growth of HDS™ technology in the Asian and Latin American tire markets.

 

 

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In addition, Silcea:

 

divested its European silicone putty cartridge activities, which accounted for more than €50 million in sales and weighed negatively on the balance sheet, to Henkel, the global leader for this type of building product. We partnered with Henkel for the supply of polymers and silicone putties; and

 

confirmed in May 2005 that it was moving closer to concluding a preliminary accord for the creation of a Global Alliance with China National Chemical Corporation/Bluestar in the field of silicones. We and Bluestar have the intention of assuming a leading role in the global silicones market capable of competing with the two largest players. The plan calls for investing in a new production facility for methylchlorosilane and major building blocks for silicone in Tianjin (China) through the use of our technology.

Coatis

Coatis recorded sales of €582 million in 2005, or 11% of our consolidated sales.

The enterprise operates in high value-added specialty segments, mainly in the markets for industrial coatings, particularly in the automotive industry with its isocyanate technology, and in the markets for decorative paints and specialty additives used in the construction industry with its latex technology. Furthermore, the Brazilian solvents operation has found opportunities in the printing market in addition to paints and coatings.

 

Products

 

Markets

 

Brand names

 

Competitors

 


 


 


 


 

Aliphatic isocyanates

 

Industrial coatings for wood, metal (automotive) and plastics

 

Tolonate®, Rhodocoat™

 

BASF, Bayer,Degussa

 

Latex

 

Decorative paints, adhesives, construction

 

Rhodopas®, Rhoximat™

 

BASF, Celanese, ICI, Rohm & Haas, Wacker

 

Oxygenated solvents

 

Industrial paints, leather, inks

 

Rhodialsolv®, RhodiaEco®

 

BP, Celanese, Exxon, Oxiteno, Shell

 

Intermediate products (TDA, TDI, chlorine and chlorine-based products, nitric acid, Raney catalysts)

 

Polyurethane foams (manufacture of car seats, mattresses, and cushions), chemicals, fine chemicals, steel, agrofood, human and animal food products, agrochemicals,
pharmaceuticals, organic syntheses

 

 

 

TDI: Bayer, Dow, BASF, Borsodchem,Zachem Nitric acid: BASF, Kemira Chlorine: MSSA, Albemarle, Caffaro, Donau

 

Sulfur products and sulfuric acid regeneration

 

Production of unleaded gasoline, car-battery storage cells, paper and sugar bleaching, water treatment

 

 

 

Carbosulf (Akzo Nobel), FMC Foret Umicore, AtoFina GP, Clariant

 


Aliphatic isocyanates are used as hardeners in polyurethane resins in conjunction with polyols. They are recognized for their UV resistance and give coatings an exceptional finish and long life. Further, we operate the aliphatic isocyanate unit of Pont de Claix, one of the largest in Europe, on behalf of Lyondell.

Oxygenated solvents combine high thinning power with a low impact on the ozone layer and negligible toxicity. They are the main alternatives to chlorinated solvents.

Latexes are dispersed polymers. They come in the form of fine particles in water or powder and are characterized by their strong binding qualities. Changing the molecule’s characteristics produces a wide range of properties that allow it to be used in a large number of applications.

Finally, Coatis is involved in the business of managing the entire life cycle of sulfuric acid, from the regeneration of processing acid to the supply of pure acid and derivatives.

The year 2005 was devoted to testing and fine-tuning the TDI production line at a particular site. Notwithstanding an annual maintenance shutdown of some 35 days, significant records in production were achieved. Progress remains to be made in the upstream part of the chain in order to bring all of the units to a level of performance reliability that will guaranty the profitability of the isocyanate activity. The objective for 2006 remains industrial excellence.

 

 

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Polyamide

Polyamide recorded sales of €1,749 billion in 2005, representing 35% of our consolidated sales.

We estimate that Polyamide is the world’s third largest manufacturer of polyamide (nylons) based on sales in 2005. Polyamide is growing through four major businesses: intermediates and polymers, engineering plastics, technical fibers and industrial yarns, and textile yarns.

In 2005, Polyamide adopted the following development objectives:

 

innovation: to maintain a productive innovation pipeline and to take advantage of the growth and know-how of the Group’s enterprises;

 

profitable growth: to take advantage of having an integrated polyamide chain, optimize logistics and reduce inventory, accelerate growth in Asia, a zone which currently represents 12% of Polyamide’s total sales;

 

team integration: develop and reinforce a common culture and common objectives; and

 

sustainable development: focus research and development on reliable and sustainable solutions, control the safety of processes and persons, and respect the environment at each stage in the development of polyamides from fabrication of raw materials to waste disposal.

Intermediates and polymers

The different products in the polyamide chain (adipic acid, DNA, HMD, nutrient salt, and polymers) are the key intermediates for the development of Polyamide’s downstream business, as well as for the expansion of external markets.

This integrated fabrication chain allows Polyamide to focus production upstream, while optimizing profits downstream. We believe that this gives the business a competitive advantage in polyamide and polyurethane production.

Engineering plastics

The engineering plastics business operates in high-tech sectors with strong growth potential such as automobiles, electronic components, connectors, and industrial and consumer goods. The key to our success lies in the globalization of our product range, our ability to innovate and the competitiveness of our products and services. The enterprise’s flagship brand, Technyl®, is regularly enhanced by innovations such as Technyl Star™, Technyl® Alloy, and Technyl® Force.

A business with a high rate of innovation, our engineering plastics provide high value-added functional qualities, such as high mechanical, chemical and thermal performance, and excellent surface appearance, which are adapted to meet the specific requirements of applications. Engineering plastics are increasingly used as alternatives to steel and aluminum, which leads to significant weight savings and gives designers greater freedom, particularly in terms of the integration of functions.

 

 

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Technical fibers and yarns

Polyamide is a leader in the market for mono-fibers for screening processes, filters and polyamide fibers used in non-woven materials. The enterprise is a leading innovator in the industrial yarn sector, notably in ropes and nets.

In addition, Polyamide is a co-leader in Europe and South America of reinforced textiles for tires. The enterprise services diverse markets such as the automotive industry with reinforced yarns for tires and airbags as well as fibers for flocked surfaces; the manufacturing industry, providing technical yarns; home furnishings with fibers and yarns for floor and sofa coverings; and, finally, various leisure industries that use ropes and nets.

The production unit for super high tenacity yarns, launched in 2004, complements both high tenacity yarn production for airbags, as well the dipping unit in Brazil for tire fabrics.

Textile yarns

We manufacture textile yarns in Brazil, by joint venture in China, and by Nylstar N.V in Europe and North America, an equally-owned joint venture with Italy’s SNIA. The enterprise specializes in the design, production, and marketing of high value-added textile yarns for use in various clothing segments: sportswear, recreational and ready-to-wear clothing, underwear, and hosiery.

 

Products

 

Markets

 

Brand names

 

Competitors

 


 


 


 


 

Intermediates
and polymers

 

Downstream polyamide
and non-polyamide products (polyurethanes, food additives), Polymers 6.6 and 6.0

 

Stabamid™,
Dioro™, Adifood™

 

Invista,
BASF, Solutia,
Asahi, Radici

 

Engineering plastics

 

Automotive, electrical,
electronics, industrial goods,
consumer goods

 

Technyl®,
Technyl Star™, Technyl® Force, Technyl® Alloy, Oromid

 

Du Pont,
BASF, Bayer,
DSM, Solutia

 

Technical yarns
and fibers

 

Automotive, tires, filtration,
printing, ropes, carpets, furnishings, textiles

 

Sylkharesse®, Noval®

 

Invista, Acordis,
Asahi, Dusa, Honeywell, Solutia, Toray

 

Textile yarns

 

Lingerie, town clothing
and sportswear

 

Meryl®, Amni®

 

Invista, Radici Nilit,
TWD, Hyosung

 

The technologies involved in Polyamide’s activities relate not only to the manufacturing process but also to the packaging of products:

 

continuous and discontinuous (batch) processes involving large-scale application of different technologies from the field of organic chemistry, including chemical synthesis, distillation, liquid/solid separation, and extraction (dehydration);

 

transformation of nylon salt into polyamide (nylon) 6.6 through continuous and batch condensation polymerization;

 

compounding of polyamide (nylon) 6.6, 6 and 6.10, and granulation; and

 

automated packaging of compound flakes in 25 kg sacks or 1,000 kg containers.

Polyamide’s four branches of activity are also concurrent with the different technologies it applies:

Intermediates and polymers are produced from petrochemical derivatives (benzene, butadiene, cumene, and cyclohexane). These are the vital elements in the production of polyamides. They are also used in the manufacture of engineering plastics, and technical yarns and fibers.

 

 

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Engineering plastics are used for their mechanical and thermal properties by the automotive, electrical, and electronics industries, and in a number of consumer and industrial goods such as sports and recreational equipment, clamps, and tools, etc.

Technical yarns and fibers can be broken down into three categories: functional fibers and micro-fibers and yarns used for making flocked surfaces and carpets; high-tenacity industrial yarns used for making tires, airbags, ropes, and nets; and high-performance technical yarns used in filtration, printing, and the automotive industry, as well as fibers used for making non-woven fabrics.

Textile yarns that we produce in Brazil or by Nylstar N.V., a joint venture with SNIA, are used in hosiery, lingerie, sportswear, and town garments.

The world market for polyamide applications is estimated at $25 billion and is experiencing an average annual growth rate of around 2.5%. The polyamide market is a consolidated one, with just six manufacturers responsible for 50% of the world’s production of yarns, fibers, and plastics and for 67% of all intermediate products. This trend toward strong consolidation can be expected to continue in the coming years, reinforced by significant technological and financial barriers to new entrants.

Polyamide occupies a constantly evolving position in this market, with growth rates greater than the industry average.

In textiles, the situation in Europe has deteriorated continuously since 2001, mainly due to a fall in local demand for fibers caused by increases in imports of Asian-made garments. This deterioration, linked to the gradual elimination of textile quotas, was particularly pronounced in 2004, and led Nylstar N.V., our joint venture with SNIA, to undertake a major restructuring program. As a result of these factors, in 2005 Polyamide announced its intent to withdraw from this business. This withdrawal began by the signing on November 8, 2005 of a letter of intention for the transfer by us and SNIA to the Italian chemical interest RadiciGroup of all of our capital shares in the Nylstar N.V. joint venture.

At the same time that it was consolidating its activities, Polyamide was also making efforts to streamline its manufacturing capacity and increase the competitiveness of its fabrication units, through major investments at its Belle-Etoile (France) and Onsan (South Korea) facilities.

In the second half of 2005, Polyamide demonstrated its desire to increase its polymerization capabilities, through the purchase of a polymerization unit in Freiburg (Germany). Lastly, Solsys, responsible for our solvents activity, was merged into the Polyamide enterprise since the beginning of 2006. The different oxygenated solvents – acetone and acetic and ketonic acid – are manufactured in large part in Brazil and are used in the automobile industry (paints, linings, adhesives, and leathers) and for consumer and industrial goods.

Acetow

Acetow recorded sales of €410 million in 2005, representing 8% of our consolidated sales.

Acetow specializes in the production of acetate tow, the raw material used to make cigarette filters. Acetow ranks among the three leading manufacturers in this sector, alongside Eastman and Celanese.

As result of technical know-how that enables it to provide high quality products, together with client service and the competitiveness of its manufacturing facilities, Rhodia Acetow has become a favored partner of the tobacco industry.

Over the past few years, Acetow’s aim has been to strengthen its international presence in order to keep up with the geographic expansion of its multinational clients.

 

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Products

 

Markets

 

Brand names

 

Competitors

 


 


 


 


 

Acetate tow

 

Cigarettes

 

Acetow

 

Celanese, Eastman,
NTC, Daicel, Acordis, Mitsubishi

 

“Filter tow” or acetate tow is produced through a two-step process. The first step consists of a chemical transformation, in which cellulose acetate is produced through the reaction of acetic-anhydride with wood pulp. The second step is one of physical transformation, in which the cellulose acetate is dissolved in acetone, and then spun into tow. This tow is supplied to tobacco companies to make cigarette filters.

In 2005, for the second consecutive year, the industry saw strong growth in the five to six percent range, above the long-term annual growth prospects estimated at about 2.6 to 2.7%. Rhodia Acetow’s market share remains at around 18%.

The year 2005 was notable for a transfer of production capacity from the United States to China. Output capacity doubled in China, while one of Acetow’s competitors announced the closure of two production facilities. Following these changes, the market share open to independent manufacturers was reduced, although the usage rate, in terms of worldwide output potential, should remain stable in the coming years.

The growth of liquid crystal display flat screens was also one of the major developments of 2005. It led one of the enterprise’s Japanese competitors to convert a portion of its cellulose acetate output in order to respond to demand created through the manufacture of one of the component sheets (film) for this type of screen.

Eco Services

Eco Services recorded sales of €209 million in 2005, representing 4% of our consolidated sales.

Rhodia Eco Services is the leading company in the North American market for sulfuric acid regeneration services. Its strong production capabilities coupled with a logistical network allow it to provide unequaled reliability in the refining sector. Other manufacturers now apply our regeneration technology. Eco Services also produces sulfuric acid and sulfur derivatives.

 

Product range

 

Markets

 

Brand names

 

Competitors

 


 


 


 


 

Sulfuric acid, regeneration services, alum and other sulfur derivatives

 

Oil refining, chemical and petrochemical production

 

 

Du Pont, Marsulex,
General Chemical, Chemtrade

 

Regeneration is the process of converting used sulfuric acid into pure acid that can be re-used in the manufacturing process. Regeneration services are vital for clients in the refining sector given their need for continuous production output. This technology accounts for the greatest portion of the enterprise’s sales.

Eco Services offers its partners – petroleum refiners as well as petrochemical and chemical manufacturers – non-stop, around-the-clock regeneration services, through multi-year contractual arrangements. A focus on permanent and ongoing improvements in the reliability of its services is one of the key elements explaining the enterprise’s success. This focus led to the adoption in 2004 of the “Reliability Strategy” program. As part of this program, several of Eco Services’ production sites were shut down for complex maintenance operations, which were scheduled so as not to conflict with the seasonal production and operational needs of certain major refining customers.

The enterprise is always in a position to respond to the needs of its clients, even in adverse conditions, due to its network of six factories located in the United States Gulf Coast region and in the industrial centers in the U.S. mid-West and West Coast. In September 2005, Eco Services’ production units in the Gulf of Mexico promptly implemented repairs and resumed their activities after the passage of the devastating storms in the region.

 

 

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It is expected that Eco Services’ primary markets will grow at the same pace as the GDPs of the North American markets. Moreover, as the sales and services of Eco Services are linked to gasoline consumption, growth volumes will also be tied to growth in the automobile sector.

Eco Services currently enjoys sufficient capacity to meet expected short-term growth and is considering improving the output of certain production facilities through modest investments as part of a de-bottlenecking program.

Organics

Organics recorded sales revenue of €349 million in 2005, or 7% of our consolidated sales.

Our expertise in fine organic chemistry is brought together in the Organics enterprise, which is organized under three worldwide activities as follows:

 

flavorings and perfumes;

 

agrochemical intermediates; and

 

fluorinated coolants (FCP).

The enterprise is the world leader in the manufacture of diphenols (catechol/hydroquinone), vanillin and other catechol derivatives, of coumarine, and of salicylates.

 

Product range

 

Market

 

Brand names

 

Competitors

 


 


 


 


 

Salicylates

 

Flavors for the food industry and synthetic fragrances for high—end perfume, manufacturing, for detergents,
and cosmetic goods

 

Rhovanil ®, Rhodiarome ®, Rhodiantal ™, Rhodiaflor™, Rhodiascent ™, Petunial ™, Rosilial®, Carnaline®

 

Borregard, Jiaxing,
Mitsui,
Ube

 

Shafts produced
from diphenols

Line of fluorinated
components and derivative products

 

Polymerization inhibitors, colorants, photo,
antiozonants, acidic catalysis, electronics, intermediate
agricultural products

 

Acilys ™

 

Solvay,
Central Glass,
Halocarbon, Miteni,
Chinese and
Indian competitors

 

Blended fluorinated products
(blended coolants line transferred in June 2005 to Du Pont)

 

Coolants

 

Isceon®

 

Ineos, Honeywell,
DuPont, Arkema

 

Fluorination is a key technology. Organics has mastered this technology, which requires rigorous application of elevated security norms. Organics is considered a specialist in derived fluoroaliphatics such as trifluoroacetic acid and triflic acid.

Organics enjoys great expertise in the hydroxylation of phenol, which is necessary for manufacturing of the diphenols hydroquinone and catechol (catechine).

Above and beyond the multitude of oxidation processes, we have perfected a technology that is innovative, competitive, and respectful of the environment, namely, air oxidation.

Thanks to its expertise relating to a multitude of continuous and discontinuous processes of nitration and its expertise relating to exploitation of corrosive reactants, Organics manufactures nitrophenols, nitrochlorobenzenes, nitrofluorbenzenes, etc.

The entire range of products in our Flavorings and Perfumes line benefited from very strong demand throughout 2005 with line-wide volume growth on the order of 5%. This is due in large part to Organics’ capacity to supply products in compliance with all applicable regulations, including those relating to dietary hygiene and environmental requirements. The line took advantage of a

 

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restructuring in the Asian market. Indeed, a number of our competitors ceased operations, due either to insufficient profit margins or to an inability to adapt their practices and operations to the ever-more restrictive regulatory environment.

The arrival of Chinese and Indian competitors on the Agrochemical Intermediates market brought about a restructuring of the European industry as well as major reductions in production capacity. In this competitive environment, the most reactive of the European players in this market segment succeeded in improving their competitiveness while at the same time increasing their prices in denser local market.

Rhodia Pharma Solutions (RPS)

RPS recorded sales of €172 million in 2005, representing 3% of our consolidated sales.

Because of the difficulties that persist in the on-demand (custom) drug manufacturing industry, we decided to discontinue our synthesis operations. On March 31, 2006 we confirmed that we had completed the sale of our pharmaceutical custom synthesis business to Shasun Chemicals & Drugs Ltd.

After the disposal of the pharmaceutical custom synthesis business, RPS now focuses on the following segments:

 

aspirin (acetylsalicylic acid), where RPS believes it is the world leading producer for the bulk analgesic market;

 

paracetamol (acetaminophen, or APAP), where RPS believes it is the second leading producer; and

 

calcium phosphates, where it is the leading distributor for pharmaceutical and nutraceutical applications.

RPS believes it is the world leader in the production of aspirin (acetylsalicylic acid) for the bulk analgesic market, and the number two producer of paracetamol (acetaminophen, or APAP). The enterprise is also the leading distributor of calcium phosphates for pharmaceutical and nutraceutical applications.

 

Product range

 

Market

 

Brand names

 

Competitors

 


 


 


 


 

Aspirin

 

Pharmaceuticals

 

Rhodine

 

Jilin, Shandong

 

Paracetamol

 

Pharmaceuticals

 

Rhodapap

 

Tyco (Mallinckrodt),
Weifang

 

Calcium phosphates

 

Pharmaceuticals, nutraceuticals

 

A-Tab, Di-Tab, Tri-Tab, Calipharm

 

Budenheim, Astrarin,
Yeou-Fa

 

 

 

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New Organizational Structure

We continue to pursue the simplification of our organization. Beginning in 2006, the remaining activities of the Coatis enterprise are being integrated into the Polyamide and Organics enterprises as follows:

 

oxygenated solvent production in Latin America has been transferred to Polyamide; and

 

HDI, TDI and related activities have been transferred to Organics.

Furthermore, the synthesis business of Rhodia Pharma Solutions (RPS) is being sold. RPS’s remaining products, such as acetylsalicylic acid and paracetamol, are being integrated into Organics. Finally, our energy supply business, as well as management of our portfolio of greenhouse gas emission credits is being regrouped into a new entity, the Energy Services enterprise.

The seven enterprises that make up our simplified organization as from January 1, 2006 can be presented as three clusters, as indicated below.

 

Cluster

 

Enterprise


 

Performance Materials

 

PolyamideAcetow

Functional Chemicals

 

NovecareSilcea

Organic and Services

 

Eco ServicesOrganicsEnergy Services

Risk Management and Insurance

After analyzing our industrial risks, we manage them by relying first on a comprehensive prevention policy and only then on worldwide insurance programs. Our internal efforts and results in the area of industrial safety, workplace hygiene, environment and post-consumer product monitoring are described in our environmental reports available on our website. In addition, together with our insurers we have implemented a comprehensive, large-scale prevention and protection program for industrial risks. To minimize insurance premiums and provide strong incentives for prevention, all of our worldwide insurance programs feature very high deductibles. We only insure on the market against risk of catastrophic loss. Risk retention is distributed between insurance deductibles, borne by each of our operating companies, and retained risk assumed centrally by a consolidated captive reinsurance company, which bears losses in excess of the affiliated companies’ deductibles.

This description of the main insurance programs underwritten by us is necessarily partial and incomplete in order to preserve confidentiality and protect our competitive position. The total amount of insurance premiums for coverage of our industrial risks in 2005 was roughly €40 million. The great majority of those premiums are paid to independent insurers and reinsurers. The rest represents premiums received by our captive insurance company.

 

The property and casualty program absorbs most of the costs (insurance premiums and prevention program). The property and casualty program is supplemented by business interruption coverage not only for standard fire and explosion risks but also for equipment breakdowns and natural disasters. Coverage amounts are consistent with estimated risks. Most of our industrial sites are currently covered by an umbrella policy with a limit of €300 million per incident. The largest sites get additional coverage of up to €800 million, in line with assessments of maximum possible loss.

 

 

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The civil liability program covers both operating and product liability. We believe that coverage amounts compare favorably with those of our competitors, and

 

The transport program, with a limit of €15 million underwritten on the insurance market (without participation by our captive insurance company) covers goods stored by us as well as goods in transit or stored with third parties.

Our property, casualty, civil and products liability policies were renewed as of January 1, 2006 on satisfactory and comparable terms and lower premiums.

Research and Development

By the end of 2005, our R&D department consisted of 1,300 researchers located in five multi-disciplinary and multi-enterprise centers across the world plus 35 technical development centers providing links between the research centers and enterprises, customers and local markets. Gross expenditure on R&D rose to €146 million, €11 million of which came from grants and tax credits, for a number amounting to 2.7% of our net sales.

In 2005, the R&D department played an important role in our reorganization by adopting a simplified and more streamlined organizational structure, while still maintaining momentum in the launch of new products and above all by productivity gains of 6% compared with 2004. Furthermore, almost 17% of our sales came from new products (defined as commercial products launched in the last five years) and there were savings from improvements made to processes. We are a key innovator in five areas: nanometric reinforcement of materials, polyamide-based thermoplastics for automobiles, catalysis to control automobile emissions, solutions for performance fluids, and the modification of surface properties by polymers.

The R&D department, together with the enterprises, is focused on short term projects, such as development, transfers of technology and process amelioration. In 2006, the R&D department will work to rebalance its efforts between Europe and high growth regions, namely Asia. Since 2005, we have reinforced our technological resources in Asia, with the creation of a new laboratory for synthesis and processes and the acquisition of new analytical equipment. Management is now based out of Shanghai, China.

Raw Materials

We purchase raw materials and chemical intermediates from a large number of third parties, with a centralized purchasing department procuring the entirety of the raw materials needs of each of our enterprises. The cost of raw materials was approximately €2.5 billion in 2005. We estimate that in a typical year approximately one quarter of our annual raw material costs relate to benzene, one quarter to natural gas, one eighth to naphta and one tenth to electricity.

The table below sets forth our principal raw. materials.

 

Cyclohexane

Phosphorus

Acetic acid

Cumene

Ethylene oxide

Sulfur

Butadiene

Ammonia

Glass Fiber

Gas (as raw material)

Wood pulp

 

Phenol

Nitric acid

 

 

 

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Any significant change in raw material costs can have a significant effect on our earnings. See “Item 5. Operating and Financial Review and Prospects—Certain Factors Affecting Our Financial Condition and Results of Operations—Cost of Raw Materials.” Changes in prices of raw materials cannot always be passed on to customer in the forms of higher prices; hence, profit margins may be affected. Moreover, competitive pressures may drive down selling prices in the wake of lower raw material prices, thereby limiting the potential for improved profits. As a hedge against fluctuations in the prices of raw materials, we enter into medium- and long-term contracts for the primary materials used in our production.

Major requirements for key raw materials and energy are typically satisfied pursuant to medium- or long-term contractual agreements with suppliers. We are not generally dependent on any one supplier for a major part of our raw materials requirements, but certain important raw materials are obtained from a few major suppliers. In general, where we have limited sources of raw materials, we have developed contingency plans to minimize the effect of any interruption or reduction in supply.

In 2005, in light of our strategic plans, suppliers were organized into buying segments and classified into three categories, with the aim of organizing a competitive bidding process and reinforcing our market expertise. In 2006, these panels will be managed and evaluated regularly in order to assure supply and the achievement of our productivity objectives, notably through collaborations aimed at increasing productivity and integrating suppliers’ innovations.

Temporary shortages of raw materials may occasionally occur and cause temporary price increases. In recent years, such shortages have not resulted in unavailability of raw materials. However, the continuing availability and price of raw materials are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic and world market and political conditions, as well as to the direct or indirect effect of European and national regulations. During periods of high demand, certain raw materials are subject to significant price fluctuations, and, in the past, such fluctuations have had an adverse impact on the results of our operations. The impact of any future raw material shortages on our business as a whole or in specific geographic regions cannot be accurately predicted. Operations and products may, at times, be adversely affected by legislation, shortages or international or domestic events. See also “Item 5. Operating and Financial Review and Prospects.”

Sales, Marketing and Distribution

We sell our products and services in over 130 countries through decentralized sales, marketing and distribution functions. Such functions are currently carried out pursuant to policies established by the management of each enterprise. Our products are generally ready in bulk for use in industrial applications or subsequent reformation or incorporation in consumer and business goods. In connection with our strategy of increasing accountability of enterprise management, sales, marketing and distribution, which in the past were managed mainly by local subsidiaries responsible for several enterprises, are increasingly being placed under the direct responsibility of the management of individual enterprises. In addition, we are putting increased emphasis on key account management and new product launching across geographic regions in order to establish global sales, marketing and distribution arrangements for customers operating internationally.

Sales in all enterprises are generally on a purchase order basis; however, longer-term arrangements have been established with certain key customers or when dictated by customer requirements. Such arrangements generally do not extend beyond one year. We occasionally enter into long-term arrangements for periods ranging from three to five years with customers who consider their purchases to be strategic products or with whom we have jointly developed customized products.

Health, Safety and Environment

Our Health, Safety and Environment policy (HSE) is based on a worldwide program of risk prevention and continued improvement. In 2005, we invested €72.3 million worldwide into this program, of which, €30.5 million went towards health and €41.8 million went towards environmental objectives. These investments are part of our ongoing improvement programs that have been in place for several years. We have targeted four HSE objectives:

 

 

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Environment. We have implemented the principle of sustainable development, deploying a number of methods designed to ensure the application of sustainable development practices. Following widespread application and success of these methods in the United States, several such pilot initiatives have been initiated in Europe.

 

Workplace Safety. Members of our Executive Committee and members of the Enterprise Management Committees conduct management safety visits at least once every three years, designed to inform employees about safety issues, along with more thorough visits at least once every five years. We follow the industry “best practices” for workplace safety. High-risk sites are given special priority and receive more frequent visits.

 

Industrial Sites. We have developed our own system for managing the health and safety of our employees and environmental issues on our sites, which goes beyond ISO 14001 standards, the generally accepted environmental management standard. We require that our system be enforced at all sites, regardless of their size or of the nature of their activities, and we have audited over the past three years 98% of our own sites according to this system.

 

Products. We have implemented a policy designed to ensure that each product design, manufacturing and marketing team operates in consideration of HSE issues.

Environment

Sustainable development entails the satisfaction of the present generation’s needs without jeopardizing the resources of generations to come. Our objective is to use our technologies, capabilities and innovations to reduce consumption of energy and non-renewable materials. Reducing the consumption of energy and non-renewable materials is one of the guiding principles in our commitment to sustainable development. Our sustainable development policy entails three key objectives:

 

conservation in upstream research and development;

 

improvements in the manufacturing process; and

 

marketing products made from recycled materials.

Our sustainable development objectives strive to safeguard natural resources through innovation while developing synergies among different businesses and leveraging strong partnerships with customers. For example, Eolys has led to the production of a catalyst that enables the filtering of over 90% of soot particles in diesel fuel exhaust. At our La Rochelle site in France, suspended solids are recycled to recover rare earth oxides.

In compliance with the regulations set forth by the European Chemical Industry Council (CEFIC), and in accordance with the French government’s commitment to reduce gas emissions by 30% over the period of 1990-2010, we have implemented a policy that targets the reduction of the release of greenhouse gases (CO2 and N2O emissions) and tropospheric ozone-generating volatile organic compounds (VOCs). Over €20 million has been invested towards the achievement of these aims. Emissions reduction is a challenge that requires long-term action at all Group sites concerned, in particular regarding VOC emissions and the quantification of releases.

We also give special attention to protecting water resources, particularly by anticipating implementation of the European Water Framework Directive. Over a ten-year period (1990-2000), we reduced our water pollution by 60% and are now focusing on micro-pollutant releases with pilot projects underway at several sites. In addition, to prevent accident-related pollution, our main manufacturing sites have been equipped with release retention basins. In 2000, we implemented a data-reporting procedure based on CEFIC standards. This procedure combines both raw data and indicators based on overall environmental impacts at almost 100% of our sites.

Workplace Safety

We monitor the health and safety of employees and other people at all of our sites. Our objective in this respect is to evaluate risks associated with each workstation over the past five years. Moreover, we engage in preventive procedures regarding the health of our employees, persons working at our sites, and the users of our products. Investments by our Group into workplace safety has risen to €30.5 million.

 

 

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We remain dedicated to our zero-accident objective. As the establishment of an entirely risk-free industrial environment is nevertheless impossible, it is vital to prepare and train all of our employees to respond as effectively as possible in the event of an accident or other crisis. Our objective is to establish and test emergency plans that are tailored to the risks involved for every business and activity. 97% of our businesses have revised and tested their emergency plans over the past three years. Industrial hygiene correspondents have been appointed to coordinate industrial initiatives and to ensure the execution of risk evaluations at all of our sites. These risk evaluations involve, among other things, identifying chemical, biological, physical and ergonomic hazards, as well as estimating exposure levels and assessing short-, medium- and long-term risks.

We seek to improve our safety record on an ongoing basis. This requires daily individual commitment by all of our employees, especially our managers. Accordingly, members of the Executive Committee inspect our sites without prior warning. The results reflect the efforts expended, as the rate of accidents at our sites has declined each year. Thanks to this improvement, Rhodia ranks among the best in the industry worldwide. Based upon its historic configuration, with a TF1 of 0.8 and a TF2 of 1.8, Rhodia posted its best-ever safety performance during 2005. The table below sets forth certain information relating to the accident frequency rate for the years ended December 31, 2003, 2004 and 2005.

 

 

 

Year ended December 31,

 

 

 


 

 

2005

 

2004

 

2003

 

 

 


 


 


 

TFI(1)

 

0.8

 

0.9

 

1.4

 

TF2(2)

 

1.8

 

2.2

 

3.2

 

TF1EE(3)

 

1.1

 

2.0

 

2.5

 

 

______________

(1)

TFI: Accident Frequency Rate resulting in work stoppage, expressed in terms of number of accidents per million hours worked.

(2)

TF2: Accident Frequency Rate whether or not resulting in work stoppage, expressed in terms of number of accidents per million hours worked.

(3)

TF1EE: Accident Frequency Rate resulting in work stoppage, for companies outside our Group but involved in work at our sites.

Industrial Sites

Managing industrial risks entails identifying and prioritizing these risks in order to implement the necessary preventive and protective measures based on systematic reviews of processes, installations and workstations. We have developed our own safety and environmental management system, SIMSER+, which integrates the best existing practices, the requirements of the ISO 14001 or OSHA 18001 standards and principal international regulations. This system, or a more simplified version thereof with regards to smaller facilities (our rules and regulations), is implemented at all of our facilities worldwide.

Each facility is audited every three years. In addition, all installations and processes are subject to a security review adapted to their risks. These reviews are updated every five years, to reflect changes in legislation, our knowledge or the methods of analysis and modeling tools used to assess impacts. At the occurrence of any material event, a review is carried out or updated immediately. For this, we have at our disposition a network of trained experts as well as recognized methods of review. Particular attention is given to facilities qualified as “top-tier sites” under the European Union’s SEVESO Directive (or the equivalent thereof, outside Europe). This represents 43 sites worldwide, of which 23 are in Europe and 14 are in France. These security procedure reviews allow us to identify danger, whether it is of a physical, chemical or biological nature, and to assess the risks in light of factors relating to the occurrence of accidents and the potential targets. In addition, we encourage the exchange of experiences between our facilities that, for the most part, possess systems for the collection of incidents. A monthly letter, “Security Procedures,” helps develop these exchanges.

We cooperate with public authorities, through the Union of Chemical Industries (l’Union des Industries Chimiques) and the French Business Confederation (Le Mouvement des Entreprises de France) for the implementation of the law of July 20, 2003 on industrial risks and in particular concerning the urbanization surrounding sites that pose risks and the remediation of such sites. After the pilot study on risks surrounding the Roussillon site, our methodology (DRC 40) was approved by experts in the French Ministry of Ecology and Sustainable Development.

 

 

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A total of 91% of our facilities have undergone a process-related safety study within the last three years. This indicator, which has posted a steady increase from year to year, represents a major investment by our operational teams. An emphasis was placed on Seveso-classified and similar facilities (i.e. outside the European Union), for which 93% coverage was achieved.

Intellectual Property

We own a large number of patents that relate to a wide variety of products and processes. Each year, we file a significant number of new patent applications (134 in 2005), and we also license a small number of patents owned by others. In addition, we own a considerable number of registered trademarks throughout the world, under which we market our products. Such patents and trademarks in the aggregate are of material importance to our operations. In addition to patent protection, we also rely on our know-how and technical expertise in many of our manufacturing processes for developing and maintaining our market position.

Although exclusivity can be maintained on a relative basis for certain products following patent expiration through know-how and technical expertise, the expiration of a patent can result in intense competition, including from lower cost producers, and the erosion of margins. Prior to and following expiration of the patent for a key product, we will generally focus efforts on developing patentable enhancements to the product or new patentable formulations for which the product is used. We do not believe that the loss of patent protection for any particular product or process would have a material adverse effect on our financial condition, results of operations or cash flows.

Government Regulation

Domestic and international laws regulate production and marketing of chemical substances. Although almost every country has its own legal procedure for registration and import, laws and regulations in the European Union, the United States, Canada and Japan are most significant to our business. The most important of these laws include the European Inventory of Existing Chemical Substances, the European List of Notified Chemical Substances, the United States Toxic Substances Control Act Chemical Substances Inventory, the Domestic Substance List of Canada and the Japan Handbook of Existing and New Chemical Substances. Chemicals that are on one or more of the above lists can usually be registered and imported without additional testing in any other country, although additional administrative hurdles may exist. Our personnel work closely with the regulatory agencies of these countries to bring new chemicals and products to market. The future European Union’s Regulation concerning the Registration, Evaluation, Authorization and Restriction of Chemicals, the “REACH” project, which was adopted by the European Commission on October 29, 2003 and amended by the European Parliament and the Council in December 2005, is intended to verify the degree of toxicity of some 30,000 chemical substances for health and the environment. It is due to be implemented from 2007 onwards.

We estimate that 400 substances need to be recorded for the 6,653 chemical products sold in Europe. We are taking active steps to prepare for implementation, including by setting objectives for the revision of our Safety Data Sheets (SDS), the quality of which provides a solid platform for the future deployment of REACH or by designing the requisite IT systems. Of these 400 substances, 6 have been found as CMR (carcinogenic, mutagenic, toxic for reproduction) and will be treated with priority.

We also actively seek approvals from the FDA for certain specialty chemicals, principally when we believe that such specialty chemicals will or may be used in the manufacture of products that will come in contact with food and health. In addition, certain chemicals to be used in the manufacture of food and/or drug products are subject to thorough review by our staff and, where applicable, the FDA.

 

 

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Property, Plant and Equipment

The total gross value of our real property at December 31, 2005 was €7,081 million. This sum includes the value of our inventory and equipment worth €5,732, and buildings worth €1,065 million. The total net value of our real property at December 31, 2005 was €2,135 million, approximately 37.8% of our total Consolidated Balance Sheet at December 31, 2005. This includes the value of our inventory and equipment at €1,533 million and buildings worth €351 million.

The table below sets forth the number of our principal production sites, by enterprise and geographic region, as of December 31, 2005. The sizes of our sites vary considerably in terms of employees and production capacity. Of the 88 sites, 12 serve two or more enterprises. These sites are listed in the table under the principal enterprise utilizing the site. The table excludes facilities operated by joint ventures accounted for under the equity method.

 

 

 

As of December 31, 2005

 

 

 


 

 

 

Europe

 

North America

 

Latin America

 

Asia/Pacific

 

Total

 

 

 


 


 


 


 


 

Novecare

 

6

 

7

 

0

 

8

 

21

 

Silcea

 

9

 

3

 

1

 

6

 

19

 

Coatis

 

5

 

1

 

1

 

3

 

10

 

Polyamide

 

9

 

0

 

3

 

2

 

14

 

Acetow

 

2

 

1

 

2

 

0

 

5

 

Eco Services

 

0

 

7

 

0

 

0

 

7

 

Organics

 

6

 

0

 

0

 

2

 

8

 

RPS

 

2

 

0

 

0

 

2

 

4

 

 

 


 


 


 


 


 

Total

 

39

 

19

 

7

 

23

 

88

 

 

 


 


 


 


 


 

 

We own all our properties, except for a limited number of sites that are subject to leases. See Note 14 to the Consolidated Financial Statements. Utilization of our principal facilities may vary with economic and other business conditions. Our business facilities generally have sufficient capacity for existing needs and expected near-term growth.

Many of our manufacturing sites have an extended history of industrial use. See “Item 3. Key Information—Risk Factors—Risks Related to our Business” and “Item 4. Information About Rhodia—Health, Safety and Environment” for a discussion of environmental issues relating to our business.

Item 4A. Unresolved Staff Comments

Not applicable.

 

 

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Item 5. Operating and Financial Review and Prospects

The following discussion and analysis should be read in conjunction with “Item 3. Key Information—Selected Financial Data” and our Consolidated Financial Statements. The discussion of our results of operations includes certain information on a comparable basis to eliminate the impact of changes in the scope of consolidation and the translation effect of exchange rate fluctuations. See “Presentation of Financial and Other Information” for an explanation of the basis of calculation of this information, as well as an explanation of how we calculate the effect of changes in volume and price on our operating results. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, including in “Item 3. Key Information—Risk Factors”. The Consolidated Financial Statements have been prepared in accordance with IFRS, with a reconciliation of net income and shareholders’ equity to U.S. GAAP. For a discussion of the principal differences between IFRS and U.S. GAAP as they relate to us, and a reconciliation of net income and shareholders’ equity to U.S. GAAP, see Note 39 to the Consolidated Financial Statements.

Overview of 2005

The highlights of our financial performance in 2005 include:

 

8.4% growth in net sales to €5,085 million, sustained by significant price increases in all activities;

 

operating profit of €97 million, compared with a loss of €188 million in 2004;

 

net loss of €616 million, compared with €641 million in 2004, substantially impacted by the disposal of underperforming businesses and restructuring and refinancing costs;

 

improvement in our financial structure due to a successful capital increase, with an 11.3% decline in our net debt to €2,089 million at the end of 2005;

 

continued refocusing of our business portfolio on segments in which we hold leading worldwide positions and divestments of businesses with weak or unprofitable positions;

 

registration by the UN of greenhouse gas emission reduction projects in South Korea and Brazil; we have announced our initial decisions in order to maximize the value of the emission allowances obtained in the long term.

Certain Factors Affecting Our Financial Condition and Results of Operations

Certain factors affecting our financial condition and results of operations are described below. For further discussion of these and certain other factors, see “Consolidated Results of Operations for 2005 and 2004”.

Exchange Rate Fluctuations

We publish our Consolidated Financial Statements in euro. Because a substantial portion of our assets, liabilities, sales and earnings are denominated in currencies other than the euro, we are exposed to fluctuations in the values of these currencies against the euro. These currency fluctuations, especially the fluctuation of the value of the U.S. dollar, the Brazilian real and the pound sterling against the euro, have had and may continue to have a material impact on our financial condition and results of operations.

We estimate that the effects of currency fluctuations in 2005 resulted in a decrease in our consolidated net sales of approximately 2.9% and decrease in our operating income of approximately 4%. Currency fluctuations can also have a significant impact on our balance sheet, particularly shareholders’ equity, when we translate the financial statements of our subsidiaries located outside of the euro zone into euros.

An appreciation of the euro compared with the dollar lessens the euro-value of sales generated in dollar zone countries, and lowers the competitiveness of products manufactured by us in Europe against products produced in, or exported from, the United States and other dollar zones. This effect is partially offset by the decreased cost in euro of a significant portion of our raw material and energy purchasing requirements denominated in non-euro currencies.

 

 

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The table below sets forth average exchange rates of the euro with respect to key currencies in 2003, 2004 and 2005.

 

 

 

2005

 

% change 2004/2005

 

2004

 

% change 2003/2004

 

 


 


 


 


U.S. dollar/euro(1)

 

1.24

 

0.1

 

1.24

 

10.0

Pound sterling/euro(1)

 

.68

 

0.8

 

.68

 

1.4

Brazilian real/euro(2)

 

3.04

 

16.4

 

3.64

 

6.9

______________

(1)

Daily currency prices published by the European Central Bank.

(2)

Daily currency prices published by the Brazilian Central Bank against the U.S. dollar, converted to euro based on the daily prices published by the European Central Bank.

Our policy with respect to limiting our exposure to short-term fluctuations in exchange rates is described under “Item 11. Quantitative and Qualitative Disclosure About Market Risk”. See also Note 10 to the Consolidated Financial Statements.

Cost of Raw Materials

In 2005, our raw material costs amounted to €2.5 billion compared to €2.2 billion in 2004. Raw materials relating to petrochemicals and energy totalled €1.4 billion. Because of the length of manufacturing cycles, the impact of changes in raw material prices normally affects our financial statements after a delay of two to three months. A key objective for our enterprises is to ensure that prices for our products our increased to compensate for increased raw material costs. However, increases in overall levels of raw materials prices may not necessarily be passed on through an increase in sales prices, and in such case, may create negative pressure on margins. Decreases in the average prices for raw materials may, as a result of competitive pressures, also cause prices to decline, and may, in certain cases, limit the potential gain in margins. In order to reduce the impact of change in raw materials prices, we seek to procure our major requirements for key raw materials pursuant to medium- or long-term contracts. See “Item4. Information About Rhodia—Raw Materials”.

Because of the length of manufacturing cycles, the impact of changes in raw material prices normally affects our financial statements after a delay of two to three months. Increases in overall levels of raw materials prices may not necessarily be passed on through an increase in sales prices, and in such case, create negative pressure on margins. Decreases in the average prices for raw materials may, as a result of competitive pressures, also cause prices to decline, and may, in certain cases, limit the potential gain in margins. In order to reduce the impact of change in raw materials prices, we seek to procure our major requirements for key raw materials pursuant to medium- or long-term contracts. See “Item 4. Information About Rhodia—Raw Materials”.

Changes in Scope of Consolidation

The principal acquisitions, divestitures and other changes in our scope of consolidation during 2004 and 2005 are set forth below.

In 2005, we completed the following disposals:

 

in March, the disposal of the chlorine production business located in Staveley (United Kingdom) of the Novecare enterprise to Ineos Chlore Ltd.; and

 

in October, the disposal of our phosphate production business (reported under Corporate and Others) and the sulfuric acid production business of our Coatis enterprise, located in Rieme (Belgium) to Misa Inc.

We completed the following disposals in 2004:

 

in May, the food ingredients business of the Novecare enterprise to the Danisco group;

 

in June, the European specialty phosphate business of the Novecare enterprise to Thermphos International;

 

 

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in August and November, the European potable water treatment operations of the Eco Services enterprise to Feralco AB and Novasep, respectively;

 

in August, the North American phosphates business of the Novecare enterprise to Bain Capital;

 

in November, the chlorine production business, located in Staveley (United Kingdom) of the Novecare enterprise to Ineos Chlore Ltd.; and

 

in December, the anesthetics business of the Organics enterprise to Nicholas Piramal India Ltd.

Disposals completed in 2005 generated a net loss of €46 million before tax, while disposals completed in 2004 generated a €216 million net gain before tax, with the income tax charge amounting to €22 million.

In addition, in December 2004, we acquired the Chloralp Group from LaRoche Industries. As a result of the acquisition, the Chloralp Group, Cevco and GIE Spiral, which were previously accounted for by the equity method, became fully consolidated.

The main businesses in the process of being sold as of December 31, 2005 were:

 

Nylstar: this 50% owned entity was classified under discontinued operations in 2004, pursuant to our commitment to a disposal in connection with our withdrawal from the European textile business of Polyamide. We expect that the negotiations under way with the Radici group should lead to a sale in 2006;

 

decorative coatings and adhesives (latex business): in November 2005, this Coatis segment business was subject to a sales agreement with Hexion Specialty Chemicals Inc. and the disposal was completed in January 2006;

 

development and custom synthesis for the pharmaceuticals industry: in December 2005, Rhodia signed a letter of intent with Shasun Chemicals & Drug Ltd. with a view to selling this Rhodia Pharma Solutions segment business and the disposal was completed in March 2006;

 

spanish phosphates production business of the Corporate and Others segment: after having withdrawn from the phosphates production business at Rieme in Belgium, we have been negotiating actively our withdrawal from this business since the end of 2005.

Critical Accounting Estimates

The Consolidated Financial Statements were prepared for the first time in accordance with IFRS (International Financial Reporting Standards), as adopted by the European Union. IFRS accounting standards include IFRS, IAS (International Accounting Standards) and IFRIC (International Financial Reporting Interpretations Committee) interpretations. The standards and interpretations adopted for the preparation of the 2005 Consolidated Financial Statements and the 2004 comparative financial statements are those published in the Official Journal of the European Union (“OJEU”) at December 31, 2005 and whose application is mandatory as of this date and those standards and interpretation which Rhodia has chosen to apply early. The principles adopted with respect to the implementation of IFRS 1 First-time adoption of international financial reporting standards and the impacts arising from the differences from the French accounting principles previously applied to the Group’s financial condition, results of operations and cash flows are analyzed in Note 38 to the Consolidated Financial Statements. See Note 2 to the Consolidated Financial Statements for additional information on our principal accounting methods.

The preparation of Consolidated Financial Statements requires us to make estimates that may affect the reported value of assets, liabilities, income, expense and commitments. We believe that the accounting estimates we use are reasonable. However, the actual amounts may differ from these estimates since even the best estimates require certain adjustments. Accordingly, we review the accounting estimates used to prepare our Consolidated Financial Statements on a regular basis to ensure that they are reasonable. Changes in these estimates may require us to record higher or lower expenses and may have a favorable or unfavorable impact on our financial condition and cash flows. Final amounts are likely to differ from the estimates used in preparing the financial statements.

 

 

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The following paragraphs list the critical accounting estimates that we deem to be important for properly understanding our financial condition, results of operations and cash flows. An estimate is considered critical if it has the following characteristics:

 

we have to assess effects of events that are highly uncertain when the estimate is made; and

 

different estimates that may reasonably be made and the possible changes to these estimates that may reasonably happen from one fiscal year to the next may have a material impact on our financial position, our results of operations and cash flows.

We have reviewed these critical accounting estimates with the Audit Committee of the Board of Directors.

Impairment of Long-lived assets and Goodwill

We test our goodwill and other intangible assets with indefinite useful lives, as well as property, plant and equipment and intangible assets with finite useful lives for impairment annually, and more frequently if there are indications of a loss in value. To test impairment, we group assets into cash-generating units (CGUs), in accordance with IAS 36 Impairment of assets. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other assets or groups of assets. For these tests, we compare the net carrying amount with the recoverable amount of the assets. The recoverable amount is the higher of fair value less costs to sell or its value in use. Value in use is the present value of the future cash flows we expect to derive from a cash-generating unit or group of CGUs after taking into account, where necessary, all other relevant information. The discount rate is calculated using the average cost of capital reflecting current market assessments of the time value of money and the risks specific to the assets tested. Our method of accounting for goodwill is described in Note 3.3 to the Consolidated Financial Statements and our method of accounting for other long-lived assets is described in Note 3.5.

The calculation of impairment losses is by its very nature highly sensitive to any changes in the underlying assumptions. The assumptions we make with regard to the future cash flows from these assets are subject to change. This could lead to adjustments to the net book value of these assets in future years.

Deferred Tax Assets

In the course of preparing our Consolidated Financial Statements, we calculate our deferred tax by applying the liability method to each tax entity in the Group. This process involves calculating the temporary differences arising from the differences between the book values and tax bases of assets and liabilities, including tax losses that may be carried forward. Deferred tax assets are recognized when it is probable (i.e. more likely than not) that they will be realized. No deferred tax assets were recognized with respect to the French, U.K. and U.S. tax groups at December 31, 2005.

Our management must make judgments when determining the realizability of deferred tax assets. The chief uncertainty is that we must estimate if, and to what extent, the tax group to which this deferred tax asset belongs will generate taxable income in the future. We make this assessment on the basis of the jurisdiction in question, the period during which the deferred tax asset may be recovered and the tax group’s earnings history. Where actual taxable income differs from these estimates or if these estimates change in future years, the deferred tax assets may need to be adjusted, which would have an impact on our Consolidated Financial Statements and on our results of operations.

Pension, Retirement and Other Post-employment Obligations

We have a large number of pension and retirement plans, including defined benefit pension plans. The specific features of the plans (benefit formulas, funding policies and types of assets held) vary depending on regulations and laws in the country in which the employees are located. Our principal commitments for pension and retirement plans principally relate to employees in the United States, the United Kingdom and France. Rhodia elected to apply the exemption in IFRS 1, First-Time Adoption of International

 

 

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Financial Reporting Standards, which allows for the immediate recognition of actuarial gains and losses relating to past-employment benefits in equity at the date of transition to IFRS (i.e. January 1, 2004). Rhodia’s accounting policy with regard to subsequent changes in actuarial gains and loss is to recognize them in the statement of recognized income and expense in shareholders’ equity. See Note 28 to the Consolidated Financial Statements. Actuarial valuations of these obligations are calculated each year by independent actuaries in most countries. These calculations are based on the probability that the employees will remain with us, on future salary increases, and on a retirement age of between 60 and 65, depending on local conditions and applicable legislation.

The discount rates used at December 31, 2005 were 4% (5% at December 31, 2004) for French plans, 5.5% at December 31, 2005 (5.75% at December 31, 2004) for U.S. plans and 4.9% at December 31, 2005 (5.8% at December 31, 2004) for UK plans. The expected long-term rates of return used for plan assets were 7.5% for U.S. plans and 8% for UK plans at December 31, 2005 and 2004.

Defined benefit plans in France are unfunded. The liabilities relating to these employees were calculated at December 31, 2005, taking into consideration applicable regulations and the agreements applicable to the chemical industry in France.

If actual results, in particular discount rates and/or rates of return on plan assets, were to differ from our estimates, our pension, retirement and other post-employment costs would be higher or lower, and our cash flows would be favorably or unfavorably impacted.

Provisions for Environmental Liabilities

We recognize provisions for environmental risks when there is a legal or constructive obligation that is expected to result in an outflow of resources and can be reliably measured. We measure these provisions to the best of our knowledge of applicable regulations, the nature and extent of the pollution, clean-up techniques and other available information. The estimated future cash flows are discounted in order to take into account market assessments of the time value of money for each geographical area, where the effect is material, using risk and inflation-free interest rates. As of December 31, 2005, our accrued environmental provisions and our contingent environmental liabilities amounted to €232 million and €145 million, respectively. See Note 29 to the Consolidated Financial Statements.

We believe that environmental matters are difficult to assess for numerous reasons, including the discovery of new contamination, discovery of new information and scarcity of reliable information pertaining to certain sites, improvements in technology, changes in the scope, enforcement or interpretation of environmental laws and regulations, numerous possible remedial techniques and solutions, difficulty in assessing the involvement of and the financial capability of other potentially responsible parties and the extended time periods over which remediation occurs. Changes in estimates on which these accruals are based may result in higher or lower costs. Future events, such as changes in existing laws and technology, the promulgation of new laws or the development or discovery of new facts or conditions, could cause us to incur additional costs and liabilities that could have a material adverse effect on our business, financial condition and results of operations.

Consolidated Results of Operations for 2004 and 2005

As part of our strategy to refocus our business portfolio, we decided to dispose of a number of non-strategic or underperforming operations in 2005. As a consequence, the financial information relating to these operations was reclassified to discontinued operations in the 2004 and 2005 income statements. The net sales of each enterprise no longer include net sales of operations which have been sold or are in the process of being sold. The enterprises most impacted by disposals in 2005 were RPS, Coatis and Organics.

 

 

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The table below sets forth an analysis of our operating profit and loss for the years ended December 31, 2004 and 2005:

 

 

 

2005

 

2004

 

   
 
 

 

 

(in millions of euros)

 

Net sales

 

5,085

 

4,693

 

Other revenue

 

460

 

453

 

Cost of sales

 

(4,620

)

(4,408

)

Administrative and selling expenses

 

(574

)

(513

)

Research and development expenditure

 

(124

)

(138

)

Restructuring costs

 

(87

)

(169

)

Goodwill impairment

 

 

 

(60

)

Other operating income/(expenses)

 

(43

)

(46

)

Operating profit/(loss)

 

97

 

(188

)


Net sales

Our net sales totaled €5,085 million in 2005, up 8.4% compared with 2004, primarily due to the increase in the net sales of Coatis, Polyamide and, to a lesser extent, Silcea. The impact of currency fluctuations on net sales amounted to €135 million. These fluctuations were essentially due to the appreciation of the Brazilian real against the euro. The negative impact of changes in the scope of continuing operations amounted to €14 million.

The growth in our net sales in 2005 was driven essentially by price increases totaling €347 million and representing a 7.4% increase in net sales, excluding the negative impact of transactional currency fluctuations of €100 million. Demand levels remained generally favorable throughout 2005, except in the phosphorous derivatives and adipic acid markets.

The table below sets forth our estimates of the effects of changes in the scope of consolidation, exchange rates, price and volume on our consolidated net sales by enterprise for the years ended December 31, 2004 and 2005. See “Presentation of Financial and Other Information”.

 

 

 

2005
net sales

 

Structure(2)

 

Exchange
rate

 

Volume

 

Selling
price

 

2004
net sales

 

 

 


 


 


 


 


 


 

 

 

(in millions of euros, unaudited)

 

Novecare

 

935

 

(42

)

2

 

(15

)

62

 

928

 

Silcea

 

810

 

(15

)

8

 

37

 

32

 

748

 

Coatis

 

582

 

26

 

28

 

13

 

33

 

482

 

Polyamide

 

1,749

 

16

 

95

 

(9

)

89

 

1,558

 

Acetow

 

410

 

4

 

8

 

7

 

(4

)

395

 

Eco services

 

209

 

 

 

 

 

2

 

6

 

201

 

Organics

 

349

 

3

 

1

 

(13

)

21

 

337

 

RPS

 

172

 

(1

)

1

 

(10

)

6

 

176

 

Other(1)

 

(131

)

(5

)

(8

)

12

 

2

 

(132

)

 

 


 


 


 


 


 


 

Total

 

5,085

 

(14

)

135

 

24

 

247

 

4,693

 

 

 


 


 


 


 


 


 

______________

(1)

Includes the sales of other activities, sales on behalf of non-Group companies and the elimination of inter-company sales.

(2)

Presents the impact of changes in scope of continuing operations not classified as discontinued operations and the reclassifications of inter-company activities.

 

 

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The following table shows the contribution by enterprise and geographical region to total net sales and other revenue in 2004 and 2005:

 

 

 

2005

 

2004

 

 

 


 


 

Net contribution to Rhodia net sales by business (as %):

 

 

 

 

 

Novecare

 

19

%

20

%

Silcea

 

16

%

16

%

Coatis

 

11

%

10

%

Polyamide

 

35

%

33

%

Acetow

 

8

%

8

%

Eco Services

 

4

%

5

%

Organics

 

7

%

7

%

RPS

 

3

%

4

%

Other(1)

 

(3

%)

(3

%)

 

 


 


 

Total

 

100

%

100

%

 

 


 


 

______________

(1)

Includes the sales of other activities, sales on behalf of non-Group companies and the elimination of inter-company sales.

 

 

 

2005

 

2004

 

 

 


 


 

France

 

18

%

16

%

Rest of Europe

 

33

%

37

%

North America

 

19

%

18

%

South America

 

12

%

12

%

Asia and other countries

 

18

%

17

%

 

 


 


 

Total

 

100

%

100

%

 

 


 


 

Net sales and other revenue by geographical area is calculated according to the customer’s geographical location.

Novecare

Novecare net sales rose slightly by 1% in 2005 to amount to €935 million. The change in the scope of continuing operations had a negative impact of €42 million, mainly due to disposed businesses not qualified as a discontinued operation. The impact of currency fluctuations represented €2 million.

The price increase strategy was sustained throughout the year, representing €62 million in net sales, and offset the rising raw material costs. Novecare benefited from the launch of new products. However, the hurricanes that devastated the U.S. in the second half of the year had a negative impact on the oil fields chemicals business. In addition, volumes declined in the phosphorus derivatives business. These factors had a negative impact of €15 million on volumes.

Silcea

Silcea net sales increased by 8% to €810 million, on the back of significant price and volume growth. Silicone sales volumes increased due to the marketing of products made available following the completion of a major project to boost production site capacity for an upstream intermediary (Silox) in France. Prices were raised across all businesses to offset the increase in raw material and energy costs and had a positive impact of €32 million. The changes in the scope of continuing operations had a negative impact of €15 million due to the sale of the sealant business. Currency fluctuations had a positive impact of €8 million on net sales.

 

 

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Coatis

Coatis net sales totaled €582 million in 2005, an increase of 21% compared with 2004. Changes in the scope of continuing activities had a positive impact of €26 million on net sales following the acquisition of Choralp operations on the Pont-de-Claix site. Currency fluctuations represented €28 million of net sales growth.

At a constant scope and exchange rate, the increase in net sales was driven by favorable pricing trends needed to offset increased raw material and energy costs, and improved year-end performance of the Pont-de-Claix plant. Price and volume increases on net sales growth amounted to €33 million and €13 million, respectively.

Polyamide

Polyamide net sales rose 12% to €1,749 million. Changes in the scope of continuing operations had an impact of €16 million and currency fluctuations had an impact of €95 million due, in particular, to the appreciation of the Brazilian real against the euro.

The increase in net sales at a constant scope and exchange rate was primarily due to price increases in the amount of €89 million. The campaign launched in the second half of 2004 to offset increased raw material costs was successfully maintained in 2005. Volume trends in engineering plastics and polyamide intermediates remained satisfactory. A flood at our Emmenbrücke (Switzerland) plant and the withdrawal from the bulk continuous filament carpets market following the closure of our Arras plant led to a decline in volumes of €9 million.

Acetow

Acetow net sales rose 4% to €410 million, mainly due to a currency translation difference of €8 million. Volumes had a 1.7% positive impact. Local currency selling prices increased, but did not offset the negative impact of currency fluctuations. In 2004, we benefited from a more favorable U.S dollar hedge on export sales than in 2005.

Eco Services

Eco Services net sales rose 4% to €209 million, as a result of price increases instituted to offset rising energy costs.

Organics

In 2005, Organics net sales increased by 4% to amount to €349 million. Changes in the scope of continuing operations and currency fluctuations contributed to net sales by €3 million and €1 million, respectively.

The impact of price increases, particularly for the diphenol product line, totaling €21 million substantially offset the negative impact of the €13 million decline in volumes following the enterprises’ decision to refocus on three main product lines.

Rhodia Pharma Solutions (RPS)

Net sales from the continued operations of Rhodia Pharma Solutions (pharmaceutical ingredients) fell slightly by 2% to €172 million. Lower volumes in the paracetamol (APAP) segment had a negative impact of €10 million. The price increases in the Company’s other product lines, amounting to €6 million, partly offset this volume impact.

 

 

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Operating expenses

The following table shows financial data relating to our operating expenses for 2004 and 2005:

 

 

 

For the years ended

 

 

 


 

 

 

2005

 

2004

 

% change

 

 

 


 


 


 

 

 

(in millions of euros)

 

Cost of sales

 

(4,620

)

(4,408

)

4.8

%

Administrative and selling expenses

 

(574

)

(513

)

12

%

Research and development expenditure

 

(124

)

(138

)

(10

)%

Restructuring costs

 

(87

)

(169

)

(49

)%

Goodwill impairment

 

 

 

(60

)

 

 

Other operating income/(expenses)

 

(43

)

(46

)

(6.5

)%

 

 


 


 


 

Total

 

(5,448

)

(5,334

)

2

%

 

 


 


 


 

Cost of sales

Cost of sales increased by €212 million from €4,408 million in 2004 to €4,620 million in 2005. This significant 5% cost increase reflects oil derivatives, particularly benzene, benzene derivatives and natural gas price trends.

Administrative and selling expenses

Administrative and selling expenses rose by €61 million compared with 2004 mainly due to the following factors:

 

the appreciation of the Brazilian real by 20% against the euro had an impact of €9 million.

 

the costs of implementing the global project to improve central information systems for €20 million. This project is a key factor in improving our performance and efficiency.

 

the payment by our captive insurance firm of €13 million in compensation for the flooding of the Swiss Emmenbrücke plant.

 

Sarbanes-Oxley project costs totaled €3 million.

Research and development expenditure

Research and development expenditure fell 10% due to measures to optimize R&D organization and efficiency.

Restructuring costs

Restructuring and reorganization measures continued in 2005, totaling €87 million, and mainly involved industrial streamlining programs and operating performance improvement plans. This should be compared with the €169 million cost incurred in 2004, the first year of our recovery plan initiated in October 2003.

The new measures in 2005 essentially correspond to the following:

In France:

 

closure of a textile production site in Arras at Polyamide;

 

“horizon” project in order to reorganize our industrial platform in Pont-de-Claix (Isère) at Coatis;

 

productivity measures on the Saint-Fons site (Rhône) at Silcea.

 

 

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Abroad:

 

closure of unprofitable production sites and productivity measures for site support functions on the Oldbury site (UK), the main production site for Performance products in the European Phosphorus and Derivatives segment at Novecare;

 

productivity measures within the marketing, commercial and industrial teams at Novecare.

In addition, changes in estimates for prior plans gave rise to an additional charge of €34 million in 2005.

Other operating income and expenses

Other operating income and expenses dropped by 6.5%, as a result of a decrease in environment-related expenses from €69 million in 2004 to €27 million in 2005 and declines in net gains on asset disposals of €40 million in 2005 compared with €10 million in 2004.

Operating profit/(loss)

Operating profit totaled €97 million in 2005, compared with a loss of €188 million in 2004, an increase of €285 million.

 

This improvement results mainly from the rise in selling prices which more than offset the increase in raw material and energy prices. The impact of the increase in selling prices was €232 million (net of the impact of exchange rate fluctuations), whereas, costs of goods sold primarily related to raw material and energy price increases rose by €210 million. In addition, the rise in sales volumes had a favorable impact of €22 million compared with the previous year. Finally, we pursued our fixed cost-cutting measures with total savings of €113 million in 2005. However, a percentage of these savings was offset by the impact of inflation on fixed costs for €59 million and the increase in project costs and other items for a total of €24 million.

 

The substantial decline in restructuring costs from €169 million in 2004 to €87 million in 2005 as discussed above in “—Restructuring costs”.

 

A decrease in depreciation and amortization charges from €498 million in 2004 to €368 million in 2005 (excluding impairment of assets relating to restructuring operations). This decrease was mainly due to the impairment in 2004 for €108 million, including €60 million in goodwill impairment (including €43 million for the Silicones enterprise and €17 million for RPS) and €48 million in impairment of property, plant and equipment relating to several enterprises. In 2005, no asset impairment losses existed.

 

A slight decline in other operating income and expenses from €46 million in 2004 to €43 million in 2005.

Novecare

Operating profit fell 27% to €53 million. This decline is despite price increases of €59 million in order to offset the €57 million rise in raw material costs, the decline reflected the lower volumes sold by phosphorous derivatives and the volume losses of oil field chemical products, mainly in the third quarter due to the hurricanes in the U.S. Novecare pursued fixed cost-cutting measures in 2005 compared with 2004; however, these savings were more than offset by the impact of inflation on fixed costs and the increase in other non-recurring items. The negative net impact on fixed costs totaled €2 million. The €8 million increase in restructuring costs compared with 2004 relating to the reorganization plans mainly concerning the restructuring of the management team and the improvement in the productivity of one production site.

 

 

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Silcea

Operating profit totaled €20 million in 2005, compared with a loss of €36 million in 2004, an increase of €56 million. This improvement results mainly from the rise in selling prices, which more than offset the increase in raw material and energy prices. The impact of the increase in selling prices on operating profit was €30 million (net of the impact of exchange rate fluctuations), whereas, raw material and energy prices rose by €15 million. In addition, the rise in sales volumes had a favorable impact of €9 million compared with the previous year. The sharp improvement of Silcea mainly results from a turnaround in the Silicones business. The completion of a major project to improve production site capacity for an upstream intermediary (Silox) in France and a satisfactory increase in prices also contributed to this operating turnaround. In addition, price increases pursued by the silica systems business partly offset the rising energy costs. Silcea pursued its fixed cost-cutting measures with total savings of €18 million in 2005 compared with 2004. In particular, the transfer of the upstream rare earths production to China resulted in a decline in the fixed costs of this activity. A significant decrease in depreciation and amortization charges from €99 million in 2004 to €63 million in 2005 (excluding impairment of assets relating to restructuring operations), was mainly due to impairment in 2004, including €43 million in goodwill impairment for the Silicones business.

Coatis

After a particularly strong year-end, Coatis broke even in terms of operating profit in 2005, compared with an operating loss in the amount of €25 million in 2004. This improvement results mainly from the rise in selling prices, which partially offset the increase in raw material and energy prices. The impact of the increase in selling prices on operating profit was €30 million (net of the impact of exchange rate fluctuations), whereas, raw material and energy prices rose by €33 million. The rise in sales volumes had a favorable impact of €23 million on 2005 compared with the previous year. The changes in the scope of continuing operations had a negative impact of €5 million, mainly due to the acquisition of the Choralp plant at Pont-de-Claix (France). This acquisition is a key to improving the competitiveness and ensuring the turnaround of the Pont-de-Claix plant as a whole. The first signs of improvement in reliability appeared in the third quarter and this was confirmed in the fourth quarter. Price increase initiatives were successful, particularly in the high-performance coatings business. There was a€9 million decline in restructuring costs from €15 million in 2004 to €6 million in 2005.

Polyamide

Operating profit totaled €132 million compared with €70 million in 2004, an increase of €62 million. This results mainly from the rise in selling prices, which more than offset the increase in raw material and energy prices. The impact of the increase in selling prices on operating profit was €85 million (net of the impact of exchange rate fluctuations), whereas, raw material and energy prices rose by €60 million. The demand for engineering plastics and polyamide intermediates was stable throughout the year. As the demand for polyamide 6.6 outweighed supply, strong pricing power was maintained and was largely sufficient to compensate for increases in raw material costs. In 2005, volumes were slightly down by €8 million. The impact of flooding at the Emmenbrücke plant, which was closed for most of the autumn, totaled €13 million. The adipic acid market encountered a difficult year due to the start-up of a new rival production unit in China. Finally, Polyamide pursued its fixed cost-cutting measures with net savings of €24 million in 2005 compared with 2004. Depreciation and amortization charges declined from €116 million in 2004 to €101 million in 2005 (excluding asset impairment relating to restructuring operations). The Brazilian real appreciated against the euro and had a €14 million positive impact on operating profit.

 

 

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Acetow

Operating profit totaled €65 million in 2005, compared with €74 million in 2004, a decrease of €9 million. The performance of Acetow slightly deteriorated during the year, despite an increase in volumes. The negative net impact on operating profit of the increase in local currency selling prices totaled €4 million due to the negative impact of exchange rate fluctuations. Local currency price increases were insufficient to offset the €17 million rise in raw material and energy prices. Finally, Acetow pursued its fixed cost-cutting measures with net savings of €5 million in 2005 compared with 2004.

Eco Services

Operating profit totaled €36 million in 2005, compared with €35 million in 2004, an increase of €1 million. Selling price increases offset rising natural gas prices, particularly due to the contractual indexing formulas set up with Eco Services’ main customers.

Organics

In 2005, Organics experienced a sharp turnaround in operating profit, from a loss of €50 million at the end of 2004 to an operating profit of €4 million in 2005, an increase of €54 million. A leader in the diphenol and perfumery and flavorings markets, Organics was able to pass price increases in its markets. These increases had a €20 million positive impact and substantially offset rising raw material and energy costs. In 2005, volumes were down compared with 2004 due to the refocusing of the enterprise’s businesses on a limited number of product lines. This had an unfavorable impact of €8 million. Organics continued to benefit from the fixed cost-cutting measures initiated in 2003 with net savings of €9 million in2005 compared with 2004. The following were also factors; the substantial €15 million decline in restructuring costs from €24 million in 2004 to €9 million in 2005; a significant decline in depreciation and amortization charges from €40 million in 2004 to €30 million in 2005 (excluding asset impairment relating to restructuring operations); and the sharp €23 million rise in other operating income and expenses due to the gain recognized in 2005 on the disposal of the Coolants activity in the UK.

Rhodia Pharma Solutions

RPS, after reclassification of the custom synthesis activity into discontinued operations, incurred an operating loss of €10 million in 2005. However, these losses were reduced considerably compared with operating losses of €87 million in 2004. There was a significant decrease in depreciation and amortization charges from €85 million in 2004 to €9 million in 2005 (excluding impairment of assets relating to restructuring operations). This decrease was mainly due to the non-recurring impairment in 2004, including €17 million in goodwill impairment and €41 million in impairment of property, plant and equipment relating to the Holmes Chapel site. Continuing operations are now focused on the production of pharmaceutical ingredients such as aspirin, paracetamol and other fine chemicals. The price increases instituted during the year offset rising raw material costs. The €8 million decline in volumes of paracetamol was offset by falling fixed costs reductions from the fixed cost-cutting measures initiated in 2004.

Net finance costs

Net finance costs totaled €369 million in 2005, compared with €334 million in 2004. These amounts take into account the reclassification as finance costs of the interest expense on retirement benefits and similar obligations, minus the expected return on plan assets for €33 million in 2005 and €36 million in 2004. This cost was previously recognized in operating expenses. The recognition in 2005 of the accretion of interest of €12 million related to the discounting of environmental provisions in 2005 mainly concerns long-term environmental provisions set aside at the end of 2004.

 

 

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The increase in finance costs in 2005 was mainly due to the rise in costs from €60 million to €79 million of our refinancing transactions, which break down as follows:

 

€39 million in respect of the premium paid for the early redemption of €128 million and $ 310 million of High Yield Notes;

 

€15 million in respect of the accelerated amortization of issuance costs related to the High Yield Notes that were redeemed early;

 

€17 million in respect of the accelerated amortization of the origination fees for the medium-term Refinancing Facilities Agreement (RFA), pursuant to the entering of a new syndicated credit facility on June 17, 2005;

 

€8 million in respect of the early redemption premium regarding the European Medium-Term Notes (EMTNs) maturing in 2006.

Foreign exchange gains or losses

A foreign exchange loss of €67 million was recognized in 2005, compared with a foreign exchange gain of €67 million in 2004. This loss stems mainly from the appreciation of the U.S. dollar against the euro at the end of 2005, resulting in unrealized losses on unhedged U.S. dollar-denominated debt.

Share of profit of associates

Rhodia’s share in the profit of associates in 2005 was zero, compared with a €3 million profit share in 2004.

Income tax expense

Income tax expense for 2005 totaled €49 million, compared with €102 million in 2004. In 2005, the income tax expense comprised a current tax expense of €23 million and a deferred tax expense of €26 million, mainly including a €24 million impairment loss for the deferred tax assets of the UK tax group existing at the beginning of the year due to new tax losses incurred during the year.

In 2004, the income tax expense took into account the probability of recovering the deferred tax assets of the UK tax group, resulting in the recognition of an impairment loss in the amount of €61 million.

 

 

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Profit/(loss) from discontinued operations

The table below sets forth our losses from discontinued operations for 2005 and 2004.

 

 

 

2005

 

2004

 

 

 


 


 

 

 

(in millions of euros)

 

Net sales

 

314

 

765

 

Other revenue

 

30

 

23

 

Restructuring costs

 

(8

)

(35

)

Goodwill impairment

 

(3

)

(80

)

Operating profit/(loss) before gains/(losses) on disposals

 

(169

)

(201

)

Gains/(losses) on disposals

 

(46

)

216

 

Finance costs

 

(18

)

(3

)

Profit/(loss) from discontinued operations before tax

 

(233

)

12

 

Share of profit/(losses) of associates

 

 

(68

)

Tax effect of disposals

 

6

 

(22

)

 

 


 


 

Profit/(loss) from discontinued operations

 

(227

)

(78

)

 

 


 


 

The principal activities classified under discontinued operations are described above in “—Certain Factors Affecting Our Financial Condition and Results of Operations - Changes in Scope of Consolidation”.

The classification under “Non-current assets held for sale” of groups of assets related to businesses in the process of being sold at December 31, 2005 resulted in the recognition of an impairment loss of €3 million for inventories in order to reduce their carrying amount to their fair value less costs to sell. This impairment was recorded under cost of sales, prior to being reclassified in profit or loss from discontinued operations.

At June 30, 2005, prior to being classified under “Non-current assets held for sale”, the property, plant and equipment and intangible assets of the development and custom synthesis business for the pharmaceuticals industry were tested for impairment, resulting in the recognition of impairment in the amount of €97 million to reduce the carrying amount of the assets to zero.

In 2004, an impairment loss in the amount of €75 million for the goodwill allocated to the Cash Generating Units (CGUs) of the development and custom synthesis business of Pharma Solutions and an impairment loss in the amount of €55 million for property, plant and equipment were recognized to take into consideration in the projected cash flows the inability to sign with certainty, and in a timely manner, a key contract for the development of the business and the downward revision of the growth and profitability assumptions to account for a slower than anticipated turnaround in the pharmaceuticals industry as a whole. Given the uncertainties surrounding the preparation of forecasts for developing businesses and in view of the sensitivity of such forecasts to changes in the assumptions used, the Group recognized an impairment loss for the full initial carrying amount of the goodwill arising from the acquisition of the ChiRex subsidiary.

Minority interests

Minority interests amounted to €1 million compared with €9 million in 2004.

Net loss attributable to the equity holders of Rhodia SA

The net loss attributable to equity holders of Rhodia SA amounted to €616 million, compared with a €641 million loss in 2004, including losses from continuing operations of €388 million compared with €554 million, in 2004, and loss from discontinued operations of €227 million compared with €78 million in 2004.

 

 

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Liquidity and Capital Resources

Rhodia debt refinancing

As a result of our refinancing and the new resources raised since the start of the year (capital increase of €604 million, syndicated credit facility for €300 million, High Yield Notes for a principal amount of €500 million and a new North American asset securitization agreement for €100 million), we believe that we can meet our liquidity requirements until the maturity of the syndicated credit facility in June 2008.

Nevertheless, we will continue to have substantial medium-term liquidity requirements that can only be met with external financing. Our syndicated credit facility will expire in June 2008, and High Yield Notes with a carrying value as of December 31, 2005 of €1,345 million will mature in June 2010.

Our capacity to repay and/or refinance our debts at maturity will depend on our ability to generate positive operating cash flows and on certain key external factors (the prices of raw materials and exchange and interest rates) that may significantly influence our financial and operating situation. See Note 26 to the Consolidated Financial Statements.

Capital increase

In December 2005, we issued 549,134,383 new shares with preferential subscription rights for a gross amount of €604 million. The preferential subscription rights enabled Rhodia shareholders to subscribe to seven new shares for eight existing shares at a price of €1.10 per share.

Revolving credit facility

On June 17, 2005, we entered into a new syndicated credit facility with a limited number of lending banks for €300 million (“Multicurrency Revolving Credit and Guaranty Facility” or “RCF”) maturing on June 30, 2008. This new syndicated credit facility replaces the RFA (“Refinancing Facilities Agreement” or “RFA”). The interest rate applied to the borrowed sums corresponds to the bank discount rate according to the currency of the borrowing plus the applicable margin. The applicable margin decreases progressively based on an improvement in the net consolidated indebtedness/adjusted EBITDA ratio. In addition, we pay a commitment commission corresponding to 45% of the applicable margin. The syndicated credit facility has been established for the benefit of Rhodia and certain of its subsidiaries, including Rhodia Inc., and is guaranteed by Rhodia. It is usable in the form of bank loans and/or guarantees.

Rhodia and Rhodia Inc. granted security interests in connection with the implementation of the RCF. Under the terms of an agreement concluded between the lending banks and other secured creditors, the lending banks of the RCF and the other banks share the proceeds from the call of any security. This agreement governs the relationship between the secured creditors concerning the process of settling collateral security and the resulting sharing of the proceeds.

Under the terms of a subordination agreement, we agreed to subordinate the repayment of certain debts of our subsidiaries to the repayment of the secured creditors. We will continue to repay subsidiaries’ debts according to their due dates as long as there is no default in relation to our financial covenants.

The RCF contains clauses that require us to comply with certain financial ratios, early repayment clauses and mandatory repayment clauses. These obligations are described in Note 26.1 to the Consolidated Financial Statements. At and prior to December 31, 2005, we have complied with all applicable financial covenants.

 

 

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High yield notes

In order to extend the average maturity of our debt, on February 14, 2005, we carried out a private placement of High Yield Notes to institutional investors. This issue of €500 million in Notes issued at 103.5% of the face value increased the tranche of €200 million in senior Notes issued on May 28, 2003 at a rate of 8% and with a maturity date of June 1, 2010, thus raising it to a total of €700 million.

Total proceeds received net of professional fees and expenses totaled around €503 million.

Finance leases

On February 18, 2005, Rhodia Inc. made certain finance lease prepayments for a total amount of approximately €108 million.

European medium-term notes (EMTN) program

On the maturity date, we redeemed the balance of the notes issued as part of the EMTN program earning interest at the rate of 6.25%, maturing in May 2005 in the principal amount of €49 million. On March 18, 2005, we closed the early redemption of Notes issued in connection with the EMTN program bearing interest at the rate of 6% and maturing in March 2006 in the principal amount of €300 million. At the end of the offer, the principal amount of the Notes we redeemed totaled approximately €246 million and the principal amount of the Notes remaining in circulation totaled approximately €54 million. The early redemption premium totaled approximately €8 million.

Asset securitization programs

We arranged two securitization programs in 2005. The pan-European securitization program signed with Calyon in December 2004 and in place since January 2005 replaced the former securitization programs in Europe. The financing available under this securitization program amounted to €242 million and £22 million. In November 2005, a North American securitization program in the amount of $100 million was signed and set up with HSBC to replace the existing program that matured in January 2006.

At December 31, 2005, the amount of uncollected trade receivables sold by Group companies as part of the securitization programs and assignment of trade receivables agreements totaled approximately €443 million, for which we received a net cash collection of approximately €328 million. The difference, which corresponds to over-collateralization, was recognized in Trade and other receivables in the balance sheet.

Uncommitted credit facilities

We and certain subsidiaries, including unconsolidated subsidiaries, have entered into a number of uncommitted facilities, overdraft authorizations and letters of credit with various financial institutions. The majority of these facilities exist to finance working capital needs and for general corporate purposes. These facilities do not typically have a specified maturity and the lenders may generally cancel these facilities with relatively short notice.

The uncommitted credit facilities and overdraft authorizations of consolidated subsidiaries totaled €105 million at December 31, 2005.

Guarantees

We have entered into guarantees for certain consolidated and unconsolidated subsidiaries. At December 31, 2005, guarantees for our unconsolidated subsidiaries totaled €12 million.

 

 

52     Form 20 - F 2005 - Rhodia



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Commercial paper

At December 31, 2005, our outstanding commercial paper amounted to €7 million.

Consolidated Statement of Cash Flows

The table below sets forth our consolidated cash flows for 2005 compared with 2004.

 

 

 

2005

 

2004

 

 

 


 


 

 

 

(in millions of euros)

 

Net cash from operating activities

 

 

€138

 

 

€7

 

Net cash (used by)/from investing activities

 

 

(211

)

 

297

 

Net cash (used by)/from financing activities

 

 

343

 

 

(486

)

Effect of foreign exchange rate changes

 

 

38

 

 

(4

)

     
   
 

Net increase/(decrease) in cash and cash equivalents

 

 

308

 

 

(186

)

     
   
 

Net cash from operating activities

Net cash from operating activities totaled €138 million for 2005, compared with €7 million in the previous year. This increase was due to the €105 million improvement in net cash from operating activities before changes in working capital from €105 million in 2004 to €210 million in 2005, and the reduction of change in working capital (defined as movements in trade and other receivables, plus movements in inventories, minus movements in trade and other payables, plus movements in other current assets/current liabilities) from €98 million in 2004 to €72 million in 2005.

Net cash (used by)/from investing activities

Investment activities resulted in a use of cash of €211 million compared to an inflow of €297 million in 2004. This €508 million swing arose from:

 

an increase in property, plant and equipment investment of €33 million and other non-current assets in the amount of €5 million (particularly investments to resolve operational difficulties such as those of Coatis with the acquisition of Chloralp);

 

a decrease in asset disposals of €601 million in 2005, compared with €652 million in 2004. The refocusing of our business portfolio announced in October 2003 that generated significant asset disposals in 2004 was completed in that year;

 

a decrease of €131 million in short-term loans and investments. A total amount of €107 million was loaned or invested in 2004, whereas an amount of €24 million was repaid in 2005.

Net cash (used by)/from financing activities

Net cash generated by financing activities amounted to €343 million in 2005, whereas net cash in the amount of €486 million was used by financing activities in 2004.

This increase in financing resources stems, in particular, from:

 

an increase in funds raised by capital increases. The capital increase on December 20, 2005 for a net amount of €576 million exceeded by €129 million the net funds raised on May 7, 2004 of €447 million;

 

greater current financing resources. Current borrowings repaid in 2005 only amounted to €176 million in 2005, compared with €926 million in 2004, reflecting the €750 million decrease in the repayment of current borrowings.

 

 

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Consolidated Balance Sheet

Working capital

Operating working capital (defined as trade accounts recievable plus inventories less trade accounts payable) totaled €670 million as of December 31, 2005, compared with €720 million as of December 31, 2004. The operating working capital over net sales ratio was 10.8% at the end of 2005, compared with 12.5% at the end of December 2004, as a result of the measures implemented to optimize working capital.

Consolidated net debt

At December 31, 2005, non-current borrowings totaled €1,975 million and current borrowings totaled €1,039 million. Consolidated net debt (defined as non-current and current borrowings less cash and cash equivalents and other current financial assets) totaled €2,089 million at December 31, 2005, compared with €2,354 million at December 31, 2004, a decrease of €265 million. The decrease in consolidated net debt was essentially due to the capital increase carried out on December 20, 2005 in the net amount of €576 million. The net cash from operating activities in the amount of €138 million, including €106 million in restructuring costs, did not cover the acquisition of property, plant and equipment and other non-current assets.

Retirement benefits and similar obligations

Our obligations were measured as of December 31, 2005 in accordance with amended IAS 19 Employee Benefits. Retirement obligations include retirement and other post-employment benefits, including termination benefits. Other benefits granted to employees are mainly comprised of bonuses related to employee seniority in France, the U.S. and the UK. Non-current obligations recognized in liabilities totaled €1,269 million at December 31, 2005, compared with €1,038 million at December 31, 2004. A detailed description of the analysis of retirement benefits and similar obligations is presented in Note 28 to the Consolidated Financial Statements.

Provisions

Provisions classified as non-current liabilities totaled €297 million at December 31, 2005, compared with €216 million at December 31, 2004.

These provisions break down by type as follows:

 

restructuring provisions, covering employee expenses and site closure costs;

 

environmental provisions. We periodically assess our environmental liabilities and future possible remediation measures. The provision is calculated based on future discounted cash flows;

 

other provisions.

Restructuring provisions are analyzed in detail in Note 29.3 to the Consolidated Financial Statements and environmental provisions in Note 29.4 to the Consolidated Financial Statements.

Other non-current liabilities

Other non-current liabilities totaled €46 million at December 31, 2005, compared with €51 million at December 31, 2004.

 

 

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Shareholders’ equity

Shareholders’ equity was negative in the amount of €666 million at December 31, 2005, compared with a negative amount of €521 million at December 31, 2004. On November 21, 2005, a new issue of capital with preferential subscription rights was launched generating gross proceeds of €604 million. This new capital increase resulted in the issuance of 549,134,383 new shares based on a ratio of seven new shares for eight existing shares. The new shares were issued at a unit price of €1.10, generating additional paid-in capital of €55 million (before deduction of related issuance costs). At December 31, 2005, following this capital increase, share capital comprised 1,176,716,541 shares.

Commitments

The table sets forth the maturity schedule for our borrowings as of December 31, 2005. See Note 26 to the Consolidated Financial Statements.

 

As of December 31, 2005

 

Total

 

2006

 

2007

 

2008

 

2009

 

2010

 

After
2010

 

Maturity


 


 


 


 


 


 


 


 


 

 

(in millions of euros)

2001 EMTN

 

54

 

54

 

 

 

 

 

 

 

 

 

 

 

Mar., 2006

2003 USD Senior Notes

 

166

 

 

 

 

 

 

 

 

 

166

 

 

 

June, 2010

2003 EUR Senior Notes

 

702

 

 

 

 

 

 

 

 

 

702

 

 

 

June, 2010

2004 USD Senior Notes

 

531

 

193

 

 

 

 

 

 

 

338

 

 

 

June, 2010

2004 EUR Senior Notes

 

175

 

63

 

 

 

 

 

 

 

112

 

 

 

June, 2010

2003 USD Senior Subordinated Notes

 

321

 

71

 

 

 

 

 

 

 

 

 

250

 

June, 2011

2003 EUR Senior Subordinated Notes

 

298

 

65

 

 

 

 

 

 

 

 

 

233

 

June, 2011

Other Notes

 

25

 

25

 

 

 

 

 

 

 

 

 

 

 

Mar., 2006

Early redemption penalties

 

39

 

39

 

 

 

 

 

 

 

 

 

 

 

Jan., 2006

Bilateral credit facilities

 

179

 

152

 

19

 

5

 

1

 

1

 

1

 

2006-2016

Commercial paper

 

7

 

7

 

 

 

 

 

 

 

 

 

 

 

1-3 months

Assignment of receivables

 

328

 

315

 

6

 

7

 

 

 

 

 

 

 

2006-2008

Finance lease debts

 

129

 

16

 

18

 

8

 

64

 

4

 

19

 

2006-2016

Other debts

 

37

 

16

 

2

 

1

 

1

 

2

 

15

 

2006-2015

Accrued interest payable

 

23

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 


 


 


 


 


 


 

 

Total

 

3,014

 

1,039

 

45

 

21

 

66

 

1,325

 

518

 

 

 

 


 


 


 


 


 


 


 

 

We recorded cash and cash equivalents of €920 million as of December 31, 2005, compared with €612 million as of December 31, 2004. We also recorded other current financial assets in the amount of €5 million as of December 31, 2005. In addition, we had unused committed credit facilities of €251 million. Our liquidity resources totaled €1,176 million as of December 31, 2005, compared with €1,080 million as of December 31, 2004.

 

 

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The table below sets forth the maturity schedule for our other obligations and long-term liabilities as of December 31, 2005.

 

 

 

Payments due by period

 

 


Contractual obligations

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

More than
5 years


 


 


 


 


 


Long-term debt obligations (exclusive of capital lease obligations)(1)(2)

 

2,885

 

1,023

 

40

 

1,323

 

499

Capital lease obligations(1)(2)

 

129

 

16

 

26

 

68

 

19

Operating lease obligations(1)

 

148

 

24

 

40

 

36

 

48

Purchase obligations(3):

 

 

 

 

 

 

 

 

 

 

Raw materials and services

 

1,996

 

889

 

730

 

202

 

175

Energy (electricity, gas, steam)

 

880

 

327

 

358

 

77

 

73

 

 


 


 


 


 


Total purchase obligations

 

2,876

 

1,261

 

1,088

 

279

 

248

 

 


 


 


 


 


Other long-term liabilities(1)(2):

 

 

 

 

 

 

 

 

 

 

Pension and retirement

 

1,350

 

81

 

82

 

83

 

1,104

Environmental

 

232

 

44

 

60

 

43

 

85

Restructuring

 

109

 

87

 

12

 

3

 

7

Other provisions

 

206

 

73

 

39

 

11

 

83

Deferred income taxes

 

65

 

31

 

19

 

13

 

2

 

 


 


 


 


 


Total other long-term liabilities

 

1,962

 

316

 

212

 

153

 

1,281

 

 


 


 


 


 


Total contractual obligations

 

8,000

 

2,640

 

1,406

 

1,859

 

2,095

 

 


 


 


 


 


______________

(1)

Includes the current portion of these liabilities.

(2)

Included on Rhodia’s Consolidated Balance Sheet.

(3)

We have various purchase obligations for raw materials, energy and services incident to the ordinary course of business. Management believes that these obligations generally are not in excess of current market prices and reflect normal business operations. If an obligation is in excess of current market prices, a provision is recorded. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the entity that specifies all significant terms, including: fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions; and the approximate timing of the transaction.

Off-Balance Sheet Commitments

With respect to certain asset disposals, we have undertaken to indemnify the buyers, sometimes for significant maximum amounts, insofar as such assets would cause damage to the environment. Similar warranties have been granted, particularly with regard to accounting, tax and employee-related matters. Even though the warranties have a limited term, their deductible or maximum amount, according to the business segment in which we operate, is not limited. Note 31 to the Consolidated Financial Statements specifies certain types of off-balance sheet commitments.

Recent Developments

Carbon Emissions Receipts. On March 1, 2006, we announced that the Rhodia Energy Services enterprise would implement the first initiatives to optimize the value of the Carbon Emissions Receipts (CERs) generated from projects to reduce greenhouse gas emissions at plants in South Korea and Brazil, launched under the Kyoto Protocol’s Clean Development Mechanism (CDM). Rhodia Energy Services has established the first stage of a hedging strategy involving the forward sale of 8 million tons of CERs, of which 6.5 million will be sold at a price of €15/tonne to be spread equally over 2007 and 2008. Rhodia Energy Services has also signed an agreement to create an equally owned joint venture with Société Générale Energie, a wholly owned subsidiary of Société Générale. The two partners will transfer all their emissions credits activities to the new company, which, in particular, will sell the credits generated by Rhodia’s projects in South Korea and Brazil. Société Générale Energie will provide its expertise and infrastructure to the new company. Rhodia Energy Services has also formed a technical partnership with IXIS Environment & Infrastructures, a wholly owned subsidiary of IXIS Corporate & Investment Bank. The goal is to leverage the partners’ expertise to help manufacturers develop projects that generate emissions credits, as provided for in the Kyoto Protocol’s flexibility mechanisms.

 

56     Form 20 - F 2005 - Rhodia

 



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Disposal of latex business. On January 31, 2006, we finalized the disposal of our latex business to the U.S. group Hexion Specialty Chemicals. The assets and liabilities allocated to these businesses were reclassified under “Assets and liabilities classified as held for sale” in the balance sheet at December 31 and measured at the lower of net carrying value or fair value less costs to sell. The completion of this sale should therefore not have any impact on our 2006 income statement.

Redemption of High Yield Notes. On January 26, 2006, we completed the early redemption of a portion of our High Yield Notes as follows:

 

the maximum authorized nominal amount, i.e., 35% of the nominal amount of our euro-denominated Senior 10.50% Notes and our dollar-denominated Senior 10.25% Notes, both maturing in 2010;

 

21.6% of the nominal value of the euro-denominated Senior Subordinated 9.25% Notes and our dollar-denominated Senior Subordinated 8.875% Notes, both maturing in 2011.

This transaction will enable us to reduce our debt-related interest expense by approximately €38 million per year in 2006.

Disposal of pharmaceutical custom synthesis business. On March 31, 2006 we announced that we had completed the sale of this pharmaceutical custom synthesis business to Shasun Chemicals & Drugs Ltd.

Outlook

This section contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results could materially differ from those discussed in these forward-looking statements. Please refer to the sections “Cautionary Note About Forward-Looking Statements” and “Risk Factors.”

Market conditions remained satisfactory at the beginning of 2006, in an environment still shaped by volatile raw material and energy costs. Over the year, we will continue to implement our proactive strategy of raising prices and pursue our reorganization and restructuring programs, in line with our fixed cost reduction objectives.

Net Income and Shareholders’ Equity under U.S. GAAP

The following tables reconcile the differences between IFRS and U.S. GAAP for net loss for the two years ended December 31, 2005 and 2004 and shareholders’ equity at December 31, 2005 and 2004. See also Note 39 to the Consolidated Financial Statements.

 

Form 20 - F 2005 - Rhodia     57

 



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Net loss:

A reconciliation of the net loss between IFRS and U.S. GAAP for the years ended December 31, 2005 and 2004 follows:

 

 

 

Year Ended December 31,

 

 


 

 

2005

 

2004

 

 

 


 


 

 

 

(in millions of euros)

 

Net loss – IFRS

 

(615

)

(632

)

 

 


 


 

Minority interests

 

(1

)

(9

)

 

 


 


 

Net loss – IFRS – Attributable to equity holders of Rhodia SA

 

(616

)

(641

)

 

 


 


 

Pension and retirement plan differences:

 

 

 

 

 

Unrecognized actuarial losses and past service costs – principally resulting from immediately recognizing these losses for IFRS and amortizing these losses for U.S. GAAP

 

(15

)

(36

)

Curtailment (gains)/losses – differences in the calculation of curtailment (gains)/losses between IFRS and US GAAP

 

(12

)

(42

)

Goodwill and other intangible assets – differences in impairments and the carrying values of businesses sold – principally due to recording an impairment loss of the goodwill relating to the Pharma Solutions enterprise in 2004 for IFRS and in 2005 for U.S. GAAP

 

(48

)

30

 

Capitalized development costs – development costs are not capitalized for U.S.GAAP

 

(7

)

(8

)

Tangible assets:

 

 

 

 

 

Components and spare parts depreciation

 

(17

)

(1

)

Impairments – principally due to recording a tangible asset impairment relating to the Pharma Solutions enterprise in 2004 for U.S. GAAP and in 2005 for IFRS

 

35

 

(31

)

Environmental and other provisions – differences between discounted and undiscounted provisions – discounting of provisions of U.S. GAAP is generally not done; whereas for IFRS discounting is required if significant

 

31

 

(82

)

Exit and disposal activities – lease termination and other provisions – lease termination provisions are recorded for IFRS on the commitment date; whereas for U.S. GAAP, they are recorded at the cease use date

 

8

 

13

 

Sale/leaseback transaction – the gain on sale/leaseback transactions that are accounted for as operating leases are immediately recognized for IFRS and must be amortized over the lease term for U.S. GAAP

 

3

 

(24

)

Environmental indemnification agreement

 

 

(19

)

Other

 

(6

)

(5

)

Income taxes

 

(1

)

81

 

 

 


 


 

Net loss – U.S. GAAP

 

(645

)

(765

)

 

 


 


 

 

 

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Shareholders’ equity:

A reconciliation of shareholders’ equity between IFRS and U.S .GAAP at December 31, 2005 and 2004 follows:

 

 

 

At December 31,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

 

 

(In millions of euros)

 

Shareholders’ equity – IFRS

 

(666

)

(521

)

 

 


 


 

Minority interests

 

(26

)

(25

)

 

 


 


 

Shareholders’ equity – IFRS – Attributable to equity holders of Rhodia SA

 

(692

)

(546

)

 

 


 


 

Pension and retirement plan differences:

 

 

 

 

 

Unrecognized actuarial losses and past service costs – principally resulting from immediately recognizing these losses for IFRS and amortizing these losses for U.S. GAAP

 

814

 

576

 

Minimum liability adjustments – recognizing the minimum liability for U.S. GAAP when the plan assets are less than the accumulated benefit obligation

 

(692

)

(523

)

Goodwill and other intangible assets – differences in amortization, impairments and the carrying values of businesses sold – principally due to recording an impairment loss of the goodwill relating to the Pharma Solutions enterprise in 2004 for IFRS and in 2005 for U.S. GAAP

 

(22

)

24

 

Capitalized development costs – development costs are not capitalized for U.S. GAAP

 

(30

)

(23

)

Tangible assets:

 

 

 

 

 

Components and spare parts depreciation

 

 

17

 

Impairments – principally due to recording a tangible asset impairment relating to the Pharma Solutions enterprise in 2004 for U.S. GAAP and in 2005 for IFRS

 

5

 

(29

)

Environmental and other provisions – differences between discounted and undiscounted provisions – discounting of provisions of U.S. GAAP is generally not done; whereas for IFRS discounting is required if significant

 

(70

)

(90

)

Exit and disposal activities – lease termination and other provisions – lease termination provisions are recorded for IFRS on the commitment date; whereas for U.S. GAAP, they are recorded at the cease use date

 

21

 

13

 

Sale/leaseback transaction – the gain on sale/leaseback transactions that are accounted for as operating leases are immediately recognized for IFRS and must be amortized over the lease term for U.S. GAAP

 

(21

)

(24

)

Other

 

4

 

13

 

Income taxes

 

9

 

14

 

 

 


 


 

Shareholders’ equity – U.S. GAAP

 

(674

)

(578

)

 

 


 


 

 

 

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Item 6. Directors, Senior Management and Employees  

Board of Directors, Chairman and Chief Executive Officer

In accordance with French law governing a société anonyme, our Company is managed by our Board of Directors, our Chairman and our Chief Executive Officer, who has full executive authority to manage the activities of our Company.

At the Board meeting held on October 3, 2003, our Board decided in principle to separate the functions of Chairman and Chief Executive Officer, as permitted by the French Company Law No. 2001-420 dated May 15, 2001. Subsequent to the Extraordinary General Meeting of Shareholders of March 31, 2004, our Board of Directors appointed Mr. Yves René Nanot to the position of Chairman and Mr. Jean-Pierre Clamadieu, who is also a Director, to the position of Chief Executive Officer.

Board of Directors

Pursuant to French law and our by-laws (statuts), our Board of Directors must consist of at least three but no more than 18 Directors (except following a merger or in other excepted circumstances provided by French law). As of December 31, 2005, our Board of Directors consisted of 11 members. Our Board of Directors met 11 times in 2005 (with an average attendance rate of 88.42%).

Directors

The table below sets forth, as of the date hereof, the names and ages of our Directors, their current positions with us, the date of their initial appointment as Directors, the expiration dates of their current terms and their current principal occupation or employment. At the shareholders’ meeting of June 23, 2005, the general assembly voted to reduce the term of our Directors from six to four years, with retroactive effect, as recommended in the Bouton Report.

 

Name (Age)

 

Current position
with Rhodia

 

Initially
appointed

 

Term*
expires

 

Present principal occupation
or employment


 


 


 


 


Yves René Nanot (69)

 

Director, Chairman of the Board

 

2002

 

2008

 

Chairman of the Board and Chief Executive Officer of Ciments Français

Jean-Pierre Clamadieu (47)

 

Director, Chief Executive Officer

 

2003

 

2009

 

Chief Executive Officer of Rhodia

Aldo Cardoso (49)

 

Director

 

2004(1)

 

2009

 

Director of Orange, Gaz de France, Imerys and Accor

Pascal Colombani (60)

 

Director

 

2005(2)

 

2009

 

Associate Director at A.T. Kearney

Jérôme Contamine (48)

 

Director

 

2004

 

2008

 

Senior Executive Vice President of Veolia Environment

Michel de Fabiani (60)

 

Director

 

2003

 

2008

 

Director of BP France, the Institut Français du Pétrole and Member of the Supervisory Board of Vallourec

Jacques Kheliff(3) (52)

 

Director

 

2005(2)

 

2009

 

Vice President of Sustainable Development at Rhodia

Olivier Legrain (53)

 

Director

 

2005(2)

 

2009

 

Chief Executive Officer of Materis

Pierre Lévi (51)

 

Director

 

1999

 

2009

 

Chairman and Chief Executive Officer of Faurecia S.A.

Francis Mer (66)

 

Director

 

2004(1)

 

2009

 

Former French Minister of Economy, Finance and Industry, Director of Alstom, Adecco (Switzerland) and Inco (Canada)

Hubertus Sulkowski (63)

 

Director

 

1999

 

2008

 

Partner at Shearman & Sterling LLP

 

______________

(1)

Appointment as Director was ratified and mandate renewed at the shareholders’ meeting of June 23, 2005.

(2)

Appointed as Director at the shareholders’ meeting of June 23, 2005.

(3)

Mr. Kheliff was voluntarily appointed Director at the shareholders’ meeting of June 23, 2005 after the expiry of the term of the former Director representative of employee shareholders, Walter Cirillo. The shares held by employee shareholders represents less than 3% of our capital, which under our by-laws leads to the expiry of the term of the representative of employee shareholders.

 

 

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Biographies

Yves René Nanot has been Chairman of our Board of Directors since March 31, 2004. He was Vice President of our Board from October 3, 2003 to March 30, 2004. He has been a Director of our Board since his appointment in October 2002. He is also Chairman of the Board and Chief Executive Officer of Ciments Français and a Director of Imerys, Provimi and Italcementi (in Italy), as well as Ciments Français’ foreign subsidiaries in the United States, Morocco, India, Thailand, Turkey and Egypt. He was appointed Chairman and Chief Executive Officer of Total France, then President of Total Refining and Marketing and member of the Total Group Executive Committee. He joined the Total Group in 1983 and was Chairman of Hutchinson S.A. from 1983 to 1989. He began his career with Dupont de Nemours in the United States and held various positions with the Company in France and Europe between 1962 and 1983. Mr. Nanot is a graduate of the Arts et Métiers school of engineering (Paris) and has a MBA and PhD from the University of California at Los Angeles (UCLA).

Jean-Pierre Clamadieu has been our Chief Executive Officer since October 2003. From October 2003 until March 31, 2004, he also served as Interim Chairman of our Board of Directors. Prior to holding his current position, he served as President of the Pharmacy & Agrochemicals Division from April 2003 until October 2003, and he was President of the Fine Organics Division from January 2002 through April 2003. In 2001, he served as Senior Vice President for Corporate Purchasing, and between 1999 and 2000, he was President of Rhodia Eco Services. From 1996 through 1999, he served as President of the Chemical Sector in the Latin American Zone for our Company and as Manager of the Automotive Pollution Control Project in the Chemical Sector of Rhône-Poulenc. He joined Rhône-Poulenc in 1993 to develop new activities in the area of automobile pollution control. Prior to joining Rhône-Poulenc, he was technical advisor to Labor Minister Martine Aubry between 1991 and 1993. Mr. Clamadieu began his professional career in 1984 with various positions in French government agencies such as the regional industry and research office (DRIR) and the regional land-use planning department (DATAR). He holds an engineering degree from the École des mines (Paris, France).

Aldo Cardoso has been a Director of our Board since July 28, 2004, and currently serves as Chairman of our Audit Committee and member of our Compensation and Selection Committee. He is currently a Director of Orange, Gaz de France, Imerys and Accor. From 2002 to 2003, he served as acting CEO of Andersen Worldwide. He was Managing Partner for France until 2002. He was Chairman of the Supervisory Board of Andersen Worldwide from 2000 to 2001. He began his career as a consultant auditor in the Andersen Group in 1979, was named Partner in 1989 and was Director of the Audit Department, France in 1993, prior to taking responsibility for the European Audit Department and Financial Consultancy in 1988. Mr. Cardoso is a graduate of École supérieure de commerce de Paris.

Pascal Colombani was appointed Director at the shareholders’ meeting of June 23, 2005 and currently serves as member of our Strategic Committee. Mr. Colombani is Associate Director at A.T. Kearney and currently serves on the Board of Directors of Institut Français du Pétrole (IFP), Alstom and British Energy. He was Chairman of AREVA’s Supervisory Board until 2003. From 1999 to December 2002 he was Chairman and CEO of France’s Atomic Energy Commission (CEA). From 1998 to 1999, he was Director of technology at the French Ministry of Education, research and technology, before which he spent nearly 20 years at Schlumberger in various positions in Europe and the United States, and becoming President of the Company’s subsidiary in Tokyo. He began his career at France’s CNRS Nuclear Physics Institute. Mr. Colombani graduated from École Normale Supérieure in France, Physics habilitation (aggrégation) (1969) and holds a doctorate in physics (1974).

Jérôme Contamine has been a Director on our Board since March 2004 and currently serves as a member of our Audit Committee. He is Senior Executive Vice President of Veolia Environment with responsibility for all cross-functional activities since 2003. In 2000, he was named Senior Vice President Europe/Central Asia of the Exploration-Production Division of TotalFinaElf. In the same year, he joined Vivendi Environment as Executive Vice President, Finance, and Director of the Management Board. He became President and CEO of Elf Norway in 1995, after being named Deputy to the Senior Vice President Europe/United States of Elf Exploration-Production in 1994. In 1988, he joined the Elf Aquitaine Group, where he served in several posts in the Finance Department. He began his career as a public auditor in the French Government Accounting Office, where he worked from 1984 until 1988. Mr. Contamine is a graduate of the École polytechnique (1979) and the École nationale d’administration (1984).

 

 

 

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Michel de Fabiani was named a Director of our Board in April 2003 and currently serves as Chairman of the Compensation and Selection Committee and as a member of the Audit Committee. Mr. de Fabiani also serves as a Director of BP France, the French Petroleum Institute and serves as a Member of the Supervisory Board of Vallourec. Through 2004, he was Chairman and Chief Executive Officer of BP France and Regional President of Europe BP Group. Mr. de Fabiani also previously served as Chief Executive Officer of BP Oil Europe.

Jacques Kheliff was appointed Director at the shareholders’ meeting of June 23, 2005 due to his ability to represent employee shareholders. Since October 2003, he has been our Vice President for Sustainable Development, after having joined us in November 2002 as Assistant and Special Advisor to the President for Sustainable Development. Mr. Kheliff was General Secretary of the CFDT Federation of Chemical and Energy Industry Workers from 1997 to 2002, after having risen to the position of General Secretary of the Unified Federation of Chemical Industry Workers in 1984. At the same time, he became a member of the CFDT trade union’s national bureau. He was also Vice President of the European Mine, Chemical and Energy Workers Federation (EMCEF). He started his career with Rhône-Poulenc at the Chalampé factory in 1972, where he was involved in CFDT trade union activities.

Olivier Legrain was appointed Director at the shareholders’ meeting of June 23, 2005 and currently serves as a member of our Compensation and Selection Committee. Since 2001, he is Chairman and CEO of Materis, which was created out of Lafarge’s specialty materials business. He joined Lafarge in 1994, where he served as Group Chief Operating Officer, and afterwards managed the specialty materials business in 1995 and strategy materials in 1997. Prior, he had held a number of senior executive positions in different Rhône-Poulenc divisions. He joined Rhône-Poulenc in 1986 as Chief Operating Officer of the Basic Chemicals Division. Mr. Legrain is a graduate of École civil des Mines.

Pierre Lévi has been a Director of our Board since October 1999 and also currently serves on the Strategic Committee. He is also Chairman and Chief Executive Officer of Faurecia S.A. and President of Faurecia Automotive Holdings. He also serves as President of the Management Board of Faurecia Investissements in France and Director at Faurecia Exhaust Systems, Inc. in the United States. Prior to 1999, he had executive roles at Rhodia, Rhône-Poulenc and Carnaud Metalbox. He graduated in engineering from École des Mines and holds an MBA from Wharton.

Francis Mer has been a Director of our Board since May 13, 2004 and currently serves as the Chairman of our Strategic Committee. He is also a Director of Alstom, Adecco (Switzerland) and Inco (Canada) and since June 1988, has been Chairman of the French Steel Federation (Fédération française de l’acier). Mr. Mer served as Minister of Economy, Finance and Industry in the French Government from May 7, 2002 to March 30, 2004. He was Chairman of Usinor Sacilor, which was privatized in 1995 before sponsoring the creation of the Arcelor Group in 2001. In September 1986, he had been appointed Chairman of the new entity created from the merger of Usinor and Sacilor. In July 1982, he became Chairman and Managing Director of Pont-à-Mousson S.A. and Director of the Saint-Gobain Group’s Pipelines and Mechanical Engineering Division. In September 1978, he was appointed Deputy Managing Director of the Saint-Gobain Group, in charge of industrial policy. He acted as managing Director of Saint-Gobain Industries (1974-1978), prior to which he was planning Director at Saint-Gobain Pont-à-Mousson (1973). He joined the Saint-Gobain Pont-à-Mousson Group in October 1970 in the Corporate Strategy Department. Mr. Mer is a graduate of École polytechnique and holds a degree in engineering from the Écoles des mines.

Hubertus Sulkowski has been a Director of our Board since October 1999. He is a senior partner at the Paris office of Shearman & Sterling LLP.

Board Practices

Our by-laws do not specify a mandatory retirement age for Directors. Where the by-laws do not specifically provide otherwise, French law stipulates that the number of Directors over 70 years old must not exceed one-third of the total number of Directors. Any appointment made in breach of this requirement is null and void. If the number of Directors over 70 years old exceeds the one-third limit, the oldest Director automatically resigns by operation of law.

 

 

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Our by-laws provide that each Director is elected for a term of four years, which may be renewed. At a shareholders’ meeting of June 23, 2005, the Directors’ term was reduced from six to four years, with retroactive effect. For this reason, the mandates of current Directors were immediately reduced by two years. Pursuant to our by-laws, each of our Directors must hold at least 100 of our shares. Under French law, a Director may be an individual or a legal entity, but the Chairman and/or the Chief Executive Officer must be an individual.

In accordance with French law, our Directors are elected by the shareholders at an ordinary general meeting and serve until their respective terms expire or until they resign, die or are removed, with or without cause, by the shareholders. None of our shareholders has the exclusive right to appoint a Director to the Board. As provided for in our by-laws, the Board of Directors, subject to ratification at the next ordinary shareholders’ meeting, may under certain conditions fill vacancies on the Board of Directors.

Our by-laws grant the Board of Directors all of the powers conferred upon it by law, specifically:

 

to determine the direction of our Company’s activities and oversee its implementation;

 

to consider any issue related to the functioning of the Company and make decisions regarding these issues at its meetings, within the limits of the powers specifically granted to the shareholders and the corporate objectives;

 

to engage in controls and verifications it deems appropriate—the Chairman or the Chief Executive Officer must communicate to each Director all documents and information necessary for the fulfilment of their mission together with any other documents a Director may deem appropriate;

 

to create committees to examine issues as defined by the Board of Directors or its Chairman as well as to determine the composition and the mission of such committees under the Board’s authority; and

 

to grant to one of its members or a third party special mandates with one or more objectives, with or without the right to delegate in part or in full.

Pursuant to our by-laws, meetings of the Board of Directors are convened and presided over by the Chairman. The Chief Executive Officer, or, if the Board of Directors has not met for more than two months, at least one-third of the members of the Board of Directors, may request the Chairman to convene the Board of Directors on a specific agenda. The Directors may be convened by any means, including orally.

A quorum consists of at least one-half of the members of the Board of Directors, and decisions are taken by a vote of the majority of members present either in person or represented by other members of the Board of Directors.

To be represented, a Director must give a written proxy to another Director 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. French law allows Directors to participate in Board meetings by videoconference if provided for in the by-laws, and such participation will be included in the determination of the relevant quorum and majority, except in relation to certain decisions. Our by-laws provide for the possibility of participating in a meeting by videoconference. In case of a tie, the vote of the Chairman will be the deciding vote. A Director may not vote for an arrangement or contract in which he or she is materially interested.

French law strictly prohibits loans by the Company to a Director. Moreover, a company may not provide overdrafts for Directors or guarantee any Director’s obligations. This prohibition also applies to Chief Executive Officers (directeurs généraux) and Designated Executive Officers having the authority to represent the Company (directeurs généraux délégués), permanent representatives of companies on the Board of Directors, spouses and heirs of such persons and other intermediaries.

French law requires the Chairman of the Board, the Chief Executive Officer, any Designated Executive Officers, any Directors and any holders of more than 10% of our voting rights (or in the case of a shareholder which is a company, the Company controlling it), that are considering entering into an agreement or arrangement which is not prohibited as set forth above with the Company, either directly or indirectly, personally or through an intermediary, to inform the Company’s Board of Directors before the transaction is consummated. The Chairman of the Board of Directors will inform the Company’s auditors in turn. French law requires such an

 

 

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agreement to be authorized by the Board of Directors (unless such an agreement is a customary arm’s-length transaction) and prohibits the Director in question from voting on the issue. Any agreement entered into in violation of these requirements may be voided by the Commercial Court at the request of the Company or of any shareholder, if such agreement has caused damage to the Company. French law further requires such an agreement to be submitted to an ordinary general shareholders’ meeting for approval once entered into, upon presentation of a special report from the Company’s auditors.

French law also states that such agreements entered into in the ordinary course of business and with terms and conditions that are not out of the ordinary are not subject to the prior authorization of the Board of Directors. Nevertheless, an interested party must disclose such agreements to the Chairman of the Board of Directors unless they are not significant in terms of purpose or financial impact. The list and purpose of such agreements must be communicated by the Chairman to the Board of Directors and to the statutory auditors.

In consideration for their services on the Board, Directors are entitled to receive Directors’ fees (jetons de présence). The total annual amount of Directors’ fees is set at the shareholders’ meeting; however, the Board determines the allocation of such fees among the Directors. In addition, compensation may be granted to Directors on a case-by-case basis for special assignments. A Director may not vote with respect to his or her own compensation. The Board may also authorize the reimbursement of travel and accommodation expenses as well as other expenses incurred by Directors in the corporate interest.

Under French law, Directors elected by our shareholders are potentially liable for violations of French laws and regulations applicable to sociétés anonymes, violations of our by-laws or mismanagement. They may be held liable for such actions both individually and jointly with the other Directors.

Chairman of the Board

Pursuant to French law, the Chairman of the Board organizes and manages the duties performed by the Board and reports to the shareholders’ meeting. He is also responsible for the proper functioning of the corporate bodies and ensures that the Directors are capable of fulfilling their assignments.

In the event that the Chairman is temporarily incapacitated or dies, the Board may appoint a Director as acting Chairman. In the event of temporary incapacitation, the said appointment will be made for a limited term and will be renewable. In the event of death, the appointment will remain in effect until the election of a new Chairman.

Our by-laws provide for the retirement age of the Chairman. The Chairman cannot be appointed if he is 70 years old, whether or not also acting as Chief Executive Officer.

The Board sets the Chairman’s compensation.

Chief Executive Officer

The Chief Executive Officer is vested with the broadest powers to act in any circumstance in the name of our Company, within the limits of our corporate purpose, and subject to the powers expressly conferred by law upon shareholders’ meetings and upon the Board of Directors. The Chief Executive Officer represents us in dealings with third parties. We are bound even by acts of the Chief Executive Officer that are not within the scope of the corporate purpose unless we prove that the third party knew that the act was outside the corporate purpose or that under the circumstances the third party could not have been unaware of this. However, mere publication of our by-laws is not sufficient to constitute such proof. The Board may limit the powers of the Chief Executive Officer. However, the limitation of his powers is not binding on third parties.

The Board of Directors establishes the duration of the Chief Executive Officer’s term. The Board sets the Chief Executive Officer’s compensation. The Board of Directors may remove the Chief Executive Officer at any time. In the event this dismissal is not justified, the Chief Executive Officer may claim damages, except if the Chief Executive Officer is also the Chairman of the Board.

 

 

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Designated Executive Officers

Upon proposal of the Chief Executive Officer, the Board of Directors is entitled to appoint up to five Designated Executive Officers (directeurs généraux délégués), whose role is to assist the Chief Executive Officer.

The Board of Directors establishes the duration of the Designated Executive Officers’ terms and the limits of their powers in accordance with the Chief Executive Officer. The Board also sets the Designated Executive Officers’ compensation.

A Designated Executive Officer has the same powers as the Chief Executive Officer in dealing with third parties, including the authority to represent the Company in dealing with third parties. Upon proposal of the Chief Executive Officer, the Board of Directors may remove the Designated Executive Officers at any time. In the event this dismissal is not justified, the Designated Executive Officer may claim damages.

At the Board of Directors meeting on October 3, 2003, Mr. Gilles Auffret was named Designated Executive Officer (directeur général délégué) with the specific mandate to implement the reorganization plan and to reduce costs. His term expired at the end of the first Board meeting held after our June 23, 2005 shareholders’ meeting. On June 23, 2005 Mr. Auffret was appointed and continues to be Group Executive Vice President of Operations.

Corporate Governance

We have a policy of aiming to ensure that French best practices, recommendations and standards on corporate governance, especially those resulting from the AFEP-MEDEF Report of October 2003 (“Report“), which consolidated the Vienot and Bouton reports, are integrated into our administrative and managerial functioning and operations.

In addition, we are subject to certain United States securities laws and regulations and New York Stock Exchange rules and standards regarding corporate governance. Certain French corporate governance rules, notably those defining Director independence and the role and functioning of committees, are different from NYSE standards. In addition, as a non-U.S. company listed on the NYSE, we benefit from certain exemptions from U.S. rules and regulations, and other rules and regulations will only apply to us in the future.

Independence

Based on corporate governance principles set forth in the Report and NYSE corporate governance rules, our Board of Directors has evaluated the independence of its members. Pursuant to the terms of the Report, “a Director is independent if such Director maintains no relation of any kind with the Company, the Group or its management which could compromise exercising liberty of judgment“. The Report recommends that the Board of Directors, according to the indicative criteria set forth in the report, review the qualification of independent Directors each year. We also took into account the criteria of independence under the NYSE rules and bore in mind the Sarbanes-Oxley Act that requires foreign issuers to have an Audit Committee composed exclusively of qualified independent members. On December 14, 2005 the Board of Directors determined the independence of each of its members, after having reviewed their respective situations and any intervening events since their prior qualification.

Messrs. Cardoso, Colombani, Contamine, de Fabiani, Legrain, Lévi, and Mer, seven of the 11 members comprising our Board, were found to be independent. With respect to Messrs. Colombani and Legrain, new members of the Board of Directors, they satisfy criteria for independence set out in the Report. Their independence was also a factor in their appointment as Directors. The independence of Messrs. Cardoso, Contamine, de Fabiani, Lévi and Mer has not changed since the Board last evaluated them. They continue to satisfy the criteria for independence set out in the Report. With respect to Mr. Lévi, our Board determined that he continues to be independent, and that limited ordinary course commercial relationships between our Company and Faurecia did not impair his independence. With respect to Mr. Nanot, our Board determined that he should no longer be considered to be independent due to his position as Chairman of our Board of Directors and the compensation he received for such service. The Board found that Mr. Clamadieu, Chief Executive Officer, and Mr. Kheliff, Vice President of sustainable development, are not considered independent because of their positions in

 

 

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our Company and the related compensation paid to them. Mr. Sulkowski is also a non-independent Director as he is a partner at Shearman & Sterling LLP, a law firm that regularly provides legal services to us.

Qualification of seven of our 11 Board members as “independent“ should not cast any doubt on the professionalism and independence of judgment that characterize the other members of our Board.

Significant differences from NYSE Corporate Governance requirements

As a foreign private issuer, we are required to comply with New York Stock Exchange (“NYSE“) rules regarding the independence, duties and responsibilities of its Audit Committee, and to disclose any significant differences between its corporate governance practices and NYSE corporate governance standards applicable to U.S. companies. On August 2005, our Chief Executive Officer submitted written affirmation to the NYSE attesting to our compliance. As of the last date of evaluation by the Board of Directors, and according to NYSE standards, seven out of eleven Directors were determined to be independent, as well as all members of our Audit Committee and Compensation and Nominating Committee were found to be independent. We are not aware that the independent members of our Board meet formally outside the presence of our management. Furthermore, our Audit Committee has put into place a Sarbanes-Oxley compliant whistleblowing procedure for the reporting of accounting or financial irregularities.

Committees

Under French law, committees established by the Board of Directors only have the power to make recommendations and proposals. Decision making power rests within the exclusive power of the Board.

Audit Committee

Our Board of Directors has an Audit Committee, of three independent Directors: Mr. Cardoso (chair), Mr. Contamine and Mr. de Fabiani. The Board of Directors at its December 14, 2005 meeting certified each member of the Audit Committee as a financial expert within the meaning of the SEC rules, their knowledge of IFRS and their experience in relevant areas. The Audit Committee meets at least four times per year and as often as required in our best interests. Constituted in 1998, the Audit Committee is the newly named committee comprising the former Accounts Committee and Risks Committee, which were merged because of similarity of their missions. The Audit Committee is also responsible for the examination of our periodic financial reporting, the implementation of and compliance with internal control procedures and the Group’s compliance policy controls, the implementation of the recommendations of our independent auditors and the examination of the organization, functioning and actions of the internal and external auditors. More generally, the Audit Committee examines all financial and accounting questions delegated to it by the Board. The Audit Committee met eight times in 2005 with an average attendance rate of 87.5%.

In the context of our goal of sustainable development, part of the Audit Committee’s mission is to ensure that all due diligence and appropriate measures have been taken by the Group, or upon the initiative of our management, in order to permit the identification, analysis, documentation, and amelioration of risk prevention and control dealing with all types of risks which the Group has encountered or may encounter in the context of our special chemical activities, notably those which could cause bodily harm or have a negative impact on the Group’s tangible or intangible assets. In this context, the Audit Committee ensures that management has verified that the relevant conduct procedures and policies are known and applied in a continuous and uniform manner throughout the Group and that recourse to audits (internal as well as external) and insurance are optimized. The Audit Committee participates in the review of the synthesis of internal and external auditors’ reports dealing with these risks and examines the organization, operation and mission plans carried out by the Internal Audit.

In 2005, in addition to reviewing annual and quarterly financial statements and closing options, the Committee continued implementing IFRS norms. Another important focus was internal control procedures. Regular reviews were conducted of enterprises’ procedures and their response to obligations resulting from the Sarbanes-Oxley Act. The committee was attentive to and intervened regarding the adequacy of such means and measures to conform with this important project. Its activities also included the presentation of a risks chart; the putting into place of a whistleblowing procedure for the reporting of accounting or financial irregularities which corresponds to the requirement under Sarbanes-Oxley; review of insurance policies; auditor relations (including fee issues); annual accounts; and prospects for an internal audit.

 

 

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During its preliminary meeting with the Board to review financial statements, the Committee members had the opportunity to hold discussions with the auditor and the Group’s Financial Director.

Compensation and Selection Committee

The Board of Directors also has a Compensation and Selection Committee comprised of three independent Directors: Mr. de Fabiani (chair), Mr. Cardoso and Mr. Legrain. The Compensation and Selection Committee was created in May 1998 and is responsible for proposing to the Board the compensation to be granted to the Chairman and the Chief Executive Officer, employee stock option plans, the policy that governs salaries and bonuses of our officers and key personnel, capital increases reserved to employees and succession plans, as well as nominees for top management posts. It meets at least twice a year and as often as required in the best interests of the Company. It is also responsible for presenting nominees for Board membership, evaluating their independence and selecting members for committees.

The Compensation and Selection Committee met nine times in 2005 (with an average attendance rate of 100%). The Committee’s work and recommendations dealt primarily with reviewing Director’s fixed and variable compensation and attendance fees based on market practice; future developments in the Directors’ remuneration policy; and review of the variable fees for General Management Committee and Executive Committee members. It also made adjustments to the stock option program, as a result of the capital increase. It reviewed the indemnity policy and retirement plans for high managers, the composition of the Board of Directors and Committees and began researching potential corporate members.

Strategic Committee

The Strategic Committee, created in September 2000, is comprised of three independent permanent Directors: Mr. Mer (chair), Mr. Lévi and Mr. Colombani. The Strategic Committee is responsible for advising the Board of Directors with regard to portfolio transactions, contemplated external growth opportunities, asset disposals or major alliances. The Strategic Committee must meet at least twice a year, with one annual meeting to review and analyze our operations and strategy, and as often as required by our best interests. Meetings are open to attendance by other members of the Board of Directors owing to the importance of the matters covered.

The Strategic Committee met three times in 2005 with an average attendance rate of 88.8%. Over the course of its meetings, the Committee reviewed strategic prospects and divestment programs, as well as specific strategies targeting certain business activities and an analysis of the Group’s portfolio of activities.

Board of Directors’ Internal Regulation

Since June 2000, our Board of Directors has operated according to internal rules (règlement intérieur). Neither a replacement of French law nor our by-laws, the Board’s internal rules are an internal document that defines the composition, role and powers of the Board of Directors and its committees. These rules are aimed at optimizing the efficiency of meetings and discussions and at taking precautionary measures and maintaining confidentiality. The rules provide for our Board to be informed either directly or through its Committees of all significant events affecting our markets and us. The internal rules provide that the Board must perform an annual self-evaluation to examine, in particular, its own functioning and consideration of important questions.

General Management Committee

The table below sets forth, as of the date hereof, the names, current position and ages of the members of our General Management Committee (Comité de direction générale), which is our principal management body. The six members of the General Management Committee are our executive officers. At regular meetings, the General Management Committee implements our global orientations that are established with the Board of Directors, and makes key decisions with respect to strategy, human resources, legal matters, finance, international development, environment and safety, as well as corporate communications.

 

 

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Name (Age)

 

Principal position with Rhodia

 



 

Jean-Pierre Clamadieu (47)

 

Chief Executive Officer

 

Gilles Auffret (59)

 

Group Executive Vice President, Operations
(Directeur général adjoint opérations)

 

Yves Boisdron (61)

 

Group Executive Vice President, Strategy

 

Pascal Bouchiat (45)

 

Group Executive Vice President, and Chief Financial Officer

 

Bernard Chambon (58)

 

Group Executive Vice President, Human Resources Communications and Sustainable Development