20-F 1 rhodiaform20f.htm RHODIA FORM 20-F RHODIA 2006 FORM 20-F

 

 



As filed with the Securities and Exchange Commission on March 30, 2007

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, 2006

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

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(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: 1,204,186,174

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





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TABLE OF CONTENTS



Presentation of financial and other information

3

Part I

5

Item 1.

Identity of Directors, Senior Management and Advisers

5

Item 2.

Offer Statistics and Expected Timetable

5

Item 3.

Key Information

5

Item 4.

Information About Rhodia

18

Item 4A.

Unresolved Staff Comments

34

Item 5.

Operating and Financial Review and Prospects

34

Item 6.

Directors, Senior Management and Employees

62

Item 7.

Major shareholders and Related Party Transactions

80

Item 8.

Financial Information

82

Item 9.

The Offer and Listing

87

Item 10.

Additional Information

91

Item 11.

Quantitative and Qualitative Disclosure About Market Risk

117

Item 12.

Description of Securities Other than Equity Securities

119

Part II

120

Item 13.

Defaults, Dividend Arrearages and Delinquencies

120

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

120

Item 15.

Controls and Procedures

120

Item 16A.

Audit Committee Financial Expert

121

Item 16B.

Code of Ethics

121

Item 16C.

 Principal Accountant Fees and Services

122

Item 16D.

 Exemptions from the Listing Standards for Audit Committees

122

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

123

Part III

124

Item 17.

Financial Statements

124

Item 18.

Financial Statements

124

Item 19.

Exhibits

124











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Presentation of financial and other information

The Consolidated Financial Statements for each of the years ended December 31, 2006, 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”). 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 (“US GAAP”). For a description of the principal differences between IFRS and US GAAP, as they relate to us and to our consolidated subsidiaries, and for a reconciliation to US GAAP of net income for each year during the three years ended December 31, 2006, and shareholders’ equity at December 31, 2006, 2005 and 2004, see Note 36 to the Consolidated Financial Statements.

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;

·

changes in volumes; and

·

the transactional effect of changes in exchange rates.


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 subsequent period’s results the activities included in our Consolidated Financial Statements for all or part of the prior period only for the same portion of such subsequent period as they were included in the prior 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 prior period but which were not included for any portion of the subsequent period;

·

we calculate the impact of “the conversion effect 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 calculate the impact of “the transactional effect of changes in exchange rates” as the translation into the home country currencies of sales by our subsidiaries denominated in currencies other than such home country currency at average exchange rates.


Form 20-F 2006 – Rhodia - 3


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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 US GAAP. They should not be considered as an alternative to any measures of performance under IFRS or US 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 US dollars at specified rates. These translations should not be construed as representations that the converted amounts actually represent such US dollar amounts or could be converted into US 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 “US” 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.



Form 20-F 2006 – Rhodia - 4


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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 as adopted by the European Union for each of the three years ended December 31, 2006 and at December 31, 2006, 2005 and 2004, and in US GAAP for each of the five years ended December 31, 2006 and at December 31, 2006, 2005, 2004, 2003 and 2002. Such IFRS as applied by the Company are currently the same as IFRS as adopted by the IASB. 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. IFRS differs in certain significant respects from US GAAP. For a description of the principal differences between IFRS and US GAAP as they relate to us and to our consolidated subsidiaries, and for a reconciliation to US GAAP of net income and shareholders’ equity for the three years ended December 31, 2006 and at December 31, 2006, 2005 and 2004, see Note 36 to the Consolidated Financial Statements.


Form 20-F 2006 – Rhodia - 5


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(in millions, except for per share data)

Year ended and at December 31,

 

2006 $ (1)

2006 €

2005 (7)

2004 (7)

Amounts in accordance with IFRS:

    

Income Statement Data:

    

Net sales

6,397

4,810

4,521

4,184

Other revenue

600

451

435

424

Cost of sales

(5,667)

(4,261)

(4,139)

(3,941)

Administrative and selling expenses

689

(518)

(523)

(455)

Research and development expenditure

(137)

(103)

(104)

(116)

Restructuring costs

(28)

(21)

(82)

(168)

Goodwill impairment

(16)

Other operating income/(expenses)

1

1

(42)

(47)

Operating profit/(loss)

477

359

66

(135)

Finance income

177

133

133

121

Finance costs

(596)

(448)

(496)

(449)

Foreign exchange gains/(losses)

13

10

(69)

68

Share of profit/(loss) of associates

3

Profit/(loss) before income taxes

72

54

(366)

(392)

Income tax benefit/(expense)

76

57

(53)

(98)

Profit/(loss) from continuing operations

148

111

(419)

(490)

Loss from discontinued operations

(60)

(45)

(196)

(142)

Net profit/(loss) for the period

88

66

(615)

(632)

Attributable to:

    

Equity holders of Rhodia SA

82

62

(616)

(641)

Minority interests

5

4

1

9

Basic earnings per share (in euros) (2)

0.07

0.05

(0.95)

(1.36)

Diluted earnings per share (in euros) (2)

0.07

0.05

(0.95)

(1.36)

Balance Sheet Data:

    

Working capital (3)

706

531

171

151

Property, plant and equipment (net book value)

2,341

1,760

2,135

2,245

Total assets

6,853

5,153

5,646

5,566

Non-current borrowings (4)

2,689

2,022

1,975

2,250

Current borrowings

549

413

1,039

721

Total borrowings (5)

3,239

2,435

3,014

2,971

Cash, cash equivalents and other current financial assets

646

486

925

617

Net borrowings (6)

2,592

1,949

2,089

2,354

Other non-current liabilities

2,139

1,608

1,646

1,360

Minority interests

33

25

26

25

Total shareholders’ equity

(868)

(653)

(692)

(546)

Share capital and additional paid-in capital

1,632

1,227

1,747

1,435

Cash Flow Statement Data:

    

Purchases of property, plant and equipment

350

263

(254)

(221)

Other Data:

    

Capital expenditure

414

311

286

248




Form 20-F 2006 – Rhodia - 6


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(in millions, except for per share data)

Year ended and at December 31,

 

2006 (1) $

2006 €

2005 (7)

2004 (7)

2003 (7)

2002 (7)

Amounts in accordance with US GAAP:

      

Income Statement Data:

      

Net sales (7)

6,397

4,810

4,521

4,138

3,814

4,064

Other revenue (7)

596

448

435

429

437

388

Operating profit/(loss) (7)

348

262

(21)

(360)

(272)

171

Income/(loss) from continuing operations (7)

49

37

(474)

(639)

(780)

61

Income/(loss) from discontinued operations (7)

(29)

(22)

(171)

(126)

(675)

15

Net income/(loss) (7)

20

15

(645)

(765)

(1,455

76

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

0.04

0.03

(0.73)

(1.35)

(4.35)

0.34

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

(0.03)

(0.02)

(0.27)

(0.27)

(3.76)

0.09

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

0.01

0.01

(1.00)

(1.62)

(8.11)

0.43

Balance Sheet Data:

      

Working capital (3)

732

550

264

218

(777)

(358)

Property, plant and equipment (net book value)

2,068

1,555

1,867

1,937

2,526

2,743

Total shareholders’ equity

(1,035)

(778)

(674)

(578)

(223)

1,457

(1)

Translated for convenience purposes only as €1.00 = $1.33, the Noon Buying Rate on March 28, 2007.

(2)

Basic earnings/(loss) per share for 2006, 2005, 2004, 2003 and 2002 has been calculated on the basis of 1,190,639,506 shares, 645,635,891 shares, 471,607,727 shares, 179,309,188 shares and 178,765,518 shares outstanding (less treasury stock) on average for such years, respectively. Diluted earnings/(loss) per share has been calculated for 2006 on the basis of 1,196,170,270 shares and for prior years on the basis of the same number of shares used to calculate basic earnings/(loss) per share.

(3)

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

(4)

Non-current borrowings include 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 2005 and prior years to conform to the presentation in 2006 relating to discontinued operations.



Form 20-F 2006 – Rhodia - 7


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Exchange Rate Information

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

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

Month

Period-end rate

Average rate (1)

High

Low

Euro/Dollar (2)

    

March 2007 (through March 28)

  

0.76

0.75

February 2007

  

0.77

0.75

January 2007

  

0.77

0.75

December 2006

  

0.76

0.75

November 2006

  

0.79

0.75

October 2006

  

0.80

0.78

September 2006

  

0.79

0.78

Year

    

Euro/Dollar (2)

    

2006

0.83

0.79

0.84

0.75

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

(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.



Form 20-F 2006 – Rhodia - 8


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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 as an international group of companies, which exposes us to the economic conditions, political risks and the specific regulations of the countries in which we operate. In addition to Europe and North America, where we generated 51% and 16%, respectively, of our 2006 net sales, we operate in the Latin America and Asia-Pacific regions, which are areas in which we have focused our growth strategy. In 2006, Latin America and the Asia-Pacific region represented 15% and 18%, respectively, of our net sales. Our strategy is to seize development opportunities in growing markets, principally in China, South Korea and Brazil.

Our presence on these markets exposes us to risks such as sudden, material changes in regulations, political, financial and social instability, exchange rate fluctuations, the outbreak of major health risks, transfer of payment regulations or withholding taxes that may create difficulties in repatriating local currencies or investing in such countries, or difficulties in obtaining local financing. The occurrence of such events could have a material adverse effect on our results of operations and financial condition.

Certain markets in which we are involved are very competitive.

While the degree of our exposure to competition in the markets in which we operate varies significantly, we face intense competition in certain markets. The competitive pressure that we are exposed to may result from the following factors, among others: strong price competition, primarily caused by overcapacity, competition from low-cost producers and consolidation among our customers and competitors. New products or technologies developed by competitors may also have a material adverse impact on our competitive position.

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. Our results of operations and financial condition in the past have been adversely affected by a 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 are designed to 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, may cause volatility in raw material prices and product demand, as well as fluctuations in our prices, volumes and margins.


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Sustained high raw materials and energy 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 volatility in the price of oil that may result from instability in oil-producing regions and are directly exposed to increases in the price of benzene. We are also exposed to volatility in the price of our other principal raw materials, including natural gas. Our ability to maintain operating margins depends on our ability to pass on increases in raw material and energy prices through price increases, which can often be difficult.

A significant portion of our future cash flow will depend on the production and sale of CERs.

We expect that a significant portion of our future cash flow will be generated by the production and sale of CERs.

We cannot guarantee, however, that in the future we will be able to successfully sell or obtain satisfactory prices on the market for our CERs. Prices for CERs fluctuate and we have no control over such fluctuations.

We are the world’s leading producer of adipic acid, which we use as a raw material for the production of Polyamide 6.6. The manufacture of adipic acid produces nitrous oxide (N2O), one of the greenhouse gases identified by the Kyoto Protocol.

Within the framework of the Clean Development Mechanism established by the Kyoto Protocol, we have undertaken two projects to reduce our production of N2O, one at our Onsan (South Korea) site and another at our Paulinia (Brazil) site. The N2O emissions treatment unit at the Onsan site has been operational since September 2006. In the fourth quarter of 2006, we received from the Secretariat of the United Nations Framework Convention on Climate Change (UNFCCC) an initial allocation of 1.6 million tons of Certified Emission Reduction (CER) credits, following an independent audit of our greenhouse gas reductions. At our Paulinia site, the N2O emissions treatment unit has been operational since the end of 2006, and reached its maximum efficiency during the first weeks of 2007.

Due to the N2O emissions treatment units at these two sites, we expect to receive between 11 and 13 million tons of CER credits per year beginning in 2007 and through 2013.

The CER credits which we have received and expect to receive have value and are marketable and /or tradeable. Markets are being 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. Potential cash flows generated by the value of our CERs could have a material impact on our financial condition. In 2006, sales of CERs amounted to €22 million. Fluctuations in the price of CER credits could affect the market value of our securities.

In order to reduce the fluctuation and volatility risks associated with the emission credits market and to maximize the value of our CERs, we entered into an agreement with Société Générale Energie (a wholly owned subsidiary of Société Générale) to create a 50/50 joint venture, ORBEO, in July 2006. This joint venture will be primarily responsible for trading CERs with respect to the greenhouse gas emission reduction projects developed by us in South Korea and Brazil under the Kyoto Protocol.

Each company transferred to ORBEO exclusive rights concerning its emission credits activities: for Rhodia, a certain amount of future CERS from the South Korean and Brazilian approved projects, if such CERS are so generated, and for Société Générale Energie its skill and experience in emission credits trading. ORBEO is an investment company approved by the Credit Institutions and Investment Companies Committee (CECEI). The company is active in the CER market and oversaw a part of the forward sales of our CERs. In this context, we granted to ORBEO a guarantee of up to €100 million to cover obligations of Rhodia subsidiaries arising in connection with CER forward sales to ORBEO. We have established control systems within ORBEO that are designed to limit our exposure to risks relating to our CER activity. Global risk limits are reviewed regularly by the Board of Directors of ORBEO, and analyzed on a monthly basis by a Risks Committee. In addition, risk managers from both partners analyze ORBEO’s daily position, and report this analysis to the management of ORBEO and the management of each partner.


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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 Enterprises depend on long-term or renewable contracts with our clients and suppliers. 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. Furthermore, in certain cases, these contractual relationships may be with a relatively limited number of customers and suppliers. 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. See “Item 4. Information About Rhodia—Raw Materials,” and “Item 5. Operating and Financial Review and Prospects.”

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, antitrust 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 US securities law claims and tax disputes and other disputes with governmental agencies. We believe that there is no litigation, taken individually or as a whole, which could have a material negative impact on our business, financial condition or results of operations, other than those detailed in “Item 8. Financial Information—Legal Proceedings” and Note 31 to the Consolidated Financial Statements.

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 35 to our Consolidated Financial Statements.

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 the amount of dividend distributions require the agreement of our partners. There is a risk of disagreement or deadlock among shareholders of joint controlled entities and of decisions being made that are contrary to our interests. 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 additional capital expenditure or financing requirements or obligations to buy or sell holdings. We believe, however, that these agreements contain standard clauses and conform to standard practice in international contract and commercial law.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accuratelyreport our financial results or prevent fraud.

We have designed and continue to design our internal controls with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, so as to assure that our financial statements conform with applicable accounting principles. We design our internal controls through the use of internal resources, external consultants and, in certain cases, with joint venture partners.

Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Any failure to maintain adequate internal controls or to be able to produce accurate financial statements on a timely basis could increase our operating costs and materially impair our ability to operate our business.


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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.”

Environmental Risks

We are subject to continually evolving environmental and health and safety laws and regulations. These laws and regulations expose us to significant costs. In addition, the sector in which we operate exposes us to significant potential liability with respect to the environment.

We are subject to continually evolving environmental and health and safety laws and regulations. These laws and regulations expose us to significant costs. 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, 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 environmental, health and safety laws and regulations has resulted in ongoing costs for us.

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.

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 as well as third party claims.

In addition, we have been and may in the future be liable under various laws, including the US 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 operate several “SEVESO” installations as defined under the European Union’s “SEVESO” Directive 82/501/EC, modified by Council Directive 96/82/CE “SEVESO II”, 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. 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.


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We also remain liable for contamination at some of our sites, that were closed or divested, where we may retain environmental liability. Many of our current, former, discontinued or sold manufacturing sites have had an extended history of industrial use. As is typical for such sites, soil and groundwater contamination has occurred in the past and might occur or be discovered at these or other sites in the future. We could be found liable or incur significant costs associated with the remediation of such sites.

The 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, which could negatively affect our operating results and financial condition. 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. Similarly, current revisions to European directives concerning waste and ground pollution, could increase liabilities for us in these areas. Likewise, in France, the implementation of two decrees in 2005 may result in new costs for us. Decree no 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. A TRPP should be implemented before July 31, 2008 for approximately ten of the sites that we or one of our Enterprises operate in France. Additionally, Decree no 2005-1170 dated September 13, 2005 provides for new procedures to determine whether remediation is necessary upon the closing of a site. In some cases, these procedures may result in additional remediation costs, if after an analysis of advantages and disadvantages, such steps are deemed to be economically acceptable.

Compliance with laws and regulations related to environmental protection may limit our ability to modify or develop our facilities, prevent the production of certain products, require us to install anti-pollution equipment or incur significant remediation costs, including by way of fines and penalties. Our provision for environmental liabilities amounted to €207 million at December 31, 2006. Our estimated contingent liability for environmental liabilities before discounting amounted to €146 million at December 31, 2006. It mainly relates to our sites at La Rochelle and Pont de Claix (France), Silver Bow (Montana, United States) and Cubatao (Brazil) with respect to the possible obligations to store or remediate waste or materials off-site as well as possible containment of an internal landfill in France. No provision has been recognized, at December 31, 2006 to cover these contingent liabilities in the absence of an obligation as of such date.

Moreover, our industrial activities in most of the regions in which we operate are subject to first obtaining permits or licenses. The markets in which we operate are for the most part regulated, including among others: pesticides, packaging materials, cosmetics and pharmaceuticals. In addition, each geographic zone or country in which we operate, namely Europe (under Council Directive 67/548/CEE of June 27, 1967 and Council Regulation 793/93 of March 23, 1993), the United States, Japan and China have specific regulations concerning chemical products.

In addition, in the area of product regulation and their placement on the market, the European regulation concerning the Registration, Evaluation and Authorization of Chemicals (REACH), adopted on December 18, 2006, puts into place a European regulatory framework for the registration, evaluation and authorisation of chemical products. The implementation of the REACH Regulation will have a material financial impact on us and could affect our ability to market certain of our products in Europe.

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.


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Risks Related to our Financial Condition and Liquidity

We have a substantial amount of indebtedness.

We have a substantial amount of debt. As at December 31, 2006 we had gross financial debt (non-current plus current borrowings) of €1,949 million, or €1,657 million, net of the proceeds of the disposal of our Silicones business, which we completed on January 31, 2007. For details on our gross financial debt as at December 31, 2006, 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; and

·

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

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 indebtedness contains clauses that oblige us to respect certain financial ratios, in particular as regards our lines of credit and other contract-based indebtedness. In the event of a deterioration of our economic or financial condition, we would not be able to guarantee our ability to comply with such ratios or other financial covenants. We believe that improved financial conditions have reduced the risk of such an occurrence. 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. We cannot assure you that we would be able to do so. The breach of certain financial covenants could lead to the occurrence of an event of default and/or acceleration of repayment under certain of our financing agreements. In any such event, we cannot assure you that our assets would be sufficient to repay all of our obligations in full.

The restrictions imposed by our indebtedness could limit our operating flexibility, our ability to finance our operations in the future, and our ability to respond to industrial opportunities.

Our Revolving Credit Facility, which was not drawn at December 31, 2006, 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;

·

repay in advance certain debt tranches;

·

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 financing 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.


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Our public debt ratings can affect availability and cost of our debt financings.

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 B1 to Rhodia (Corporate Family Rating) (under review for a possible upgrade), a rating of B2 (with a stable outlook) to our Senior Unsecured Notes and a rating of B3 (with a stable outlook) to our Senior Subordinated Notes. Standard & Poor’s has attributed ratings of B+ (with a positive outlook) to our long-term debt and B (with a positive outlook) to our short-term debt. A downgrading in debt ratings would affect the availability and cost of future debt financings.

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 in France there is no legal requirement to maintain separate assets to finance such obligations. As at December 31, 2006, we had defined benefit obligations of €803 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.

We cannot be certain 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 defined benefit plans as at December 31, 2006, we had defined benefit obligations of €2,520 million, and plan assets of €1,287 million. See Note 26 to the Consolidated Financial Statements.

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. The Notes are the obligations of Rhodia S.A. exclusively. Our subsidiaries do not guarantee the payment of principal or of interest on our Notes, and the Notes are 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 our 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 our Notes. As at December 31, 2006, our subsidiaries had €445 million of gross financial debt to third parties (€169 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 our Notes.


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Dividends we received from our subsidiaries amounted to €20 million for the year ended December 31, 2006. In addition we financed the activities of our operating subsidiaries through capital contributions of €36 million in the year ended December 31, 2006. However, our subsidiaries are distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the our 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 enter into certain transactions that would not constitute a Change of Control under the terms of our Notes but would increase the amount of our outstanding indebtedness or otherwise affect the holders of our Notes.

If specific events occur that fall within the definition of a Change of Control under the terms of our Notes, we are required to make an offer to purchase all outstanding our Notes at a purchase price equal to 101% of their principal amount plus accrued and unpaid interest and additional amounts, if any, on the our Notes. We could enter into various transactions, including acquisitions, refinancing, recapitalizations or other highly leveraged transactions that do not constitute a Change of Control but could nevertheless increase the amount of our outstanding indebtedness or otherwise affect our capital structure, credit ratings or the holders of the our Notes. In such case, we would not be required to make an offer to the holders of our Notes to purchase Notes.

We may not be able to repurchase our 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 Notes. See “Item 5. Operating and Financial Review and Prospects”.

French insolvency laws differ from US 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 no. 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 at 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.


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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 US dollar, the Brazilian real and the South Korean won. 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.

The senior floating rate notes we issued in October 2006, amounts we may draw under our Revolving Credit Facility and certain of our other sources of financing bear interest at a variable rate plus a margin. We have entered into interest rate hedging transactions with respect to a portion of our variable interest rate financing. Nevertheless, we do not fully hedge our interest rate exposure. As a result, increases in applicable reference interest rates could have a material adverse effect on our financial condition and results of operations.

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 25 to the Consolidated Financial Statements.

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. US 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 US 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 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 must hold their ADSs on a record date fixed prior to the record date applicable to shareholders. ADS holders must therefore receive voting materials from the depositary sufficiently in advance of the meeting in order to give their voting 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.


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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:

·

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

·

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

·

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

·

customers and market concentration;

·

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

·

changes in economic or technological trends;

·

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

·

fluctuations in the market 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; and

·

potential environmental claims, costs, liabilities or other obligations.

ITEM 4.

INFORMATION ABOUT RHODIA

We are a global specialty chemicals company with strong technology positions in Performance Materials, Functional Chemicals and the Organics and Services clusters. Partnering with major players in the automotive, electronics, pharmaceuticals, agrochemicals, consumer care, tires, paints and coatings markets, we offer tailor-made solutions combining original molecules and technologies to respond to customers’ needs.


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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 Article L.225.1 et 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, France (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 +331-5356-6464.

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 itself of numerous businesses and refocused its strategy on life sciences and specialty chemicals. From 1990 to 1997, it divested itself of several businesses in the basic chemicals field. 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 equity convertible bonds representing 25.9% of our share capital. In December 2002, Rhône-Poulenc (which had become Aventis) proceeded with the early redemption and cancellation of these 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). Currently, neither Aventis nor Crédit Lyonnais/Crédit Agricole holds any stake in the Company. They both sold the remainder of their holdings in the Company in 2006.

Main Businesses

In 2006 we reorganized our Group structure to include the following seven enterprises:

·

Polyamide;

·

Acetow;

·

Novecare;

·

Silcea;

·

Eco Services;

·

Organics;

·

Energy Services.

Polyamide

Polyamide recorded sales of €1,922 million in 2006, representing 40% of our net sales.

With 14 production units, and associated research and development centers, we supply our clients throughout the world and design technologies and products adapted to local markets.


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Our strategy consists of focusing on Polyamide 6.6, which represents 90% of our activity. According to our estimates, Polyamide is the world’s second largest manufacturer of Polyamide 6.6. Polyamide also produces Polyamide 6, which represents about 10% of its sales, so as to assure a complete line of services to its clients.

Very few players master the processes for producing the polyamide 6.6 chain, and our know-how is recognized worldwide. The different products in the polyamide chain (adipic acid, ADN, HMD, nutrient salt, and polymers) provide a major competitive advantage in Polyamide’s markets, in its upstream intermediaries and polymers activities, as well as downstream in its engineering plastics position.

Intermediates and polymers are produced from natural gas and petrochemical derivatives (benzene, butadiene, cumene, and cyclohexane). These are the essential elements in the production of polyamides. They are also used in the manufacture of engineering plastics, and technical yarns and fibers. Polyamide offers the polymers brand Stabamid™ on the Polymers PA6.6 market, which brings new functionalities such as UV protection and antistatic functions.

Phenol, which is exclusively produced in Brazil, is the principal raw material needed to produce the resin used for plywood production, foundries (automotive industry), and abrasives. The Enterprise also produces oxygenate solvents, again exclusively in Brazil, which are used in the automotive industry (coatings, paints, metal cleaning) as well as in the industrial (flexible conditioning, coatings, adhesives, agro-chemicals, textiles and leather) or consumption goods markets (personal care and household).

Engineering plastics are used for their mechanical and thermal properties by the automotive, electrical, and electronics industries, in connectors (connectiques) and in a number of consumer and industrial goods such as sports and recreational equipment, clamps, and tools, etc. The key to its success is the globalization of its offer , and its capacity for innovation, as well as the competitiveness of its products and services.

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 functions integration. Hence, the Entreprise has launched 20 new lines of products in the past five years.

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. In 2006, in collaboration with MIT we have launched Technyl® Xcell.

With 5% average annual growth, especially in Asian markets where the Enterprise has a long historical presence, engineering plastics are a key foundation for the Enterprise ‘s growth. As a consequence, Polyamide is directing its geographical strategy towards Asia, where both the market and local demand remain on an upward trajectory. In 2006, following this strategy, we have announced the following investment projects:

·

construction of a polymerization unit on an existing platform in Onsan (South Korea), which is scheduled to become operational by the end of 2007;

·

commencement of operations at a seventh engineering plastics plant in Shanghai (China); and

·

planned construction of an HMD plant in the Shanghai region (China), which is scheduled to become operational during 2009.


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The refocusing of Polyamide on its intermediary and engineering plastics activities resulted in us decreasing our position as a producer of industrial technical fibers and textiles. Therefore in 2006, we sold our European technical fiber and yarn activities, and in March, 2007, through an irrevocable share purchase agreement, we and SNIA sold the entirety of our respective interests in Nylstar N.V., our European textile yarn 50/50 joint venture, to a bank-appointed third party that will implement Nylstar’s financial restructuring. After these divestments, we are present in this activity exclusively in Brazil.

Products

Markets

Brand names

Competitors

Intermediates and polymers

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

Stabamid™, Dioro™, Adifood™

Invista, BASF, Solutia,
Asahi, Radici

Engineering plastics

Automotive, electrical, electronics, industrial goods, consumer goods

Technyl®, Technyl Star™, Technyl® Force, Technyl® Alloy, Technyl® Xcell 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


With a high level of demand, Polyamide’s growth in 2006 was mostly due to the Enterprise developing its activities in Asia and in Engineering Plastics. Polyamide’s activities are highly sensitive to raw material price evolutions. Its ability to maintain operating margins depends on its ability to pass on increases in raw materials and energy costs through increased selling prices. In 2005 and 2006, Polyamide was able to increase its prices so as to offset raw material and energy price increases.

Acetow

Acetow recorded sales of €447 million in 2006, representing 9% of our net sales. With an 18% market share, Acetow ranks among the three leaders in the market for acetate tow, the raw material used to make cigarette filters, alongside Eastman and Celanese.

“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.

As result of its technical know-how which enables 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. This tow is supplied to tobacco companies to make cigarette filters. In 2006, Acetow launched its new, innovative vacuum pack, which it patented in 2006.

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.

Products

Markets

Brand names

Competitors

Acetate tow

Cigarettes

Acetow

Celanese, Eastman, NTC, Daicel, Mitsubishi


After two consecutive years of growth, the market stabilized in 2006, with a minor decrease in consumption in Asia. Production capacity increases in China in 2005 resulted in decreased utilization rates.

Furthermore, Acetow’s activities are highly sensitive to raw material price fluctuations and increases. The Enterprise’s ability to convert increases in the costs of raw material and energy supplies into increases in sales prices is therefore important. In 2005 and 2006, Acetow was able to increase its prices so as to offset raw material and energy price increases.


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Novecare

Novecare recorded sales revenue of €936 million in 2006, or 19% of our net sales.

Novecare provides high performance chemicals to a wide range of industries, from cosmetics and detergent products to the oil industry. The Enterprise has developed niche positions and holds leading positions on a number of markets. Thanks to its strong capacity for innovation, it has also built long-lasting relationships with its clients.

Rhodia Novecare masters the following technologies:

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 the effectiveness of active agents, or even modify surfaces. They have applications in many markets such as cosmetics, agrochemical formulations, and oil drilling.

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.

Formulations are systems with multiple components which bring complementary and synergetic characteristics to application products having multifunctional properties such as detergents, personal care products, metal treatment and agrochemicals.

In the oil drilling sector, the Enterprise has developed various new lines of products designed for the specific application conditions present in wells and which allow significant savings of both time and labor, essential during periods of very high activity. The new products include in particular guar-based lubricants and viscoelastic surfactants. They are sensitive to the environment and meet users’ logistical reliability criteria.

Further, in the phosphate derivatives sector, new ligands have been developed, namely Ionquest® 490, which had a successful market launch in the mining industry.

Novecare successfully pursued the implementation of its multi-pronged strategic growth plan consisting of innovation, partnership with clients and geographic growth. Thus, in 2006, the Enterprise made efforts to strengthen its relationships with the main players in its markets by providing original solutions adapted to their industrial and organizational specificities. In order to maintain growth, several operational excellence programs have been implemented to include new areas. Such policies have led to improved industrial competitiveness and customer service while also contributing to a more rapid and efficient management of research and development programs.

Novecare has the goal of obtaining ISO 9001/2000 certification for all of its activities worldwide, and successfully witnessed the first global audit of its operations in September 2006.


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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

Formulations

Cosmetics, detergent formulations, agrochemicals, industrial formulations

Mirasheen, Supersol, Miracare SLB

Cognis, Clariant, Zeller


Further, Novecare’s activities are sensitive to fluctuations and increases in the cost of raw materials. The Enterprise’s ability to reflect, if necessary, the increased costs of raw material and energy in its sales prices is therefore important. In 2005 and 2006, Novecare was able to do so.

In terms of investments, a series of structural improvements have been made on the Clamecy (France) site, so as to allow the potential start-up and/or increase in production capacities of “green” products, with limited effects on the environment. At Blue Island (Illinois, USA), the surfactant production facilities responsible for, among other things, Miracare® SLB, have been overhauled and upgraded. Finally, in Asia, two investment projects have been approved, one in India with the objective of increasing specialty surfactants production capacity, and the other in Wuxi, China, to enhance production capacity of specialty polymers and broaden that product line.

Silcea

Silcea recorded sales of €412 million in 2006, or 9% of our net sales.

In 2006, Silcea refocused its activities on high performance silicas and rare earths, sectors in which it holds leading positions and which constitute the Enterprise ‘s growth pillars. The silicones activity, in which the group had a small market share with a poorly developed geographical presence, has been sold to China National BlueStar Corporation.

The Silcea Enterprise combines two high value-added businesses: high performance silicas (Silica Systems) and rare earths (Electronics & Catalysis), each with its own specific technology.

Rhodia Silcea’s silicas are amorphous precipitation-generated silicas, which are obtained from a process that uses mainly sand (the most abundant mineral in the Earth’s crust). The silicas are used to reinforce polymers (specifically rubbers and elastomers) or as support for human and animal nutrition.

A worldwide leader in high performance silica technology, which Rhodia Silcea invented in the 1990s, the Enterprise has developed products that are part of numerous innovations, such as high-performance, low energy consuming “green” tires.

Rare earths are natural elements, like iron or oxygen, which are present in great quantities in the Earth’s crust. Rhodia Silcea is involved in the processes of separating and finishing these elements to a high degree of purity. Rhodia Silcea then uses them to produce high value-added compositions used in the automobile catalysis sector (reducing pollution from gas- and diesel-driven vehicles) and electronics (luminescence, for low energy light bulbs, for LCD and plasma flat screen televisions, high precision optics, etc.).


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Products

Markets

Brand names

Competitors

Products made from rare earths

Electronics: luminescence for new flat screens, low consumption bulbs, precision optics, Catalysis: automotive anti-pollution for gas and diesel vehicles

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

AMR, DKK, Chinese manufacturers, Octel, Infineon

High Performance Silicas

Tires, shoe soles, technical rubber parts, paper industry, nutrition, oral hygiene products

Siloa®, Zéosil®, Tixosil®, Tixolex®

Degussa, Huber, PPG


In 2006, Silcea continued to experience strong growth, as a result of both its innovative product offerings and favorable global demand, attributable in particular to:

·

high growth worldwide on the “HDS” high performance market, sustained by the:

·

increased use in Europe and standardization in Asia and North America of low energy consuming tires (Zeosil® for tires), and

·

substitution of antibiotics with additives formulated through HDS silicas (Tixosil®) for the animal nutrition market;

·

an automotive market that anticipates the evolution of regulatory emissions standards, thus favoring:

·

roll-out of “particle filter” technology, and of our Eolys™ soluble catalyst on a worldwide basis (as of today, more than two million vehicles are so equipped),

·

strong start-up sales for the OptalysTM line, a new generation of materials for catalytic converters, and

·

increased sales of the Actalys™ line, which coincided with the rise of Asian car manufacturers (one catalytic converter out of three in the world today contains rare earths from Rhodia);

·

the development of the plasma and LCD flat screen market and of low-energy consumption bulbs, resulting in increased demand for luminescent materials (the LuminostarTM product line).

Rhodia Silcea’s activities are sensitive to volatility and increases in the price of the raw materials. In 2006, the Enterprise was able to offset increases in raw material and energy prices by raising its sales prices.

Eco Services

Eco Services recorded sales of €230 million in 2006, representing 5% of our net sales.

Eco Services is the leading company in the North American market for sulfuric acid regeneration services with eight production units at six different sites in the Gulf region, the Midwest and the West Coast. Eco Services’ success lies in its strong emphasis on the reliability of its production, strict adherence to product specifications as well as the integrated management of its logistical network.

Sulfuric acid is used as a catalyst for refining and for the production of alkylate, which is a key element in high octane gasoline. For this reason, petroleum refiners represent the main client base for the Enterprise. As gasoline is being produced, sulfuric acid accumulates impurities, which diminish its capacity for catalysis. Once the catalysis process is finished, used sulfuric acid is delivered to the Enterprise’s facilities where such impurities are corrected in high-temperature ovens operating on natural gas. This purified acid is regenerated and thereafter returned to the refiners for reuse.


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Eco Services is in the third year of its “Reliability Strategy” program, which assures the uninterrupted supply of regeneration services to its partners, regardless of their level of demand or peaks in their production cycles. This program integrates and coordinates the Enterprise’s resources, specifically investment planning, construction, maintenance and logistics.

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


Eco Services maintains close relations with its clients through contracts that are for terms of five or more years. In 2006, the Enterprise renewed a series of contracts, and a significant part of its client base has been secured. Most of these contracts are indexed to natural gas prices. When there is a drop in natural gas prices, a certain lapse of time may be required before the price decrease is reflected in client contracts. Such was the situation in 2006, which allowed the Enterprise to realize exceptional non-recurring operating margins over a short period of time.

It is anticipated that Eco Services’ North American market will grow at the same pace as that of the North American GDP and of gasoline consumption.

Organics

Organics recorded sales revenue of €875 million in 2006, or 18% of our net sales.

In 2006, Organics absorbed Coatis and Pharma Solutions, after the transfer or sale of certain divisions (including the sale of the latex, custom synthesis, and solvents divisions). The new regrouping brings together all of our fine organic chemistry expertise.

Organics technological lines or “branch-products” are as follows:

·

diphenols, for which Organics is the world’s leading producer and the only producer to operate three different production facilities worldwide (St. Fons, France; Baton Rouge, USA; and Zhenjiang, China (production due to start in June 2007));

·

salicylicates. Organics is the world’s leading producer of acetylsalicylic acid and of aspirin;

·

fluorination, of which Organic’s is the world’s leading producer of “HF” technology, which has great development potential;

·

aliphatic isocyanats, for which Organics is the number two in Europe, and leader for products presented in a water-based solution.

Included with the above are related products and products requiring the same production skills and techniques.

Organics’ strategy consists of improving its financial performance by refocusing its activities portfolio around its leadership positions, as well as by the reorganization, restructuring and repositioning of its activities.

Organics aims to maintain both the growth and profitability of its “branch-products,” which constitute its main leverage for value creation. These branch-products are organized in “profits centers” so as to facilitate product management, from conception to production and sales, and address a number of markets.

Organics’ technologies are critical to a series of essential products in a number of industries, including flavorings and perfumes, car refinishes, active pharmaceutical products, intermediary products for the agrochemical business and polymers production.

Flavorings and Perfumes: The Enterprise is the world leader for vanillin and ethylvanillin. The entire range of products in our line benefited from strong demand throughout 2006. Organics also holds a leadership position for technologies used in these markets, due in large part to Organics’ unique capacity to supply products in compliance with all applicable regulations, including those relating to dietary hygiene and environmental requirements. The Enterprise took advantage of a restructuring in the Asian market, as well as certain industrial events that affected its competitors. Certain of Organics’ 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.


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Performance products and intermediates for agrochemicals: In a highly competitive environment, Rhodia Organics has improved its competitiveness. As the main European player in this market segment, the Enterprise has succeeded in increasing its prices in a denser local market. The arrival of Chinese and Indian competitors on this market puts further pressure on competition in Europe.

Pharmacy: Organics considers itself as the world’s leading producer of aspirin (acetylsalicylic acid) directed to analgesics bulk market. It is the world’s leading distributor of calcium phosphate for nutraceutical and pharmaceutical uses. The enterprise is also present in the paracetamol market.

Isocyanats for paints and industrial resins: The Enterprise positions itself on high added-value specialty segments, especially in the industrial coatings market, and namely the automotive industry with its “isocyanats” technology. Aliphatic isocyanats are renowned for their resistance to UV light and give an exceptional finishing and longevity to coatings. In 2006, a new generation of the Rhodocoat line was launched, with a new technology for paint formulators: polyisocyanats auto-emulsifiable in water, which offer new paints that are more environmentally friendly and which generate fewer organo-volatile components.

On the aromatic isocyanats market, Rhodia operates one of Europe’s most important production units, located in Pont de Claix, on behalf of Lyondell.

Product range

Market

Brand names

Competitors

Dyphenols and Salicylates

Flavors for the food industry and synthetic fragrances for high-end perfume, manufacturing, for detergents, and cosmetic goods, Performance products for industries: polymerization inhibitors, pigments, photo, antiozonants

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

Borregard, Jiaxing, Mitsui, UbeEastman, Goodyear

Salicylicates and associated

Pharmaceutical (aspirin, Paracetamol, calcium phosphate)

Rhodine, Rhodapap, A-Tab,
Di-Tab, Tri-Tab, Cilpharm

Jilin, Shandong Tyco, Mallinckrodt, Weifang, Budenheim, Astrarin, Yeou-Fa

Line of fluorinated components and derivative products

antiozonants, acidic catalysis, electronics, intermediate agricultural products

Acilys ™

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

Isocyanats and intermediary products

Industrial coatings: wood, metal (automotive), plastics, polyurethane foam (seat filings, mattresses…), chemistry, fine chemistry, steel industry, agri-food industry

Tolonate®Rhodocoat tm

BASF, Bayer, Degussa, Dow, Borsodchem, Zachem,Nitric acid:BASFKemira chlorine:MSSA, Albemarle


In a context of high volatility of raw materials and energy prices, Organic’s ability to reflect, if necessary, the increased costs of raw material and energy in its sales prices has been of importance.

The year 2006 was dedicated to the follow-up of the “industrial excellence” program, on the Pont de Claix site, specifically in the upstream chain, so as to obtain a high enough level of reliability, in order to guaranty the profitability of isocyanates. Important investments have been made in order to modernize chloride production, allowing Organics to break production records.


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Energy Services

Energy Services recorded sales revenue of €25 million in 2006.

Rhodia Energy Services (RES) is the Rhodia Enterprise in charge of energy supply management and production, as well as management of greenhouse gas emissions and optimization of the emission credits portfolio.

RES accounts have been published as a Rhodia Enterprise since January 2006 (prior to then, they were recorded under the unallotted portion of the Rhodia Consolidated Financial Statements).

In the energy area

·

RES has developed activities based on energy trading and the optimization of energy production assets;

·

RES manages approximately €820 million of energy purchases worldwide, both for the Group and on behalf of third parties, of which 55% represents natural gas purchases and 30% electricity. In France, RES is the second largest industrial buyer of natural gas and is among the ten largest buyers of electricity;

·

RES is a founding member of Exeltium, a purchasing consortium of heavy users of electricity in the French industrial sector.

In the emission credits area

We are the world’s leading producer of adipic acid, which we use as a raw material for the production of Polyamide 6.6. The manufacture of adipic acid produces nitrous oxide (N2O), one of the greenhouse gases identified by the Kyoto Protocol.

Within the framework of the Clean Development Mechanism established by the Kyoto Protocol, we have undertaken two projects to reduce our production of N2O, one at our Onsan (South Korea) site and another at our Paulinia (Brazil) site. The N2O emissions treatment unit at the Onsan site has been operational since September 2006. In the fourth quarter of 2006, we received from the Secretariat of the United Nations Framework Convention on Climate Change (UNFCCC) an initial allocation of 1.6 million tons of Certified Emission Reduction (CER) credits, following an independent audit of our greenhouse gas reductions. At our Paulinia site, the N2O emissions treatment unit has been operational since the end of 2006, and reached its maximum efficiency during the first weeks of 2007.

Due to the N2O emissions treatment units at these two sites, we expect to receive between 11 and 13 million tons of CER credits per year beginning in 2007 and through 2013.

The CER credits which we have received and expect to receive have value and are marketable and /or tradeable. Markets are being 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. Potential cash flows generated by the value of our CERs could have a material impact on our financial condition. In 2006, sales of CERs amounted to €22 million.

In order to reduce the fluctuation and volatility risks associated with the emission credits market and to maximize the value of our CERs, we entered into an agreement with Société Générale Energie (a wholly owned subsidiary of Société Générale) to create a 50/50 joint venture, ORBEO, in July 2006. This joint venture will be primarily responsible for trading CERs with respect to the greenhouse gas emission reduction projects developed by us in South Korea and Brazil under the Kyoto Protocol.

Each company transferred to ORBEO exclusive rights concerning its emission credits activities: for us, a certain amount of future CERs from our South Korean and Brazilian approved projects, if such CERs are so generated, and for Société Générale Energie its skill and experience in emission credits trading. Société Générale Energie paid us €30 million for our 50% interest in ORBEO, which is not repayable under any circumstances, for which we recognized a related gain on sale of €27 million. (See Note 7 to the Consolidated Financial Statements.). ORBEO is an investment company approved by the Credit Institutions and Investment Companies Committee (CECEI). The company is active in the CER market and oversaw a part of the forward sales of our CERs. In this context, we granted to ORBEO a guarantee of up to €100 million to cover obligations of Rhodia subsidiaries arising in connection with CER forward sales to ORBEO. We have established control systems within ORBEO that are designed to limit our exposure to risks relating to our CER activity. Global risk limits are reviewed regularly by the Board of Directors of ORBEO, and analyzed on a monthly basis by a risks committee. In addition, risk managers from both partners analyze ORBEO’s daily position, and report this analysis to the management of ORBEO and the management of each partner.


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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 progress in the area of industrial safety, workplace hygiene, the environment and post-consumer product monitoring are described in our environmental reports available on our website. The various programs we implement include the organization of insurance expert visits, which are aimed at evaluating the modifications and corrective actions implemented since the previous visit and are designed to allow the making of recommendations which are part of the ongoing improvement process. Further, those conclusions are analyzed by us in conjunction with our insurers. 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 insure on the market only 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 2006 was roughly €29 million. Those premiums are paid to independent insurers and reinsurers.

·

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 benefit from additional coverage of up to €800 million, in line with assessments of maximum possible loss.

·

The civil liability program covers:

·

the civil liability program covering both operating and product liability;

·

the Directors and Officers civil liability program;

·

special guaranties on environment, especially in France, where an insurance agreement for “SEVESO” classified sites has been subscribed.

·

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.

·

We have set up worldwide programs with a panel of insurers to provide all of our subsidiaries with adequate insurance coverage for major risks, respecting the highest solvability criteria. However, for economic and/or legal reasons, some countries have not joined these worldwide programs. In those cases, coverage has been provided by either local representatives of leading insurers or, for some countries, by first class local insurers.


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


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Research and Development

By the end of 2006, our R&D department consisted of 1,050 researchers located in five multi-disciplinary and multi-Enterprise centers across the world. Gross expenditure on R&D rose to €140 million, including €23 million in capitalized research and development. In 2006, we registered 127 patents.

In 2006, our R&D department focused on three main fields: materials, reinforcement and decontamination, in such areas as:

·

reducing emissions and energy consumption for the automotive industry through:

·

new catalytic materials in our OPtalysTM line, which following our Eolys III and Actalys materials and which allow a reduction of auto emissions of up to 15%, and

·

engineering plastics, which are increasingly used in the place of metal in vehicles, reducing weight and improving emissions reduction;

·

green tires, using our high performance silicates;

·

green solvent, which are biodegradable, recyclable, nontoxic, and of low volatility.

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. In 2006 as in 2005, the cost of raw materials and energy was approximately €2.5 billion.

In 2006, these costs broke down as follows:

·

18% for energy;

·

21% related to raw materials derived from benzene;

·

24% related to raw materials derived from natural gas;

·

22% related to non-petroleum linked raw materials and

·

15% related to raw materials derived from naphta and other raw materials.


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 customers in the form 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.

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.”


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With regard to our electricity supply, we are a party to the Exeltium Consortium, through which we reached an agreement protocol with EDF (Electricité de France) in January 2007, in order to ensure volumes, prices, and risk sharing.

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 available in bulk for use in industrial applications or subsequent reformation or for 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.

Our organization is based on four geographical zones. Each one of those four zones is under the authority of a Zone Director who is a member of our Executive Committee. Inside each of those four zones, Country Delegates are in charge of the main countries in which we operate, and their role is to represent Rhodia before the respective countries’ authorities. This system allows for efficient vertical communication.

Health, Safety and Environment

We have designed our own safety and environmental program (SIMSER – Safety, Environment and Health Management System) for sites of over 100 employees; this system has been certified by DP2i as being in conformity with the OHSAS 18001 referential equivalent to the ISO 14001 standard, for environmental purposes.

91.4% of our sites have been audited according to the 3RHSE and/or SIMSER+ referentials in the past three years.

As for health and safety risks, in 2006, the evaluated functions rate in the past five years has reached 84.1% to be compared with 73% in 2005.

Our Health, Safety and Environment policy (HSE) is based on a worldwide program of risk prevention and continued improvement. In 2006, we invested €59.2 million worldwide in this program, of which €24.7 million went towards health and safety, and €34.5 million 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:

·

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 ISO14001 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.

·

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


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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 health and safety amounted to €24.7 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. 95% 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 0.5 and a TF2 of 1.1, Rhodia posted its best-ever safety performance during 2006. The table below sets forth certain information relating to the accident frequency rate for the years ended December 31, 2004, 2005 and 2006.

 

Year ended December 31,

 

2006

2005

2004

TF1 (1)

0.5

0.8

0.9

TF2 (2)

1.1

1.8

2.2

TF1EE (3)

1.2

1.1

2.0

(1)

TF1: Accident Frequency Rate for Rhodia personnel resulting in work stoppage, expressed in terms of number of accidents per million hours worked.

(2)

TF2: Accident Frequency Rate for Rhodia personnel 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 37 sites worldwide, situated in France, Germany, Brazil, the USA, China, and Korea. 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 newsletter, “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 urban areas surrounding sites that pose risks and affect the remediation of such sites. After the pilot study on risks surrounding the Roussillon site, our methodology (DRC40) was approved by experts in the French Ministry of Ecology and Sustainable Development.

A total of 80% of our facilities have undergone a process-related safety study within the last five 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.


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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 (127 in 2006), 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.

In the area of product regulation and their placement on the market, the European regulation concerning the Registration, Evaluation and Authorization of Chemicals (REACH), adopted on December 18, 2006, puts into place a European regulatory framework for the registration, evaluation and authorisation of chemical products. We have been actively preparing for the implementation of the REACH Regulation for four years. We estimate using 400 commercial substances affected by REACH, which could represent more than €80 million of costs related to testing that we are likely to undertake between 2008 and 2015.

Our purchasing department together with our operational units are responsible for evaluating the impact of the REACH Regulation on our raw material supplies. Such risks may include the unforeseen use of a prohibited substance by a supplier (which would result in a prohibition to use the substance or a registration requirement for us), production stoppages concerning materials in the upstream chain and the failure by a non-European supplier to register a substance. In addition, since 2005, and in anticipation of the REACH Regulation, we implemented our red line (ligne rouge) concerning CMR (products that are Carcinogenic, Mutagenic and toxic for Reproduction), concerning the risk management and the marketing of such products.

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 property, plant and equipment at December 31, 2006 was €5,681 million. This sum includes the value of our machinery and equipment worth €4,552 million, and buildings worth €835 million. The total net value of our property, plant and equipment at December 31, 2006 was €1,760 million, approximately 34.1% of our total Consolidated Balance Sheet at December 31, 2006. This includes the net value of our machinery and equipment in an amount of €1,219 million and buildings in an amount of €279 million.

The table below sets forth the number of our principal production sites, by enterprise and geographic region, as at December 31, 2006. The sizes of our sites vary considerably in terms of employees and production capacity. Of the 77 sites, 11 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.

 

At December 31, 2006

 

Europe

North America

Latin America

Asia/Pacific

Total

Novecare

5

8

0

10

23

Silcea

8

3

1

5

17

Polyamide

6

0

5

2

13

Acetow

2

1

1

0

4

Eco Services

0

7

0

0

7

Organics

9

1

0

3

13

TOTAL

30

20

7

20

77


We own all our properties, except for a limited number of sites that are subject to leases. See Note 12 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.

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 US GAAP. For a discussion of the principal differences between IFRS and US GAAP as they relate to us, and a reconciliation of net income and shareholders’ equity to US GAAP, see Note 36 to the Consolidated Financial Statements.


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Overview of 2006

The highlights of our financial performance in 2006 include:

·

6.4% growth in net sales to €4,810 million, sustained by significant price increases in all activities;

·

operating profit of €359 million, compared with €66 million in 2005;

·

net income of €66 million, compared with a net loss of €615 million in 2005;

·

a 6.7% decline in our net debt to €1,949 million at the end of 2006.

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 2006 and 2005”and “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, net 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 US 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 2006 resulted in a decrease in our consolidated net sales of approximately €79 million and decrease in our operating income of approximately €5 million. 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 net 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 2006, 2005 and 2004.

 

2006

% change 2006/2005

2005

% change 2005/2004

2004

US dollar/euro (1)

1.26

(1.2)

1.24

0.1

1.24

Pound sterling/euro (1)

0.68

0.3

0.68

0.8

0.68

Brazilian real/euro (2)

2.73

10.1

3.04

16.4

3.64

(1)

Daily currency prices published by the European Central Bank.

(2)

Daily currency prices published by the Brazilian Central Bank against the US 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 “Item11. Quantitative and Qualitative Disclosure About Market Risk”. See also Note8 to the Consolidated Financial Statements.

Cost of Raw Materials

In 2006, our raw material costs amounted to approximately €2.5 billion compared with €2.5 billion in 2005 and €2.2 billion in 2004. 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 selling 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 selling 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 “Item4. Information About Rhodia—Raw Materials”.

Discontinued Operations

In the financial information presented below, certain business activities that were divested or are in the process of being divested are reported under discontinued operations in accordance with IFRS 5 and other applicable standards.

The principal acquisitions, divestitures and other changes in our scope of consolidation during 2006, 2005 and 2004 are set forth below. See Note 10 to the Consolidated Financial Statements.

In 2006 we completed the following disposals:

·

in January our Decorative Coatings and Adhesives business (Latex) of our former Coatis enterprise was sold to Hexion Specialty Chemicals Inc.;

·

in March we sold our development and custom synthesis for the pharmaceutical industry business of our former Rhodia Pharma Solutions enterprise to Shasun Chemicals & Drug Ltd.;

·

in December we sold our European industrial fibers and yarns business (Polyamide enterprise) to Butler Capital Partners.


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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;

·

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, our sulfuric acid 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.

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 table below sets forth the results of our discontinued operations for 2006, 2005 and 2004.

(in millions of euros)

2006

2005

2004

Net sales

654

878

1274

Other revenue

40

55

53

Goodwill impairment

(4)

(104)

(174)

Net operating expense

(684)

(989)

(1474)

Net finance costs

(13)

(23)

(10)

Profit/(loss) from discontinued operations before tax and gains/(losses) on disposals

(7)

(183)

(331)

Gains/(losses) on disposals

(30)

(24)

216

Tax effect of disposals

(8)

11

(27)

LOSS FROM DISCONTINUED OPERATIONS

(45)

(196)

(142)


The income statements for the comparative periods 2005 and 2004 have been adjusted to reflect all discontinued operations as a separate line item. As a result, individual income statement items such as net sales, and operating profit (loss) reflect only continuing operations for all years presented.

Assets Held for Sale

The main businesses in the process of being sold at December 31, 2006 were:

·

Nylstar: On March 6, 2007, we and SNIA signed an agreement for the irrevocable sale for €1 of all our shares in Nylstar to a third party designated by the banks which should initiate Nylstar’s financial restructuring;

·

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. A sale agreement was signed in February 2007 with Misa Inc., and the disposal is expected to close in the first half of 2007;

·

Silicones: We signed an agreement in October 2006 with China National BlueStar Corporation for the sale of our Silicones business, which closed in January 2007.


In accordance with IFRS 5, the previous year’s balance sheet has not been adjusted for any of these businesses.


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Recent Developments

·

On March 23, 2007 we presented a plan to close our Mulhouse Dormach site in France to our Works Council. The closure would be effective as of December 31, 2007.

·

On February 17, 2007, we signed an agreement for the irrevocable sale of our Phosphates business located in Huelva (Spain), giving rise to a disposal loss due to the contractual commitments undertaken in this transaction.

·

A tender offer for the purchase of the US dollar-denominated 10.25% senior notes maturing in 2010, initiated on February 1, 2007, resulted in our repurchase of notes representing 98.7% of the principal amount then outstanding. The expense in the 2007 financial statements should include €12 million for the accelerated amortization of issue costs and around €53 million for redemption premiums.

·

Our worldwide Silicones and Sulfuric acid businesses (les Roches site) were sold on January 31, 2007 to Bluestar, resulting in the recognition of a disposal gain in 2007 and the reduction in consolidated net debt of around €325 million.

·

On January 15, 2007, the Board of Directors approved a new bonus share plan for 448 participants (2 x 4,129,500 shares) subject to the conditions governing Rhodia’s performance and the continued employment of the participants.

Critical Accounting Estimates

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.

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 2.7 to the Consolidated Financial Statements and our method of accounting for impairment of long-lived assets is described in Note 2.9.


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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. At December 31, 2006, deferred tax assets amounted to €183 million. See Note 18 to the Consolidated Financial Statements. For further information regarding our recognition of deferred fax assets in the United States in 2006, See Note 9 to our Consolidated Financial Statements.

Our management must make judgments when determining the reliability 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 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 26 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 table below sets forth the discount rates and expected long-term rates of return for our French, US and U.K. plans as of the dates indicated.

 

As of December 31,

 

2006

2005

2004

 

France

US

U.K.

France

US

U.K.

France

US

U.K.

Discount rate

4.5%

5.5%

5.1%

4.0%

5.5%

4.9%

5.0%

5.75%

5.8%

Expected long-term rate of return

n/a

7.5%

7.5%

n/a

7.5%

8.0%

n/a

7.5%

8.0%


Defined benefit plans in France are unfunded. The liabilities relating to these employees were calculated at December 31, 2006, 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.


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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, 2006, our accrued environmental provisions and our contingent environmental liabilities amounted to €207 million and €146 million, respectively. See Note 27 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 2006 and 2005

We simplified our organizational structure to take effect as of January 1, 2006. Thus, Polyamide now includes the solvents activity of the former Coatis enterprise, and, following the sale of the latex and custom synthesis activities for the pharmaceutical industry, Organics now includes the former Coatis and Rhodia Pharma Solutions enterprises. Finally, our Energy Services business was removed from the “Corporate and Other” in which it had been included previously. Figures for 2005 have been revised based on this new organizational structure in order to facilitate year-to-year comparison.

As part of the strategic refocusing of our business portfolio, we made a number of decisions concerning the disposal of those activities that do not fall within our strategy or which were performing unsatisfactorily. Thus, the European industrial fibers and yarns business belonging to the Polyamide enterprise was sold in 2006. In addition, Silcea’s silicone activity was classified as a “discontinued operation” within the meaning of IFRS 5; the disposal of this activity was completed in early 2007. Financial and other data relating to discontinued operations as defined by IFRS 5 have accordingly been reclassified in the 2005 and 2006 income statements as proceeds of the discontinued operations.

The table below sets forth an analysis of our operating profit for 2006 and 2005:

(in millions of euros)

2006

2005

Net sales

4,810

4,521

Other revenue

451

435

Cost of net sales

(4,261)

(4,139)

Administrative and selling expenses

(518)

(523)

Research and development expenditure

(103)

(104)

Restructuring costs

(21)

(82)

Goodwill impairment

  

Other operating income/(expenses)

1

(42)

Operating profit/(loss)

359

66



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Net sales

Our net sales amounted to €4.810 million in 2006, up 6.4% compared with 2005. Changes in structure (activities that modified the Group’s range of activities but which are not categorized as «discontinued operations» within the meaning of IFRS 5, plus changes in accounting methods) had a negative impact of (1.5)%. Fluctuations in exchange rates had a positive impact of 1.7% during the year, due primarily to the appreciation of the Brazilian real against the euro.

On a basis of a constant Group structure and constant exchange rates, net sales grew due to an increase in volumes sold (responsible for €130 million), increases in selling prices (€219 million), and the negative effect of exchange rates (€(70) million) arising primarily from the transactional impact of the depreciation of the US dollar as compared with the Brazilian real.

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 2006 and 2005. See “Presentation of Financial and Other Information.”

Evolution of the net sales figure (%)

Net sales 2006

Structure

Exchange rate impact (conversion)

Volume & mix

Selling price

Exchange rate impact (transactions)

Net sales2005

Rhodia

4,810

(69)

79

130

219

(70)

4,521

Polyamide

1,922

(10)

78

102

103

(61)

1,710

Acetow

447

0

4

13

20

0

410

Novecare

936

(33)

(1)

10

27

(2)

935

Silcea

412

(18)

1

17

23

(4)

393

Eco services

230

0

(2)

0

23

0

209

Organics

875

(33)

1

(30)

28

(3)

912

Energy services

25

0

0

25

0

0

0

Corporate & Other (after elimination of inter-company sales)

(37)

25

(2)

(7)

(5)

0

(48)


The tables below sets forth the contribution by enterprise to net sales in 2006 and 2005. See Note 3.2 to the Consolidated Financial Statements for further details.

Net contribution by enterprise to Rhodia’s overall net sales

  

(in %)

2006

2005

Polyamide

40

38

Acetow

9

9

Novecare

19

21

Silcea

9

9

Eco Services

5

4

Organics

18

20

Energy Services

1

0

Corporate & Other (1)

(1)

(1)

TOTAL

100

100

(1)

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



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The table below sets forth the contribution by geographic region to total net sales and other revenue in 2006 and 2005. See Note 3.2 to the Consolidated Financial Statements for further details.

(in %)

2006

2005

France

17

19

Rest of Europe

34

33

North America

16

20

South America

15

13

Asia and other countries

18

15

TOTAL

100

100


Net sales and other revenue by geographical area are calculated according to the customers’ geographical location.

Polyamide

Polyamide’s net sales rose 12% to €1,922 million. Currency fluctuations, which resulted mainly from the appreciation of the Brazilian real against the euro, had a positive impact of €78 million.

The increase in net sales at a constant scope and exchange rate was due principally to an increase in volumes (responsible for €102 million) that arose from an increased level of demand throughout the year in the enterprise’s two key activities, intermediates and engineering plastics, and also from an increase in selling prices (€103 million) noted primarily in the intermediates branch, both of which factors offset increases in the costs of raw materials and energy and the negative transactional effect of exchange rate changes €(61)million arising primarily from the depreciation of the US dollar vis-à-vis the Brazilian real.

Acetow

Acetow’s net sales rose 9% to €447 million. Exchange rate fluctuations had a positive impact of €4 million.

The increase in net sales at a constant scope and exchange rate was due principally to an increase in volumes (responsible for €13 million) and increases in selling prices of €20 million, both of which partially offset the increased cost of raw materials and energy. Acetow also benefited from the putting into place at the beginning of 2006 of a foreign currency hedge, which allowed it to avoid the potentially negative effect of the progressive decline of the US dollar as compared with the euro in 2006.

Novecare

Net sales for Novecare were stable in 2006 compared with 2005, at €936 million. The disposal of our silicate operations (which had been conducted from the Nogent site in France) as well as the transfer of the silica oral care line of activity to the Silcea Enterprise resulted in a negative impact of €(33) million from changes in the scope of consolidation.

The increase in net sales at a constant scope and exchange rate was due principally to an increase in volume of €10 million. The phenomenon of increasing selling prices continued throughout the year, for a contribution of €27 million.

Silcea

Silcea has now refocused its activities on silica and rare earths following the sale of its silicone operations to the China National BlueStar Corporation.

Silcea’s net sales rose 4.8% to €412 million. Changes in the company’s structure, caused by the sale of the silicon sealant line of business but mitigated in part by the transfer from Novecare of its silica oral case branch, resulted in the enterprise experiencing a net negative impact of €(18) million from changes in the scope of operations.

The increase in net sales at a constant scope and exchange rate was due principally to an increase in volume relating to the enterprise’s two main businesses, silica and lanthanide, responsible for €17 million, and increases in selling prices, responsible for €23 million, both of which acted to offset increased energy costs.


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Eco Services

Eco Service’s net sales rose 10% to achieve €230 million. Fluctuations in exchange rates, resulting from the depreciation of the US dollar compared with the euro, accounted for a slightly negative impact of €(2) million.

The increase in net sales at a constant scope and exchange rate was due principally to increases in selling prices (€23 million) that had been put in place to offset the increased cost of natural gas at the beginning of 2006.

Organics

Net sales by Organics were down (4.1)% at €875 million. The sale of the coolant unit and changes to the methods of accounting applied to sales of certain intermediate products had a negative impact of €(33)million.

Net sales were slightly down at a constant scope and exchange rate. Organics’ strategic priority is to improve its profit margins, and application of this strategy meant that the company ceased certain operations that were insufficiently profitable. Discontinuation of these activities played a role in volumes declining (€(30) million negative impact) but most of this drop was offset by selling price increases (€28 million). Finally, the transactional effect of exchange rate changes amounted to €(3) million.

Energy Services

Energy Services is a Rhodia Group enterprise created on January 1, 2006. Its activities are described in Item 4 “Information about Rhodia”.

Its total net sales for 2006 were €25 million, consisting mainly of €22 million of net sales of Certified Emissions Reduction (CER) credits received in December 2006.

Operating expenses

The following table shows financial data relating to our operating expenses for the periods ending December 31, 2005 and December 31, 2006:

(in millions of euros)

At December 31,

 

2006

2005

% change

Cost of net sales

(4,261)

(4,139)

2.9%

Administrative and selling expenses

(518)

(523)

(1)%

Research and development expenditure

(103)

(104)

(1)%

Restructuring costs

(21)

(82)

(74.4%)

Other operating income/(expenses)

1

(42)

-

TOTAL

(4,902)

(4,890)

0.2%


Cost of net sales

Cost of net sales increased by €122 million, an increase of 2.9%, rising from €4,139 million in 2005 to €4,261 million in 2006.

This variation arises from the three following factors:

·

the benefit of the net positive effect on the Group evaluated at €43 million resulting primarily from the sale of the silicon sealant and Silicate operations (the Nogent, France site);

·

the effect of unfavorable conversion rates, valued at €68 million, relating to the appreciation of the Brazilian real against the euro; and

·

an increase of €97 million in variable costs, which was due principally to increases in the costs of raw materials and energy.


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Administrative and selling expenses

Administrative and selling expenses were down slightly, by €5 million as compared with 2005. This decline was due principally to the net positive effect on the Group of the sale of the silicon sealant line, though this was partially offset by the effect of unfavorable conversion rates tied primarily to the appreciation of the Brazilian real against the euro (responsible for €(6) million).

Research and development expenditures

Research and development expenditures remained stable at €103 million in 2006, as compared with €104 million in 2005.

Restructuring costs

Restructuring and reorganization measures continued in 2006. Their total cost in 2006 was €21 million, as compared with €82 million in 2005, when important restructuring programs were implemented. The measures undertaken in 2006 were primarily designed to complement the plans already underway since the end of 2003, but they also included certain new measures aimed at improving administrative productivity.

Note 27.3 to the Consolidated Financial Statements provides detailed information about restructuring costs.

Other operating income and expenses

Other operating income was €1 million in 2006, as compared with other operating expenses of €(42) million in 2005.

Of the capital gains and losses recorded in 2006, €27 million corresponds to sale of 50% of the shares of Orbeo to Société Générale Energie, a wholly-owned subsidiary of Société Générale. Orbeo sells credits issued in the context of the greenhouse gas reduction programs developed by Rhodia. In 2005, the increases and decreases in value recognized for accounting purposes related principally to the following transfers: coolant operations to the United Kingdom and Mastic Etanchéité Europe and distribution subsidiaries to the Middle East. Expenses relating to environmental issues are analyzed in Note 27.4 to the Consolidated Financial Statements. They accounted for €(4) million in 2006, compared with €(27) million in 2005.

The remaining items under other operating income and expenses for 2006 consisted primarily of provisions relating to accounts receivable.

See Note 7 to the Consolidated Financial Statements for further information.

Operating profit/(loss)

Rhodia’s operating profits amounted to €359 million in 2006, compared with €66 million in 2005, an increase of €293 million.

This strong increase was due principally to rises in selling prices totaling €207 million. This more than offset the negative impact of €(101) million resulting from increases in raw material and energy costs as well as the negative impact of €(66) million arising from the effects of currency conversions on price. 2006 was a strong year for volumes, which was responsible for a net positive effect of €97 million compared with 2005. Lastly, the continuation of our efforts to reduce fixed costs resulted in gross savings €66 million compared with 2005. This offset the inflation experienced in our fixed costs in the amount of €(40) million, for an overall savings and positive effect of €26 million on operating profit.


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The improvement was also due to:

·

a €15 million decrease in depreciation and amortization charges, which went from €315 million in 2005 to €300 million in 2006. This drop resulted from the disposal of the Group’s silicon sealant, silicate, and coolant activities;

·

a €4 million decrease in the loss of value recognized for accounting purposes in 2006 as compared with 2005;

·

a €61 million reduction in restructuring costs; and

·

a €43 million improvement in other operating income and expenses.

Polyamide

Polyamide’s operating profits for 2006 were €172 million as compared with €135 million in 2005, or an increase of €37 million.

This increase was due mainly to:

·

sharp rises in selling prices totaling €98 million. This more than made up for the negative impact of €(37) million resulting from increases in raw material and energy costs as well as the negative impact of €(58) million arising from the effects of currency conversions on price;

·

favorable market conditions, especially in the nylon intermediates and engineered plastics sectors, as well as rising demand in Asia and Latin America. The company thus saw a strong increase in its volumes, which was responsible for a positive impact of €45 million in 2006. Given the strong level of activity and the starting up of new production facilities, fixed costs had a negative impact of €(8) million;

·

an increase of €10 million in other operating expenses, corresponding to provisions for depreciation in the value of accounts receivable; and

·

a €7 million decrease in the restructuring expenditures, not counting depreciation and amortization charges and loss of value.

Acetow

The operating profits for Acetow were €78 million in 2006, compared with €65 million in 2005, or an increase of €13 million.

The increase in selling prices had a positive impact of €19 million, which more than made up for the negative impact of €(14) million caused by increases in raw material and energy costs. Increased volumes were responsible for another positive impact of €2 million. Operating profits also benefited from a foreign currency hedge put in place at the start of the year in order to limit the potentially negative consequences of a depreciation of the US dollar as compared with the euro.

In addition, depreciation and amortization charges declined €4 million in 2006 compared with 2005.

Novecare

Novecare saw operating profits of €76 million in 2006 as compared with €53 million in 2005, namely an increase of €23 million.

This increase is primarily the result of increased selling prices, which accounted for a positive impact of €26 million and which more than offset the negative effect of €(23) million from increases in the cost of raw materials and energy, as well as the negative currency conversion impact on selling prices of €(2) million. In addition, in 2006 Novecare continued its program aimed at reducing its fixed expenses, resulting in savings of €16 million.

Restructuring costs decreased €10 million as compared with 2005. During 2005 Novecare implemented significant restructuring initiatives, and in 2006 they permitted the company to reduce significantly its fixed costs.

Silcea

Silcea’s operating profits in 2006 were €33 million, which represents an increase of €31 million over 2005’s operating profit of €2 million.

This improvement resulted principally from increased selling prices, which were responsible a positive impact of €21 million and which more than offset the negative impact of €(13) million attributable to increases in the cost of raw materials and the negative impact of €(3) million caused by the effect of currency conversion on selling prices. Silcea also benefited from increasing demand in the high performance tire sector, by growth in the auto catalysis market, and by growing demand for highly technical products on the electronics market. Increased volumes in these fields had a positive impact of €11 million.

Changes in the enterprise structure had a positive impact of €10 million, due to the loss in value recognized in 2005 relating to the sale of the silicon sealant activity.

Other operating revenues increased €3 million, restructuring costs decreased €2 million, and depreciation and amortization charges decreased €2 million.


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Eco Services

The operating profits of Eco Services were €58 million in 2006, compared with €36 million in 2005, representing an increase of €22 million.

The majority of this growth comes from increased selling prices, which were responsible for €20 million, and from a small growth in volumes (€3 million). In 2006, Eco Services was able to take advantage of selling price indexing with certain of its clients. This mechanism provides for selling prices to be adjusted as a function of the evolving price of natural gas, although there is a delay before the price adjustments are applied. In a context of progressively decreasing natural gas prices in the United States since the end of 2005, the company has benefited from the delay in the application of selling price adjustments.

Organics

Organics operating profits were significantly improved in 2006, attaining €31 million, which is to be compared with the loss of €(23) million experienced in 2005.

This sharp improvement was due principally to a very significant reduction in fixed costs, in the amount of €47 million, which followed the restructurings and reorganizations underway at the company. In addition, the improvement represents the effects of the company’s plans targeting improved industrial reliability. Moreover, selling price increases made a positive contribution, in the amount of €26 million, and this more than offset the increased costs of raw materials and energy, which had a combined negative impact of €(15) million, and the negative effect of currency conversion on selling prices, which was responsible for €(3) million. With the goal of improving its profit margins, Organics discontinued certain lines of activity that were insufficiently profitable; this led to a drop-off of volumes amounting to €(5) million.

The improvement was also due to:

·

the non-reoccurrence in 2006 of the negative effect of changes in group structure that had been experienced in 2005 primarily as a result of the sale of the coolants line, which accounted for €(28) million in 2005, and from transfers among enterprises;

·

the decrease of €16 million in depreciation and amortization charges, half of which comes from the effect in 2005 of a loss of asset value in the amount of €8 million and from the end of depreciation of certain assets;

·

the decrease of €9 million in restructuring costs as compared with 2005, which was the year during which Organics implemented important restructuring programs that allowed the company to make significant reductions in its fixed costs in 2006.

Energy Services

In 2006, the operating profits of Energy Services rose €63 million to €76 million, up from the €13 million achieved in 2005.

This increase is primarily attributable to:

·

volumes responsible for €31 million, arising primarily from the sale of Certified Emissions Reduction (CER) credits received in December 2006 and also from an increase in traditional activities connected with reducing the costs of access to energy;

·

an exceptional gain of €27 million, linked to the sale of 50% of the shares of Orbeo to Société Générale Energie, a wholly-owned subsidiary of Société Générale. Among other operations, Orbeo sells credits issued in the context of the greenhouse gas reduction programs developed by Rhodia.

The fixed costs of Energy Services rose and represent a negative impact of €(4) million. This increase is due to the putting into place of the organizational structure of this new company.


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Net finance costs

Net finance costs amounted to €315 million in 2006, compared with €363 million in 2005, and €328 million in 2004. These amounts take into account the finance costs of pension obligations and other similar benefits, minus the expected return on the invested assets for a total of €34 million in 2004, €43 million in 2005, and €28 million in 2006.

In 2006, costs of €7 million relating to the discounting of environmental provisions were taken into account, compared with €12 million in 2005. These costs relate primarily to long-term environmental provisions established at the end of 2004.

In 2006, gross interest expense on borrowings declined due to the partial early redemption of high yield notes in January 2006 from funds raised during the December 2005 capital increase (see Note 8 to the Consolidated Financial Statements).

The remaining finance costs are principally related to refinancing activities.

Finance costs in 2006 included €70 million in redemption premiums related to the early repayment of €720 million and $197 million of high yield notes, as well as €7 million of accelerated amortization of issue costs and high yield note premiums relating to the redeemed portion of the notes.

In 2005, finance costs included €79 million of costs relating to Group refinancing activities, broken down as follows: €39 million relating to redemption premiums for the early repayment of €128 million and $310 million of high yield notes; €15 million of accelerated amortization of the issue costs for the high yield notes, relating to the repaid portion of the notes; €17 million of accelerated amortization of the costs of putting into place the mid-term line of credit (RFA), following the setting up of a new syndicated line of credit (RCF) on June 17, 2005; and, finally, €8 million relating to the redemption premium relating to early repayment of the EMTN notes maturing in 2006.

Foreign exchange gains or losses

In 2005 and 2006, foreign exchange gains or losses consisted essentially of gains and losses on unhedged US dollar-denominated high yield notes.

Income tax expense

In 2006, the Group recognized an income tax benefit of €57 million, compared with income tax expense of €53 million recorded in 2005.

This benefit resulted primarily from an income tax asset recognized in the United States in 2006 for a net amount of €84 million. This included €99 million related to the recognition of previously unrecognized deferred tax assets whose recovery during future years was first considered probable in 2006. Current income tax expense amounted to €40 million in 2006.

In 2005, the income tax expense was made up of a current tax expense of €21 million and of a deferred tax expense of €32 million, the latter of which consisted mainly of a €(24) million write-off of 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.


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Loss from discontinued operations

Our losses from discontinued operations amounted to €45 million in 2006 compared with €196 million in 2005.

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

Minority interests

Minority interests amounted to €4 million in 2006 compared with €1 million in 2005.

Net income (loss) attributable to the equity holders of Rhodia

The net income attributable to equity holders of Rhodia amounted to €62 million, compared with a net loss of €(616) million in 2005, including income from continuing operations of €111 million compared with a loss of €(419) million in 2005, and loss from discontinued operations of €(45) million compared with €(196) million in 2005.

Consolidated Results of Operations for 2005 and 2004

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

(in millions of euros)

2005

2004

Net sales

4,521

4,184

Other revenue

435

424

Cost of net sales

(4,139)

(3,941)

Administrative and selling expenses

(523)

(455)

Research and development expenditure

(104)

(116)

Restructuring costs

(82)

(168)

Goodwill impairment

-

(18)

Other operating income/(expenses)

(42)

(47)

Operating profit/(loss)

66

(135)


Net sales

Our net sales amounted to €4,521 million in 2005, up 8.1% compared with 2004, primarily due to the increase in the net sales of Polyamide and, to a lesser extent, Silcea. The growth in our net sales in 2005 was driven essentially by selling price increases, partially offset by the impact of currency fluctuations. These fluctuations were essentially due to the appreciation of the Brazilian real against the euro. Demand levels remained generally favorable throughout 2005, except in the phosphorous derivatives and adipic acid markets. The negative impact of changes in the scope of continuing operations were not significant.


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The table below set forth the contribution by enterprise to total net sales in 2005 and 2004:

Net contribution to Rhodia net sales by business

  

(as %)

2005

2004

Polyamide

38

35

Acetow

9

9

Novecare

21

22

Silcea

9

10

Eco Services

4

5

Organics

20

20

Corporate and Other (1)

(1)

(1)

TOTAL

100

100

(1)

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


The table set forth the contribution by geographic region to total net sales and other revenue in 2005 and 2004. See Note 3.2 to the Consolidated Financial Statements for further details.

(as %)

2005

2004

France

19

16

Rest of Europe

33

37

North America

20

19

South America

13

13

Asia and other countries

15

15

TOTAL

100

100


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

Polyamide

Polyamide net sales rose 16% to €1,710 million. Currency fluctuations had a significant impact due, in particular, to the appreciation of the Brazilian real against the euro, as did price increases.

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 slight decline in volumes.

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 US dollar hedge on export net sales than in 2005.

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 US 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.


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Silcea

Silcea net sales slightly decreased to €393 million. Selling prices were raised across all businesses, partially offsetting the increase in raw material and energy costs. Changes in the scope of continuing operations had a negative impact due to the sale of the sealant business.

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 7% to €912 million. Changes in the scope of continuing operations and currency fluctuations contributed slightly to the increase of net sales.

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

Operating expenses

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

(in millions of euros)

For the years ended

 

2005

2004

% change

Cost of net sales

(4,139)

(3,941)

5.0

Administrative and selling expenses

(523)

(455)

14.9

Research and development expenditure

(104)

(116)

(10.3)

Restructuring costs

(82)

(168)

(51.2

Goodwill impairment

(16)

 

Other operating income/(expenses)

(42)

(47)

(10.6)

TOTAL

(4,890)

(4,743)

3.1


Cost of net sales

Cost of net sales increased by €198 million from €3,941 million in 2004 to €4,139 million in 2005. This significant cost increase reflects oil derivatives, particularly benzene, benzene derivatives and natural gas price trends.

Administrative and selling expenses

Administrative and selling expenses rose by €68 million compared with 2004 mainly due to the following factors:

·

the appreciation of the Brazilian real by 20% against the euro;

·

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

·

Sarbanes-Oxley project costs.

Research and development expenditure

Research and development expenditure fell €12 million due to measures to optimize R&D organization and efficiency.


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Restructuring costs

Restructuring and reorganization measures continued in 2005, totaling €82 million, and mainly involved industrial streamlining programs and operating performance improvement plans. This should be compared with the €168 million cost incurred in 2004, the first year of our recovery plan initiated in October 2003.

The new measures in 2005 essentially corresponded 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.

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.

Other operating income and expenses

Other operating income and expenses dropped by 10.6%, as a result of a decrease in environment-related expenses from €69 million in 2004 to €27 million in 2005.

Operating profit/(loss)

Operating profit amounted to €66 million in 2005, compared with a loss of €135 million in 2004, an increase of €201 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 (net of the impact of exchange rate fluctuations), offset increases in the costs of goods sold primarily related to raw material and energy price increases. In addition, the rise in volumes had a favorable impact compared with the previous year. Finally, we pursued our fixed cost-cutting measures. However, a percentage of these savings was offset by the impact of inflation on fixed costs and the increase in project costs and other items.

·

The substantial decline in restructuring costs from €168 million in 2004 to €82 million in 2005 as discussed above in “—Restructuring costs”.

·

A decrease in depreciation and amortization charges from €446 million in 2004 to €323 million in 2005 (excluding impairment of assets relating to restructuring operations).

·

A slight decline in other operating income and expenses from €(47) million in 2004 to €(42) million in 2005.

Polyamide

Operating profit amounted to €135 million compared with €78 million in 2004, an increase of €57 million. This results mainly from the rise in selling prices, which more than offset the increase in raw material and energy prices. 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. The adipic acid market encountered a difficult year due to the start-up of a new rival production unit in China and contributed to a small decline in volumes. Finally, Polyamide pursued its fixed cost-cutting measures. Depreciation and amortization charges declined. The Brazilian real appreciated against the euro and had positive impact on operating profit.


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Acetow

Operating profit amounted to €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 amounted to €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.

Novecare

Operating profit fell 27% to €53 million in 2005, compared with €72 million in 2004. 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 US 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 amounted to €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.

Silcea

Operating profit amounted to €2 million in 2005, compared with €24 million in 2004, a decline of €22 million. The decline in operating profit was mainly due to the impact of the disposal of the silicones sealant business which did not qualify for discontinued operations treatment under IFRS 5 resulting in both a small negative scope effect and a capital loss on disposal. In the remaining businesses Silica Systems and Rare Earths selling prices were raised to offset the increase in raw material and energy costs.

Eco Services

Operating profit amounted to €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 strong improvement in operating profit, with an operating loss of €23 million, compared with an operating loss of €176 million in 2004. All activities in Organics increased prices to offset rises in raw material and energy costs. Volumes rose overall due to improved reliability in the Pont de Claix plant. Organics continued to benefit from the fixed cost-cutting measures initiated in 2003. The following were also factors; the substantial decline in restructuring costs; a significant decline in depreciation and amortization charges (excluding asset impairment relating to restructuring operations); and the sharp rise in other operating income and expenses due to the gain recognized in 2005 on the disposal of the Coolants activity in the UK.

Net finance costs

Net finance costs amounted to €363 million in 2005, compared with €328 million in 2004. 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.


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Foreign exchange gains or losses

A foreign exchange loss of €69 million was recognized in 2005, compared with a foreign exchange gain of €68 million in 2004. The loss stemmed mainly from the appreciation of the US dollar against the euro at the end of 2005, resulting in unrealized losses on unhedged US dollar-denominated debt.

Share of profit of associates

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

Income tax expense

Income tax expense for 2005 amounted to €53 million, compared with €98 million in 2004. In 2005, the income tax expense comprised a current tax expense of €21 million and a deferred tax expense of €32 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.

Losses from discontinued operations

Our losses from discontinued operations amounted to €196 million in 2005 and €142 million in 2004.

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

Minority interests

Minority interests amounted to €1 million in 2005 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 in 2005, compared with a €641 million loss in 2004, including losses from continuing operations of €419 million in 2005 compared with €490 million in 2004, and losses from discontinued operations of €196 million compared with €142 million in 2004.

Consolidated Balance Sheet for 2006, 2005 and 2004

Working capital

Operating working capital (defined as trade accounts receivable plus inventories less trade accounts payable) amounted to €662 million at December 31, 2006, compared with €670 million at December 31, 2005 and €720 million at December 31, 2004. The ratio of operating working capital needs to net sales was 12.3% at the end of 2006 compared with 10.8% at the end of 2005 and 12.5% at the end of 2004.


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Consolidated net debt

At December 31, 2006, long-term financial debt amounted to €2,022 million, while short-term financial debt (short-term borrowings plus the short-term portion of long-term debt) amounted to €413 million.

Consolidated net debt (defined as non-current and current borrowings less cash and cash equivalents and other current financial assets) was reduced by €140 million in 2006 to €1,949 million at December 31, 2006, compared with €2,089 million at December 31, 2005 and €2,354 million at December 31, 2004.

This reduction in consolidated net debt was due principally to: net cash from operating activities, in the amount of €102 million, (including €80 million of restructuring-related expenses); asset disposals completed during the year in the amount of €140 million; the reclassification of the debt of Silicones as a liability to be disposed of in the amount of €88 million; a positive translation effect of €75 million; and an employee offering for €36 million. This generation of cash from operating activities was not sufficient to cover capital expenditures, which amounted to €311 million.

The decrease in consolidated net debt in 2005 was essentially due to the capital increase carried out on December 20, 2005 for a net amount of €576 million

Retirement benefits and similar obligations

Our obligations were measured at December 31, 2006 in accordance with amended IAS 19 Employee Benefits. Retirement obligations include retirement payments, including complementary retirement programs and early retirement payments, severance pay, and the like. Other benefits granted to employees are mainly comprised of bonuses related to employee seniority in France, the US and the UK. Non-current obligations recognized as liabilities in the balance sheet amounted to €1,227 million at December 31, 2006, compared with €1,269 million at December 31, 2005. A detailed description of the analysis of retirement benefits and similar obligations is presented in Note 26 to the Consolidated Financial Statements.

Provisions

Provisions classified as non-current liabilities amounted to €306 million at December 31, 2006, compared with €297 million at December 31, 2005 and €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; and

·

other provisions.

Restructuring provisions are analyzed in detail in Note 27.3 to the Consolidated Financial Statements and environmental provisions are discussed in Note 27.4 to the Consolidated Financial Statements.

Other non-current liabilities

Other non-current liabilities amounted to €43 million at December 31, 2006, compared with €46 million at December 31, 2005 and €51 million at December 31, 2004.


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Shareholders’ equity

Shareholders’ equity was negative in the amount of €(628) million at December 31, 2006, compared with a negative amounts of €(666) million at December 31, 2005 and €(521) million at December 31, 2004.

On June 30, 2006, we issued 27,469,633 new shares for cash, as well as 215,193 stock purchase warrants intended for employees of the Group’s subsidiaries based in Germany. The gross proceeds of the issuance were €37 million. The new shares were issued at a price per share of €1.35 (€1.59 for the Group’s employees based in Germany), with a per share premium of €0.35 (€0.59 for the employees of Group companies located in Germany). The new shares were entitled to full rights as from January 1, 2006. The expenses associated with the transaction, which amounted to €1.2 million, were deducted from the share premium.

The stock purchase warrants were issued without consideration, and each gives the right to purchase a new share for the price of €1.59. The warrants are exercisable until July 1, 2011.

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, 2006, the share capital consisted of 1,204,186,174 shares.

Consolidated Statement of Cash Flows

The table below sets forth our consolidated cash flows for 2006, 2005 and 2004.

(in millions of euros)

2006

2005

2004

Net income (loss)

62

(616)

(641)

Operating income before changes in working capital

244

210

105

Net cash from operating activities

102

138

7

Net cash from investing activities

(170)

(211)

297

Net cash from financing activities

(376)

343

(486)

Effect of foreign exchange rate changes

(9)

38

(4)

Net increase/(decrease) in cash and cash equivalents

(453)

308

(186)


Net cash from operating activities

Net cash from operating activities amounted to €102 million in 2006, €138 million in 2005 and €7 million in 2004.

This performance is due in part to the €34 million increase in the net cash from operating activities before changes in working capital, which rose from €210 million in 2005 to €244 million in 2006, and also in part to an increase in changes in working capital, which went from an increase of €72 million in 2005 to an increase of €142 million in 2006. The increase in the working capital requirements was principally due to the non-repetition of 2005’s performance in terms of inventory management. Inventory had fallen to a record low at the end of 2005.

Net cash from investing activities

Net cash from investing activities accounted for an outflow of €170 million in 2006, as compared with an outflow of €211 million in 2005 and an inflow of €297 million in 2004.


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The factors behind this reduction of €41 million were:

·

an increase of €9 million in acquisitions of property, plant, and equipment and of €16 million in acquisitions of other assets of a non-recurring nature (in particular, capitalized development expenditures went from €13 million in 2005 to €23 million in 2006);

·

a strong increase of €89 million in income realized from the disposal of assets, which amounted to €140 million in 2006, as compared with €51 million in 2005. In 2006, we completed in particular the disposal of our latex operations to Hexion Specialty Chemicals Inc, of our development and custom synthesis for the pharmaceutical industry business to Shasun Chemicals & Drug Ltd., and of our European industrial fibers and yarns business to Butler Capital Partners;

·

a decrease of €23 million in repayment of loans and financial investments, which had generated a positive cash flow of €24 million in 2005 compared with €1 million in 2006.

The €508 million change in 2005 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 from financing activities

Net cash from financing activities resulted in an outflow €376 million in 2006, compared with a €343 million inflow in 2005 and a €486 million outflow in 2004.

This strong drop in financing cash came mainly from:

·

a decrease in the amount of funds raised by share capital increases. The December 20, 2005 transaction, which raised €576 million exclusive of costs, exceeded the June 30, 2006 transaction by €540 million, as the latter operation raised only €36 million exclusive of costs; and

·

higher repayments in 2006 of loans and non-current borrowings. In 2006 we continued repaying outstanding debt securities (principally high yield notes) in a total amount of €1,402 million, compared with repayments of loans and non-current borrowing of €1,285 million in 2005. At the same time, only €94 million of current financing was reimbursed, compared with €176 million of reimbursements in 2005.

This increase in financing resources in 2005 stemmed 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.

Capital expenditure

Capital expenditure (purchases of property, plant and equipment, purchases of other capitalized assets, and variation of capital expenditure providers) amounted to €311 million in 2006. These capital expenditures consisted principally of acquisitions of property, plant and equipment for an amount of €278 million less the variation of capital expenditure providers for an amount of €15 million. Acquisitions of other intangible assets amounted to €48 million, and related principally to software acquisition and installation costs and development costs.


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62% of the costs incurred for the acquisition of property, plant and equipment and intangible assets related to assets located in Europe. This amount includes in particular investments in computer systems made in Europe and deployed on a worldwide basis, and R&D investments.

Capital expenditure in 2006 can be broken down as follows:

·

Approximately half is dedicated to the development of the Group’s activities.

Projects in Asia represented 70% of development expenditures, including principally:

·

the construction of a diphenol unit in Zhenjiang (China);

·

the construction of a polymerazation unit at our Onsan (South Korea) site;

·

the construction of an engineering plastics unit in Shanghai (China).


The principal European projects are:

·

the Tow cube packaging patented by Rhodia Acetow;

·

production capacity increases for Rhodia Silcea and Rhodia Organics.

·

The other half related to capital expenditures for the maintenance of our productive assets.

Capital expenditure for 2007 is expected to amount to approximately €330 million.

Liquidity and Capital Resources

Debt refinancing

As a result of our previous refinancing, and our issuance of €1,100 million in high yield notes due 2013, which permitted us to refinance in part our notes due 2010, we believe that we can meet our liquidity requirements for at least the next twelve months.

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 25 to the Consolidated Financial Statements.

Capital increase

In 2006 we completed an employee share offering.

On June 30, 2006, we issued 27,469,633 new shares for cash, as well as 215,193 stock purchase warrants intended for employees of the Group’s subsidiaries based in Germany. The gross proceeds of the issuance were €37 million. The new shares were issued at a price per share of €1.35 (€1.59 for the Group’s employees based in Germany), with a per share premium of €0.35 (€0.59 for the employees of Group companies located in Germany). The new shares were entitled to full rights as from January 1, 2006. The expenses associated with the transaction, which amounted to €1.2 million, were deducted from the share premium.

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.


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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 24.1 to the Consolidated Financial Statements. At and prior to December 31, 2006, we have complied with all applicable financial covenants related to the RCF.

We are currently negotiating a new revolving credit facility to replace the RCF.

High yield notes

Using €576 million of net proceeds from our December 2005 capital increases on January 24, 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.

The principal amounts reimbursed amounted to $310 million and €128 million. The early redemption resulted in the payment of a redemption premium in a total amount of approximately €39 million. Because an irrevocable redemption notice was issued in December 2005, the notes reimbursed and the related premium were accounted for as current borrowing at December 31, 2005.

We continued the refinancing of our outstanding debt securities in October 2006 through (i) the issuance of €1,100 million high yield notes due October 15, 2013, bearing interest at 3 month Euribor plus 2.75% and (ii) the early repurchase of the following notes:

·

99.4% of the outstanding principal amount of our euro-denominated 10.5% Senior Notes due 2010 that remained outstanding after the early redemption of January 24, 2006;

·

86.1% of the outstanding principal amount of our euro-denominated 8% Senior Notes due 2010;

·

99.5% of the outstanding principal amount of our dollar-denominated 7.625% Senior Notes due 2010.

The total principal amount repurchased amounted to $197 million and €720 million, together with a premium of €70 million. The transaction allowed us to extend our maturity profile, provided us greater flexibility, in particular with the possibility of repurchasing the new high yield debt issuance following the one-year anniversary of its issuance, and reduced our interest expenses.


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Finance leases

In 2006, finance lease debts decreased by €106 million, due principally to the reclassification of debts of subsidiaries in the process of being disposed into liabilities held for disposal, for a total amount of €91 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%, maturing in May 2006 in the principal amount of €54 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 amounted to approximately €246 million and the principal amount of the Notes remaining in circulation amounted to approximately €54 million. The early redemption premium amounted to approximately €8 million.

Asset securitization programs

We and certain of our subsidiaries have entered into multi-year asset securitization agreements and assignment of trade receivables agreements pursuant to which they sell their uncollected trade receivables on a monthly or quarterly basis to financial institutions. These sales are performed either on a recourse basis or directly to special purpose entities controlled by Rhodia which retains the risks and rewards incident to the ownership of the disposed assets. As a result, these receivables appear on our balance sheet.

We arranged two securitization programs in 2005 one in Europe and the other in North America. 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.

Neither of the two European and North American securitization programs contain financial covenants based on Rhodia’s financial performance. They do, however, provide for cross‑acceleration upon the acceleration of debt incurred under the Revolving Credit Facility or any other debt of Rhodia in an amount in excess of €10 million. The pan-European program also provides for cross acceleration in the event of enforcement of security provided by Rhodia S.A. to the lenders under the Revolving Credit Facility or any other financing arrangement.

At December 31, 2006, the amount of uncollected trade receivables sold by Group companies as part of the securitization programs and assignment of trade receivables agreements amounted to approximately €375 million, for which we received a net financing of approximately €246 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 amounted to €106 million at December 31, 2006.


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Guarantees

We have entered into guarantees for certain consolidated and unconsolidated subsidiaries and affiliates. At December 31, 2006, guarantees for our unconsolidated subsidiaries amounted to €10 million.

Commercial paper

At December 31, 2006, our outstanding commercial paper amounted to €1 million.

Commitments

The table sets forth the maturity schedule for our borrowings at December 31, 2006. See Note 24 to the Consolidated Financial Statements.

At December 31, 2006 (in millions of euros)

Total

2007

2008

2009

2010

2011

After 2011

Maturity

2006 EUR Senior Notes

1,074

     

1,074

Oct. 2013

2003 USD Senior Notes

2

   

2

  

June 2010

2003 EUR Senior Notes

97

   

97

  

June 2010

2004 USD Senior Notes

307

   

307

  

June 2010

2004 EUR Senior Notes

1

   

1

  

June 2010

2003 USD Senior Subordinated Notes

225

    

225

 

June 2011

2003 EUR Senior Subordinated Notes

234

    

234

 

June 2011

Other Notes

25

  

25

   

Mar. 2009

Bilateral credit facilities

147

138

5

3

1

  

2007-2010

Commercial paper

1

1

     

1-3 months

Assignment of receivables

246

234

7

5

   

2007-2009

Finance lease debts

23

13

3

4

1

1

1

2007-2014

Other debts

28

2

2

1

1

5

17

2007-2014

Accrued interest payable

25

25

      

TOTAL

2,435

413

17

38

410

465

1,092

 



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The table below sets forth the maturity schedule for our other obligations and long-term liabilities at December 31, 2006. [add interest payments]

 

Payments due by period

Contractual obligations

Total

1 year

1-3 years

3-5 years

More than 5 years

Long-term debt obligations (exclusive of capital

lease obligations) (1)(2)

2,412

400

48

873

1,091

Capital lease obligations (1)(2)

23

13

7

2

1

Operating lease obligations (1)

168

25

46

37

60

Purchase obligations (3)

     

Raw materials and services

2,252

947

935

169

201

Energy (electricity, gas, steam)

820

357

248

120

95

Total purchase obligations

3,072

1,304

1,183

289

296

Other long-term liabilities (1)(2)

     

Pension and retirement

1,325

98

231

240

756

Environmental

207

34

55

30

88

Restructuring

58

39

5

5

9

Other provisions

231

75

19

10

127

Deferred income taxes

73

49

3

5

16

Total other long-term liabilities

1,894

295

313

290

996

TOTAL CONTRACTUAL OBLIGATIONS

7,569

2,037

1,597

1,491

2,444

(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

Note 30 to the Consolidated Financial Statements details our off-balance sheet commitments.

In connection with the implementation of the RCF in June 2005, Rhodia, Rhodia Inc. and certain of their subsidiaries granted security interests to the lending banks and other secured creditors. These security interests included interests in shares of certain subsidiaries, inter-group loans and certain industrial assets in the United States. At December 31, 2006, secured assets were sufficient to cover amounts drawn under the RCF, which amounted to €48 million at such date.

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.

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.”

The beginning of 2007 was marked by satisfactory levels of activity in all markets and geographic regions in which we operate. Raw material and energy costs remained high and volatile and throughout the year we expect to pursue our policy of managing selling prices in respect thereto. We also intend to pursue our fixed cost reduction plan with the objective of offsetting inflation. At the same time, we expect to increase fixed costs in order to optimize our the functioning of the Group.


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Net Income and Shareholders’ Equity under US GAAP

We prepared the Consolidated Financial Statements in accordance with IFRS as adopted by the European Union. See Note 36 to the Consolidated Financial Statements for a reconciliation of the significant differences between IFRS and US GAAP as they apply to us.

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 a Board of Directors (together with its Chairman) and a 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 of the Board of Directors 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 at December 31, 2006, our Board of Directors consisted of 11 members. Our Board of Directors met ten times in 2006 (with an average attendance rate of 87.3%).



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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. The term of the Directors’ appointments were reduced from six to four years in 2005, as recommended in the AFEP/MEDEF Report.

Name (Age)

Current position with Rhodia

Initially appointed

Term expires

Present principal occupation or employment

Yves René Nanot (70)

Director,
Chairman of the Board

2002

2008

Chairman of the Board and Chief Executive
Officer of Ciments Français

Jean-Pierre Clamadieu (48)

Director,
Chief Executive Officer

2003

2009

Chief Executive Officer of Rhodia

Aldo Cardoso (50)

Director

2004

2009

Directors of Orange, Gaz de France, Imerys,
Accor, and Mobistar (Belgium).

Pascal Colombani (61)

Director

2005

2009

Associate Director at A.T. Kearney

Jérôme Contamine (49)

Director

2004

2008

Senior Executive Vice President
of Veolia Environnement

Michel de Fabiani (62)

Director

2003

2008

President of the Franco-British Chamber of Commerce; President of Hertford British Hospital Corporation;Director of BP France, the Institut Français du Pétrole and Member of the Supervisory Board of Vallourec, Director of Star Oil Mali, SEMS MAROC and EB Trans Luxembourg

Jacques Kheliff (53)

Director

2005

2009

Vice President of Sustainable Development at Rhodia

Olivier Legrain (54)

Director

2005

2009

Chairman and Chief Executive Officer of Materis

Pierre Lévi (52)

Director

1999

2009

Director of Compagnie Deutsch (USA)

Francis Mer (67)

Director

2004

2009

Former French Minister of Economy, Finance and Industry, Chairman of the Supervisory Board of SAFRAN, Director of Adecco (Switzerland)

Hubertus Sulkowski (64)

Director

1999

2008

Partner at Shearman & Sterling LLP



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Biographies

Yves René Nanot has been Chairman of the Board of Directors of Rhodia since March 31, 2004. He was Vice President of the Board from October 3, 2003 to March 30, 2004. He has been a Director 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 SA from 1983 to 1989. He began his career with Du Pont 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 an MBA and PhD from the University of California at Los Angeles (UCLA).

Jean-Pierre Clamadieu has been Chief Executive Officer of Rhodia since October 2003. 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 Rhodia. 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 Rhodia since July 28, 2004, and currently serves as Chairman of the Audit Committee and member of the Compensation and Selection Committee. He is currently a Director of Orange, Gaz de France, Imerys, Accor and Mobistar (Belgium), censor of Bureau Veritas and Axa Investment Management. From 2002 to 2003, he served as acting CEO of Andersen Worldwide. He was Managing Partner for Andersen France from 1998 to 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 1998. 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 the Strategic Committee. Mr. Colombani is Associate Director at A.T. Kearney and currently serves on the Board of Directors of Alstom and British Energy Group plc. He was Chairman and CEO of AREVA’s Supervisory Board until 2003. From 1999 to December 2002 he was Chairman of France’s Atomic Energy Commission (CEA). From 2000 to 2002, he also was Senior Advisor to Arjil Banque and Detroyat Associés. 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, 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, with a degree in physics (Aggrégation) (1969) and holds a doctorate in physics (1974).

Jérôme Contamine has been a Director of Rhodia since March 2004 and currently serves as a member of the Audit Committee. He is Senior Executive Vice President of Veolia Environnement with responsibility for all cross-functional activities since 2003. He currently is President and Chairman and CEO of VENAO (USA), Director of Veolia UK, Veolia Environmental Services plc. and Veolia ES Holdings (UK). In France, he also serves as Director of Veolia Transports, Veolia Propreté, VE Services-RE, Veolia Eau and Valeo. He is a Member of the Supervisory Board A&B of Dalkia and of Dalkia France. 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 at the French Accounting Court, 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 Rhodia 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 is Chairman of the Franco-British Chamber of Commerce, and of Hertford British Hospital Corporation. He also serves as a Director of BP France, and as a Member of the Supervisory Board of Vallourec. Abroad, he is a Director of Star Oil Mali, SEMS Maroc and EB Trans Luxembourg. 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 upon voluntary proposal of the Board of Directors, due to its interest in having a representative of employee shareholders. Since October 2003, he has been Rhodia’s Vice President for Sustainable Development, after having joined the Group 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 also was 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 Rhodia’s Compensation and Selection Committee. Since 2001, he is Chairman and CEO of Materis, which was created out of Lafarge’s specialty materials business, as well as CEO and Director of a number of various companies of the Materis group. 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 various 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 civile des Mines.

Pierre Lévi has been a Director since October 1999 and also currently serves on the Strategic Committee. He is a Director of Deutsch (USA). He also currently serves as director of Companie Deutsch (USA). He served as Chairman and Chief Executive Officer of Faurecia SA from May 22, 2000 to August 2, 2006. 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 since May 13, 2004 and currently serves as the Chairman of Rhodia’s Strategic Committee. He also is Chairman of the Supervisory Board of SAFRAN, and a Director of 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 SA 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 since October 1999. He is a senior partner at the Paris office of Shearman & Sterling LLP.


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Board Practices

Rhodia’s 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.

The by-laws also 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 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:

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

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to consider any issue related to the functioning of the Company and make decisions regarding these issues at its meetings, without prejudice of the powers specifically granted to the shareholders’ meetings and the corporate objectives;

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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;

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to create committees to examine and advise on 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

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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 and teleconference 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 and Board Internal Rules provide for the possibility of participating in a meeting by videoconference or teleconference. 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.


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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 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 for any of the parties. 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 following the recommendation of the Compensation and Selection committee. 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 oversees its work and reports to the general shareholders’ meeting thereon. 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 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.

The by-laws provide for the retirement age of the Chairman which is seventy (70) years. Under the by-laws, the Chairman shall be considered to have resigned at the end of the general shareholders’ meeting called to approve the financial statements for the year in which he reaches the age of seventy (70).

The Board sets the Chairman’s compensation.


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Chief Executive Officer

The Chief Executive Officer is vested with the broadest powers to act in any circumstance in the name of the Company, within the limits of its 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 the Company in dealings with third parties. The Company is bound even by acts of the Chief Executive Officer that are not within the scope of the corporate purpose unless it is proven 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 the 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.

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.

In dealing with third parties, a Designated Executive Officer has the same powers as the Chief Executive Officer, or as the Chairman of the Board if he is also appointed as Chief Executive Officer, including the authority to represent the Company. 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.

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-US company listed on the NYSE, we benefit from certain exemptions from US rules and regulations.

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 requirement that foreign private issuers should have an Audit Committee composed exclusively of qualified independent members. On December 13, 2006 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.


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On occasion of their latest evaluation, 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 Mr. Lévi, our Board confirmed his qualification as independent Director, given that he did not hold any position or performed any executive duty for Rhodia in the past five years. With respect to Mr. Nanot, our Board determined that he should not be considered 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 our Company and the related compensation paid to them. Mr. Sulkowski is also not considered independent 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 and to disclose any significant differences between our corporate governance practices and NYSE corporate governance standards applicable to US companies. On July 3, 2006, our Chief Executive Officer submitted written affirmation to the NYSE attesting to our compliance.

Because we are incorporated under French law, with securities publicly traded on markets in the United States (New York Stock Exchange) and France (Euronext Paris), our corporate governance structure reflects the mandatory provisions of French corporate law, the securities laws and regulations of both France and the United States, as well as the rules of the aforementioned public markets. Our principal references of corporate governance standards are the French Commercial Code (Code de Commerce), the French Financial and Monetary Code (Code monétaire et financier), as well as a number of general recommendations and guidelines on corporate governance, most notably the French Bouton Report.

While we believe that our corporate governance framework is comparable as regards investor protections to the corresponding rules of the NYSE, there are nevertheless significant difference.

Board of Directors

NYSE listing standards provide that the Board of Directors of a US listed company must consist of a majority of independent directors and that certain committees must consist solely of independent directors. The Bouton Report recommends that at least half of the members of the Board of Directors be independent in companies that have a dispersed ownership structure and no controlling shareholder.

In line with NYSE rules applicable to domestic issuers and with the Bouton Report a majority of RHODIA Board members are independent. As of the last date of evaluation by the Board of Directors, seven out of eleven Directors were determined to be independent.

Board Committees

NYSE listing standards require that a US listed company have an Audit Committee, a nominating/corporate governance committee and a compensation committee. Each of these committees are to be composed solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards.

French law requires neither the establishment of Board Committees nor the adoption of written charters. The Bouton Report recommends, however, that the Board of Directors set up an Audit Committee, a nominating committee and a compensation committee, indicating that the nominating and compensation committees may form one committee. The report also recommends that at least two-thirds of the Audit Committee members and a majority of the members of each of the compensation committee and the nominating committee be independent directors.


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We have created an Audit Committee and a combined Compensation & Selection Committee and have complied with the Audit Committee independence and other requirements of the Rule 10A-3 under the US Securities Exchange Act of 1934, as amended, adopted pursuant to the Sarbanes-Oxley Act of 2002. For the membership of each committee, see “Item 6 - Corporate Governance”.

Our specialized committees support the decision-making process of the Board of Directors.

However, where the NYSE Listed Company Manual would vest certain decision-making powers with specific committees by delegation, under French law, the committees of our Board of Directors are advisory only. Our Board of Directors remains by law the ultimate competent body to make such decisions, while taking into account the recommendations of relevant committees.

Additionally, under French corporate law and recommendations, at annual shareholders meetings shareholders are competent to appoint our auditors upon the proposal of our Board of Directors; our internal rules provide that the Board of Directors make its proposal on the basis of the recommendation of our Audit Committee.

We believe that such French requirements, although less detailed than those contained in the NYSE listing standards, together with the additional legal requirement that two sets of statutory auditors be appointed by the shareholders, achieve the New York Stock Exchange’s underlying goal of ensuring that the audit of our accounts be conducted by auditors independent from company Management. For more detailed information concerning our Audit Committee see “Item 6: Corporate Governance – The Audit Committee”.

With respect to related party transactions, French corporate law requires that the Board of Directors approve a broadly-defined range of transactions that could potentially create conflicts of interest between our Company on the one hand, and our directors and officers, on the other hand. While the precise scope of this requirement and its application may differ from those applicable to NYSE listed companies, this requirement is generally consistent with various provisions of the NYSE Manual that require disclosure and/or approval of various types of related party transactions.

Disclosure

NYSE listing standards require US listed companies to adopt, and post on their websites, a set of corporate governance guidelines, which include for instance director qualification standards, director responsibilities, director access to Management and independent advisers, director compensation and annual performance evaluation.

Moreover, the CEO of a US listed company must annually certify to the NYSE that he/she is not aware of any violations by the company of the NYSE’s corporate governance listing standards. French law requires neither the adoption of such guidelines nor the publication of such certifications. The Bouton Report recommends, however, that the Board of Directors of a French public company perform annual self-evaluations and that a formal evaluation by an outside consultant be undertaken every three years. We believe that we comply with such requirements.

As a ‘foreign private issuer’ under the US securities laws, our CEO and CFO issue certifications required by § 302 and § 906 of the Sarbanes Oxley Act of 2002 on an annual basis (with the filing of our Annual Report on US Form 20-F) rather than on a quarterly basis as would be the case of a US corporation filing quarterly reports on US Form 10-Q.

Code of business conduct and ethics

NYSE listing standards require each US listed company to adopt, and post on its website, a code of business conduct and ethics for its directors, officers and employees. There is no similar requirement or recommendation under French law. However, under the SEC’s rules and regulations, all companies are required to submit periodic reports to the SEC and must disclose in their Annual Reports whether they have adopted a code of ethics for their principal executive officer and senior financial officers.


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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 comprised of three independent Directors: Mr. Cardoso (chair), Mr. Contamine and Mr. de Fabiani. The Board of Directors at its December 13, 2006 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 our internal and external auditors. More generally, the Audit Committee examines all financial and accounting questions delegated to it by the Board.

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 Internal Audit.

The Audit Committee met eight times in 2006 with an average attendance rate of 100%, to be compared with eight meetings in 2005, with an average attendance of 87.5%.

In 2006, 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 a detailed presentation of certain risks, following up on the risks chart from 2005; the functioning of fraud control processes and the putting into place of a whistleblowing procedure for the reporting of accounting or financial irregularities which corresponds to the requirement under Sarbanes-Oxley for companies listed on the NYSE; review of insurance policies; auditor relations (including fee issues); and prospects for an internal audit.

In order to evaluate of its own functioning, the committee answered a self-evaluation questionnaire supplied by the American Institute of Certified Public Accountants (AICPA).

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


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Compensation and Selection Committee

The Board of Directors 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 and committee membership, evaluating their independence and selecting members for committees.

The Compensation and Selection Committee met five times in 2006, with an average attendance rate of 93.33% to be compared with 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 general and Directors’ remuneration policy; review of the variable fees for General Management Committee and Executive Committee members; and considerations on the capital increase reserved for Rhodia’s employees. 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.

Strategic Committee

The Strategic Committee, created in September 2000, is comprised of three independent 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 twice in 2006 with an average attendance rate of 100% to be compared with three meetings in 2005 with an average attendance rate of 88.8%. Over the course of its meetings, the Committee worked on the implementation of the Group strategic plan, and the Polyamide strategy.

Board of Directors’ Internal Rules

Since June 2000, our Board of Directors has operated according to internal rules (règlement intérieur). It has been modified several times in order to comply with the evolution of corporate governance principles, and specifically with the AFEP-MEDEF recommendations and the Sarbanes-Oxley Act. 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.


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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.

Name (Age)

Principal position with Rhodia

Jean-Pierre Clamadieu (48)

Chief Executive Officer

Gilles Auffret (60)

Group Executive Vice President, Operations

Yves Boisdron (62)

Group Executive Vice President, Strategy

Pascal Bouchiat (46)

Group Executive Vice President, and Chief Financial Officer

Bernard Chambon (59)

Group Executive Vice President, Human Resources, Communications and Sustainable Development

Jean-Pierre Labroue (44)

Group Executive Vice President, General Counsel and Corporate Secretary


The 6 members of the General Management Committee are supported and assisted by 15 members representing the enterprises, zones and support functions of the Group. Altogether, they constitute the “Executive Committee“.

Gilles Auffret is Group Executive Vice President Operations. He served as Chief Operating Officer from 2001, after joining us on September 1, 1999 as Deputy President responsible for the Polyamide Division. He also served as Designated Executive Officer (Directeur général délégué) from October 2003 through June 2005. Prior, he worked at Pechiney, which he joined in September 1982, and where he held a series of senior Management posts, including President of Pechiney’s aluminum division. In January 1982 he was appointed public auditor (conseiller référendaire) at the Cour des comptes (the equivalent of the US General Accounting Office). He also worked at the French Ministry of Industry, where he served as chargé de mission reporting to the General Director for Industry. Mr. Auffret started his professional career in 1975 as an auditor at the French Cour des comptes.

Yves Boisdron has been Group Executive Vice President, Strategy since November 2003. Prior to holding his current position, he was President of the Asia Pacific Zone from 1998 through October 2003. Mr. Boisdron served as Senior Vice President of Rhône-Poulenc Chimie from 1994 to 1996, Senior Vice President of Rhône-Poulenc IOM from 1990 to 1994, Vice President of Rhône-Poulenc Inc. from 1987 to 1990 and Vice President of Rhodia Brasil from 1981 to 1987. Mr. Boisdron has also served as General Manager of the enzyme division of Gist Brocades and as a project engineer at Badger.

Pascal Bouchiat has been Group Executive Vice President, and Chief Financial Officer since December 2005. In 2004 he was appointed Vice President, Corporate Finance and Treasury. He became Group Financial Controller in 2001 prior to which he was Vice President, Finance, of the Consumer Specialties Division. He was appointed Rhodia Group Management Controller in 1998, when Rhodia was first created. He had first joined the Finance Department in 1994 where he held several positions of increasing responsibility. He began his professional career in 1985 as an R&D engineer in Rhône-Poulenc before assuming industrial responsibilities, notably, as a production manager in the Saint-Fons Silicones factory. He holds a masters in chemical engineering, an MBA from Cesma/EM Lyon and an Executive MBA from Trium (New York University – London School of Economics – HEC Paris).

Bernard Chambon has been Group Executive Vice President of Human Resources, Communications and Sustainable Development since November 2003. Prior to holding his current position, Mr. Chambon was Group Executive Vice President of Human Resources and Internal Communications (April 2002) and Executive Vice President in charge of Human Resources and Communication (January 1998). Mr. Chambon has also served as President of Human Resources and Communication for the Chemicals segment’s European operations, Senior Vice President of Rhône-Poulenc’s Organic and Inorganic Intermediates segment and Director of Development of Human Resources for the Rhône-Poulenc group. Prior to joining the Rhône-Poulenc group in 1989, Mr. Chambon held senior human resources positions at Bouygues, Aerospatiale and Fiat.

Jean-Pierre Labroue has been Group Executive Vice President, General Counsel and Corporate Secretary since September 2004. Prior, he served from December 1999 as Vice President, General Counsel and Corporate Secretary of Aventis Pharma SA, in charge of legal support to the commercial, industrial and research and development operations first for France, and later for Europe. He was previously Vice President and General Counsel, Europe and International of Rhône-Poulenc Rorer, through May 1996, after having been in Rhône-Poulenc Rorer’s American headquarters in Collegeville, PA, through November 1993. He was previously a member of the Rhône-Poulenc Chimie legal department through May 1989 and where he became involved in mergers and acquisitions. He began his career in October 1988 with the Jeantet & Associés law firm in Paris. He holds post-graduate degrees in international law (DEA) and in international business law (DESS) from the University of Paris X. He also completed the ESSEC-IMD business school program and obtained a LL.M. degree in Corporate Law and Finance from Widener University, Delaware.


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Compensation of the Members of General Management Committee

The aggregate amount of gross compensation (excluding social charges payable by us, and before the deduction of social charges payable by employees) due in respect of the 2006 fiscal year to the members of our General Management Committee, amounted to €4,557,634 as compared with €4,652,028 in 2005.

The aggregate amount of gross compensation paid in 2006 (including variable compensation paid with respect to 2005, but not including variable compensation payable with respect to 2006) to the members of the Committee was €4,376,600. Aggregate gross compensation paid to Committee members in 2005 was €5,237,604.

The aggregate amount of compensation in kind paid to Committee members in 2006 amounted to €37,695, as compared with €43,344 in 2005.

The aggregate amount of our retirement obligations as at December 31, 2006 with respect to members of the General Management Committee as a group amounted to €16,360,643, as compared with €10,812,623 as at December 31, 2005. The increase in retirement obligations from 2005 to 2006 results from the mechanical effect of changes in assumptions required by applicable regulations (in particular a change in the mortality rate table) and a change in the average variable compensation of members of the General Management Committee over the previous three years, the reference period used to calculate these obligations. Furthermore, during 2006 a member of the General Management Committee became a potential beneficiary of a specified pension benefit plan.

The obligations made to the members of the General Management Committee in case of termination of their employment contracts amounted to €5,551,000 as at December 31, 2006, as compared with €3,604,000 as at December 31, 2005. This difference is due principally to the extension of this protection to two members of the General Management Committee, who did not benefit from it as at December 31, 2005.

See also Note 32 to the Consolidated Financial Statements.

Compensation

According to French law, compensation of the Chairman and Chief Executive Officer is determined by the Board of Directors. The Compensation and Selection Committee makes recommendations to the Board regarding such compensation.

Chairman of the Board of Directors

In 2006, the amount of gross compensation paid to Mr. Nanot in his capacity as Chairman of our Board of Directors was €300,000. He did not receive any variable compensation.


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Chief Executive Officer

The aggregate amount of gross fixed compensation paid to Mr. Clamadieu in 2006 in his capacity as Chief Executive Officer was €500,000. The variable component of his compensation in respect of 2006, paid in 2007, was €950,000. The variable portion of his remuneration may equal between zero and €1 million, and is determined based 50% on quantitative criteria (EBITDA Margin and positive net income) and 50% on qualitative criteria (20% based on strategy, 15% based on workplace safety and environmental results and 15% on Management of the major divestment and development projects). In respect of 2005, his variable compensation totaled €800,000 (which was paid to him in 2006).

Furthermore, Mr. Clamadieu received a mid-term bonus of €26,667 euros earned in 2003 through his work contract prior to his mandate as Chief Executive Officer. This mid-term bonus results from a collective bonus plan open to Executive Officers, members of the Group’s “operational committee”, which is based on the annual contribution of new products to our net sales. The length of the program is 3 years, with intermediary objectives, allowing the definitive acquisition, or anticipated partial payment of the bonus, for developments realized during the first two years.

The total gross compensation due to Mr. Clamadieu for 2006 was €1,450,000 including both fixed and variable payments for 2006. The total amount received by Mr. Clamadieu in 2006 was €1,326,667 (including fixed compensation for 2006 and variable compensation for 2005 plus the 2003 mid-term bonus).

In addition, for the fiscal year 2006, Jean-Pierre Clamadieu benefited from share grant plans decided by the Board of Directors held on January 13, 2006. (Please refer to the Share Grant Plans section hereunder)

Mr. Clamadieu is also party to a separation agreement signed in March 2007, providing compensation in case of termination of his Chief Executive Officer position. This agreement is described in “Item 7 – Major Shareholders and Related Party Transactions”.

Other Directors’ compensation – Directors’ Fees

The general shareholders’ meeting held April 18, 2000 set at €500,000 the maximum amount of fees Directors may collectively receive. This amount has not been modified since the general shareholders’ meeting of April 18, 2000. Within this limit, the Board apportions Director’s fees based on criteria established by its internal regulations. These criteria include fixed and variable portions tied to Directors’ attendance at Board and Committee meetings.

We paid our Directors €499,700 in fees for 2006 (€499,500 for 2005).

Among the current Directors, Messrs. Nanot, Clamadieu and Kheliff declined to receive Directors’ fees for 2006. They each received remuneration from us.

There is no specific pension benefits plan in place for Directors. However, Mr. Clamadieu, pursuant to his employment contract, is a potential beneficiary of supplementary retirement schemes available to Executive Officers under a specific plan which was set up after 2001 for newly appointed General Management Committee members and provides defined benefits. The vesting of the benefits under this plan was subject to specific conditions including minimum 10 years seniority at Rhodia, as well as 1 year seniority as a member of the General Management Committee, and being within the Company at the time of retirement. There is no funding for this plan. Finally, Mr. Kheliff benefits from another defined benefit retirement plan, which was closed to new participants in the late 1970’s, pursuant to his employment contract and status as an employee of the Group.


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The table below sets forth the total compensation and benefits due for year 2006 and by companies in which we exercise control to our Directors and our Designated Executive Officer, in accordance with the provisions of article L. 225-102-1 of the French Commercial Code.

Current Directors(in euros)

Fixed portion
paid during
and in respect
of 2006

Fixed portion
paid during
and in respect
of 2005

Variable
portion
in respect
of 2006
(to be
paid in 2007)

2005 paid
in 2006

Benefits
in kind

Directors’
fees

Jean-Pierre Clamadieu (CEO) (1)

500,000 (2)

500,000 (2)

950,000

800,000

5,076 (2)

(3)

Yves René Nanot (Chairman)

300,000

300,000

(3)

Jacques Kheliff (5)

153,400

85,818 (6)

62,894

38,350

3,584 (2)

(3)

Aldo Cardoso

94,200

Pascal Colombani

47,900

Jérôme Contamine

63,800

Michel de Fabiani

94,200

Olivier Legrain

57,500

Pierre Lévi

38,300

Francis Mer

55,900

Hubertus Sulkowski (4)

47,900

(1)

In respect of 2005, he received a mid-term bonus of €26,667 gained in 2003 under his work contract and prior to being appointed Chief Executive Officer.

(2)

Company automobile.

(3)

Renounced Directors’ fees in 2006.

(4)

Hubertus Sulkowski is a partner of Shearman & Sterling LLP, whose services are used by the Company.

(5)

Jacques Khéliff also received €1,323 as participation and profit sharing, €16,667 as mid term bonus 2003 due to his employment contract and €3,360 as extraordinary remuneration.

(6)

For the 06/23/2005 to 12/31/2005 period.


Employees

The table below sets forth the percentage of our employees by enterprise and geographic location as at December 31, 2006, 2005 and 2004.

 

At December 31,

 

2006

2005

2004

TOTAL

17,077

19,444

20,577

By enterprise:

   

Novecare (1)

13.0%

11.9%

13%

Coatis (2)

–%

6.2%

7%

Silcea (3)

15.0%

13.4%

14%

Polyamide

24.3%

25.8%

25%

Eco Services

2.5%

2.2%

2%

Acetow

7.4%

6.6%

6%

Organics (4)

14.2%

5.9%

6%

Rhodia Pharma Solutions

–%

4.4%

5%

Energy Services

0.1%

Others

23.5%

23.6%

22%

TOTAL

100%

100%

100%

By geographic zone:

   

Europe

52.8%

57.8%

60.5%

North America

9.7%

8.9%

9.0%

Latin America

18.2%

16.3%

15.0%

Asia/Pacific

19.3%

16.9%

15.5%

TOTAL

100%

100%

100%

(1)

Novecare resulted from the combination in 2005 of Phosphorous Phosphates & Foods (comprising 16% in 2003 and 8% in 2004 of our total work force) and HPCII (comprising 6% in 2003 and 5% in 2004 of our total work force).

(2)

Coatis was previously named Performance Products for Multifunctional Coatings.

(3)

Silcea was previously named Rare Earths Silicones Silica Systems.

(4)

Organics was previously named Rhodia Perfumery Performance & Agro.



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Membership of our employees in trade unions varies from country to country, and we have entered into various collective bargaining agreements. In Europe, following a European Union directive, we have established a “European Committee” that meets at various times during the year with representatives coming from different European Union countries in which we have employees. At the world-wide level, we have signed an agreement on “Corporate Social Responsibility” with the ICEM (International Federation of Chemical, Energy and Mine Workers).

In France, the five principal French labor unions are represented at our facilities. As required by French law, Management holds annual meetings with a delegation of union representatives in order to negotiate salaries and working conditions. Management also holds other periodic consultations with representatives of our employees through the Group’s workers’ committee (comité de groupe). In recent years, there have been no significant strikes or work stoppages. We believe that relations with our employees and unions are satisfactory as demonstrated by the number of agreements signed with them.

Employee and Director share ownership

Director and Executive share ownership

The table below lists, to the best of our knowledge, the total number of shares owned by the members of our Board of Directors as at December 31, 2006.

 

At December 31, 2006

Shares

Percentage of class

Identity of person or group

  

Yves René Nanot

131,250

*

Jean-Pierre Clamadieu

47,208 (1)

*

Aldo Cardoso

21,875

*

Pascal Colombani

1,875

*

Jérôme Contamine

18,750

*

Michel de Fabiani

37,500

*

Jacques Khéliff

17,066 (2)

*

Olivier Legrain

24,368

*

Pierre Lévi

51,342 (3)

 

Francis Mer

186

*

Hubertus Sulkowski

44,785

*

*

Less than 5%.

(1)

Mr. Jean-Pierre Clamadieu holds 217,122 shares of the funds FCPE “Actions Rhodia” and “PELT Actions Rhodia” pursuant to an employee share scheme, which correspond to a similar number of shares in Rhodia.

(2)

Mr Jacques Khéliff holds 3,703 shares of the funds FCPE “Actions Rhodia” and “PELT Actions Rhodia” pursuant to an employee share scheme, which correspond to a similar number of shares in Rhodia.

(3)

Mr. Pierre Lévi holds 7,913 shares of the funds FCPE “Actions Rhodia” and “PELT Actions Rhodia” pursuant to an employee share scheme, which correspond to a similar number of shares in Rhodia.


We do not report the individual shareholdings of General Management Committee members. To the best of our knowledge, the individual amount held by any member of this group is less than 1% of our share capital, including any shares held indirectly.

Employees may participate in profit-sharing plans based on performance criteria for their business and a mutualization on a Group level. We believe participation increases individual incentives and cohesion of our shareholders.

As at December 31, 2006, our employees held 44,075,172 shares through employee plans, corresponding to 3.66% of our shares and voting rights.


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Our rules of governance only allows Directors and Executive Officers to sell their shares during the 60 day period following the publishing of our annual, half-year and quarterly results and prohibit any sales when the seller has benefited from privileged information.

Pursuant to French law, we must declare transactions in our securities carried out by Directors and the Chief Executive Director during the 2006 fiscal year to the extent the aggregated amount of the transactions by each of such persons exceeds €5,000 per year. The following transactions were declared in 2006:

Director

Transaction

Yves René Nanot

Through related persons:

- Purchase of 454 shares on April 27, 2006 at €2.04 per share

- Purchase of 500 shares on April 27, 2006 at €2.04 per share

- Purchase of 550 shares on April 27, 2006 at €2.04 per share

- Purchase of 500 shares on May 9, 2006, at €1.94 per share

- Purchase of 6,000 shares on May 11, 2006 at €1.98 per share

- Purchase of 4,000 shares on May 11, 2006 at €1.99 per share

- Purchase of 1,000 shares on May 11, 2006 at €1.97 per share

Jean-Pierre Clamadieu

Purchase of 205,007 shares of the fund FCPE “Actions Rhodia” and “PELT Actions Rhodia”, on June 30, 2006, at €1.35 per share.

Aldo Cardoso

Purchase of 20,000 shares on May 24, 2006 at €1.64 per share.

Pascal Colombani

None

Jérôme Contamine

None

Michel de Fabiani

Sale of 732 shares on November 13, 2006 at €2.34 per share.

Jacques Kheliff

Purchase of 3,703 shares of the fund FCPE “Actions Rhodia” and “PELT Actions Rhodia”,

on June 30, 2006, at €1.35 per share.

Olivier Legrain

None

Pierre Levi

None

Francis Mer

None

Hubertus Sulkowski

Sale of 7,200 shares on October 23, 2006 at €1.92 per share

Purchase of 7,200 shares on October 23, 2006 at €1.92 per share


Share grant plans

Pursuant to the authorization granted by the June 23, 2005 general shareholders’ meeting, the Board of Directors decided to establish two free share grant plans based on economic performance on January 13, 2006 and two others on January 15, 2007.

Regarding the 2006 plans, the Board of Directors allocated 4,653,125 shares to 338 beneficiaries (“Plan A”). Definitive acquisition of shares under Plan A is contingent on our achieving a ratio of recurring EBITDA to net sales from operating activities as published in our 2006 consolidated financial statements greater than or equal to 13%. Under the second plan (“Plan B”), the Board of Directors allocated 4,653,125 shares to 338 beneficiaries. Definitive acquisition of shares under Plan B is contingent on our achieving a ratio of recurring EBITDA to net sales from operating activities as published in our 2006 consolidated financial statements that is greater than or equal to the average ratio of a reference group of European specialty chemicals manufacturers. The performance conditions under these two plans have been reached. Under both plans, shares are definitively acquired at the end of the two years following the date of allocation (January 14, 2008) and must be held for two years (until January 14, 2010).


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The table below sets forth the names, titles, principal employment locations and number of shares allocated pursuant to the two 2006 plans described above with respect to (i) the members of our Board of Directors (Mr. Clamadieu and Mr. Kheliff) who were allocated shares and (ii) the twelve employees of our Group who were allocated the highest number of shares.

Name

Position

Location

Plan A

Plan B

Total

Jean Pierre Clamadieu

Chief Executive Officer

France

300,000

300,000

600,000

Jacques Kheliff

Sustrainable Development Director and Director

France

47,000

47,000

94,000

Gilles Auffret (1)

Group Executive Vice President, Operations

France

180,000

180,000

360,000

Yves Boisdron (1)

Group Executive Vice President, Strategy

France

120,000

120,000

240,000

Pascal Bouchiat (1)

Group Executive Vice President
and Chief Financial Officer

France

120,000

120,000

240,000

Bernard Chambon (1)

Group Executive Vice President, Human Resources Communications and Sustainable Development

France

120,000

120,000

240,000

Jean-Pierre Labroue (1)

Group Executive Vice President, General Counsel and Corporate Secretary

France

120,000

120,000

240,000

Mike DeRuosi

President of Novecare

USA

90,000

90,000

180,000

Laurent Schmitt

President of Polyamide

France

90,000

90,000

180,000

Olivier Caix

President of Organics

France

85,000

85,000

170,000

Patrick Koller

Industrial and Purchasing Director

France

85,000

85,000

170,000

Michel Audoin

President of Acetow

Germany

80,000

80,000

160,000

James Harton

President of Eco Services North America

USA

80,000

80,000

160,000

Olivier Clermont-Tonnerre

President of Silcea, Marketing
and International Business Supervisor

France

80,000

80,000

160,000

(1)

Members of the General Management Committee.


Regarding the 2007 plans, the Board of Directors allocated 4,129,500 shares to 448 beneficiaries (“Plan A”). Definitive acquisitions of shares under Plan A is contingent on our achieving a goal specifically determined by the Board of Directors, of the ratio of Net Debt to recurring EBITDA. Under the second plan (“Plan B”), the Board of Directors allocated 4,129,500 shares to 448 beneficiaries. Definitive acquisition of shares under Plan B is contingent on our achieving a recurring EBITDA-to-sales ration greater than or equal to the average ratio of a reference group consisting of specialty chemical companies. Under both plans, shares are definitively acquired at the end of the two years following the date of allocation (January 14, 2008) and must be held for two years (until January 14, 2010).

Options

The table below sets forth certain information relating to our stock option plans. Each option gives the right to subscribe to one Rhodia share. For a more detailed discussion of our stock option plans, see Note 33 to the Consolidated Financial Statements.

Option Plans

1998

1999/1

1999/2

2000/1

2000/2

2001

2002

2003

2004A

2004B

Date of shareholders’ meeting approval

05/13/98

05/13/98

05/13/98

05/13/98

04/18/00

04/18/00

04/18/00

05/21/02

05/21/02

05/21/02

Date of grant by Board of Directors

06/24/98

02/23/99

02/23/99

03/30/00

09/27/00

03/16/01

03/20/02

05/28/03

06/17/04

06/17/04

Adjusted number of options outstanding as at 12/31/06 (1)

39,608

3,207,611

2,389,060

4,004,742

-

5,008,943

4,068,264

2,788,622

2,703,514

1,484,970

Adjusted number of options exercisable as at 12/31/06 (1)

39,608

3,207,611

2,389,060

4,004,742

-

5,008,943

4,068,264

2,788,622

-

-

Adjusted exercise price (1)

€9.08

€6.38

€6.38

€7.29

-

€6.68

€5.12

€2.34

€1.26

€1.26

Number of participants as at 12/31/06

12

290

288

399

-

601

428

458

269

72

Maximum term

10 yrs

10 yrs

10 yrs

10 yrs

10 yrs

12 yrs

12 yrs

12 yrs

8 yrs

8 yrs

Exercise period (2)

7 yrs from 06/24/01

7 yrs from 02/23/02

7 yrs from 03/01/02

7 yrs from 03/30/03

7 yrs from 09/27/03

9 yrs from 03/16/04

9 yrs from 03/20/05

9 yrs from 05/28/06

5 yrs from 06/17/07

5 yrs from 06/17/07

(1)

Following the May 7, 2004 and December 20, 2005 share capital increases, the Board of Directors adjusted the exercise price and number of options in conformity with the provisions of the Commercial Code and regulations applicable to stock options.

(2)

Without taking into account the tax holding period for tax residents in France of four years as from 2001 and five years previously.



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The performance condition under the 2004 B plan (Ratio of EBITDA to net sales are published in our 2006 consolidated financial statements greater than or equal to 13%) has been reached. At December 31, 2006, there were 25,695,334 options outstanding under our various stock option plans, representing 2.09% of our share capital on a diluted basis.

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major shareholders

The table below sets forth the principal owner of our shares as of the dates indicated.

 

December 31, 2006 (1)

December 31, 2005 (1)

December 31, 2004 (2)

Number of shares

% capital

% voting rights

Number of shares

% capital

% voting rights (3)

Number of shares

% capital

% voting rights

Sanofi-Aventis

-

-

-

96,110,182

8.17

2.84 (4)

96,110,182

15.3

15.3

Crédit Agricole

-

-

-

17,937,800

1.52

0.81 (4)

17,761,610

2.8

2.8

TIAA-CREF Investments Management, LLC

-

-

-

44,219,307

3.76

4.01

38,798,015

6.2

6.2

Capital Group International

67,191,300

5.58

5.58

-

-

-

-

-

-

Employees-Company Savings Plan

44,075,172

3.66

3.66

15,049,102

1.28

1.36

15,849,705

2.5

2.5

(1)

Source: Euroclear France and Capital Precision.

(2)

Source: Euroclear France and Ilios.

(3)

Based on 1,103,199,316 voting rights, taking into account (i) the loss of voting rights decided by the general shareholders’ meeting on June 23, 2005 and (ii) the capital increase of December 2005.

(4)

Taking into account the loss of voting rights decided by the general shareholders’ meeting on June 23, 2005.


At December 31, 2006, there were 1,204,186,174 ordinary shares issued and outstanding. At December 31, 2006, 33,851,675 ordinary shares were held in the form of ADSs, representing 2.8% of the total share capital and held by 455 registered shareholders.

On January 19, 2007, JP Morgan Asset Management, UK Ltd., notified us that it held indirectly 63,490,878 shares, equal to 5.3% of voting rights.

On January 9, 2007, Capital Group International Inc. notified us that if held indirectly 59,050,917 shares, equal to 4.9% of our share capital and voting rights.

To our knowledge, the share capital and voting rights held by members of our Board of Directors or General Management Committee are not material. To our knowledge, no shareholders, other than those mentioned in the above table, hold directly or indirectly more than 5% of our capital or voting rights.

We are not aware of any shareholders’ agreements between our shareholders.

Our major shareholders do not have voting rights different from those of other shareholders.


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Related Party Transactions

In the ordinary course of business, we sell and purchase materials, supplies and services from and to numerous customers and suppliers throughout the world, including from time to time companies with which members of our Board of Directors are affiliated. We do not consider the amounts involved in such transactions to be material to our business and believe that these amounts are not material to the business of the firms involved. See “Item 6. Directors, Senior Management and Employees” for information on the outside affiliations of our Directors.

Other than as described herein, we have no related party transactions, other than those occurring in the ordinary course of business and those that are immaterial, both to us and to the related party.

Due to its minority participation in our capital, Sanofi-Aventis is no longer considered a related party.

Separation Agreement and Executive Compensation

During its March 6, 2007 meeting, your board authorized the conclusion of a separation agreement with Mr. Clamadieu.

Pursuant to this agreement, if his duties as Chief Executive Officer are terminated, regardless of the reason, other than in a limited number of cases, Mr. Clamadieu would be entitled to payment of a fixed amount equal to two years of a compensation consisting of (i) his fixed annual compensation at that time, plus (ii) the average variable compensation paid during the last three fiscal years prior to the termination of his duties. This compensation would not be owed to Mr. Clamadieu if his duties were terminated due to gross negligence (“faute grave”) or willful misconduct (“faute lourde”), his resignation (unless due to a change of control or major, long-term difference of opinion regarding the strategy followed by the board of directors), reaching the maximum age to perform his duties or his death.

Further, this agreement also states that:

·

the fiscal years during which he exercises his duties as Chief Executive Officer, as well as the compensation therefore, will be taken into consideration in calculating the rights that Mr. Clamadieu may have under the Officers’ and Directors’ Supplemental Retirement Plan (referred to as the “ODSRP”), of which he became a potential beneficiary in the performance of his employment contract (which is currently suspended);

·

subject to reaching any performance requirements as provided for in the plans, or the specific consent of the board of directors (for performance requirements that cannot be met until after his duties end), Mr. Clamadieu would retain the rights to the free attributions of shares and subscription or purchase options that he received or that he will receive during the term of his duties as Chief Executive Officer.

The Separation Agreement constitutes a “regulated” agreement under French law, according to article L 225-38 et seq. of the French Commercial Code, and as such must be approved at the shareholders’ meeting voting upon on a special report prepared by the auditors.

Furthermore, the employment contract of Mr. Khellif, Sustainable Development Director, was changed to provide an increase in fixed compensation totaling €170,000 and an increase in his target variable compensation from 25% to 30% of his fixed compensation.

Multicurrency Revolving Credit and Guarantee Facility

On June 17, 2005, we concluded an agreement with a limited number of banks, on our behalf and on behalf of certain of our subsidiaries, including Rhodia Inc., for a renewable syndicated multicurrency line of credit totaling €300 million and expiring June 30, 2008. In the framework of this agreement, Rhodia SA, Rhodia Inc and certain of our subsidiaries have agreed to a series of sureties with the above-mentioned group of banks and certain other banks who act as our creditors. These sureties include collateral title to the capital of our subsidiaries, intragroup loans and certain industrial assets located in the United States. Furthermore, according to the terms of the subordination agreement, in case of default we will subordinate certain debts owed by our subsidiaries to our guaranteed creditors. We will continue to repay the debts of our subsidiaries within the agreed to terms until no further case of default exists. At December 31, 2006 we had drawn 48 million under the Revolving Credit Facility line of credit.


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Guarantees agreed to in the framework of securitization of commercial debt

On December 21, 2004, we and certain of our European subsidiaries concluded a series of contracts with a French bank putting into place a five year program for the securitization of commercial debt, for a maximum financing amount of €300 million. In particular, we guaranteed the payment of the total sum due by our subsidiaries. At December 31, 2006, the amount of outstanding non-collected debt totaled approximately €215 million; obtained financing amounted to approximately €127 million.

ITEM 8.

FINANCIAL INFORMATION

Legal Proceedings

In the ordinary course of our business, we are involved in a certain number of judicial, arbitral and administrative proceedings. These proceedings are mainly initiated by buyers of businesses sold by us or involve environmental or civil liability compensation claims related to marketed chemicals. We are also subject to certain claims and lawsuits which fall outside the scope of the ordinary course of its business, the most significant of which are summarized below in this section.

Provisions for the charges that could result from these procedures are not recognized until they are probable and their amount can be reasonably estimated. The amount of provisions made is based on our assessment of the level of risk on a case-by-case basis and depends on our assessment of the basis for the claims, the stage of the proceedings and the arguments in our defense. The occurrence of events during proceedings may lead to a reappraisal of the risk at any moment.

Certain of our US subsidiaries have potential liabilities under US federal Superfund legislation and environmental regulations at the state or federal level. Given the nature of the proceedings, the number of plaintiffs, the volume of waste at issue and the provisions that have already been recognized for these cases, we estimate that these claims will not result in significant costs for us and will not give rise to significant additional provisions. See “Item 3. Key Information—Risk Factors.”

We also believe that there is no litigation or exceptional issues that, taken individually or as a whole, could have a material negative impact on our business, financial condition or results of operations, other than those detailed below.

AMF administrative proceedings

On October 6, 2003, we were informed that the General Director of the French Commission des Opérations de Bourse (who subsequently became the General Secretary of the French Autorité des Marchés Financiers (“AMF”) following a reform of the French market regulatory agencies) had launched an inquiry into our financial reporting. On March 29, 2005, the AMF notified us of the findings by the specialized commission of the AMF of three alleged rule infringements concerning financial reporting in 2002 and at June 30, 2003:

·

valuation of ChiRex;

·

valuation of deferred tax assets; and

·

financial disclosures regarding debt, liquidity and environmental risks.


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We put forward strong arguments in defense of the AMF allegations in a defense statement that we filed at the end of July 2006. A decision by the AMF Enforcement Commission is expected in 2007. Under applicable French law, the maximum fine that could be imposed in the event that penalties were to be assessed against us in this proceeding would be €1.5 million.

Shareholders’ litigation

We are directly or indirectly involved in the following proceedings initiated by shareholders:

In January 2004, certain shareholders initiated two proceedings before the Paris Commercial Court based on various contentions concerning our acquisition of Albright & Wilson, mainly alleging inaccuracy of certain information made public at the time of the acquisition but also claiming dereliction by Management.

·

In the first commercial suit, the plaintiffs sued certain members of our Board of Directors, our auditors at the time, and Aventis (now Sanofi-Aventis), claiming damages of approximately €131.8 million as compensation for their alleged personal losses.

·

In the second commercial suit, the plaintiffs sued certain members of our Board of Directors at the time and Aventis and demanding that the defendants be ordered to pay Rhodia €925 million under the individually brought (“ut singuli”) action as compensation for the alleged harm Rhodia suffered.

Taking due note of the existence of a judicial inquiry involving identical facts, the Paris Commercial Court called for the adjournment of the two proceedings on January 27 and February 10, 2006 until a definitive decision was taken with respect to the criminal proceedings. On July 25, 2006, Rhodia was informed that the plaintiffs in the first suit had appealed against the decision of the Chairman of the Paris Appeal Court that prevented them from appealing against the adjournment of February 10, 2006.

In 2004, the aforementioned shareholder plaintiffs of the second commercial suit, together with others, filed a lawsuit before the Supreme Court of the State of New York, based on similar alleged losses for approximately €60 million. On December 23, 2004, we were notified of an amended petition adding allegations relating to under-provisioning of pension obligations and environmental liabilities. In January 2005, we filed a motion to dismiss for forum non conveniens, which was granted on July 5, 2006 in a non-appealable decision. This litigation was therefore settled in our favor.

·

On March 19, 2005, one of the minority shareholders in the cases mentioned above brought suit (in an ut singuli proceeding) against the Chairman of our Board of Directors and our Chief Executive Officer, alleging mismanagement, in an attempt to have them repay Rhodia the amounts paid to Mr. Jean-Pierre Tirouflet upon his departure in October 2003 (severance payment of €2.1 million and, if applicable, payments made under a supplementary retirement plan, for which no sums have been paid to date). The defendants contest the merits of this claim. A decision of the trial court is expected in 2007.

·

Since April 7, 2005, various complaints have been filed by our shareholders, including certain “ERISA”1 type litigation filed by company employees, against us as well as certain of our Directors and senior Management in the US federal court for the Southern District of New York and in the federal court of the District of New Jersey. On October 21, 2005, the US judicial panel on multidistrict litigation decided to regroup all the pending litigation which was then transferred to the US federal court for the Southern District of New York as one law suit. It was specified nevertheless that the “ERISA” type litigation will be judged by the same court in parallel due to its particularity. The plaintiffs have generally alleged that between April 26, 2001 and March 23, 2004 or March 24, 2005, depending on the plaintiff, certain provisions of the Securities Exchange Acts of 1933 and 1934 were violated, notably in terms of financial communication. The certification proceeding has begun and may lead to a consolidated class action suit. On September 28, 2006, the plaintiffs filed an amended complaint, aiming to reinforce their case. Following this complaint, we filed on November 28, 2006 a motion to dismiss for forum non conveniens on various procedural grounds.

·

On June 27, 2005, we were officially notified of the criminal investigation “against an unspecified defendant” conducted by Judges Pons and d’Huy during a search carried out at our headquarters. This investigation related to three criminal complaints which were filed by shareholders against an unspecified defendant alleging various financial and accounting improprieties relating to us, including misleading financial disclosure, insider trading and abuse of corporate assets. With respect to one of the complaints that was filed as an ut singuli proceeding, we decided to join the entire criminal procedure as a civil party on January 25, 2006. This procedure is still on-going at December 31, 2006.




1

Relates to litigation with respect to US retirement plans, in which certain US employee-shareholders contend that Rhodia has not invested in an appropriate and sufficiently prudent manner their retirement savings plan assets, which it manages in their interests.


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Commercial Litigation

Adisseo

Following a fire at its Roches de Condrieu Sik on May 22, 2003, Rhodia Eco Services Sulfurique had to invoke force majeure in connection with its performance under a contract with Adisseo to supply hydrogen sulfide. Adisseo immediately sought compensation and demanded damages of €380,000 (contractual penalty for interruption in the supply of hydrogen sulfide). Adisseo subsequently sought to exercise its call option, which would result in the transfer of Rhodia Éco Services Sulfurique’s hydrogen sulfide and carbon sulfide business to Adisseo for €1. This dispute was in arbitration before the French arbitration association, the A.F.A. (Association Française d’Arbitrage). On November 21, 2004, an additional demand relating to the alleged operating losses of €27 million following the fire was sent to Rhodia Eco Services Sulfurique. Rhodia PPMC (successor to Rhodia Eco Services Sulfurique) challenged all of these claims. Furthermore, on August 30, 2005, Rhodia PPMC learned that Adisseo’s insurers wished to voluntarily intervene in the arbitration, which was approved, it being specified that the insurers would be subrogated in the rights of Adisseo for up to €12,097,602, corresponding to the sums that they had paid Adisseo without consulting Rhodia to compensate for the alleged operating losses.

On December 19, 2006, all the parties to these procedures signed a settlement agreement which resulted in the payment of €1.85 million by Rhodia Opérations (successor to Rhodia PPMC) to the insurers, thus terminating this litigation. This agreement was subject to the disposal of our Silicones business.

Rhodia/Innophos litigation

On November 8, 2004, we received from Innophos, a subsidiary of Bain Capital, a complaint originating from Mexico’s National Water Commission relating to water use at the Coatzacoalcos site during the period from 1998 to 2002. The total claim amounts to approximately 1.5 billion Mexican pesos (around €100 million), including user fees, interest and penalties. The Coatzacoalcos site was part of the specialty phosphates business that was sold in August 2004 to Bain Capital, giving rise to the creation of a new company, Innophos. To best protect its interests, we informed Bain that we were willing to assume direct responsibility, subject to certain legal reservations, for resolving this matter with the Mexico National Water Commission. Since then, we have worked closely with Innophos to prepare a response, which was filed in Innophos’ name on January 17, 2005. The amount of the initial claim was lowered following the application we made to the administrative authority to reconsider and materialized by a decision rendered on August 29, 2005. The total amount of the revised claim is approximately €16.5 million. We still believed that stronger arguments exist in its defense and with respect thereto made public in November 2005 our demand to cancel the claim pending before the Mexican federal administrative and tax courts. However, we and Innophos still disagreed as to the precise scope of their respective contractual obligations relating to this claim and Innophos filed suit before the New York (United States) court in December 2004. On June 13, 2005, the court ruled in favor of Innophos, and Rhodia filed an appeal against this decision on June 16, 2005. This case is still on-going at December 31, 2006.

Based on our analysis of the merits of the case, we did not consider it necessary to recognize a provision in respect of this claim.

Rhodianyl/KoSa France Holding arbitration

On October 1, 2004, KoSa France Holding (new Rhodianyl partner in the Butachimie Joint Venture) launched a counter-arbitration proceeding (ICC) parallel to the arbitration (ICC) currently underway between Rhodianyl and DuPont France (its former partner in the Butachimie Joint Venture), to overturn the expected sentence in the Rhodianyl/DuPont France proceeding. In this initial arbitration, Rhodianyl requested the arbitration court to recognize the inexistence of a geographical limitation on the sale, export or use of ADN produced by Butachimie. This position was settled in favor of Rhodianyl in the final June 13, 2005 award (final award which may not be appealed). Under these conditions, the main demands (principally based on claims contrary to those made by Rhodianyl in its arbitration against DuPont France) made as part of the counter-arbitration proceeding by KoSa France Holding–for an initial amount of around €37 million reduced to €21.5 million in January 2006, to which should be added, according to KoSa, the amount of sales that will be generated in 2006 until the arbitration award is rendered, or alternatively and on a subsidiary basis an amount of €147 million–were according to us without merit. The arbitral award rendered on June 15, 2006 confirmed the position already adopted in favor of Rhodianyl in the Rhodianyl/DuPont France case since: (i) we are totally free to use and export the ADN (and its by-products) of Butachimie, (ii) no compensation was granted to Kosa for the elimination of this “alleged” contractual usage and export restriction and (iii) no damages were allocated to Kosa for the 2004 strikes. This litigation was therefore definitively settled in our favor.


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Other procedures

Securities and Exchange Board of India

We are involved in proceedings in India initiated by the Securities and Exchange Board of India (“SEBI”), which is seeking to require us to initiate a public tender for 20% of the shares of Albright & Wilson Chemicals India Limited (“AWCIL”), a listed subsidiary of the group formerly known as Albright & Wilson, which we acquired in 2000 and of of which we now own 72.79%. These shares would be acquired at a price of 278 rupees per share, based on the value of those shares at the time of our acquisition of Albright & Wilson, and increased by interest accrued since 2000. Such a decision by the SEBI would increase our holding of AWCIL from 72.79% to 92.79%. As our shareholding would then exceed 90%, we would then be required, to initiate a mandatory public tender offer (or “squeeze out”) for the remaining 7.21% of outstanding shares for the same price. In this case, all the shares not-yet held by us (27.21%) would be acquired for €7.2 million. We are challenging the merits of SEBI’s claims, but the risk is provided for in the financial statements. The High Court of Mumbai, which is hearing the case on our appeal following an initial unfavorable judgment, is expected to make a final decision in 2007.

Oil for food Program

Two of our subsidiaries, Rhodia Silicones and Rhodia Middle East Jordan, were named in the report of the United Nations independent investigation committee concerning the “Oil for Food Program” in Iraq. The report notes alleged illicit payments of around $1.7 million made in regard to petroleum surpluses and humanitarian aid with respect to contracts with Iraq. Following an internal investigation into the matter, no embezzlement was identified. The conclusions of this investigation were submitted in April 2006 to the United Nations independent investigation committee, which did not transmit any comments to us.

Significant procedures entered into by Rhodia

Silver Bow site

After several unsuccessful approaches by us and Rhodia Inc. to reach an amicable settlement with Aventis, we sent a formal legal notice to Sanofi-Aventis on October 8, 2004, asking it to bear a portion of the clean-up costs related to the Silver Bow site. In the absence of satisfactory response from Sanofi-Aventis, Rhodia Inc., which never operated the Silver Bow site, filed a complaint against Sanofi-Aventis and Bayer CropScience Inc. with the US District Court for the District of New Jersey on December 29, 2004, under the US Comprehensive Environmental Response, Compensation and Liability Act and New Jersey state law to recover a portion of the clean-up costs. On October 6, 2006, the New Jersey District Court announced the administrative suspension of these proceedings, pending the decision of another court regarding a similar question.


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Cubatao site

We and Rhodia Brasil filed a complaint against Sanofi-Aventis on March 15, 2005, with the Commercial Court of São Paulo. This claim involves the recovery of costs unfairly borne by Rhodia Brasil and directly related to the operation by Rhône-Poulenc of this site, which was definitively closed in 1993. On March 28, 2006, Rhodia Brasil’s claim was declared inadmissible by the Central Civil Court of São Paulo. Rhodia Brasil appealed the decision on April 27, 2006.

Other environmental and employee pension liabilities

With respect to the arbitral proceedings we initiated in April 2005 against Sanofi-Aventis (Rhône-Poulenc’s successor), the court stated in its ruling of September 12, 2006 that it lacked the jurisdiction to decide on our main request regarding the existence of a compensation right for all the liabilities transferred with respect to retirements and the environment. In addition, in response to a subsidiary request, the compensation limits provided under the 1998 environment guarantee contract and the March 2003 settlement were confirmed. Accordingly, there was no additional compensation. We filed an application with the Paris Appeal Court to set aside this ruling.

Dividend Policy

The following table sets forth the total dividends paid per share and per ADS with respect to each year indicated, with and without the French avoir fiscal and before deduction of any French withholding tax.

Year to which dividend related

Dividend per share (1)

Dividend per share including avoir fiscal (1)

 

2001

0.12

0.18

2002

0.12

0.18

2003

0

0

2004

0

0

2005

0

0

(1)

Not adjusted to reflect the issuance of new shares.


Our Board of Directors decided not to propose payment of a dividend in 2007 in respect of fiscal year 2006. The payment and amount of dividends on the ordinary shares, if any, are subject to the recommendation of our Board of Directors and approval by the shareholders at the shareholders’ annual meetings. We will be able to pay dividends in the future depending on our financial performance and within the flexibility of the covenants included in certain of our financing agreements. In addition, certain of our financing agreements include covenants limiting our ability to declare dividends. Unconsolidated statutory net income in each fiscal year (after deduction for depreciation and provisions), as increased or reduced, as the case may be, by any income or loss carried forward from prior years, less any contributions to the reserve accounts pursuant to law or to our by-laws, is available for distribution to our shareholders as dividends.

Record holders of ADSs on the dividend record date will be entitled to receive payment in full of a dividend declared in respect of the year for which it may be declared. Cash dividends payable to such holders will be paid to the depositary in euro and, subject to certain exceptions, be converted into dollars by the depositary. See “Item 10; Additional Information – Dividends” for information regarding French law considerations affecting the payment of dividends.

Any dividends paid to US holders of shares or ADSs who are not residents of France will generally be subject to French withholding tax at a rate of 25% or, if such holders qualify for benefits under the applicable US-France tax treaty and comply with the procedures for claiming treaty benefits, a reduced rate of 15%. See “Item 10. Additional Information—Taxation” for a summary of French and US tax consequences to holders of shares or ADSs. Prospective purchasers of shares or ADSs should consult their own tax advisers with respect to the tax consequences of an investment in the shares or ADSs.


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ITEM 9.

THE OFFER AND LISTING

Trading Markets

Our ordinary shares are traded on the Eurolist by Euronext™ market (Compartment A) of Euronext Paris, their principal trading market, under the ISIN code FR0000120131. In the United States, our ordinary shares trade in the form of American Depositary Shares issued by Citibank N.A. as depositary, each representing one ordinary share (the “ADSs”). Our ADSs are listed on the New York Stock Exchange where they trade under the symbol “RHA” and ADS CUSIP number 762397 107.

The table below sets forth, for the periods indicated, the reported high and low last sales prices in euro for our ordinary shares on the Eurolist by Euronext™ of Euronext Paris (source: Dow Jones) and the high and low sales prices in dollars for the ADSs on the NYSE (source: Dow Jones).

 

Euronext Paris Price Per Share

NYSE Price per ADS

 

High

Low

High

Low

 

$

$

March 2007

2.77

2.53

3.66

3.26

February 2007

2.91

2.65

3.80

3.44

January 2007

2.90

2.59

3.77

3.27

December 2006

2.69

2.43

3.52

3.22

November 2006

2.45

2.12

3.19

2.70

October 2006

2.16

1.80

2.70

2.27

2006 full year

2.69

1.30

3.52

1.66

Fourth quarter

2.69

1.80

3.52

2.27

Third quarter

1.81

1.38

2.36

1.72

Second quarter

2.31

1.30

2.84

1.66

First quarter

2.42

1.83

2.85

2.21

2005 full year

1.82

1.06

3.12

1.60

Fourth quarter

1.82

1.29

2.50

1.68

Third quarter

1.55

1.14

2.19

1.60

Second quarter

1.35

1.06

2.28

1.60

First quarter

1.66

1.28

3.12

2.14

2004

2.18

0.79

4.99

1.16

2003

4.66

1.64

8.50

3.74

2002

6.91

3.26

11.30

5.76

Source: Thomson One.

  


Stock Option and Share Grant Plans

Our stock option plans and share grant plans are described in “Item 6. Directors, Senior Management and Employees – Employee and Director Share Ownership” and in Note 33 of the Consolidated Financial Statements.

Trading Practices and Procedures on Euronext Paris Markets

General

Euronext N.V. is comprised of Euronext Paris, Euronext Amsterdam, Euronext Brussels, Euronext Lisbon and the London International Financial Futures and Options Exchange (“LIFFE”).


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Securities quoted on any of the stock exchanges participating in Euronext cash markets are traded and cleared through common Euronext platforms: NSC is the common platform for trading and Clearing 21 for clearing. LIFFE CONNECT™, the LIFFE trading platform, is used for all Euronext futures and options. Euronext Paris SA has implemented a central clearinghouse of settlement and custody structures. However, these securities remain listed on their respective local exchanges. As part of Euronext, Euronext Paris SA retains responsibility for the admission of securities to Euronext Paris’ trading markets, as well as for the regulation of these markets.

Euronext N.V. has been listed on Eurolist by Euronext™ (previously the Premier Marché) of Euronext Paris since July 2001. In January 2002, Euronext N.V. acquired the London International Financial Futures and Options Exchange (LIFFE), London’s derivatives market. On February 6, 2002, Bolsa de Valores de Lisboa e Porto (BVLP) became a wholly-owned subsidiary of Euronext N.V. and was therefore renamed Euronext Lisbon.

Euronext Paris SA and Eurolist by Euronext™

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

·

compartment A comprises the companies with a market capitalization above €1 billion;

·

compartment B comprises the companies with a market capitalization between €150 million and up to and including €1 billion; and

·

compartment C comprises the companies with a capitalization below €150 million.

Our shares are classified in Compartment A.

Euronext Paris SA places securities in two categories depending on their trading volume. The two categories are “Continu” (continuous trading) or “Fixing” (call auctions). Our ordinary shares are placed in the category Continu, which includes the most actively traded securities.

Securities listed on Eurolist by Euronext™ are traded through authorized financial institutions that are members of Euronext Paris.

For Continu securities, trading takes place continuously on each business day from 9:00 a.m. to 5:25 p.m. (Paris time), with a pre-opening session from 7:15 a.m. to 9:00 a.m. and a pre-closing session from 5:25 p.m. to 5:30 p.m. during which transactions are recorded but not executed, and a closing auction at 5:30 p.m. From 5:30 p.m. to 5:40 p.m., which corresponds to “trading at last phase”, transactions are executed at the closing price. Any trade of securities that occurs after a stock exchange session closes is recorded on the next Eurolist trading day at the previous session’s closing price for that security. Euronext Paris SA has introduced continuous electronic trading during trading hours for most actively traded securities. Euronext Paris publishes a daily official price list that includes, among other things, price information on listed securities. Trading in a security after trading hours can be effected within a range of 1% of the closing price.

Euronext Paris may temporarily reserve trading in a security listed in Continu on Eurolist by Euronext™ if purchases and sales recorded in the system would inevitably result in a price beyond a certain threshold, determined on the basis of a percentage fluctuation from a reference base. Trading may be suspended for up to four minutes. The thresholds vary depending on whether the price fluctuation occurs when trading commences or during the trading session. Euronext Paris may display an indicative trading price during such reservation period. Once trading has commenced, further suspensions for up to four minutes are also possible. Euronext Paris also may suspend trading of a security listed on Eurolist by Euronext™ in other limited circumstances, including, for example, where there is unusual trading activity in the security. In addition, in exceptional cases, the Autorité des marchés financiers or AMF, the French stock exchange regulatory authority, may also request a suspension in trading.


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Trades of securities listed on Eurolist by Euronext™ are settled on a cash settlement basis (“au comptant”) on the third trading day after the trade. However, market intermediaries are also permitted to offer investors a deferred settlement service (ordre stipulé à règlement livraison différé, or “OSRD”) for a fee. The OSRD allows investors to benefit from certain leverage and other special features of the former monthly settlement market (marché à règlement mensuel). The OSRD is only available for trades in securities that have both a total market capitalization of at least €1 billion and a daily average volume of trades of at least €1 million on Euronext Paris SA and that are cited on the list published by Euronext Paris SA Our shares are eligible for the OSRD service. Investors in securities eligible for OSRD service can elect on the determination date (date de liquidation), which is at the latest the fifth trading day before the end of the month, either to settle by the last trading day of the month or to pay an additional fee and postpone the settlement decision to the determination date of the following month.

Equity securities traded on a deferred settlement basis are considered to have been transferred only after they have been registered in the purchaser’s account. Under French securities regulations, any sale of securities executed with a deferred settlement basis during the month of a dividend payment date is deemed to occur after the dividend has been paid. If the sale takes place during the month preceding a dividend payment date, the purchaser’s account will be credited with an amount equal to the dividend paid and the seller’s account will be debited by the same amount.

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

Purchase and Trading by Rhodia in our Own Shares

Purchase of our own shares

In accordance with French law, we may not subscribe to our own shares. However, pursuant to the European regulations, French law and the AMF’s regulations, we may, either directly or through a financial services intermediary (prestataire de services d’investissement) purchase up to 10% of our share capital in connection with a share repurchase program prospectus (note d’information). Since July 26, 2005 the requirement to obtain a prior approval (visa) from the AMF on a share repurchase program prospectus was eliminated. The public will now be informed of such program through a document called program description (descriptif du programme) which is made freely available to the public and published on the AMF’s website. We may not repurchase an amount of shares that would result in our holding, directly or through a person acting on our behalf, more than 10% of our outstanding share capital, or if we have different classes of shares, 10% of the shares in each class.

We must hold any shares that we repurchase in registered form. These shares also must be fully paid up. Shares repurchased by us are deemed outstanding under French law but are not entitled to dividends or voting rights, and we may not exercise the preferential subscription rights attached to them.

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


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As at December 31, 2005 and December 31, 2006, we held no treasury shares.

We are not currently authorized to repurchase our shares. The Board of Directors has submitted a resolution to the general shareholders’ meeting to be held on May 3, 2007 to authorize the Board of Directors to repurchase and dispose of up to 10% of the share capital of our Company at a maximum purchase price of €5 per share, for a period of 18 months. This authorization is requested for an 18 month period.

Under the requested authorization the Board of Directors would be able to proceed with repurchases in order to:

·

participate in reverse split transactions involving the Company’s shares, as described in a resolution submitted to the general shareholder’s meeting to be held on May 3, 2007;

·

attribute shares to employees, officers and directors of our Group, under no-cost share attribution plans, stock subscriptions, or any other form of allocation;

·

issue shares when the exercise rights attached to securities grant access to capital;

·

create a market for the security pursuant to a liquidity agreement, in accordance with the practices of the market recognized by the French “Autorité des Marchés Financiers”;

·

retain or subsequently issue in exchange or as payment for acquisitions in accordance with the practices of the market recognized by the French “Autorité des Marchés Financiers”; and

·

use them in accordance with new market practices allowed by the French “Autorité des Marchés Financiers” and in general any other transactions consistent with applicable regulations.

To date the Board of Directors has not implemented any repurchase program and no share repurchase program prospectus (note d’information) has been prepared nor filed with the AMF.

Trading in our own shares

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

·

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

·

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

·

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

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

·

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

·

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

·

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


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However, these requirements do not apply if:

·

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

·

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

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

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

ITEM 10.

ADDITIONAL INFORMATION

By-laws

We are a société anonyme, a form of French corporation, incorporated under the laws of France.

Our registered office is located at: Immeuble Cœur Défense, Tour A, 110 Esplanade Charles de Gaulle – 92400 Courbevoie. We are registered with the Register of Commerce and Companies of Nanterre under the number 352 170 161. For more information about the Company, please see “Item 4. Information About Rhodia –Corporate History”.

The information below is a summary of the material information concerning our share capital, together with material provisions of applicable French law and of our by-laws (statuts), as amended on December 20, 2005. An unofficial English translation of the by-laws is included as an exhibit to this Annual Report. You may obtain copies of our statuts in French at our registered office. Please refer to those full documents for additional details.

Board of Directors

For a discussion of Directors’ powers under French law and our by-laws, see “Item 6. Directors, Senior Management and Employees – Board of Directors, Chairman and/or Chief Executive Officer”.

Shareholders’ meetings and Voting Rights

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

Ordinary general meetings are required for matters such as the election, replacement and removal of Directors, the allocation of fees to the Board of Directors, the appointment of statutory auditors, the approval of annual financial statements and Consolidated Financial Statements, the declaration of dividends or authorization of dividends to be paid in shares and the approval of related party transactions.


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Extraordinary general meetings are required for the approval of matters such as amendments to our by-laws, approval of mergers, the change of our corporate name or our corporate purpose, increases or decreases in share capital, the creation of a new class of equity securities (common or preferred shares), the authorization or approval of the issuance of any securities giving rights to equity securities, and the voluntary liquidation of the Company prior to the end of its statutory term.

Special meetings of shareholders of a certain category of shares or of securities giving access to a company’s share capital are required for any modification of the rights attached to such category of shares or for any modification of the terms of such securities giving access to such share capital. The resolutions of the shareholders’ general meeting affecting these rights are effective only after approval by the relevant special meeting.

Annual ordinary general meetings

French law requires our Board of Directors to convene an annual ordinary general meeting of shareholders for approval of the annual and Consolidated Financial Statements. This meeting must be held within six months of the end of each fiscal year. This period may be extended by a decision of the President of the Tribunal de commerce (Commercial Court). Our Board of Directors may also convene an ordinary or extraordinary general meeting of shareholders upon proper notice at any time during the year. If our Board of Directors fails to convene a shareholders’ meeting, our statutory independent auditors may call the meeting. In the event of a bankruptcy the liquidator or the court-appointed agent may also call a shareholders’ meeting in some instances. Any of the following may request the court to appoint an agent to convene a shareholders’ meeting:

·

any interested party, including the Workers Committee in the event of emergency;

·

one or more shareholders holding together more than 5% of the share capital, or certain duly qualified associations of shareholders who have held their shares in registered form for at least two years and who together hold at least 5% of the voting rights of our Company; and

·

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

Notice of shareholder’s meetings

Annual shareholders’ meetings are called in accordance with French Law. All shareholders are entitled to participate to such meetings, regardless of the number of shares they own on the date of the meeting, provided that their stock has been fully paid up. General meetings must be announced at least 35 days in advance by means of a preliminary notice (avis de réunion) published in the Bulletin des annonces légales obligatoires (the “BALO”). Such preliminary notice is usually first sent to the AMF. The AMF also recommends that the preliminary notice be published in a newspaper of national circulation in France. It must contain, among other things, the time, date and place of meeting, the preliminary agenda, a draft of the resolutions to be submitted to the shareholders, a description of the procedures that holders of bearer shares must follow to attend the meeting and the procedure for voting by mail or by proxy.

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

Typically, shareholders can only vote on matters included in the agenda for the meeting. However, shareholders may vote on the dismissal of Directors under certain circumstances and on certain miscellaneous matters even if they are not included on the agenda. Additional resolutions to be submitted for approval by the shareholders at the meeting may be submitted to the Board of Directors within ten days of the publication of the preliminary notice in the BALO by one or several shareholders holding a specified percentage of our share capital, by the “Workers Committee” (Comité d’entreprise), or by a duly qualified association of shareholders who have held their shares in registered form for at least two years and who together hold at least 5% of our voting rights. The Board of Directors must submit these resolutions to a vote of the shareholders.


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In addition to rights to certain information regarding our Company, any shareholders may, from the publication of the final notice to convene the shareholders’ meeting until the date of the meeting, submit to our Board of Directors written questions relating to the agenda for the meeting. Our Board of Directors must respond to such questions during the general meeting.

Attendance and voting at shareholders’ meeting

Each share confers on the shareholders the right to one vote. Participation of shareholders at a shareholders’ meeting is not restricted in any way. Pursuant to our by-laws, a shareholder does not need to have a minimum number of shares in order to be able to attend or be represented at a general meeting or to vote by videoconference or any other means of telecommunication which allows the shareholder to be identified.

Under French law, shares of a company held by entities controlled directly or indirectly by that Company are not entitled to voting rights and are not counted for quorum and majority purposes.

Under French law, the right to attend a shareholders' meeting must be documented by the accounting registration of securities on behalf of the shareholder, or on behalf of an intermediary registered therefore, at midnight (Paris time) three business days (D-3) prior to the meeting, either in a registered account maintained by the company (or its agents), or in a bearer securities account maintained by an authorized intermediary.

Our by-laws provide that shareholders may participate in and vote at any general or special meetings by video-conference or any other electronic means of telecommunication or remote transmission that permits their identification under the conditions provided for by applicable regulations and pursuant to terms defined by the Board of Directors. Shareholders are thus deemed present at these meetings for the calculation of quorum and majority.

Proxies and votes by mail

In general, all shareholders who have properly registered their shares or duly presented a certificate from their accredited financial intermediary may participate in general meetings. Shareholders may participate in general meetings either in person, by proxy or by mail or, if provided for by the by-laws and decided by the Board of Directors, by video-conference. As mentioned above, our by-laws provide for the possibility of participation by video-conference or any other means of telecommunication that allows the shareholders to be identified. Shareholders’ votes are counted in proportion to the number of shares they hold.

We will send proxy forms and postal vote forms to any shareholder on request. In order to be counted, the completed form must be returned at our registered office or at any other address indicated on the notice convening the meeting, no later than two days prior to the date of the general meeting pursuant to our by-laws. French law and our by-laws provide that shareholders may send their proxy form and postal vote form for any general meetings either in paper form or, subject to a prior decision of the Board of Directors published in the preliminary notice of meeting and final notice, by remote transmission.

A shareholder may grant a proxy to his or her spouse, to another shareholder, or, if the shareholder is a corporation, to a legal representative. Alternatively, the shareholder may send us a blank proxy without nominating any representative. In this case, the Chairman of the meeting will vote the blank proxies in favor of all resolutions proposed or agreed to by our Board of Directors and against all others.


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Representation of non-French residents

Pursuant to French law, a shareholder who is not a French resident may be represented at the general meeting by an intermediary under the name of which he or she is registered and who is acting on his or her behalf (see “Form, holding and transfer of shares – Holding of shares”) if:

·

the registration of such an intermediary, in the form of a collective account or in several individual accounts, has been made with the account keeper;

·

such an intermediary has declared, when opening one or several accounts with the account keeper, that it is an intermediary holding shares on someone’s behalf, under conditions imposed by French Law; and

·

such an intermediary has, upon our or Société Générale’s request, disclosed the identity of the non-resident holders of the shares whose voting rights are exercised.

An intermediary who complies with the above-mentioned requirements may exercise the voting rights or transmit the relevant proxies pertaining to the shares for which they have received a general power of attorney. However, such voting rights or proxies will not be taken into account if the intermediary has not registered or has not disclosed the identity of the non-resident holders of the shares for whom such voting rights or proxies are exercised.

Quorum

Under French law, a quorum requires the presence, in person, by mail or by proxy, or by any means including remote data transmission, in accordance with applicable laws and our by-laws, of shareholders holding at least (i) 20% of the shares entitled to vote, in the case of an ordinary general meeting or an extraordinary general meeting deciding upon any capital increase by incorporation of reserves, profits or share premiums, (ii) 25% of the shares entitled to vote, in the case of any other extraordinary general meeting, or (iii) 33 1/3% of the shares entitled to vote in the case of any special meeting.

If a quorum is not present at any meeting, the meeting is adjourned. There is no quorum requirement when an ordinary general meeting is reconvened. However, when an extraordinary general meeting or a special meeting is reconvened, the quorum required is 20% of the shares entitled to vote, except where the reconvened meeting is considering an increase in our share capital through incorporation of reserves, profits or share premiums. If a quorum is not present, the reconvened meeting may be adjourned for a maximum of two months. No deliberation by the shareholders may take place without a quorum. However, only questions that were on the agenda of the adjourned meeting may be discussed and voted upon.

Majority

Approval of any resolution at an ordinary general meeting or an extraordinary general meeting deciding upon any capital increase by incorporation of reserves, profits or share premiums requires a simple majority of the votes cast. Approval of any other resolution at an extraordinary general meeting requires a two-thirds majority of the votes cast. Notwithstanding these rules, any proposal to increase shareholders’ liabilities requires a unanimous vote. Abstention from voting by those present in person or represented by proxy or voting by mail counts as a vote against any resolution submitted to a vote.

In general, and pursuant to our by-laws each of our shareholders is entitled to one vote per share, subject to the limitations described above and under “Requirements for Holdings Exceeding Certain Percentages” below.

Under French law, any of our shares held by us or by entities controlled directly or indirectly by us have no voting rights and do not count for quorum or majority purposes.


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Financial Statements and Other Communications with shareholders

In connection with any shareholders’ meeting, we must provide a set of documents including our Annual Report and a summary of the results of the five previous fiscal years to any shareholder who so requests.

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

Pursuant to the French Financial Security Law of August 1, 2003, the Chairman of our Board prepares a special report to the annual general shareholders’ meeting regarding the terms of preparation and organization of the workings of our Board of Directors, the terms of internal controls procedures implemented by our Company and the restrictions, if any, that our Board of Directors has placed on powers granted to the Chief Executive Officer (Directeur général). More precisely, this report describes our internal control objectives, the organization of internal control participants and internal control procedures in place. This report will be presented to the combined extraordinary and ordinary shareholders’ meeting of May 3, 2007.

Dividends

We may only distribute dividends to our shareholders from our stand-alone net income in each fiscal year (after deductions for depreciation and provisions), as increased or reduced by any profit or loss carried forward from prior years, less any contributions to the reserve accounts pursuant to law or our by-laws.

Legal reserve

French law provides that French sociétés anonymes such as our Company must allocate 5% of their unconsolidated statutory net profits in each fiscal year, after reduction for losses carried forward from previous years, if any, to a legal reserve fund before dividends may be paid with respect to that year. Funds must be allocated until the amount in that fund equals 10% of the aggregate nominal amount of the issued and outstanding share capital. This restriction on the payment of dividends also applies to each of our French subsidiaries on an unconsolidated basis. The legal reserve constitutes a legal guarantee for third party dealing with us and, in this respect, they may not be distributed to shareholders, nor used by us to purchase treasury shares. In the event of loss, the legal reserve funds will be used to compensate such loss in the absence of any other available reserve. As of the present date, our legal reserve is approximately €32 million (before profit allocations that are to be decided at the general shareholder’s meeting to be held on May 3, 2007).

Approval of dividends

Upon recommendation of our Board of Directors, our shareholders may at the annual general meeting decide to allocate all or part of distributable profits among special or general reserves, to carry them forward to the next fiscal year as retained earnings, or to allocate them to the shareholders as dividends. Our Board of Directors may propose a dividend for approval by the shareholders at the annual general meeting of shareholders.

We must distribute dividends to our shareholders pro rata according to their shareholdings.

Interim dividends

If we have earned distributable income since the end of the preceding fiscal year, as reflected in an interim income statement certified by our auditors, our Board of Directors may distribute interim dividends, to the extent of the distributable income without shareholder approval, subject to French corporate law and regulations.


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Option to receive dividends in shares

Our by-laws authorize our shareholders, in an ordinary general meeting, to authorize the grant to each holder of an option to receive all or part of any annual or interim dividends in either cash or in our shares. For dividends or interim dividends paid in shares, prior authorization by a shareholders’ meeting is required.

Timing of payment of dividends

The actual dividend payment date is decided by our shareholders at an ordinary general meeting or by our Board of Directors, if no decision is taken by our shareholders. We must pay any dividends within nine months of the end of our fiscal year. Dividends not claimed within five years of the date of payment revert to the French State.

Increases in Share Capital

Pursuant to French law, we may increase our share capital only with our shareholders’ approval at an extraordinary general meeting. We may increase our share capital by issuing common or preferred shares, by issuing a new class of equity securities or by increasing the nominal value of our existing shares. Increases in share capital by issuing common or preferred shares may be effected by issuing such securities:

·

for cash;

·

subject to certain conditions, in satisfaction of our indebtedness;

·

for assets contributed in kind;

·

by capitalization of our profits, reserves or share premiums, in which case additional shares will be issued and delivered to our shareholders free of charge;

·

upon conversion, exchange or redemption of debt securities previously issued; or

·

upon the exercise of any such rights attached to securities giving rights to common or preferred shares including warrants or options shares.

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

Since the promulgation of the ordinance no. 2004-604 of June 24, 2004, shareholders, at an extraordinary general meeting, may delegate the authority, subject to certain conditions, or the powers to carry out certain increases in our share capital to the Board of Directors. The Board of Directors may further delegate this right to the Chief Executive Officer and with his agreement, to one or several delegated general directors (directeurs généraux délégués).

Under French law, each time shareholders decide on a capital increase or decide to delegate to the Board of Directors the right to carry out a capital increase (except when the increase in share capital results from an earlier issue of securities giving rights to shares), they must decide whether or not to proceed with a capital increase reserved to the employees of the Company and its subsidiaries or, delegate to the Board of Directors the authority or powers to carry out such reserved capital increase, as applicable.

Decreases in Share Capital

According to French law, we may decrease our share capital only with our shareholders’ approval at an extraordinary general meeting. In the case of a capital reduction, other than a reduction to absorb losses or a reduction as part of a program to purchase our own shares, all holders of shares must be offered the possibility to participate in such a reduction. There are two ways by which we may reduce our share capital: by decreasing the nominal value of our outstanding shares or by reducing the number of outstanding shares. We may reduce the number of outstanding shares either by exchanging shares or, if the reduction is not due to losses incurred by us, by repurchasing and canceling shares. Holders of each class of shares must be treated equally unless each affected holder agrees otherwise.


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Preferential Subscription Rights of shareholders

Under French law, current shareholders have preferential subscription rights to subscribe on a pro rata basis for issuances of new shares or other securities giving rights to our share capital issued by us for cash. These preferential subscription rights require us to give priority treatment to our shareholders. Shareholders may waive their preferential rights in respect of a particular offering, either individually or as a group at an extraordinary general meeting. During the subscription period relating to a particular offering of shares, shareholders may transfer their preferential subscription rights, if they have not previously waived these rights. Also, during this period, preferential subscription rights may be listed on Euronext Paris or any relevant stock exchange.

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

For additional information, see “Item 3. Key Information – Risk Factors – Risks Related to our Shares and to our ADSs”.

Ownership of ADSs or Shares by Non-French Residents

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

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

However, pursuant to the French decree No. 2003 196 of March 7, 2003, the acquirer/investor must file a déclaration administrative (administrative notice) with French authorities in connection with certain cases of foreign investments, direct investments and indirect foreign investments in any French company. Under existing administrative rulings, ownership of more than 33.33% of a French company’s share capital or voting rights is regarded as a direct investment subject to a déclaration administrative.

Form, Holding and Transfer of Shares

Form of shares

Our by-laws provide that our shares may, at the shareholder’s option, be held either (i) in bearer form and recorded in its name in an account maintained by an accredited financial intermediary, such as a French broker, bank or other authorized financial institution, or (ii) in registered form in its name in an account maintained by Société Générale for us and on our behalf. Shareholders may, at their own choosing and expense, change from one form of holding to the other.


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Holding of shares

In accordance with French law concerning the dematerialization of securities, shareholders’ ownership rights are represented by book entries instead of share certificates. We maintain a share account with Euroclear France SA (“Euroclear”) with respect to all shares in registered form, which is administered by Société Générale acting on our behalf as our agent. In addition, we maintain separate accounts in the name of each shareholder either directly or through the holder’s accredited intermediary. Each shareholder’s account shows the name of the holder and the number of shares held and shows whether shares are held through an accredited intermediary. Société Générale, as a matter of course, issues confirmations to each registered shareholder as to shares registered in the holder’s account. However, these confirmations are not documents of title.

Shares held in bearer form are held on the holder’s behalf in an account maintained by an accredited intermediary and are registered in an account maintained by such accredited intermediary with Euroclear, which is separate from our share account with Euroclear. Each accredited intermediary maintains a record of shares held through it and will issue certificates of registration for the shares that it holds. If this alternative is adopted, the shares are referred to as being in bearer form, although no bearer document of title is issued by us or on our behalf with respect to them. Shares held in bearer form may only be transferred through accredited intermediaries and Euroclear.

Our by-laws permit us to request at any time that Euroclear provide us, among other things, with the identity of the holders of our shares or other securities granting immediate or future voting rights, held in bearer form, and with the number of shares or other securities so held and if applicable, the restrictions relating to such securities.

In addition, according to French law, shares held by any non-French resident may be held in a collective account or in several individual accounts by an intermediary acting on the holder’s behalf. The intermediary must declare that it is acting as an intermediary and may be requested by us to provide the identity of the shareholders on whose behalf it is acting.

Transfer of shares

Our by-laws do not contain any restrictions relating to the transfer of shares, other than those provided for by French law and regulations.

Registered shares must be converted into bearer form before being transferred on Euronext Paris and, accordingly, must be inscribed in an account maintained by an accredited intermediary. A shareholder may initiate a transfer by giving instructions to the relevant accredited intermediary with respect to shares held in bearer form (“au porteur”) or in administered registered form (“au nominatif administré”) and to Société Générale with respect to shares held in pure registered form (“au nominatif pur”).

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

Identification of shareholders

Our by-laws permit, in accordance with applicable legislation, the use of a procedure known as titres au porteur identifiables, according to which Euroclear (or any clearing agent that may replace Euroclear) will, upon our request at any time, disclose all or selected information regarding our shareholders, including name, date of birth (or, in the case of a legal person, name and date of organization), nationality, address and the amount of shares or securities that have or may in the future have a voting right held by such holder that have, or may in the future acquire, voting rights, and, as the case may be, the restrictions that may apply to these shares or securities.

Pursuant to applicable law, the accredited intermediary that holds shares or securities in bearer form on behalf of a shareholder must transmit the above requested information to Euroclear within 10 business days following the request. If the time limit is not complied with or if the information is inaccurate or incomplete, Euroclear may ask the President of the Tribunal de Grande Instance (Civil Court) to compel the accredited intermediary to comply with its duties. Within five days after such transmission, Euroclear provides the information to us on a confidential basis.


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If we consider that in turn the holder of bearer shares or securities whose identity has been disclosed holds shares or securities on behalf of third parties, we may renew our request indefinitely through Euroclear until we find the actual owner of our shares or securities.

With respect to shares or securities in registered form, we may at any time request from any intermediary to disclose, within 10 business days following the request, the identity of the person it acts for. If we consider that in turn this person whose identity has been disclosed holds shares on behalf of third parties, we may renew our request indefinitely until we find the actual owner of our shares or securities.

If the person does not transmit the above requested information in due time or transmits incomplete or inaccurate information pertaining to its status or to the owners of our securities, the voting rights of the shares or the securities giving immediate or future access to our share capital for which such person is registered cannot be exercised until such date as such information has been disclosed or rectified, and the payment of the corresponding dividend is postponed until such date. In addition, if the person knowingly fails to comply with the obligation to disclose the identity of the relevant security owner, a court may, at our request or at the request of one or several shareholders representing at least 5% of our share capital, deprive some or all the shares held by the security holder whose identity was not disclosed from any voting rights and dividends, for a period not to exceed 5 years.

According to French law, and notwithstanding any other obligation to report holdings exceeding certain percentages, any entity holding more than 2.5% of our share capital or voting rights must disclose, upon our request, the identity of any individual or entity holding, directly or indirectly, more than 1/3 of its share capital or voting rights attached hereto.

Requirements for Holdings Exceeding Certain Percentages

French law provides that any individual or entity (including a holder of ADSs), acting alone or in concert with others, that directly or indirectly becomes the owner of more than 5%, 10%, 15%, 20%, 25%, 33 1/3, 50%, 66 2/3%, 90% or 95% of the outstanding shares or voting rights of a listed company in France, such as our Company, or whose holdings fall below any of these thresholds, must notify us within 5 trading days of crossing the threshold of the number of shares and voting rights it holds. The individual or entity also must notify the AMF within 5 trading days of crossing any of these thresholds. A holder who, when increasing its shareholdings, violates these notification requirements will lose the voting rights attached to the undeclared shares above the relevant threshold. The shareholder will not regain these voting rights until 2 years following the date that it notifies the AMF of having crossed this threshold. Also, a shareholder who does not comply with the notification requirements may have all or part of its voting rights suspended for up to 5 years by the commercial court at the request of our Chairman, any of our shareholders or the AMF, or may be subject to criminal penalties and fines.

Under French law, any person or persons, acting alone or in concert with others, who acquire more than 10% or 20% of our outstanding share capital or our voting rights, either through shares or ADSs, must fill a report within ten trading days following the threshold crossing to us and the AMF. In this report, the acquirer must indicate whether or not he intends, within the 12-month period following the acquisition, to increase his shareholdings and to request a seat on our Board of Directors and whether they are acting in concert with others. The AMF makes the notice public and the person or persons who have acquired the voting rights must publish a press release in a financial newspaper having national circulation in France. The acquirer may amend its stated intentions, provided that it does so on the basis of significant changes in its own situation or shareholders. Upon any change of intention, it must file a new disclosure report. The sanctions regarding failure to comply with these rules are identical to those regarding threshold crossings described above.


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To permit shareholders to give the notice required by French law, we must publish, pursuant to our by-laws, information regarding the total number of current and potential shares and voting rights and the number of securities granting access immediately or subsequently to capital or voting rights available as of the date of our annual general meeting in the BALO within 15 calendar days after this meeting and inform the AMF thereof. Under French law, every month, we must also notify the AMF of, and publish, the total number of voting rights and shares of our share capital if the number of available voting rights and shares so notified has changed compared with the last published information. In order to facilitate compliance with the notification requirements, a holder of ADSs may deliver to Citibank, our ADS depositary bank, notifications regarding shares represented by ADRs and Citibank will forward the notification to us and the AMF as soon as practicable.

Under the regulations of the AMF and subject to its limited exemptions, any person or persons acting in concert who come to own more than 33 1/3 of the share capital or voting rights of Rhodia must initiate a public tender offer for the balance of our share capital and for the balance of the securities giving access to our share capital (including, for these purposes, all securities convertible into or exchangeable for equity securities).

Purchase of our Own Shares

Under the French Commercial Code, we may not issue shares to ourselves. However, we may purchase our own shares in the limited cases described in “Item 9. The Offer and Listing – Purchase and Trading by Rhodia in Its Own Shares”.

French Insolvency Laws

Rhodia SA 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 no. 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 at January 1, 2006.

Pursuant to article 1244-1 of the French Civil Code (Code civil), French courts may order the deferral or otherwise reschedule over a maximum period of two years the payment obligations of the debtor. In addition, pursuant to article 1244-1, French courts may order that any such deferred or rescheduled amounts bear interest at a lower rate than the contractual rate (yet not lower than the minimum statutory rate) and/or that payments be first allocated to the repayment of the principal rather than interest. A court order rendered under article 1244-1 of the French Civil Code in respect of one or more creditors will automatically suspend any pending enforcement proceedings initiated by such creditors against the debtor and any contractual penalties for late payment will not accrue or be due during the period set by the court.

A company may, provided it faces actual or foreseeable difficulties of a legal, economic or financial nature and so long as it has not been insolvent for more than 45 days (as defined by the French insolvency test of cessation des paiements, under which the company cannot pay its outstanding debts out of its available assets), petition for conciliation proceedings (formerly voluntary arrangement - règlement amiable). This procedure will result in the appointment of a conciliator in charge of supervising and facilitating a rescheduling agreement.

Conciliation proceedings may last up to five months (the president of the commercial court can appoint a conciliator for a period not exceeding four months which he may, through a reasoned ruling, extend by one month at the most when so requested by the conciliator). A company’s creditors may continue to pursue any legal proceedings against it during the conciliation phase. When such creditors pursue the company during conciliation proceedings, the company will have the possibility to ask the judge to defer or reschedule its payment obligations. The aim of conciliation proceedings is to facilitate the conclusion of an amicable restructuring between the company and its principal creditors as well as its usual contract partners. An agreement reached by means of a conciliation procedure can either be approved by a court ratification (homologation) or recognized by the court (constatation). Where an agreement reached by means of a conciliation procedure is approved by a court ratification order, which can only be requested by the debtor, creditors providing additional capital to support the debtor’s attempt to recover will be privileged in the event of subsequent insolvency or liquidation proceedings. As an alternative to the approval procedure, the parties may request, by means of a joint application, that the court recognize the conciliation agreement. However, an agreement that is recognized will not allow creditors to benefit from the above-mentioned privilege.


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When conciliation proceedings fail, the judge terminates the conciliator’s mission. If the debtor is not insolvent at the time, the debtor will have the choice of initiating safeguard proceedings. On the contrary, if the debtor is insolvent, the judge will initiate reorganization or liquidation proceedings:

The 2005 French Insolvency Law introduced a new procedure called “safeguard proceedings” (procédure de sauvegarde). The main objectives of this procedure are to permit the survival of the company as a going concern, to preserve employment and to discharge the liabilities of the company. The company, to the exclusion of its creditors, can only initiate this procedure provided it does not meet the French insolvency test of cessation des paiements. The company should be facing difficulties that could lead to an insolvency situation in order to trigger safeguard proceedings. These proceedings are governed by the same rules as the reorganization proceedings (as described hereafter). Two creditors’ committees (one for main suppliers, one for credit institutions) are set up for large companies (more than 150 employees or €20 million in turnover and the company’s accounts must have been certified by a statutory auditor or prepared by a public accountant) and should be consulted on the safeguard plan (as well as on the reorganization plan in the case of reorganization proceedings) drafted by the debtor’s Management during the observation period, which may last up to a maximum of 6 months which may be renewed once by a reasoned ruling on motion of the administrator, the debtor or the public prosecutor for another period of 6 months. It may also be extended exceptionally, on motion of the public prosecutor, by a reasoned ruling of the Court for a period which may not exceed 6 months.

The safeguard procedure has two possible outcomes, the adoption of the safeguard plan and as a consequence, the continuation of the business of the company. The plan may also provide for the cessation or the sale of part of the business of the company, if it is considered necessary for the reorganization of the company. If the preparation of a safeguard plan is impossible and the safeguard procedure fails, the court may either order the cessation of part of the business, make an order for the reorganization of the company or if the reorganization is “manifestly impossible”, the court may decide to liquidate the company. If during the performance of the plan, the debtor meets the French insolvency test of cessation des paiements, the court which has confirmed the plan shall, after the public prosecutor has given his opinion, order its rescission and pronounce a judicial liquidation.

When a company is in a situation where it is unable to pay its outstanding debts from its available assets, it is required to petition for bankruptcy within 45 days from the beginning of its insolvency. If it does not, directors and, as the case may be, de facto managers are subject to civil liability. The proceedings may also be initiated by creditors, the public prosecutor or by the court on its own initiative. As seen above, two creditors’ committees could be set up and should be consulted on the reorganization plan.

The court order commencing bankruptcy proceedings (jugement d’ouverture) may order either the reorganization of the company or its liquidation. In the event of reorganization, an administrator appointed by the court (the court has no obligation to appoint an administrator when the company has less than 20 employees and has an annual turnover of less than €3 million) investigates the business of the company during an initial observation period and makes proposals for its reorganization, sale or liquidation. At any time during this observation period, the court can order the liquidation of the company.

The date upon which the debtor becomes unable to pay its debts, the date of suspension of payments (date de cessation des paiements), is deemed to be the date of the court order commencing bankruptcy proceedings. However, in this or a subsequent order, the court may set the date of suspension of payments at an earlier date of up to 18 months prior to the court order commencing bankruptcy proceedings. The date of suspension of payments is important because it marks the beginning of the suspect period (période suspecte). Certain transactions entered into by the debtor during the suspect period are, by law, void or voidable.


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Void transactions include transactions or payments entered into during the suspect period that constitute voluntary preferences for the benefit of some creditors to the detriment of other creditors. These include transfers of assets for no consideration, contracts under which the reciprocal obligations of the debtor significantly exceed those of the other party, payments of debts not due at the time of payment, payments made in a manner which is not commonly used in the ordinary course of business, security granted for debts previously incurred, decisions to grant stock options, to exercise or sell these options, the transfer of goods or rights in a fiduciary estate and provisional measures, unless the right of attachment or seizure predates the date of suspension of payments.

Voidable transactions include transactions or payments made when due after the date of suspension of payments, if the party dealing with the debtor knew of the suspension of payments. Transactions relating to the transfer of assets for no consideration are also voidable when realized during the six-month period prior to the beginning of the suspect period. Notice made to third parties shareholders (avis à tiers détenteur), seizures to allocate (saisie‑attribution), oppositions, made after the date of suspension of payments, will also be voidable.

As a general rule, creditors domiciled in France whose debts arose prior to the commencement of bankruptcy proceedings must file a claim with the creditors’ representative within two months of the publication of the court order in the Official Bulletin of Civil and Commercial Announcements (Bulletin officiel des annonces civiles et commerciales); this period is extended to four months for creditors domiciled outside France. Creditors who have not submitted their claims during the relevant period are barred from receiving distributions made in connection with the bankruptcy proceedings and their unasserted claims are extinguished. Employees are not subject to such limitations and are preferential creditors under French law. Since January 1, 2006 this rule also applies to creditors whose debts arose after the commencement of bankruptcy proceedings and which were not intended for the needs of the proceedings, or the observation period, or as a consideration of a contribution provided to the debtor for its professional activity.

From the date of the court order commencing the bankruptcy proceedings, the debtor is prohibited from paying outstanding debts which arose prior to this date as well as debts which arose after this date and which did not take place for the purpose of the procedure. However this rule is subject to certain exceptions which essentially cover the set-off of related debts and payments, authorized by the bankruptcy judge, made to recover assets for which recovery is justified by the continued operation of the business. During this period, creditors may not pursue any individual legal action against the debtor with respect to any claim arising prior to the court order commencing the bankruptcy proceedings or when the creditors’ debts arose after the court order and were not for the purpose of the procedure if the objective of such legal action is:

·

to obtain an order for or payment of a sum of money by the debtor to the creditor (however, the creditor may require that a court determine the amount due);

·

to terminate or cancel a contract for non-payment of amounts owed by the creditor, or

·

to enforce the creditor’s rights against any assets of the debtor.

Contractual provisions such as those contained in indentures that would accelerate the payment of the debtor’s obligations upon the opening of certain bankruptcy proceedings are not enforceable under French law.

The administrator may terminate or continue executory contracts provided that the debtor fully performs its post-petition contractual obligations.

If the court orders a judicial reorganization, it can set a time period during which the assets that it deems to be essential to the continued business of the debtor may not be sold without its consent and it can reschedule the payment of debts owed by debtors.

French bankruptcy law assigns priority to the payment of certain preferential creditors, including employees, the bankruptcy court, officials appointed by the bankruptcy court as required by the regulations relating to bankruptcy proceedings, post-petition creditors, certain secured creditors (essentially in the event of liquidation) and the French Treasury.


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Material Contracts

We have not entered into any material contracts, other than those entered into the ordinary course of business, during the past two years.

Exchange Controls

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

Taxation

French taxation of shares

The following is a general summary of the principal French tax consequences of purchasing, owning and disposing of our shares. This summary may only be relevant to you if you are not a resident of France and you do not hold your shares in connection with a business conducted in France.

This discussion is intended only as a descriptive summary. It does not address all aspects of French tax laws that may be relevant to you in light of your particular circumstances. It is based on the applicable laws, conventions and treaties in force as of the date of this Annual Report, all of which are subject to change, possibly with retroactive effect, or to different interpretations. If you are considering buying our shares, you should consult your own tax advisor about the potential tax effects of owning or disposing of shares in your particular situation.

Taxation on sale or disposal of shares

Generally, you will not be subject to any French income tax or capital gains tax when you sell or dispose of our shares if the following apply to you:

·

you are not a French resident for French tax purposes; and

·

you have held, either directly or indirectly, alone or with relatives, shares, known as droits aux bénéfices sociaux, not representing more than 25% of our profits, at any time during the preceding five years.

If a double tax treaty between France and your country contains more favorable provisions, you may not be subject to any French income tax or capital gains tax when you sell or dispose of any of our shares.

If you transfer shares using a written agreement, that agreement must generally be registered. You will be required to pay a registration of duty of 1.1%, capped at €4000, (not applicable in case of listed companies if no agreement entered) on either the purchase price or the market value of the shares transferred, whichever is higher. However, in some circumstances, if the agreement is executed outside of France, you will not be required to pay this duty.

Taxation of dividends

In France, companies may only pay dividends out of income remaining after tax has been paid.


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French Withholding Tax

Under French domestic law, dividends paid to shareholders who are not residents in France are normally subject to a 25% withholding Tax. Under most tax treaties entered into between France and other countries, the rate of this withholding tax may be reduced in specific circumstances. The shareholder can generally subsequently be entitled to a tax credit in his or her country of residence for the amount of tax actually withheld. Under some tax treaties, the withholding tax is eliminated altogether.

French Tax Credit

A tax credit known as the avoir fiscal was previously attached to certain distributions from French companies. Such avoir fiscal was, subject to certain conditions, transferred to certain non-French tax residents receiving dividends from a French company. The French Budget Law abolished this tax credit for 2004.

With respect to dividends paid as of January 1, 2005, French individual shareholders are now entitled, (i) to a tax rebate of 40% (dividends paid as from January 1, 2006), (ii) to a tax rebate of €3,050 or, as the case may be, €1,525, depending on the marital status of the individual shareholder (dividends paid as from January 1, 2006) and (iii) to a new tax credit equal to 50% of the dividend paid, capped, per year, at €230 or, as the case may be, €115, depending on the marital status of the individual shareholder. Non-individual shareholders are not entitled to these tax rebates, nor to this newly implemented tax credit.

Under French law, non-residents are not eligible for the benefit of the French tax credits (including from 2005, to the new tax credit).

However, certain tax treaties provided for a refund of the avoir fiscal or similar tax credit to certain non-residents. Due to these tax treaties, individual shareholders that are residents of countries that have signed the above-mentioned treaties may be entitled to a refund of the new tax credit replacing the avoir fiscal.

The following countries, French overseas territories, (known as Territoires d’Outre-mer) and other territories have entered into treaties with France that provide for the arrangements summarized below:

Australia

India

Mexico

Switzerland

Austria

Israel

Namibia

Togo

Belgium

Italy

Netherlands

Turkey

Bolivia

Ivory Coast

New Zealand

Ukraine

Brazil

Japan

Niger

United Kingdom

Burkina Faso

Latvia

Norway

United States

Canada

Lithuania

Pakistan

Venezuela

Estonia

Luxembourg

Senegal

Territoires d’Outre-mer

Finland

Malaysia

Singapore

and other:

Gabon

Mali

South Korea

Mayotte

Ghana

Malta

Spain

New Caledonia

Iceland

Mauritius

Sweden

Saint-Pierre-et-Miquelon


Under these treaties, a shareholder who fulfills specific conditions may generally apply to the French tax authorities for the following:

·

a lower rate of withholding tax, generally 15%; and

·

a refund of the avoir fiscal (when this was still available) which should open the possibility of a refund of the new tax credit (net of applicable withholding tax), to the extent such tax credits are available.


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Dividends paid since 2005. As to dividends paid since 2005 to non-French resident shareholders benefiting from the provisions of a tax treaty (regardless of whether such treaty provides for the refund of the avoir fiscal), they should generally continue to be subject, on the date of payment of the dividend, to the withholding tax at the lower rate provided for by such tax treaty (rather than to the French withholding tax at the rate of 25% to be later reduced to the treaty rate), provided, however, that these non-residents establish their entitlement to such lower rate before the date of payment of the dividend by providing us with a certificate (the Certificate) based on the draft provided by the French Tax Authorities in their Administrative Guidelines 4 J-1-05, dated February 25, 2005.

If a non-resident does not file the Certificate before the dividend payment date, we shall withhold French withholding tax at the rate of 25%. Such non-resident will be entitled to claim a refund of the excess withholding tax by completing and providing the French tax authorities with the relevant form before December 31 of the second year following the year during which the dividend is paid.

Non-resident individual shareholders that benefit from a tax treaty which provides for the refund of the avoir fiscal (which they were entitled to for dividends paid until January 1, 2005), will be entitled to the refund of this new tax credit available to French resident individual shareholders since January 1, 2005 with respect to distributions paid since 2005 (French tax authorities Administrative Guidelines 5 I-2-05 dated August 11, 2005).

Estate and gift tax

France imposes estate and gift tax when an individual or entity acquires shares of a French company by way of inheritance or gift. The tax applies without regard to the residence of the transferor or transferee. However, France has entered into estate and gift tax treaties with a number of countries. Under these treaties, residents of those countries may be exempted from this tax or obtain a tax credit, assuming specific conditions are met. You should consult your own tax advisor about whether French estate and gift tax will apply to you and whether you may claim an exemption or tax credit.

Wealth tax

You will not be subject to French wealth tax, known as impôt de solidarité sur la fortune, on your Rhodia shares if both of the following apply to you:

·

you are not a French resident for French tax purposes; and

·

you own less than 10% of our share capital, either directly or indirectly, and your shares do not enable you to exercise influence on us.

If a double tax treaty between France and your country contains more favorable provisions, you may not be subject to French wealth tax even if one or both of the above statements apply to you.

Taxation of US Holders of Shares or ADSs

The following is a general summary of certain material US federal income and French tax consequences to US holders of owning and disposing of our shares or ADSs. For purposes of this summary, you are a “US holder” if you are the beneficial owner of Rhodia shares or ADSs and all of the following six points apply to you:

1)

you own (directly, indirectly or through attribution) less than 10% of the outstanding share capital or voting stock of Rhodia;

2)

you are any one of (a), (b), (c) or (d) below and you or the beneficiaries are subject to US federal income taxation on a net income basis:

a)

an individual who is a citizen or resident of the United States for US federal income tax purposes,

b)

a corporation or other entity taxable as a corporation for US federal income tax purposes created or organized in or under the laws of the United States or any state thereof (including the District of Columbia),


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c)

an estate whose income is subject to US federal income tax regardless of its source, or

d)

a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust, and if one or more United States persons have the authority to control all substantial decisions of the trust;

3)

you are entitled to the benefits of the Convention between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital, signed August 31, 1994, and any protocols thereto (the “US-France tax treaty”) as a US resident under the “limitation on benefits” article of that treaty;

4)

you are not also a resident of France;

5)

you hold the shares or ADSs as capital assets; and

6)

your functional currency is the US dollar.

If a partnership (including for this purpose any entity treated as a partnership for US federal income tax purposes) holds shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. If you are a partner in a partnership that holds shares or ADSs, you are urged to consult your own tax advisor regarding the specific tax consequences of owning and disposing of your shares or ADSs.

Special rules may apply to US holders that are United States expatriates, banks, regulated investment companies, insurance companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, securities broker-dealers, traders in securities who elect to apply a mark-to-market method of accounting, persons who acquired their shares or ADSs pursuant to the exercise of employee stock options or otherwise as compensation, and persons holding their shares or ADSs as part of a straddle, hedging or conversion transaction, among others. Those special rules are not discussed in this summary. Furthermore, this discussion is based on current United States tax laws and US Internal Revenue Service (the “IRS”) practice, including the Internal Revenue Code of 1986, as amended, Treasury regulations, rulings, judicial decisions, administrative pronouncements, and French law and practice, all as in effect as of the date hereof and all of which are subject to change or changes in interpretation, possibly on a retroactive basis. In addition, this summary is based, in part, upon representations made by the Depositary to us and on the assumption that each obligation in the Deposit Agreement and any related agreements will be performed in accordance with its terms. You should consult your own tax advisors concerning the US federal, state or local tax consequences in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.

For purposes of the US-France tax treaty and the United States Internal Revenue Code of 1986, as amended, if you own ADSs evidenced by ADRs, you will be treated as the owner of the shares represented by such ADSs. Accordingly, in the following discussion, references to shares shall include ADSs unless the context specifically requires otherwise.

Taxation of Dividends

Withholding tax and French tax credits. Under the US-France tax treaty, the rate of French withholding tax on dividends paid to a US holder whose ownership of the ADSs or shares is not effectively connected with a permanent establishment or a fixed base in France is reduced to 15%.

US holders benefiting from the reduced rate of the dividend withholding tax under the US-France tax treaty may be subject immediately to the 15% withholding tax rate upon payment of the dividends if the US holder provides before the dividend payment date a residency certificate (the “Certificate”) based on the draft provided by the French Tax Authorities in their Administrative Guidelines 4 J 1 05, dated February 25, 2005.

If a US holder entitled to a reduced withholding tax rate does not file a completed Certificate before the dividend payment date, we will withhold French withholding tax at the rate of 25%. Such US holder will be entitled to claim a refund of the excess withholding tax by completing and providing the French tax authorities with the Treasury Form RF1 B EU-No. 5053 (or any other form that may replace such Treasury Form) before December 31 of the second year following the year during which the dividend is paid.


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If you are a holder of ADSs, you can obtain the Treasury Form referred to above or the Certificate from the Depositary and also from the United States Internal Revenue Service, and the Depositary will file it with the French tax authorities as long as you deliver a completed document within the requisite time period.

Finally, individual US holders are entitled to the refund of the new tax credit described under French taxation of shares above, subject to the deduction of a 15% withholding tax.

For US federal income tax purposes, the gross amount of a dividend and any French tax credit paid to you, including any French withholding tax, will be included in your gross income as dividend income. You generally must include these amounts in income on the date the payment is actually or constructively received by you, which, if you hold ADSs, will be the date on which the payment is received by the Depositary. Dividends paid by us will not give rise to any dividends received deduction. They will generally constitute foreign source “passive” income for foreign tax credit purposes (or, for some holders, foreign source “financial services” income). Under recently enacted legislation, for taxable years beginning after December 31, 2006, dividend income generally will constitute “passive category” income, or, in the case of certain US holders, “general category” income.

In addition, for US federal income tax purposes, the amount of any dividend paid to you in euro, including any French withholding taxes, generally will be included in gross income in an amount equal to the US dollar value of the euro amount calculated by reference to the spot rate in effect on the date the dividend is includible in income, regardless of whether you convert the payment into US dollars. You may be required to recognize US source ordinary income or loss when you subsequently sell or dispose of the euro. You may also be required to recognize foreign currency gain or loss if you receive a refund of tax withheld from a dividend in excess of the 15% rate provided for under the US-France tax treaty. This foreign currency gain or loss generally will be US source ordinary income or loss.

If you are an accrual method taxpayer, then unless you make the election described below you must translate French taxes into US dollars at a rate equal to the average exchange rate for the taxable year in which the taxes accrue, but must translate taxable dividends into US dollars at the spot rate on the date received. This difference in exchange rates may reduce the US dollar value of the credits for French taxes relative to your US federal income tax liability attributable to a dividend. However, for taxable years beginning after 2004, an accrual method US holder may elect to translate French taxes into US dollars using the exchange rate in effect at the time the taxes were paid. Any such election will apply for the taxable year in which it is made and all subsequent years, unless revoked with the consent of the IRS.

French withholding tax imposed on the dividends you receive on your shares or ADSs and on any French tax credit at 15% under the US-France tax treaty is treated as payment of a foreign income tax. You may claim this amount as a credit against your US federal income tax liability, subject to detailed conditions and limitations, or you may instead claim an itemized deduction for all of the foreign taxes you pay in a particular year. A deduction does not reduce United States tax on a dollar-for-dollar basis like a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax credits.

The United States Treasury has expressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for US holders of ADSs. Accordingly, the discussion above regarding the creditability of French withholding tax could be affected by future actions that may be taken by the United States Treasury. You are urged to consult your own tax advisor regarding the availability of foreign tax credits.

Certain US holders (including individuals and some trusts and estates) are eligible for reduced rates of US federal income tax at a maximum rate of 15% in respect of “qualified dividend income” received in taxable years beginning before January 1, 2011. For this purpose, qualified dividend income generally includes dividends paid by a non-US corporation if, among other things, the US holder meets certain minimum holding periods and the non-US corporation is not a “passive foreign investment company” (as described below under Passive foreign investment company status) for the taxable year in which the dividend is paid or the proceeding taxable year and satisfies certain other requirements, including that either (i) the shares (or ADSs) with respect to which the dividend has been paid are readily tradable on an established securities market in the United States, or (ii) the non-US corporation is eligible for the benefits of a comprehensive US income tax treaty (such as the US-France tax treaty) which provides for the exchange of information. We currently believe that dividends paid with respect to our shares and ADSs will constitute qualified dividend income for US federal income tax purposes. The United States Treasury and the IRS have announced their intention to promulgate rules pursuant to which holders of shares or ADSs, among others, will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividend income. You are urged to consult your own tax advisor regarding the availability of the reduced dividend tax rate in light of your own particular situation and regarding the computation of your foreign tax credit with respect to any qualified dividend income paid by us, as applicable.


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Taxation of capital gains

If you are a resident of the United States for purposes of the US-France tax treaty, you will not be subject to French tax on any capital gain if you sell, exchange or otherwise dispose of your shares or ADSs, unless you have a permanent establishment or fixed base in France and the shares or ADSs you sold, exchanged or otherwise disposed of were part of the business property of that permanent establishment or fixed base. Special rules apply to individuals who are residents of more than one country.

In general, for US federal income tax purposes, you will recognize capital gain or loss if you sell, exchange or otherwise dispose of your shares or ADSs in an amount equal to the difference between the US dollar value of the amount realized on the disposition and your tax basis in the shares or ADSs (generally, the amount in US dollars for which you purchased the shares or ADSs). Any gain or loss generally will be US source gain or loss, and will be treated as long-term capital gain or loss if your holding period in the shares or ADSs exceeds one year at the time of disposition. If you are an individual, any capital gain generally will be subject to US federal income tax at preferential rates if you meet the specified minimum holding periods. The deductibility of capital losses is subject to significant limitations.

Furthermore, any deposit or withdrawal of shares by you for ADSs will not be subject to US federal income tax.

Taxation of Preferential Subscription Rights Distributed in 2004

We believe that the distribution of preferential subscription rights to US holders in 2004 (the “rights”) will be treated as tax-free for US federal income tax purposes pursuant to section 305(a) of the Code. The rights were distributed to shareholders, but US holders of shares or ADSs were not allowed to receive or exercise rights unless they certified that they were both (1) a “qualified institutional buyer” as defined under the Securities Act of 1933, as amended, and the rules and regulations thereunder, and (2) a “qualified purchaser” within the meaning of Section 3(c) under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder.

Any sale of rights received (or deemed received) by a US holder as a result of the distribution, including the sale by the Depositary of rights in the case of a US holder of ADSs, will result in a capital gain or loss in an amount equal to the difference between the amount realized by the US holder upon the sale of rights and the US holder’s basis in the rights disposed of.

Because the fair market value of the rights exceeded 15% of the fair market value of the shares or ADSs on the date of distribution of the rights, to determine a US holder’s basis in the rights, each US holder is required to allocate its adjusted tax basis in the shares or ADSs held as of the date the rights were distributed between (x) such shares or ADSs and (y) the rights, in proportion to their relative fair market values immediately after the distribution. Capital gain or loss arising from the sale of the rights is generally US source gain or loss and generally will be treated as long-term capital gain or loss if the shares or ADSs with respect to which the rights were distributed were held by the US holder for more than one year prior to the date on which the rights were sold.


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US holders of shares or ADSs that received rights and exercised the rights to acquire additional shares will not recognize a gain or loss from the receipt or exercise of the rights. The tax basis of each share acquired through the exercise of a right will equal the sum of the subscription price plus the tax basis (determined by the allocation method described above) in the right. The holding period of any share acquired by exercising a right will be measured from the date the right was exercised. If a US holder of shares that received rights allowed the rights to expire without exercise, no basis will be allocated to the rights and no loss will be recognized as a result of their expiration.

US holders of shares or ADSs are urged to consult their own tax advisors to determine the exact consequences to them of the receipt, sale, and exercise of the rights for US and other applicable tax purposes.

French estate and gift taxes

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

French wealth tax

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

Passive foreign investment company status

A non-US corporation will be classified as a Passive Foreign Investment Company (a “PFIC”) for any taxable year if at least 75% of its gross income consists of passive income, such as dividends, interest, rents, royalties (other than rents or royalties derived in the active conduct of a trade or business and received from an unrelated person), or gains on certain commodities and securities transactions), or at least 50% of the average value of its assets consist of assets that produce, or are held for the production of, passive income. We currently believe, based on our operations and assets, that we were not a PFIC for the year ended December 31, 2006. However, this conclusion is a factual determination that must be made at the close of each year and is based on, among other things, a valuation of our assets, which will likely change from time to time. If we were characterized as a PFIC for any taxable year, you would suffer adverse tax consequences. These consequences may include having gains realized on the disposition of shares or ADSs treated as ordinary income rather than capital gains and being subject to punitive interest charges on certain dividends and on the proceeds of the sale or other disposition of the shares or ADSs. Furthermore, dividends paid by a PFIC are not eligible to be treated as “qualified dividend income” (as discussed above).

You should consult your own tax advisor regarding the potential application of the PFIC rules to your ownership of our shares or ADSs.

US information reporting and backup withholding

Distributions paid to you and proceeds from the sale, exchange or other disposition of your shares or ADSs may be subject to information reporting to the IRS and backup withholding at a current rate of 28%. Backup withholding will not apply to a holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification, or who is otherwise exempt from backup withholding. US persons who are required to establish their exempt status generally must provide a duly completed IRS Form W-9 (Request for Taxpayer Identification Number and Certification). Non-US holders generally will not be subject to US information reporting or backup withholding. However, these holders may be required to provide certification of non-US status (generally on IRS Form W-8BEN) in connection with payments received in the United States or through certain US-related financial intermediaries.

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


Form 20-F 2006 – Rhodia - 109


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Taxation of Rhodia High Yield Notes Issued May 28, 2003 and May 17, 2004

French Taxation of Notes

The following is a general summary of the principal French tax consequences of purchasing, owning and disposing of our High Yield Notes that were issued on May 28, 2003 and May 17, 2004 (hereinafter in this section, the “Notes”). This summary may only be relevant to you if you are not a resident of France, you do not hold your Notes in connection with a business conducted in France and you do not otherwise hold shares of our Company.

This discussion is intended only as a descriptive summary. It does not address all aspects of French tax laws that may be relevant to you in light of your particular circumstances. It is based on the applicable laws, conventions and treaties in force as of the date of this Annual Report, all of which are subject to change, possibly with retroactive effect, or to different interpretations. You should consult your own tax advisor about the potential tax effects of owning or disposing of Notes in your particular situation.

Notes issued by us are characterized as obligations under French commercial law and should be deemed issued outside France for purposes of Article 131 quater of the General Tax Code (Code général des impôts). In any case, pursuant to Article 125 A, III, of the General Tax Code, income derived by a non-French resident from notes (“obligations”) issued in France is tax exempt.

Pursuant to Article 131 quater of the General Tax Code (Code général des impôts), interest paid on such debt securities that are deemed issued outside France are entitled to the exemption from deduction of tax at source provided by such provision.

A holder of debt securities who is not a resident of France for French tax purposes will not be subject to income or withholding taxes imposed by France in respect of gains realized on the sale, exchange or other disposition of debt securities unless such debt securities form part of the business property of a permanent establishment or a fixed base that such holder has in France.

Transfers of debt securities will not be subject to any stamp duty or other transfer taxes imposed in France.

European Union Directive on the Taxation of Savings Income

The EU has adopted a Directive regarding the taxation of savings income. Subject to a number of important conditions being met, it is proposed that Member States will be required from a date not earlier than July 1 2005 to provide to the tax authorities of other Member States details of payments of interest and other similar income paid by a person to an individual in another Member State, except that Austria, Belgium and Luxembourg will instead impose a withholding system for a transitional period unless during such period they elect otherwise.

This Directive was implemented in French law by the Amended Budget Law for 2003, which imposes on paying agents based in France to report to the French tax authorities certain information with respect to interest payments made to beneficial owners domiciled in another Member State, including, among other things, the identity and address of the beneficial owner and a detailed list of the different categories of interest paid to that beneficial owner. These reporting obligations have entered into force with respect to interest payments made on or after the Directive becoming applicable, that is, July 1, 2005.


Form 20-F 2006 – Rhodia - 110


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United States Taxation of Notes

The following discussion is a general summary of certain material US federal income tax consequences of the ownership and disposition of the euro-denominated Notes originally issued in 2003 (“2003 Euro Notes”), the US dollar-denominated Notes originally issued in 2003 (“2003 Dollar Notes”), together, the “2003 Notes”, and the euro-denominated Notes issued with original issue discount in 2004 (“2004 Euro Discount Notes”) and the US dollar-denominated Notes issued with original discount in 2004 (“2004 Dollar Discount Notes”), together, the “2004 Discount Notes”, by a US holder (as defined below) that holds the Notes as capital assets. This summary is based on current United States tax laws and US Internal Revenue Service (the “IRS”) practice, including the Internal Revenue Code of 1986, as amended, Treasury regulations, rulings, judicial decisions, and administrative pronouncements, all as in effect as of the date hereof, and all of which are subject to change or changes in interpretation, possibly on a retroactive basis.

This summary does not address all aspects of US federal income taxation that may apply to holders subject to special tax rules, including US expatriates, banks, regulated investment companies, insurance companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, securities broker-dealers, traders in securities who elect to apply a mark-to-market method of accounting, persons holding their Notes as part of a straddle, hedging transaction or conversion transaction, persons whose functional currency is not the US dollar, persons who hold shares or ADSs or Rhodia, and persons that hold their Notes as part of the business property of a permanent establishment of fixed base in France. Such holders may be subject to US federal income tax consequences different from those set forth below.

If a partnership (including for this purpose any entity treated as a partnership for US federal income tax purposes) holds Notes, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. If you are a partner in a partnership that holds Notes, you are urged to consult your own tax advisor regarding the specific tax consequences of owning and disposing of the Notes.

You will be a “US holder” if you are the beneficial owner of Notes and are:

a)

a citizen or individual resident of the United States for US federal income tax purposes;

b)

a corporation or certain other entities taxable as corporations for US federal income tax purposes created or organized in or under the laws of the United States or any state thereof (including the District of Columbia);

c)

an estate whose income is subject to US federal income taxation regardless of its source; or

d)