##### Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER
31, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 000-31228 INEOS GROUP LIMITED  ENGLAND and WALES
(Jurisdiction of Incorporation or Organisation) HAWKSLEASE, CHAPEL LANE, LYNDHURST
HAMPSHIRE, SO43 7FG
UNITED KINGDOM
(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 registeredNone
    
    N/A
 Securities registered or to
be registered pursuant to Section 12(g) of the Act: Class D Oxide Shares
(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by this annual
report: Class B Oxide Shares, 3,225,000; Class C Oxide Shares, 1,650,000; Class C
Oxide US Shares, 60,000; Class D Oxide Shares, 10,125,000; Class B Phenol
Shares, 2,201,250; Class C Phenol Shares, 742,500; Class C Phenol Regional
Tracker Shares, 1,500,000; Class D Phenol Shares, 10,556,250; Class B Fluor
Shares, 2,201,250; Class C Fluor Shares, 742,500; Class C Fluor Regional
Tracker Shares, 1,500,000; Class D Fluor Shares, 10,556,250; Class B
Silicas Shares, 2,201,250; Class C Silicas Shares, 742,500; Class C Silicas
Regional Tracker Shares, 1,500,000; Class D Silicas Shares, 10,556,250. 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
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  þ
    
    No  o
 Indicate by check mark which financial statement items the Registrant has elected to follow: Item 17  o
    
    Item 18  þ




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TABLE OF CONTENTS  
 PagePART IITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    5ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    5ITEM 3.
    
    KEY INFORMATION
    
    
    5ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    15ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    35ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    58ITEM 7.
    

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    62ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    63ITEM 9.
    
    THE OFFER AND LISTING
    
    
    63ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    63ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    69ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    69PART IIITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    69ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
    
    
    69ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    69ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    69ITEM 16B.
    
    CODE OF ETHICS
    
    
    70ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    70ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    70ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
    
    
    70PART IIIITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    70ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    71ITEM 19.
    
    EXHIBITS
    
    
    72EX-12.1EX-12.2
  2




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PART I PRESENTATION OF INFORMATION As used in this annual report: the terms Ineos Group Limited, our,
we and us refer to Ineos Group Limited and, unless the context otherwise
requires, its subsidiaries and predecessor businesses as a combined entity; and
the term Ineos Capital refers to Ineos Capital Limited. In this annual report, unless otherwise indicated: all references to the
EU are to the European Union; all references to euro or   are to the
lawful currency of the European Union; all references to the UK are to the
United Kingdom; all references to pounds sterling, sterling or £ are to
the lawful currency of the United Kingdom; all references to the United
States or the US are to the United States of America; all references to
US$, US dollars, dollars or $ are to the lawful currency of the United
States. Market data used throughout this annual report was obtained from internal
company surveys and industry surveys and publications. Industry surveys and
publications generally state that the information contained therein has been
obtained from sources believed to be reliable, but we have not independently
verified such market data. Similarly, internal company surveys, while believed
to be reliable, have not been verified by independent sources. Unless otherwise stated, references to capacities of our facilities refer
to the nameplate capacities, or theoretical maximum production capacity of
such facilities; the effective capacity of such facilities may, however,
actually be less than the nameplate capacity due to the current operating
conditions and asset configuration of each facility. All references to tonnes are to metric tonnes. 3




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FORWARD-LOOKING STATEMENTS This annual report includes forward-looking statements, within the
meaning of the US securities laws, based on our current expectations and
projections about future events, including:  
    
    our high degree of leverage and significant debt service
obligations as well as future cash flow and earnings;
    
    our sales growth across our principal businesses and our
strategy for controlling costs, growing margins, increasing
manufacturing capacity and production levels and making capital
expenditures;
    
    raw material costs or supply arrangements;
    
    our technological and manufacturing assets and our ability to
utilise them to further increase sales and the profitability of our
businesses;
    
    our ability to retain existing customers and obtain new customers;
    
    our ability to develop new products and technologies successfully;
    
    the cyclical and highly competitive nature of our businesses;
    
    risks related to environmental costs, liabilities or claims; and
    
    currency fluctuations. All statements other than statements of historical facts included in this
annual report including, without limitation, statements regarding our future
financial position, risks and uncertainties related to our business, strategy,
capital expenditures, projected costs and our plans and objectives for future
operations, may be deemed to be forward-looking statements. These
forward-looking statements are subject to a number of risks and uncertainties,
including those identified under Item 3D Risk Factors. Words such as
believe, expect, anticipate, may, intend, will, should,
estimate and similar expressions or the negatives of these expressions are
intended to identify forward-looking statements. In addition, from time to
time we or our representatives, acting in respect of information provided by
us, have made or may make forward-looking statements orally or in writing and
these forward-looking statements may be included in but are not limited to
press releases (including on our website), filings with the US Securities and
Exchange Commission, reports to our securityholders and other communications.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to be correct. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. The risks described in Item 3D Risk Factors are not exhaustive. Other
sections of this annual report describe additional factors that could adversely
affect our business, financial condition or results of operations. Moreover,
we operate in a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for us to predict all
such risk factors, nor can we assess the impact of all such risk factors on our
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, you should
not place undue reliance on forward-looking statements as a prediction of
actual results. 4




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ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable. 
 ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3.  KEY INFORMATION A.  SELECTED FINANCIAL DATA The table below sets forth the selected historical consolidated financial
data as of and for each of the periods indicated. The selected financial data
for the three years ended December 31, 2003 and as at December 31, 2002 and
2003 is derived from the consolidated financial statements of Ineos Group
Limited appearing elsewhere in this annual report. Our financial statements have been prepared in accordance with UK GAAP,
which differs in certain respects from US GAAP. See note 36 to our audited
consolidated financial statements for a summary of the main differences between
UK GAAP and US GAAP as they relate to us. You should read the data below in
conjunction with Item 5, Operating and Financial Review and ProspectsIneos
Group LimitedResults of Operations and the consolidated financial statements
in Item 18 of this annual report. 5




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Year EndedDecember 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in  millions, except ratios)Profit and Loss Account
Data:Amounts in accordance
with
UK GAAP:Turnover
    
    
    230.6
    
    
    
    337.0
    
    
    
    1,530.7
    
    
    
    2,235.8
    
    
    
    2,530.4Cost of sales
    
    
    (182.5
    )
    
    
    (270.0
    )
    
    
    (1,255.8
    )
    
    
    (1,833.9
    )
    
    
    (2,130.3
    )Gross profit
    
    
    48.1
    
    
    
    67.0
    
    
    
    274.9
    
    
    
    401.9
    
    
    
    400.1Distribution costs
    
    
    (11.5
    )
    
    
    (13.4
    )
    
    
    (104.4
    )
    
    
    (161.8
    )
    
    
    (151.7
    )Administrative
expenses before
exceptional items
    
    
    (7.9
    )
    
    
    (8.5
    )
    
    
    (68.7
    )
    
    
    (65.9
    )
    
    
    (45.7
    )Exceptional
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    (19.6
    )
    
    
    (24.6
    )
    
    
    (7.9
    )
    
    
    (8.5
    )
    
    
    (88.3
    )
    
    
    (90.5
    )
    
    
    (45.7
    )Other operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18.1Operating profit
    
    
    28.7
    
    
    
    45.1
    
    
    
    82.2
    
    
    
    149.6
    
    
    
    220.8Profit/(loss) on
ordinary activities
after taxation
    
    
    12.7
    
    
    
    27.6
    
    
    
    (21.1
    )
    
    
    35.2
    
    
    
    145.1Profit/(loss) for the
financial year
    
    
    12.7
    
    
    
    27.6
    
    
    
    (21.1
    )
    
    
    35.2
    
    
    
    135.2Amounts in accordance
with US GAAP:Profit/(loss) for the
financial year
    
    
    13.6
    
    
    
    28.3
    
    
    
    (42.0
    )
    
    
    23.0
    
    
    
    131.1Other Financial Data:Amounts in accordance
with
UK GAAP:Depreciation and
amortisation
    
    
    (6.9
    )
    
    
    (7.7
    )
    
    
    (77.4
    )
    
    
    (81.4
    )
    
    
    (77.6
    )Cash flowsOperating
    
    
    23.2
    
    
    
    49.4
    
    
    
    177.9
    
    
    
    210.8
    
    
    
    268.1Dividend received
from associate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    Returns on
investments and
servicing of finance
    
    
    (9.7
    )
    
    
    (8.8
    )
    
    
    (115.0
    )
    
    
    (61.3
    )
    
    
    (61.3
    )Taxation paid
    
    
    (0.1
    )
    
    
    (6.6
    )
    
    
    (11.9
    )
    
    
    (11.1
    )
    
    
    (12.3
    )Capital expenditures
    
    
    (10.0
    )
    
    
    (17.1
    )
    
    
    (42.9
    )
    
    
    (47.5
    )
    
    
    (55.0
    )Acquisitions and
disposal
    
    
    (4.3
    )
    
    
    
    
    
    
    (777.0
    )
    
    
    (5.0
    )
    
    
    1.4Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.9
    )Financing
    
    
    (4.8
    )
    
    
    (26.8
    )
    
    
    877.4
    
    
    
    (91.4
    )
    
    
    (81.1
    )
 6




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Year EndedDecember 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in  millions, except ratios)Balance Sheet Data
(at period end):Amounts in
accordance with
UK GAAP:Cash
    
    
    21.2
    
    
    
    12.4
    
    
    
    121.5
    
    
    
    109.0
    
    
    
    153.4Net current assets
    
    
    26.6
    
    
    
    29.6
    
    
    
    231.7
    
    
    
    209.0
    
    
    
    228.4Total assets
    
    
    202.8
    
    
    
    214.6
    
    
    
    1,428.1
    
    
    
    1,367.7
    
    
    
    1,388.4Total debt
    
    
    (128.3
    )
    
    
    (112.6
    )
    
    
    (1,036.1
    )
    
    
    (927.9
    )
    
    
    (830.8
    )Equity
shareholders
funds
    
    
    23.0
    
    
    
    41.1
    
    
    
    17.6
    
    
    
    12.3
    
    
    
    113.5Amounts in
accordance with US
GAAP:Equity
shareholders
funds
    
    
    25.9
    
    
    
    40.5
    
    
    
    (3.3
    )
    
    
    (20.7
    )
    
    
    81.7
 Exchange Rate Information The following table sets forth, for the periods indicated, certain
information concerning the noon buying rates of the Federal Reserve Bank of New
York for euro expressed in dollars per euro. These rates are provided solely for the convenience of the reader and
should not be construed as a representation that such euro amounts actually
represent such dollar amounts or that such euro amounts could have been, or
could be, converted into dollars at that rate or at any other rate. These
rates were not used to prepare the financial statements included in this annual
report. High
    
    Low$/
    
    $/As of Months EndedMay 2004
    
    
    1.23
    
    
    
    1.18April 2004
    
    
    1.24
    
    
    
    1.18March 2004
    
    
    1.24
    
    
    
    1.21February 2004
    
    
    1.28
    
    
    
    1.24January 2004
    
    
    1.29
    
    
    
    1.24December 2003
    
    
    1.26
    
    
    
    1.20
 Average(1)$/As of Year EndedDecember 31, 2003
    
    
    1.14December 31, 2002
    
    
    0.95December 31, 2001
    
    
    0.89December 31, 2000
    
    
    0.93December 31, 1999
    
    
    1.06
   (1)
    
    The yearly averages of the noon buying rates for dollars per euro were
calculated using the average noon buying rate on the last business day of
each month during the year. As of June 21, 2004, the noon buying rate of the Federal Reserve Bank of
New York for euros was $1 = 0.83 ($1.21 = 1.00). 7




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B.
    
    CAPITALISATION AND INDEBTEDNESS Not applicable.  C.
    
    REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable.  D.
    
    RISK FACTORS Risks Relating to Our Capital Structure Substantial leverageOur substantial debt could adversely affect our
financial health and prevent us from fulfilling our debt obligations. Our substantial debt could have important consequences. For example, it
could, among other things:  
    
    require us to dedicate a substantial portion of our operating
cash flow to making periodic principal and interest payments on our
debt, thereby limiting our ability to take advantage of significant
business opportunities and placing us at a competitive disadvantage
compared to our competitors that have less debt;
    
    make it more difficult for us to satisfy our obligations with respect to our debt;
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to borrow money or to sell or transfer
assets in order to fund future working capital, capital
expenditures, any future acquisitions, research, development and
technology process costs and other general business requirements; or
    
    limit our flexibility in planning for, or reacting to,
changes in our businesses and the industries in which we operate. In addition, all of our debt under the Senior Credit Facilities bears
interest at a variable rate which is based on EURIBOR or LIBOR, as applicable,
plus an agreed margin plus certain additional costs, as defined in the Senior
Credit Facilities, including any applicable reserve asset and liquidity costs.
Although we are required to hedge a portion of our interest rate exposure,
fluctuations in EURIBOR or LIBOR, as applicable, may nevertheless increase our
overall debt obligation and could have a material adverse effect on our ability
to service our debt obligations. The following chart shows total debt and shareholders equity as of
December 31, 2003: As of December 31, 2003(in millions)Total Debt (net of debt issuance costs)
    
    
    830.8Shareholders Equity
    
    
    113.5
 For further information, you should read Item 5 of this annual report
titled Operating and Financial Review and Prospects. Additional borrowings availableDespite current debt levels, we may still
be able to incur substantially more debt. This could further exacerbate the
risks described above. We may be able to incur substantial additional debt in the future. The
terms of the indenture governing our Senior Notes and the terms of the Senior
Credit Facilities permit our subsidiaries to do so, in each case, subject to
certain limitations. If new debt is added to our current debt levels, the
risks that we now face could intensify. 8




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Restrictive covenants in our debt instrumentsWe are subject to
restrictive debt covenants. If we default under these covenants, we will not
be able to meet our payment obligations. The Senior Credit Facilities contain a number of significant covenants
that restrict some of our and our subsidiaries corporate activities, including
our and their ability to:  
    
    incur debt;
    
    give guarantees and indemnities;
    
    make loans to others;
    
    create security interests in their assets;
    
    make acquisitions and investments;
    
    dispose of assets other than in the ordinary course of business;
    
    issue shares;
    
    pay dividends and make payments to shareholders; or
    
    change their accounting policies. The Indenture contains a number of significant covenants that restrict
some of our and our subsidiaries corporate activities, including our and their
ability to:  
    
    incur additional debt;
    
    pay dividends on, redeem or repurchase our capital stock;
    
    make certain investments;
    
    issue or sell capital stock of restricted subsidiaries;
    
    create certain liens;
    
    transfer or sell assets;
    
    enter into sale and leaseback transactions;
    
    enter into agreements limiting the ability of our
subsidiaries to make dividend or other payments to us;
    
    in the case of our subsidiaries, guarantee debt;
    
    engage in transactions with affiliates;
    
    create unrestricted subsidiaries; and
    
    consolidate, merge or transfer all or substantially all of
our assets and the assets of our subsidiaries on a consolidated
basis. In addition, the Senior Credit Facilities require us to comply with
specified financial ratios and tests. We believe that we are in compliance with the covenants and restrictions
contained in the Senior Credit Facilities as at December 31, 2003. However,
our ability to continue to comply with these covenants and restrictions may be
affected by events beyond our control. These include prevailing economic,
financial and industry conditions. If we breach any of these covenants or
restrictions, we could be in default under the Senior Credit Facilities. This
would permit the lending banks to take certain actions, including declaring all
amounts that we have borrowed under the Senior Credit Facilities to be due and
payable, together with accrued and unpaid interest. This would also result in
an event of default under the indenture governing the Senior Notes. The
lending banks could also refuse to extend further credit under the Senior
Credit Facilities. If we are unable to repay our debt to the lending banks,
they could proceed against the collateral that secured the debt. Ability to service debtTo service our debt, we will require a significant
amount of cash. Our ability to generate cash depends on many factors beyond
our control. The ability of our subsidiaries to transfer monies upstream to us, as well
as to pay operating expenses and to fund planned capital expenditures, any
future acquisitions and research and development efforts, will depend on our
businesses ability to generate cash in the future. This, to an 9




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extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our and our
subsidiaries control. If our subsidiaries are unable to generate sufficient cash flow to meet
their payment obligations, they may be forced to reduce or delay planned
expansions or capital expenditures, sell significant assets, discontinue
specified operations, obtain additional equity capital or attempt to
restructure or refinance all or a portion of their indebtedness on or before
maturity. If they are unsuccessful in any of these efforts, we may not have
sufficient cash to meet our obligations. Risks Relating to Business Operations The chemicals industry is cyclicalChanging market demands and prices may
negatively affect our operating margins and impair our cash flow which, in
turn, could affect our ability to make payments on our debts or to make further
investments in the business. Cyclicality and volatility in supply and demand in the chemicals industry
may affect our prices and may negatively impact our operating margins and cash
flows. This, in turn, may impair our ability to make debt payments. A significant portion of our turnover is attributable to sales of phenol,
acetone and EG, the prices of which have been historically cyclical and
sensitive to relative changes in supply and demand, the availability and price
of raw materials and general economic conditions. Historically, the markets
for some of our products have experienced alternating periods of tight supply,
causing prices and margins to increase, followed by periods of capacity
additions, resulting in oversupply and declining prices and margins. We do not
know whether prices will remain firm or whether the recent economic recovery
will continue. If future growth in demand for phenol, acetone and EG is not
sufficient to alleviate any existing or future conditions of excess industry
capacity or if any of these conditions are further aggravated by anticipated or
unanticipated capacity additions or other events, our business could experience
increased pressure on margins. For additional information, see Item 5 of this
annual report, titled Operating and Financial Review and Prospects and Item
4.B of this annual report, titled Business Overview. Raw materials and suppliersIf we are unable to pass on increases in raw
material prices, or to retain or replace our key suppliers, our results of
operations may be negatively affected. The prices for a large portion of our raw materials are cyclical. After
falling during the years from 1996 through 1999, prices for most raw materials
increased throughout the year 2000, fell again during the year 2001 and then
increased again in 2002 and 2003. While we attempt to match raw material price
increases with corresponding product price increases, our ability to pass on
increases in the cost of raw materials to our customers is, to a large extent,
dependent upon market conditions. There may be periods of time in which we are
not able to recover increases in the cost of raw materials due to our
contractual arrangements or to weakness in demand for or oversupply of our
products. In addition, we obtain a significant portion of our raw materials
from selected key suppliers. If any of these suppliers is unable to meet its
obligations under present supply agreements, we may be forced to pay higher
prices to obtain the necessary raw materials and we may not be able to increase
prices for our finished products. Therefore, increases in raw material prices
or interruptions in supply could place increased pressure on our margins and
reduce our cash flow, which could impair our ability to make debt payments or
make further investments in our business. Significant competition in the chemicals industry, whether through efforts
of new and current competitors or through consolidation of existing customers,
may adversely affect our competitive position, sales and overall operations. The markets for most of our products are highly competitive. We are
exposed to the competitive characteristics of several different geographic
markets and industries. Some of our competitors have greater financial,
technical and marketing resources than we do. As the markets for 10




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our products expand, we expect that existing competitors may commit more
resources to the markets in which we participate. We may not be able to
compete effectively in these various areas in the future and our competitive
position and results of operations may suffer as a result. Our principal competitors vary from business to business and range from
large international companies, such as Shell, Syndial, Erista, Dow Chemical,
BASF, W.R. Grace, Atofina and DuPont, to a large number of smaller regional
companies of varying sizes. The failure of our trademarks, patents and confidentiality agreements to
protect our intellectual property could adversely affect our business. Proprietary protection of our processes, apparatuses and other technology
is important to our business. Our actions to protect our proprietary rights
may be insufficient to prevent others from developing similar products to ours.
In addition, the laws of many foreign countries do not protect our
intellectual property rights to the same extent as the laws of Germany, The
Netherlands, the United States or the United Kingdom. Furthermore, any pending
patent application filed by us may not result in an issued patent, or if
patents are issued to us, such patents may not provide meaningful protection
against competitors or against competitive technologies. You should be aware
that the expiration of a patent or the failure of our patents to protect our
formulations, processes, apparatuses, technology, trade secrets or proprietary
know-how could result in intense competition with consequent erosion of profit
margins. We also rely upon unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. While it is our policy to enter into confidentiality
agreements with our employees and third parties to protect our intellectual
property, there can be no assurances that:  (1)
    
    our confidentiality agreements will not be breached,(2)
    
    they will provide meaningful protection for our trade secrets
or proprietary know-how, or(3)
    
    adequate remedies will be available in the event of an
unauthorised use or disclosure of these trade secrets and know-how. In addition, there can be no assurances that others will not obtain
knowledge of these trade secrets through independent development or other
access by legal means. In the past we have received communications asserting that our products or
their applications infringe on a third partys proprietary rights. Currently,
there is no material pending litigation against us regarding any intellectual
property claim but we cannot assure you that there will not be future claims.
Such claims, with or without merit, could subject us to costly litigation and
divert our technical and management personnel from their regular
responsibilities. Furthermore, if such claims are adversely determined against
us, we could be forced to suspend the manufacture of products using the
contested invention and our business, financial condition and operating results
could be adversely affected if any such products are material to our business. Environmental mattersWe will have ongoing costs and may have additional
costs, obligations and liabilities. The chemicals business is highly regulated in all of the jurisdictions in
which we operate. Increasingly stringent laws and regulations govern our
manufacturing processes, the storage, handling, treatment, transportation and
disposal of wastes, water discharges and air emissions, health and safety and
the sale and use of products manufactured by us. These laws and regulations
require 11




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and will continue to require material ongoing costs. Given the nature of
our business, violations of environmental laws and regulations may result in
substantial fines or penalties, the imposition of other civil or criminal
sanctions, damages or other costs, or restrictions on or the suspension of our
operating activities. In addition, potentially significant expenditures could
be necessary in order to comply with future environmental laws and regulations,
or the more stringent enforcement of existing ones. We incur substantial capital and operating costs in our efforts to comply
with these laws and regulations. At some of our sites, many of which have an
extended history of industrial chemical processing, we are required to
undertake the investigation and remediation of contamination from past
operations. Under some environmental laws, we may be liable for the costs of
investigating and cleaning up environmental contamination migrating from our
properties existing at off-site locations where we disposed of or arranged for
the disposal or treatment of hazardous wastes or at our formerly occupied
properties. The nature of the chemicals industry also exposes us to risks of
liability under these laws and regulations due to the production, storage,
transportation and sale of materials that can cause harm to human health, the
environment and natural resources. In addition, such laws and regulations
permit governmental authorities, individuals and other third parties to seek
damages for alleged personal injury or property damage due to exposure to or
contamination by chemicals at, on or from our facilities or to chemicals
otherwise produced, owned, controlled or sold by us. We expect that our operations will continue to be subject to increasingly
stringent environmental and health and safety laws and regulations. We
anticipate that these laws and regulations will continue to require increased
costs and impose additional liabilities. We have budgeted capital expenditures
for environmental improvement projects. We also have established provisions
for environmental remediation activities that we are aware are required and
that we can reliably estimate. However, it is not possible to predict
accurately the amount or timing of costs of any future compliance, remediation
requirements or private claims. Such costs could have a material adverse
effect on our competitive or financial position or our ongoing results of
operations. For additional related disclosure, see Item 4.B of this annual report
under the caption titled Business OverviewEnvironmental, Health and Safety
Matters. 12




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As part of the acquisitions of the Ineos Phenol, Ineos Fluor and Ineos
Silicas businesses, Degussa and ICI agreed to indemnify us for certain
environmental matters that are related to conditions existing before the
acquisitions, and we in turn have agreed to indemnify Degussa and ICI for
certain environmental matters arising after the acquisitions. The
indemnification agreements in our favor provide that Degussa and/or ICI will
contribute a percentage of the costs associated with certain covered
pre-acquisition environmental matters. These agreements further provide that
Degussas and/or ICIs percent share of these covered pre-acquisition costs
will gradually decrease, so that Degussa and ICI will indemnify us for most of
these costs in the early years of the agreements effective periods and we will
be responsible for most of these costs in later years. In addition, both
Degussas and ICIs indemnification obligations are subject to de minimis
exclusions, thresholds or baskets, caps and time limits. Although we believe
that the indemnities given by Degussa and ICI will help defray the costs
associated with preacquisition environmental matters, our financial results may
still be adversely affected by these matters to the extent that:  (1)
    
    either Degussa and/or ICI does not fulfil its indemnification
obligations,(2)
    
    we breach our obligations not to undertake certain activities
that may aggravate existing conditions,(3)
    
    we breach our obligations to mitigate associated losses,(4)
    
    we incur significant costs for pre-acquisition conditions
that are not covered by the Degussa and ICI indemnities, or(5)
    
    the costs we incur for covered pre-acquisition environmental
matters, notwithstanding Degussas and/or ICIs contributions
thereto, are significant. We may be exposed to liability, and our financial results may be adversely
affected to the extent that liability for an historic environmental matter
arises. International operations and currency fluctuationsWe are exposed to
economic downturns and local business risks in several different countries as
well as to currency fluctuation risks that could adversely affect our
profitability. We derive substantial turnover from international operations. As such,
our businesses are subject to risks normally associated with international
operations. These risks include the need to convert currencies which we may
receive for our products into currencies required to pay our debt, or into
currencies in which we purchase raw materials or pay for services, which could
result in a gain or loss depending on fluctuations in exchange rates. Other
risks of international operations include trade barriers, tariffs, exchange
controls, national and regional labor strikes, social and political risks,
general economic risks, required compliance with a variety of foreign laws,
including tax laws and the difficulty of enforcing agreements and collecting
receivables through foreign legal systems. The nature of our operations are subject to hazards which could result in
significant liability to us. We are not fully insured against all potential hazards inherent in our
businesses and the occurrence of any of these events could result in
significant liability to us. Our operations are subject to the hazards
associated with chemical manufacturing and the related storage and
transportation of raw materials, products and wastes. These hazards include
explosions, fires, natural disasters, mechanical failure, remediation and
chemical spills, discharges or releases of toxic or hazardous substances or
gases and other environmental risks. These hazards can cause personal injury
and loss of life, severe damage to or destruction of property and equipment and
environmental damage, and may result in suspension of operations and the
imposition of civil and criminal liabilities. 13




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Inability to implement our business and cost reduction strategiesWe may
be adversely affected if we are unable to implement our business and cost
reduction strategies. We are currently involved in developing our business strategies and will
be developing independent strategies for our various businesses. Our future
financial performance and success will largely depend on our ability to
implement successfully our business strategies. We may not be able to
successfully implement the business strategies described in this annual report
or those to be developed by our businesses or implement strategies that will
sustain or improve and not harm our results of operations in targeted sectors.
In particular, we may not be able to lower our production costs, increase our
manufacturing efficiency, enhance our current portfolio of products or achieve
other cost savings. Our business strategies are based on our assumptions about future demand
for our products and the new products and applications we are developing and on
our continuing ability to produce our products profitably. Each of these
factors depends, among other things, on our ability to finance our operations
and product development activities, maintain high quality and efficient
manufacturing operations, access quality raw materials in a cost-effective and
timely manner, protect our intellectual property portfolio and retain and
attract skilled personnel. We may be unable to implement on a timely basis our business strategies,
including the reductions or rationalisations envisaged by our cost reduction
strategy, in accordance with our plans or at all. In the process of
implementing our business strategies, we may experience business disruption,
loss of key personnel and difficulties with respect to the gathering and
processing of accounting information. In addition, the costs involved in
implementing our strategies may be significantly greater than we currently
anticipate and our cost savings plans may not produce the results we are
anticipating. Any failure to develop, revise or implement our business
strategies in a timely and effective manner may adversely affect our ability to
service our debt and could have a material adverse effect on our results of
operations and financial condition. For additional information, see Item 4.B
of this annual report titled Business Overview. Health and safety regulationOur business could be adversely affected by
regulation to which our products are subject. Our products, including the raw materials we handle, are subject to
rigorous industrial hygiene regulations and investigation. There is a risk
that a key raw material, chemical or substance or one of our products may be
recharacterised as having a toxicological or health related impact on the
environment or on our customers or employees. Industrial hygiene regulations
are continually strengthened and if such recharacterisation occurred, the
relevant raw material, chemical or product may be banned or we may incur
increased costs in order to comply with new requirements. Change in industrial
hygiene regulations also affect the marketability of certain of our products.
Changes in industrial hygiene regulations in the future may have a material
adverse effect on our business. For additional related disclosure, see Item
4.B in this annual report under the caption Business OverviewEnvironmental
Health, and Safety Matters. Product liabilityWe may be liable for damages based on product liability
claims. Because many of our products provide critical performance attributes to
our customers applications and products, the sale of these products involves
the risk of product liability claims. A successful product liability claim or
series of claims against us in excess of our insurance coverage for payments
for which we are not otherwise indemnified or have not otherwise provided could
have a material adverse effect on our financial condition or results of
operations. In particular, we could be required to increase our debt or divert
resources from other investments in our business in order to discharge any such
claims. 14




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ITEM 4.  INFORMATION ON THE COMPANY  A.
    
    HISTORY AND DEVELOPMENT OF THE COMPANY Ineos Group Limited was incorporated in England and Wales on March 19,
1998 as a private limited company. The registered office is located at
Hawkslease, Chapel Lane, Lyndhurst, Hampshire SO43 7FG, United Kingdom and can
be reached by telephone at +44-2380-287-063. Ineos Group Limited is a holding company that does not directly conduct
any operations. Prior to January 1, 2001, the only business of Ineos Group
Limited was conducted through its indirect subsidiary Ineos Oxide Limited
(formerly Ineos plc), which was acquired from Inspec on April 14, 1998. On
January 9, 2001, Ineos Fluor and Ineos Silicas were acquired by our controlling
shareholder, James A. Ratcliffe, and were subsequently contributed to us with
an effective acquisition date of January 1, 2001. In addition, Ineos Oxide
acquired the ethanolamines and gas treating amines business of Dow Chemical on
February 12, 2001 and we acquired Ineos Phenol on May 23, 2001 from Degussa AG.
Ineos Oxide acquired the acetate esters business from BP Belgium on March 1,
2002. We have made more than 184.0 million in capital expenditures since
December 31, 1998 to progress our further growth and expansion. In the Ineos
Oxide business, we have made capital expenditures of approximately 70.2
million, which are principally related to debottlenecking and capacity
expansion projects conducted to increase EO/EG plant capacity, as well as to
routine maintenance, including rectalyzations. In addition, Ineos Oxide has
invested approximately 13.4 million to increase production in its antifreeze
and alkoxylation units. We have made capital expenditures in each of the Ineos
Phenol, Ineos Fluor and Ineos Silicas businesses of approximately 49.2
million, 24.2 million and 40.4 million, respectively, since acquiring these
businesses in 2001. These expenditures have principally been for scheduled
maintenance and specific debottlenecking and capacity expansion projects. In
addition, Ineos Phenol invested 16.4 million in 2002 to rebuild the cleavage
unit at its Mobile, USA plant after this was destroyed by a fire on September
9, 2002.  B.
    
    BUSINESS OVERVIEW We are a leading global chemical manufacturer of specialty and
intermediate chemicals. We believe we hold leading market positions in each of
our core products by volume. Our company is comprised of Ineos Oxide (formerly
Ineos plc) and three other chemical businesses that have been acquired and
combined by our principal shareholders, the directors of Ineos Capital. Our
products include a wide range of ethylene-based, fluorine-based and inorganic
specialty chemicals, as well as intermediate chemicals, such as phenol, acetone
and ethylene glycol (EG). We believe our businesses are distinguished by the
broad experience of our shareholders and our management teams, leading market
positions, high quality and low-cost production facilities and operating
diversity. Our production network is comprised of 16 manufacturing facilities located
in nine countries throughout the world. We sell most of our products to a wide
range of well-known multinational companies, such as Bayer, GE Plastics, Ford,
General Motors, GlaxoSmithKline, Unilever and Anheuser-Busch. 15




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We operate through four discrete businesses as shown in the table below: Ineos Oxide
    
    Ineos Phenol
    
    Ineos Fluor
    
    Ineos SilicasMajor specialty products
    
    Ethylene oxide
(EO), EO
derivatives
(including
ethanolamines
(EOA)), ethylidene
norbornene (ENB)
acetate esters and
third party
services
    
    
    
    CFC-replacement HFC
134a, HCFC 22 and
other specialty
fluorochemicals
    
    Silicates, zeolites
and silicasMajor intermediate
products
    
    EG and antifreeze
    
    Phenol and acetone
    
    
    
    Key applications
    
    Agrochemicals,
surfactants,
synthetic
lubricants and PET
resins, fibers and
film
    
    Bisphenol A (BPA),
phenolic resins,
solvents and MMA
    
    Refrigerants,
propellant gases
and polymer
feedstock
    
    Laundry and
dishwasher
detergents,
desiccants, matting
agents, beer
filtration aids,
dental abrasives
and polyolefin
catalystsPrincipal end-use markets
    
    Consumer products,
oil and gas and
general industrial
    
    CDs, glazing,
optical lenses,
plywood, adhesives,
nylons, paints and
coatings
    
    Automotive air
conditioning,
refrigeration and
pharmaceuticals
    
    Washing powder,
coatings, brewing,
toothpaste,
polyethylene
production
 Ineos Oxide General Ineos Oxide is one of Europes largest manufacturers of specialty and
intermediate chemicals based on ethylene-derived petrochemicals, by volume,
according to the belief of management. Its specialty chemicals business
includes the production of EO, a variety of EO derivatives, acetate esters and
ENB and the provision of management and operating services to third party
chemical plants co-located on its Antwerp and Plaquemine sites. Its
intermediate chemicals business includes the production of EG and antifreeze.
We believe that Ineos Oxide has leading market positions in each of its core
products, including number one in North Western Europe in EO/EG, number one in
Europe for acetate esters, number two globally in ENB and number three globally
in EOA. The following chart illustrates Ineos Oxides products: Products
    
    Percentage of
2003 Turnover
    
    End-UsesSpecialty Products
    
    
    70
    %Ethylene Oxide
    
    
    
    
    
    EO derivativesEO derivatives
    
    
    
    
    
    Agrochemicals, surfactants,
cosmetics,EOA, alkoxylates, glycol
    
    
    
    
    
    pharmaceuticals, synthetic lubricantsethers
and GasSpecTM gas
    
    
    
    
    
    and oil and gas processingtreating aminesENB
    
    
    
    
    
    Surface coatings, inks,
pharmaceuticals and EPDM rubberThird party services and other
    
    
    
    
    
    Provision of utilities, operations and
raw materials to third party chemical
companiesIntermediate Products
    
    
    30
    %EG
    
    
    
    
    
    Polyester (PET) resins, fibers and filmAntifreeze
    
    
    
    
    
    Antifreeze
 Products and Services Ineos Oxide produces specialty and intermediate chemicals. While all of
its chemicals are used in the manufacture of further downstream chemicals and
applications, Ineos Oxide defines specialty chemicals as those chemicals which
are typically characterised by lower volumes and greater margin stability. In
contrast, Ineos Oxide defines intermediate chemicals as those chemicals 16




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which are typically characterised by higher volumes and a relatively
higher degree of margin volatility. Ineos Oxides specialty chemicals products
include EO, EO derivatives, acetate esters and ENB, and it also provides
management and operating services for third party chemical companies with
plants on its sites, which it treats as part of its specialty business, while
its intermediate chemicals products include EG and antifreeze. Ineos Oxides
products are used in a wide variety of applications, including polyesters,
antifreeze, agrochemicals, surfactants, cosmetics, pharmaceuticals, synthetic
lubricants, oil and gas processing and specialty synthetic rubbers. Sales of
Ineos Oxides specialty chemicals and third party services accounted for
approximately 70% of its turnover in 2003 while sales of its intermediate
chemicals accounted for approximately 30% of its turnover in 2003. EO EO is the principal feedstock in the production of a wide range of
intermediate and specialty chemicals, including EG and EO derivatives such as
EOA, alkoxylates, glycol ethers and other specialty and intermediate chemicals.
Ineos Oxide has increased EO production capacity by approximately 60% since
October 1998 through a series of expansion projects. In 2003, Ineos Oxide used
approximately 65% of its EO production for the captive production of EG, with
the remainder used for the captive production of EO derivatives and sold to
third parties. EO has a high level of reactivity, flammability and toxicity, which makes
it difficult and expensive to transport. EO producers, therefore, tend either
to use their EO for captive production or to sell it to third parties located
close to their plants. As a result, approximately 80% of all EO produced in
Western Europe is used for captive production and there are virtually no EO
imports into, or exports out of, Western Europe. EO derivatives Ineos Oxides EO derivatives include EOA, alkoxylates, glycol ethers and
GasSpecTM gas treating amines. The major EOA applications are agrochemicals,
surfactants (used in personal care products and detergent formulations), cement
additives, textile chemicals and pigments. Alkoxylates are used in household
detergents, herbicides, industrial cleaners, petroleum production, cosmetics,
pharmaceuticals, synthetic lubricants and surface coating intermediates.
GasSpecTM gas treating amines are high performance specialty chemicals used in
oil and gas processing to remove noxious impurities from natural gas, gasoline
and ammonia. Acetate esters Acetate esters are used as solvents in surface coatings, inks and
pharmaceutical manufacturing. ENB ENB is used in the production of ethylene propylene diene monomer (EPDM)
rubber, a high performance rubber that is both wear and weather resistant.
EPDM rubber is increasingly used in place of conventional rubber, for example,
in automobiles, roofing materials and household appliances. Third Party Services In addition to its own manufacturing operations, at its Antwerp and
Plaquemine sites, Ineos Oxide provides a range of management and operating
services to nine third party chemical manufacturers, including Kuraray, Dow
Chemical, BASF, GE and Nippon Shokubai. These third party services range from
the complete management and full operational responsibility of the third party
plants and assets, to the supply of raw materials, utilities, waste handling
facilities and site infrastructure. Ineos Oxide receives a management fee for
these services and benefits from reduced 17




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fixed costs, economies of scale with respect to the purchase of raw
materials and utilities and an ability to sell its products to end-users on
site. EG EG is used primarily as a feedstock for polyester polymers made from
polyethylene terephthalate (PET), and in a variety of other industrial
applications. The polyester polymers prepared from PET are manufactured into
PET resins, fibers and film. EG also has widespread uses in antifreeze
solutions, which we also produce and which provides Ineos Oxide with a
distribution channel for its EG. Customers, Sales and Marketing Customers Ineos Oxide sells most of its products to leading chemical manufacturers,
including Dow, Cognis, Monsanto, DSM, Bayer, Voridian and DuPont. No single
customer accounted for more than ten percent of Ineos Oxides turnover in 2003
except for Dow due to the long-term EO for EG swap associated with the EOA
acquisition. Its five largest customers represented approximately 23.5% of its
total turnover. Sales and Marketing Ineos Oxide has a sales and marketing force of 22 employees world-wide
located in Europe, North America and Asia. In North America, Ineos Oxide has
its own sales team with offices in the United States. Certain key accounts are
managed directly by the business manager of each line. In the rest of the
world, Ineos Oxide shares the sales teams of some of our other businesses and
utilises a network of distributors and agents. Contracts and Pricing The majority of Ineos Oxides sales are made pursuant to medium-term
market contracts of three to five years. Under a long-term swap agreement
entered into with Dow Chemical as part of the EOA and
GasSpecTM gas treating
amines acquisition in February 2001, Ineos Oxide will sell an increasingly
significant portion of its EG production to Dow Chemical. Dow Chemical
supplies Ineos Oxides Plaquemine facility with EO for EOA production in
exchange for EG from Ineos Oxides Antwerp facility. Ineos Oxide generally determines the prices for its chemicals on a monthly
or quarterly basis based on current market conditions, including raw material
costs. Other than EO prices, which are based on the European market price,
Ineos Oxides prices are generally based on the international market price and
factor in freight costs. EG and antifreeze pricing is cyclical and depends on
global supply and demand, while pricing for EO and EO derivatives is more
stable. Competition The chemicals markets in which Ineos Oxide operates are highly
competitive, with competition based primarily on price and reliability of
supply. Competition in the EO market is principally based upon security of
supply and pricing. Competition in EO derivatives is focused on product
quality, security of supply and price. Competition for ENB sales is based upon
security of supply and product quality. Competition in the EG market is based
primarily upon price, security of supply and established customer
relationships. Antifreeze competition is largely based on price and
technology. 18




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The main competitors of Ineos Oxide in the EG, antifreeze, EO and EO
derivatives markets are BASF, Shell, Dow Chemical, British Petroleum and
Clariant. Its main competitor in the ENB merchant market is Nippon
Petrochemicals. Competition in providing management and operating services in the chemical
industry is based largely on location of facilities, potential cost savings and
security of supply of feedstocks to the managed facility. The cost of
switching sites is generally prohibitive. Raw Materials and Suppliers Ineos Oxides principal raw material is ethylene, which accounted for
approximately 33% of its total cost of sales in 2003. The price of ethylene
fluctuates depending upon several factors, including supply and demand and the
price of ethylene feedstocks such as crude oil, naphtha and ethane. As a
result, increases and decreases in ethylene costs can have a significant impact
on Ineos Oxides operating results. The ICIS North Western Europe contract
price for ethylene was 575 per tonne in the first and second quarter of 2003,
dropped significantly in the third quarter to 445 per tonne and increased
again to 512 per tonne for the fourth quarter of 2003. Ineos Oxides Antwerp site is part of the Antwerp complex, the largest
chemical site in Europe. The Antwerp complex is the largest ethylene consumer
in Europe, and Ineos Oxide benefits from the purchasing power and ready access
that this position affords. Through its direct and indirect connections to
four alternative ethylene pipeline networks, which allow Ineos Oxide to be
supplied by all major north-western European refineries, the Antwerp site has a
secure and continuous ethylene supply. Ineos Oxide has short- and medium-term
contracts of one to five years that generally specify minimum and maximum
volumes with several different suppliers that cover up to 100% of its ethylene
requirements. This arrangement allows Ineos Oxide the flexibility to purchase
ethylene on the spot market when pricing is advantageous. The cost of its
ethylene supply is based on a discount to the current North Western European
contract price. Operations and Manufacturing Facilities Ineos Oxide manufactures its products in Antwerp, Belgium and Plaquemine,
Louisiana. With more than 165 million having been invested to modernise and
expand capacity since 1989, we believe that Ineos Oxidess facilities are
adequate for its present and projected operations. Antwerp Ineos Oxides largest production facility is at Antwerp. Its Antwerp site
is part of the Antwerp complex, the largest chemical site in Europe and the
second largest in the world. The sites strategic location facilitates its
ability to be a low-cost manufacturer of specialty and intermediate chemicals
by its proximity to customers, feedstocks, utilities infrastructure and
distribution facilities. Ineos Oxides Antwerp site has direct or indirect
connections to four major ethylene pipelines and connections to pipelines for
nitrogen, oxygen, natural gas and bulk feedstocks of propylene oxide,
butadiene, acetic acid and alcohols. In addition, the site has its own jetty
facility on the Schelde River which links it to the port of Antwerp. The site
also has modern rail and road tanker loading facilities and convenient
connections with roads to Europes industrial centers. Plaquemine Ineos Oxide produces EOA at its Plaquemine plant in the United States.
The site is located on the Gulf Coast of Mississippi and is a prime location
for chemicals production due to its raw material and distribution
infrastructure, particularly its direct access to sea jetties and close
proximity to its customer base. 19




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Production Process EO is manufactured by oxidising ethylene over a silver catalyst. EG is
produced by the non-catalytic hydration of EO. EO derivatives are manufactured
by several different processes involving EO, EG and other chemicals. ENB is
manufactured by reacting butadiene and dicyclopentadiene in a four-step
process. Acetate esters are produced by reacting alcohols with acetic acid. Ineos Phenol General Ineos Phenol is the worlds largest producer of phenol and acetone, by
volume, with an annual capacity of approximately 1,510 kilotonnes of phenol and
935 kilotonnes of acetone, according to the belief of management. It has a
long history of producing and marketing phenol and acetone in Europe, having
commenced production in Germany in 1954, and opened its first plant in the
United States in April 2000, after increasing phenol and acetone sales to
US-based customers throughout the previous five years. The following chart illustrates Ineos Phenols products: Percentage of2003Products
    
    Applications
    
    Turnover(Volume)
    
    End-UsersPhenolBisphenol A, for the production of
polycarbonates and epoxy resins
    
    
    50%
    
    
    DVDs, CDs, optical lenses,
automotive, glazing, computer and printed circuitboards and adhesivesPhenolic resins
    
    
    25%
    
    
    Polywood, oriented strand
board and foundry materialsCaprolactam, for the production of nylons
    
    
    15%
    
    
    Fibers and engineering plasticsOther
    
    
    10%
    
    
    Engineering plastics, foams
and detergentAcetoneMMA, PMMA and acrylate
    
    
    40%
    
    
    Acrylic sheet, Plexiglas,
mouldings and extrusion compoundsBisphenol A, for the production of
polycarbonates and epoxy resins
    
    
    20%
    
    
    DVDs, CDs, spectacle lenses,
automotive, glazing, computer andprinted circuit boards and adhesivesAcetone-based solvents
    
    
    25%
    
    
    Chemicals industry, paints,
coatings and printing inksOther
    
    
    15%
    
    
    Various, including moulding compounds
 Products Phenol and acetone are produced simultaneously in a single process and are
essential starting materials for a wide range of applications in the
electrical/electronics, automotive, construction and household/furniture
industries. Phenol Phenol is a primary material for a large number of chemical products. In
recent years, the use of phenol for the production of BPA, an intermediate
product used to produce polycarbonate and epoxy-resins, has increased
substantially and is now the largest phenol application. Polycarbonate is an
engineering thermoplastic material which, due to its superior optical
qualities, structural strength and weight, has a wide range of uses, including
CDs and DVDs, optic-fibers, optical lenses, structural parts in cars and trucks
and housings for electrical household appliances and office equipment. The
primary end-use for epoxy resins is for printed circuit boards and adhesives. 20




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Phenol is also combined with formaldehyde to produce phenolic resins and
is used in the production of caprolactam, which is a precursor for polyamide
(nylon). Phenolic resins, which represent the second largest commercial use of
phenol, are used in a wide range of applications, including the manufacturing
of plywood for use in housing construction and furniture, as binders in the
production of insulation materials and laminates for the construction industry,
as moulds in the foundry industry and as adhesives. Polyamide is used in the
textile industry and in a range of industrial applications, primarily due to
its resistance to corrosive chemicals. Acetone The largest commercial use of acetone is the manufacture of
methylmethacrylate (MMA). MMA is used to manufacture polymethylmethacrylate
(PMMA) resins, including acrylic sheets and compounds for moulding and
extrusion. Acrylic sheets and compounds are used in a wide range of
architectural and industrial applications, ranging from point of sale retail
displays to glazing and decorative light panels. The second largest use of
acetone is for solvents, either through the use of acetone itself as a solvent
or through the acetone-based production of solvents. The third major use of
acetone is in the production of BPA. Customers, Sales and Marketing Customers Ineos Phenol sells to most of the major phenol and acetone consumers in
Europe and North America and is establishing a market presence in Asia.
Customers in Europe and North America include Bayer, GE Plastics, DSM,
Bakelite, Röhm, Dow Chemical and Georgia-Pacific. Following completion of its
production facility in Mobile, Alabama in 2000, Ineos Phenol is increasing
sales volumes to many of its existing customers and is attracting new customers
in the United States. In Asia, customers include Dynea and Bayer Thailand,
which commenced production at its new 165 kilotonnes capacity BPA plant in
March 2002. Ineos Phenol generates approximately 72% of its total sales from its ten
largest customers. Bayer accounted for approximately 18% of Ineos Phenols
total sales by volume in 2003, while no other customer accounted for more than
10%. Ineos Phenol has developed strong relationships with these customers,
most of whom have been customers of Ineos Phenol for more than 25 years. Sales and Marketing Ineos Phenols marketing strategy is based on building long-term
relationships based on security of supply, quality of product and pricing
competitiveness. In addition, Ineos Phenol has targeted its marketing efforts
at the leading BPA producers in order to take advantage of the growing demand
in the BPA segment. Ineos Phenol has a sales team of ten people operating out of four
locations in Germany, the United States, Brazil and Thailand. The company
supplements its sales and marketing efforts through a network of regional and
local representatives, some of whom are independent and are paid on a
commission basis. Regional representatives are located in the United States,
Singapore, France, the United Kingdom, Italy, Thailand and South America. A
network of tank farms ensures that Ineos Phenol can serve its customers on a
global basis. Contracts and Pricing Most of Ineos Phenols sales are made under either long-term contracts or
long-standing informal arrangements with its customers. These arrangements
include toll, formula and market contracts and arrangements. 21




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Under toll contracts, which typically vary in term from five to ten years,
customers pay for or provide raw materials to Ineos Phenol and receive, in
return for a toll fee, corresponding phenol and/or acetone outputs in fixed
proportions. The toll fee reflects Ineos Phenols labor, energy, and overhead
costs and includes a profit component. Consequently, toll contracts can
insulate Ineos Phenol against raw material and market price fluctuations. In
2003, 46% of Ineos Phenols European phenol production and the corresponding
acetone production was sold under such contracts. There are currently no toll
contract arrangements in the United States. Under formula contracts, which vary in term from three to ten years, the
phenol selling price is linked by a formula to published benzene prices plus an
agreed upon additional amount. In 2003, Ineos Phenol made 26% of its European
and 20% of its US phenol sales under formula contracts. It also made 7 percent
of its European acetone sales under such contracts. Market contracts and arrangements range from long-term agreements to
incidental sales. In both cases, selling prices are based on published market
prices. In 2003, Ineos Phenol made 27% of its European and 80% of its US
phenol sales under market contracts and arrangements. Competition In Europe, the three leading manufacturers, Ineos Phenol, Polimeri Europa
and Ertisa, together account for approximately 80% of total European production
capacity (both captive and merchant). In the European merchant market,
Polimeri Europa, Ertisa and Ineos Phenol enjoy approximately 10%, 20% and 50%
of the merchant market, respectively. In North America, the three leading
manufacturers, Shell, Sunoco and Ineos Phenol, together account for
approximately 79% of total North American production capacity. In the North
American merchant market, Shell, Sunoco and Ineos Phenol enjoy approximately
22%, 40% and 17% of the merchant market, respectively. The difficult market
conditions of the last few years have forced the closure of four smaller phenol
plants in North America in 2002 and 2003: Fenoquimia, Frontier, the Pasedena
plant of Georgia Gulf and one of the Sunoco plants in Haverhill. The markets for phenol and acetone are traditionally viewed as regional
because of the physical difficulty of transporting and storing phenol and the
resulting high freight costs, with regional production responding to regional
demand. Individual regions go through independent price and margin cycles,
unless there are inter-regional price imbalances which exceed freight costs.
In each region, Ineos Phenols products compete on the basis of price, product
quality, security of supply and customer service. Raw Materials and Suppliers Raw materials are Ineos Phenols most significant cost category. Cumene,
which is made from the combination of benzene and propylene, is Ineos Phenols
main raw material, accounting for approximately 69% of its cost of sales in
2003, while the costs of Ineos Phenols other raw materials and utilities
accounted for only 4% of cost of sales in 2003. Ineos Phenol acquires cumene pursuant to four different types of
contractual arrangements. Under the first type of contractual arrangement,
Ineos Phenol supplies the benzene and propylene required for the production of
cumene to its suppliers, who convert these inputs into cumene. For this
service, Ineos Phenol is charged a conversion fee reflecting the suppliers
costs and a margin. Under the second type of contractual arrangement, the
suppliers charge Ineos Phenol for cumene according to contractually agreed
formulas based on benzene and propylene market prices and agreed yield factors.
A conversion fee is added to the charge. The third type of arrangement is the
toll contract, discussed above, pursuant to which customers pay for or provide
raw materials to Ineos Phenol and receive, in exchange for a toll fee,
corresponding phenol and acetone outputs in fixed proportions. Finally, Ineos
Phenol also makes some incidental purchases of cumene in the open market. As a
result of these arrangements, Ineos Phenol has some exposure to changes in the
market contract and 22




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spot rates for benzene and propylene. Ineos Phenol believes that its use
of toll contracts and formula-based contracts can reduce its exposure to raw
material price fluctuations. Ineos Phenol has entered into an agreement with Dow Chemical that it
believes will significantly reduce its cumene costs. Under the agreement,
Ineos Phenol has invested approximately $26 million (approximately 28 million)
in the expansion of Dow Chemicals European cumene plant in exchange for the
right to purchase specified amounts of its European cumene requirements at
preferential rates beginning in May 2002. As a result and based on current
market prices, Ineos Phenol expects to ultimately realise cumene cost savings
of approximately 13 million per annum. Pipelines supply the Gladbeck site with almost all of its cumene, while
the Antwerp and Mobile sites receive all of their cumene by ship. Operations and Manufacturing Facilities Ineos Phenol manufactures phenol and acetone at three sites in Gladbeck,
Germany; Antwerp, Belgium; and Mobile, Alabama. With more than 450 million
having been invested to build new phenol and acetone production facilities
since 1993, we believe Ineos Phenols facilities are adequate for its present
and projected operations. Gladbeck. With an annual capacity of 630 kilotonnes of phenol and 390
kilotonnes of acetone, Ineos Phenols Gladbeck site is the largest single-train
unit in the world. The site benefits from its proximity to key raw material
suppliers. Pipelines to BP Chemicals cumene plant in Marl and Veba Oils
cumene plant supply the Gladbeck site with cumene. The site is accessible by
rail and road and is located close to the large German phenol and acetone
consumers. Production capacity at the Gladbeck site has been significantly
increased since the plants start-up in 1954 through expansions and
de-bottlenecking projects. Recent capacity expansions have been achieved
without a corresponding increase in the fixed cost base and have contributed to
the sites leading position on the European industry curve. Antwerp. In 1993, Ineos Phenol opened a second European production plant
within the Antwerp Complex in the harbour area of Antwerp on the left bank of
the Schelde River with direct deep-water access to optimise the transport
logistics necessary for supplying customers on a global basis. The original
capacity of 200 kilotonnes per annum for phenol was expanded in 1997 to 420
kilotonnes per annum for phenol and 260 kilotonnes per annum for acetone. The
plant has been further expanded to 440 kilotonnes per annum for phenol in 2003.
All of the cumene reaches the site via ship. About 90% of the sites
end-products are transported to its customers by ship, with the balance being
transported by road. Mobile. After a two-year construction phase, Ineos Phenols newest
production site in Mobile, Alabama began production in April 2000. It has an
annual capacity of 440 kilotonnes for phenol and 270 kilotonnes for acetone
after the plant was expanded in January 2003. The site is located in the
Theodore area on the Gulf of Mexico, close to such major phenol consumers as GE
Plastics, Georgia-Pacific and Dynea. All cumene is supplied via ship mainly
from producers on the Gulf Coast. About 50% of the phenol and acetone produced
are transported via ship, and the balance by rail and road. Production Process Ineos Phenol uses the Hock Process, which uses cumene as a raw material to
produce phenol and acetone at a constant ratio of one part phenol to 0.62 parts
acetone at the end of a four-stage production process. The four stages are
oxidation, concentration, decomposition and distillation. The oxidation stage
in the production process triggers the oxidation of cumene and compressed air
through a chemical reaction that produces an intermediate substance called
cumene hydroperoxide. In the 23




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concentration stage, the cumene hydroperoxide is concentrated to
approximately 70%. The concentrated hydroperoxide is then decomposed using a
catalyst in the third stage. The result of the decomposition is a mixture that
consists primarily of phenol and acetone, with a significantly smaller amount
of alpha-methylstyrene and acetophenone. In the final stage, the individual
products are separated by distillation achieving purity levels of more than
99.9% of phenol. The cumene recovered throughout the process is recycled into
the oxidation stage. Ineos Fluor General Ineos Fluor is a leading international manufacturer of fluorine-based
chemical products, by volume, according to the belief of management. Its
hydrofluorocarbon (HFC) business was established in 1989 to exploit the
opportunity presented by the mandatory phasing out of ozone-depleting chemicals
such as chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs) under
the Montreal Protocol. HFCs are ozone-benign replacements for CFCs and HCFCs.
From the late 1980s, substantial investments were made to develop a commercial
process for HFC 134a, the most common CFC replacement product. Subsequently,
three commercial scale HFC 134a plants were built for Ineos Fluor in the United
Kingdom, the United States and Japan during the 1990s at a cost of
approximately 400 million. We believe that Ineos Fluor is now the worlds
largest producer of HFC 134a, with production volumes of approximately 50
kilotonnes per annum. The following chart illustrates Ineos Fluors products: Products
    
    Percentageof 2003Turnover
    
   End-UsesIndustrial Fluorocarbons
    
    
    84%HFC 134a
    
    
    
    
    
    Commercial, industrial and
automotive air conditioning and propellantsHCFC 22
    
    
    
    
    
    Low-temperature refrigeration and
air conditioning, foam blowing, feedstockHFC Blends
    
    
    
    
    
    Low-temperature replacement for
CFCs and HCFCs for refrigeration and air conditioningSpecialty Fluorochemicals
    
    
    11%
    
    
    Pharmaceuticals and anaestheticsHydrogen Fluoride
    
    
    3%
    
    
    Raw materials for both HFCs
and HCFCs and in the manufacture of
fuel rods for the nuclear industryEnvironmental
    
    
    2%
    
    
    Projects driven by
tightening waste treatment requirements and regulations for fluorine based chemicals
 Products HFC 134a HFC 134a, which accounted for the majority of Ineos Fluors turnover in
2003, was developed in the late 1980s and introduced commercially in the early
1990s as a replacement for ozone-depleting CFCs. HFC 134a is widely regarded
as the only practical substitute for CFC-12 in automobile air conditioning
systems, as it is the only ozone benign non-flammable product available and is
now widely used in automotive, commercial and industrial air conditioning. HCFC 22 HCFC 22, which was the second largest contributor to Ineos Fluors
turnover in 2003, is used in low-temperature refrigeration and air
conditioning, foam blowing, and as a feedstock in the production of
fluoropolymers, such as polytetrafluoroethylene. 24




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Specialty Fluorochemicals Ineos Fluor produces several other specialty fluorochemicals, including
halothane, a fluorinated inhalation anaesthetic; and medical grade HFC 134a, a
propellant in medical inhalers. HFC Blends HFC blends are being developed to replace existing CFC and HCFC products
for various refrigeration and air conditioning applications that require lower
temperature characteristics than available with HFC 134a. Regulation Demand for fluorocarbons is closely tied to changing environmental
regulations on substances that deplete the ozone layer, in particular the
Montreal Protocol (1987), which, following various revisions, required that all
production of CFCs cease in developed countries by 1996, subject to certain
exceptions for essential uses, and in developing countries by 2010. HCFCs,
already widely used in air conditioning, emerged as temporary alternatives to
CFCs, but are also controlled by the Montreal Protocol. In 1999, the Montreal Protocol was amended to phase out the use of HCFCs
for non-feedstock applications, such as foam blowing agents and refrigerants,
beginning with a freeze on consumption in developed countries in 1996, and in
developing countries in 2016. The European Union approved the agreement in
2002 and has adopted its own accelerated HCFC phase-out schedule, which began
in 2000 and will effectively be completed by 2005. The use of HCFC 22 as a
feedstock is still permitted world-wide. The most common replacements for HCFC
22 are various HFC blends, many of which contain HFC 134a. Although HFCs and HFC blends are not controlled by the Montreal Protocol,
they are one of six types of gases included in the Kyoto Protocol, an
international treaty adopted in 1997 aimed at reducing emissions of
greenhouse gases. The US government has not signed the Kyoto Protocol, whereas
the European Union has agreed to cut its emissions of all global warming gases
by a total of eight percent from their 1990 level in the commitment period of
2008 to 2010. Draft European legislation proposes to regulate the use of HFC
134a in automotive air conditioning from 2011. Customers, Sales and Marketing Ineos Fluor sells its fluorine-based chemicals to a broad range of
customers in over 50 countries, including some of the largest consumers in the
automotive, and pharmaceutical industries such as Ford, General Motors, Toyota,
Asahi Glass and GlaxoSmithKline. It supplies a significant amount of its
automotive customers HFC 134a requirements, and it has a key relationship with
GlaxoSmithKline, for which it acts as sole supplier for the supply of
inhalation grade HFC 134a used in asthma drug delivery. Its largest end-market is the automotive industry, which accounted for 60%
of its 2003 sales value, and is divided between original equipment
manufacturers and after-market sales. The HFC 134a market is highly seasonal,
with a significant increase in demand in the early summer months. Most of Ineos Fluors sales are made under contracts of one to five years.
Its sales are made by either its sales force, which consists of 24 employees
operating in the three key regions, Europe, Asia Pacific and the United States,
or by a network of independent sales agents and distributors covering Europe,
Asia (excluding Japan) and Latin America. 25




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Competition The markets for some of Ineos Fluors products are highly competitive,
even if the total number of participants in any given product market may be
quite small. The high capital cost (approximately 160 million for a
global-scale HFC 134a plant), technical complexity and long lead times (up to
four years to bring new capacity on-stream from conception to production)
required to manufacture HFCs and HCFCs act as significant barriers for
potential new entrants to the market. HFC 134a Ineos Fluor competes in the HFC 134a market on the basis of overall supply
capability, which is particularly important to original equipment
manufacturers, price and quality. The leading competitors of Ineos Fluor are
DuPont and Atofina who have approximately 45% of the HFC 134a market between
them. Our competitors in the medical grade HFC 134a market are DuPont and
Solvay. HFC Blends Our competitors in the emerging market for HFC blends are the same as in
the HFC 134a market. While Ineos Fluor has a portfolio of patents covering
unique blends of fluorocarbons and mixtures of fluorocarbons with other
compounds for use in low-temperature refrigeration, a number of our competitors
have comparable or superior patent protection in this area. In Europe, we have
entered into license agreements with certain of these competitors that grant us
the right to sell the HFC blends for use in their primary applications. In
North America, however, our competitors have patent protection for the primary
HFC blend applications currently in use. As a result, we do not intend to
focus on sales of HFC blends in North America. In Asia patent coverage is
sporadic and Ineos Fluor will target sales in patent free territories. HCFC 22 Competition in the HCFC 22 market is generally based on price, although
product quality is also important in fluoropolymer applications. In the HCFC
22 market, which is more fragmented than the HFC 134a market, the main
competitors of Ineos Fluor are DuPont, Atofina and Honeywell. Raw Materials and Suppliers Ineos Fluors key raw materials are trichloroethylene, HF and chloroform.
Ineos Fluor purchases trichloroethylene for all of its requirements in the
United Kingdom from Ineos Chlor, in the United States from PPG, Dow Chemical
and Ineos Chlor and in Japan from Toa Gosei, Kanto Denka and Ineos Chlor. It
manufactures its own HF in the United Kingdom and purchases HF from Honeywell
in the United States and from Stella Chemicals, Morita Central Glass, Ying Peng
(China), Atofina (China), and a range of smaller suppliers in Japan. Ineos
Fluor purchases all it requirements for chloroform from Ineos Chlor. Prices
for each of these raw materials have been fairly stable in recent years. Ineos
Fluor purchases its raw materials under contractual arrangements with terms of
one to five years. As a result, prices tend to be relatively stable. Operations and Manufacturing Facilities Ineos Fluor has three production sites in the United Kingdom, the United
States and Japan. Since 1990, over 400 million has been invested to build and
expand Ineos Fluors production facilities. As a result of the highly seasonal
demand for air conditioning products, utilisation rates only approach 100%
during the peak production periods in the early summer months and are lower
during the remainder of the year. 26




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We believe that the facilities of Ineos Fluor are modern, well maintained
and operated to high standards of health, safety and environmental practice and
are adequate for its present and projected operations. The facilities in the
United States and Japan focus on the production of HFC 134a, while the site in
the United Kingdom produces HFC 134a, HCFC 22, HF and several other
fluorine-based chemicals. Production Process HFC 134a is produced by reacting trichloroethylene and HF over a zinc
chromia catalyst, a patented process owned by Ineos Fluor. Hydrochloric acid
is also produced by the process and is sold as a by-product. HCFC 22 is produced by reacting chloroform and HF using an antimony
catalyst. Hydrochloric acid is also produced by the process and is sold as a
by-product. Intellectual Property Ineos Fluor has a portfolio of process and application patents for its
products. The base patents are supported by a range of regional and national
filings. The primary process technology used by Ineos Fluor is the manufacture of
HFC 134a from trichloroethylene by catalytic hydrofluorination. This core
technology is protected by fundamental catalyst patents and a range of process
patents. Downstream from these core reactions, the business has patents
covering separation and distillation. Ineos Fluor has a portfolio of patents covering unique blends of
fluorocarbons and mixtures of fluorocarbons with other compounds for use in
refrigeration. However, a number of our competitors have superior patent
protection in this area. Ineos Silicas General Ineos Silicas is a leading global manufacturer of specialty chemicals
derived from sand (impure silica) and alumina, by volume, according to the
belief of management. Founded in 1815 in the United Kingdom as a soap company
and operated as a subsidiary of Unilever for more than 70 years, Ineos Silicas
has three primary products, namely silicates, zeolites and silicas, which it
sells globally to more than 1,500 customers. We believe that Ineos Silicas has
leading market positions in each of its products, which are used in a wide
variety of end-markets, and in particular is the sole producer of a patented
added value proprietary zeolite A24. The following chart illustrates Ineos Silicas products: Percentage of 2003Products
    
    Turnover
    
    End-UsesSilicates
    
    
    32
    %
    
    Paper adhesives, civil
engineering, consumer laundry
and dishwasher detergents, water
treatmentZeolites
    
    
    29
    %
    
    Consumer laundry detergentsSilicas
    
    
    39
    %
    
    Paints and coatings, brewing,
edible oils, desiccants,
personal care products,
plastics, water treatments and
polymerisation catalysts
 27




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Products Silicates Silicates are sold into a wide variety of applications as well as being
used as a raw material for zeolites and silicas. The main downstream use for
silicates is in household and industrial detergents, where they are used for
their binding and carrying properties with active cleaning ingredients.
Silicates are also used in numerous industrial applications, including soil
consolidation, paper laminating adhesives, refractory cements, mineral
processing and specialty grouts. Ineos Silicas uses approximately 40% of its
silicate production internally as a feedstock for the production of zeolites
and silicas. While silicates manufacturing capacity generally exceeds market demand,
the relatively high distribution costs for silicates make it uneconomical to
transport more than a few hundred kilometres. Accordingly, silicates markets
tend to be regional, with manufacturers either being located in close proximity
to their key customers or using silicates for internal production. Zeolites Zeolites are key components of household detergents and powders. Zeolites
act as a builder in detergents and as a carrier of liquid surfactants to soften
water, provide alkalinity, assist with powder structuring and keep dirt in
suspension. Ineos Silicas principal European zeolite product is A24 zeolite,
a patented product sold at a premium price due to its technical advantages over
the industry standard 4A zeolite, and a number of patent-protected A24
derivatives. It also manufactures mainly 4A zeolite in the United States where
the market has chosen not to move to A24. Zeolite demand is driven by the detergent market, which is the primary
end-use application for zeolite products. For environmental reasons, zeolites
have generally replaced polyphosphates in detergent applications in most of the
developed world, although France, Spain and the UK have not yet banned the use
of polyphosphates in detergent applications. Because detergents are a
necessity level item, zeolites tend to be characterised by low growth rates and
highly stable demand regardless of the macroeconomic cycle. Although we
believe that Europe still faces over-capacity in 4A zeolite, Ineos Silicas has
been generally protected from the effects of this over-capacity as a result of
its focus on its patented A24 zeolite. Market rationalisation and plant
closures are bringing supply and demand of zeolite products closer to a
balanced situation. Since the relatively higher value of zeolites permits it
to be shipped further than silicates, zeolite markets are less regional than
silicates markets. Ineos Silicas exports product to South America and Asia
from Europe. Silicas Silicas are highly specialised chemical products used in a diverse range
of products across several different industries. Because silica products are
often tailored to each customers specifications, Ineos Silicas commands
significant price premiums for these products, with a high gross margin
relative to other products. Key applications for silicas include: thickeners
and abrasives in personal care products such as toothpaste, shampoos and body
wash products; clarifiers and stabilisers for beer, fruit juices and edible
oils; and matting agents for specialty surface coatings. Silicas are also used
as catalyst supports in the production of plastics, particularly high-density
polyethylene (HDPE). The global market for silicas is driven by many niche applications that
primarily depend upon superior performance, rather than price. Since
transportation costs comprise a relatively minor percentage of the overall
selling price, the silicas market is global, rather than regional in nature. 28




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Customers, Sales and Marketing Customers Ineos Silicas derived approximately 31% of its turnover in 2003 from
Unilever, with whom we believe we have a particularly strong relationship. Since the divestiture of Ineos Silicas by Unilever, we have expanded our
customer base, in part by seeking to develop or expand our relationships with
other detergent manufacturers. While continuing to foster the Unilever
relationship, Ineos Silicas is actively seeking to expand its customer base by
continuing to develop new products. Ineos Silicas now sells to over 1,500
customers in more than 100 countries, including Anheuser-Busch, Exxon-Mobil,
Asahi Brewers, McBride, BP Chemicals, SAB-Miller, Proctor & Gamble and SABIC. Sales and Marketing Ineos Silicas markets its products primarily on the basis of product
performance and customer relations. Ineos Silicas has an international sales
force of 60 employees. It maintains sales offices at each of its production
facilities, with additional sales offices in Singapore, Australia, China, Italy
and Japan. Its geographically focused sales efforts and its local
manufacturing presence allow Ineos Silicas to cooperate closely with its
customers and to respond to its customer base world-wide. Contracts and Pricing In 2003, Ineos Silicas sold approximately 90% of its zeolites and 25% of
its silicates pursuant to written sales contracts. Its zeolite contracts with
Unilever range in duration from four to nine years, while its silicates
contracts with Unilever tend to be short- to medium-term. Its zeolite and
silicates contracts with other customers are generally for a duration of one to
two years. Prices for zeolites and for silicates used in detergent
applications are generally set on a pass-through basis for raw material cost
changes. Ineos Silicas sells a majority of its silicas pursuant to purchase orders,
rather than on a contracted basis, but the trend for contractual arrangements
is increasing. Sales to customers in the brewing and personal care products
industries under short- to medium-term contracts, and to customers in the
polymers industry under contracts ranging from one to five years. Competition In many of the niche markets in which it competes, Ineos Silicas is either
the exclusive producer, with patent protection, or one of only a few producers. The fragmented nature of the market makes it difficult to assess specific
market shares by producer. The key competitors in silicates and zeolites are
PQ, IZL, Oxychem and Zeolin, although there are also several smaller regional
producers. In silicas, W.R. Grace currently enjoys the largest market share.
Other significant competitors include Huber, Rhodia and Degussa. PQ is the only
competitor of Ineos Silicas that has a comparably broad portfolio of silicates,
zeolites and silicas products. Raw Materials and Suppliers Ineos Silicas key raw materials are caustic soda, aluminium trihydrate
(ATH), soda ash, natural gas and sand. These raw materials account for about
70% of Ineos Silicas variable product costs. Ineos Silicas purchases all of
its caustic soda requirements in the United Kingdom and a portion of its
caustic soda requirements in the Netherlands from Ineos Chlor. It has a
contract with PPG to supply a majority of its US caustic soda requirements
through 2004. The remainder of its 29




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caustic soda requirements are bought from several suppliers on a quarterly
basis or on the spot market. ATH is only used in the production of zeolites
and its cost is largely passed on to customers. Operations and Manufacturing Facilities Ineos Silicas has eight production sites in six countries. We believe the
facilities of Ineos Silicas are well maintained and operated to high standards
of health safety and environmental practice. With more than 100 million in
total capital expenditures in the ten years up to 2001, we believe Ineos
Silicas facilities are adequate for its present and projected operations.
Investment in 2002 and 2003 has averaged 15 million per annum. Ineos Silicas has entered into a nine-year agreement with Unilever for A24
zeolite which we believe will more than double our current European production
requirements. As a result of this contract, we restarted production at our
Warrington A24 Zeolite plant in November 2001, which had been mothballed since
1997. It was mothballed due to Unilevers decision to discontinue Persil
Power, the problems of which were unrelated to Ineos Silicas A24 zeolite. In addition, the emphasis on investment has moved to silica where
substantial expansions in capacity in Warrington and Joliet have been
implemented in 2003. Production Process Ineos Silicas manufactures silicates using two processes: the furnace
process, which is used to manufacture alkaline silicates suitable for use as a
silicas feedstock; and the hydrothermal process, which is used to manufacture
silicates suitable for use as a zeolites feedstock. Zeolites are produced from the controlled crystallisation of alkaline
silicate liquor and an alkaline solution of ATH followed by filtration and
drying of the resultant zeolites. Ineos Silicas manufactures its silicas using two processes: the
precipitation process, in which silicate liquor is reacted with sulphuric acid
in a precipitation vessel to manufacture a range of silica products; and the
gel process, in which silicate liquor is again reacted with sulphuric acid
under different process conditions. The resulting silica gel material is
generally subjected to further treatment, such as drying, milling, micronising
and wax coating. Intellectual Property Ineos Silicas has extensive patent protection for its key A24 zeolite
manufacturing process. The key patent expires in 2009 and expiry dates on
supplementary patents extend into 2016. Ineos Silicas also has a royalty-free
right to use A24 zeolite in detergent applications, the key process patent for
which is held by Unilever. In addition, Ineos Silicas holds patents on its
silicates and silicas products and has developed proprietary process
technologies that we believe lead to product differentiation and barriers to
entry. Breakdown of Revenues Turnover by geographical destination is as follows: Year Ended December 31,2001
    
    2002
    
    2003( in millions)TurnoverEurope
    
    
    978.6
    
    
    
    1,534.1
    
    
    
    1,680.6Americas
    
    
    318.6
    
    
    
    450.0
    
    
    
    569.1Rest of World
    
    
    233.5
    
    
    
    251.7
    
    
    
    280.71,530.7
    
    
    
    2,235.8
    
    
    
    2,530.4
 30




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Turnover by business unit is as follows: Year Ended December 31,2001
    
    2002
    
    2003( in millions)TurnoverIneos Oxide
    
    
    432.1
    
    
    
    507.4
    
    
    
    500.1Ineos Phenol
    
    
    576.2
    
    
    
    1,189.0
    
    
    
    1,542.3Ineos Fluor
    
    
    299.5
    
    
    
    304.8
    
    
    
    273.8Ineos Silicas
    
    
    222.9
    
    
    
    234.6
    
    
    
    214.21,530.7
    
    
    
    2,235.8
    
    
    
    2,530.4
 Environmental, Health and Safety Matters We are subject to extensive, evolving and increasingly stringent
environmental, health and safety laws and regulations governing our operations
and products. The laws and regulations applicable to our operations address,
among other things: emissions to the air; wastewater discharges to surface and
subsurface waters; other releases into the environment; the generation,
handling, use and disposal of hazardous materials; the generation, handling,
storage, transportation, treatment and disposal of wastes; the maintenance of
safe conditions in the workplace; and anti-drug and war export restrictions. Other environmental, health and safety laws and regulations impose
restriction on some of our products. For example, silica and silicate products
used in the production of foods and personal care products must meet or exceed
minimum quality standards. Obtaining, producing and distributing many of our
products involves the use, storage, transportation and disposal of toxic and
hazardous materials. Although we devote considerable effort to limiting
exposure to or releases of such hazardous materials, there are significant
environmental, health and safety risks inherent in our operations and products,
and we may be subject to liability in the event of harm to human health or the
environment. Many of the raw materials and products manufactured by us,
including phenol, ethylene oxide, ethylidene norbornene and cristobalite, pose
risks of acute and chronic health effects and sensitisation (development of
allergies), as well as being combustible. The high toxicity of many of our
products, such as phenol, which at higher doses has the potential to be
genotoxic, means that it is imperative that ground and surface water are
protected from contamination therefrom. Many of our raw materials and
products, such as ethylene glycols and ethanolamines can be expected to
attenuate naturally fairly quickly. This means that when released into water
or soil they are relatively easily degraded by micro-organisms, evaporated or
diluted by infiltrating water. Phenol is rapidly biodegradable under
favourable conditions, but our experience has shown that natural attenuation of
phenol in soils can be very slow, thus increasing the likelihood that more
aggressive, and costly, remediation strategies have to be pursued in the event
of a spill or release. In addition, it is possible that certain of our
products, or by-products such as PC-Oil, may be classified as hazardous and
could thus involve costly remediation procedures not currently anticipated. We devote considerable attention to the health and safety of our employees
and the protection of the public health and the environment in the regions
where we operate. At our sites, advanced processes, controls and waste
handling practices significantly limit current environmental impact from our
operations. We believe we are in substantial compliance with applicable
environmental, health and safety laws and regulations. We also believe that
such compliance has not had an adverse effect on our competitive position or
our results of operations. In 2003, combined world-wide expenditures,
including those with respect to third party and divested sites, for compliance
with environmental, health and safety laws and regulations and internal company
initiatives, including capital expenditures, totalled approximately 19.0
million. We expect to spend a similar amount in 2004. We anticipate that
stringent environmental, health and safety laws and regulations will continue
to be imposed on us and on the industries in which we operate in general.
Although we cannot predict with certainty future expenditures, we believe that
the current spending trends will continue. 31




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##### Table of Contents



We are also subject to environmental laws and regulations that may require
us to investigate and remediate the effects of the disposal or release of
chemical substances at various sites. Under some of these laws and
regulations, a current or previous owner or operator of property may be held
liable for the costs of removal or remediation of hazardous substances on,
under, in or migrating from our property, without regard to whether the owner
or operator knew of or caused the presence of the contaminants, and regardless
of whether the practices that resulted in the contamination were legal at the
time they occurred. As is typical for chemical businesses, at some of our production sites
with an extended history of industrial use, significant soil and groundwater
contamination has occurred in the past. Contamination requiring, or
anticipated to require, investigation and remediation has been identified at
certain sites, and contamination might occur or be discovered in the future.
It is difficult to estimate the future costs of environmental investigation and
remediation because of many uncertainties, including the possibility that
additional contamination could occur or be identified in the future and future
changes to laws and regulations. Subject to the foregoing, but taking into
consideration our experience to date regarding environmental matters of a
similar nature and facts currently known, we believe that costs of
environmental remediation will not have a material adverse effect on our
competitive or financial position or our ongoing results of operations.
Because of the nature of our operations, however, there can be no assurance
that significant liabilities and costs relating to environmental, safety and
health matters will not be incurred in the future, and will not have a material
adverse effect on our competitive or financial position or our ongoing results
of operations. See Item 3.D of this annual report, Risk
FactorsRisks
Relating to Business OperationsEnvironmental mattersWe will have ongoing
costs and may have additional costs, obligations and liabilities. Although almost every country has its own legal procedures for
registration and import, laws and regulations in the European Union, the United
States and Japan are most significant to our business, including the European
inventory of existing commercial chemical substances, the European list of
notified chemical substances, the United States Toxic Substances Control Act
and the chemical list of the Japanese Ministry of Trade and Industry.
Chemicals which 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. As part of the acquisitions of the Ineos Phenol, Ineos Fluor and Ineos
Silicas businesses, Degussa and ICI have agreed to indemnify us for certain
environmental matters related to these businesses. Although we believe that
the indemnities given by Degussa and ICI were commercially reasonable, we may
be exposed to liability, and our financial results may be adversely affected to
the extent that liability for an historic environmental matter arises. See
Item 3.D of this annual report titled Risk FactorsRisks Relating to Business
OperationsEnvironmental mattersWe will have ongoing costs and may have
additional costs, obligations and liabilities. Insurance We insure our plant, equipment and other assets in the amount of 2,010
million with an all risk insurance policy which we believe is in accordance
with customary industry practices, including deductibles and coverage amounts.
We also carry policies in the amount of 745 million for consequential loss of
profits and payments of fixed costs as a consequence of fire, explosion,
electrical damage, machinery breakdown, flooding or fuel and/or power
shortages, for specified periods. In addition, we carry third party liability
insurance, transport insurance, computer insurance and life insurance for all
of our employees. Our insurance policies are currently issued by Royal & Sun
Alliance, HDI, AIG, Zürich, Scorr Re and Allianz. For additional information,
see Risk FactorsRisks Relating to Business Operations in Item 3.D of this
annual report. 32




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##### Table of Contents



C.
    
    ORGANISATIONAL STRUCTURE Ineos Group Limited is a holding company which holds the businesses
conducted by its indirect subsidiaries Ineos Oxide Limited, Ineos Phenol
Limited, Ineos Fluor Limited and Ineos Silicas Limited. The following chart
shows our group structure: (STRUCTURE CHART)  33




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##### Table of Contents



The following is a list of the principal subsidiaries of Ineos Group Limited: Country ofCompany
    
    Incorporation
    
    Percentage HoldingIneos Investment Holdings Limited
    
    UK
    
    
    100
    %Ineos Intermediate Holdings Limited
    
    UK
    
    
    100
    %Ineos Group Holdings plc
    
    UK
    
    
    100
    %Ineos Holdings Limited
    
    UK
    
    
    100
    %Ineos US Finance Inc.
    
    US
    
    
    100
    %Ineos Oxide Limited
    
    UK
    
    
    100
    %Ineos UK Holding Finance Company Limited
    
    UK
    
    
    100
    %Ineos US Finance Company Limited
    
    UK
    
    
    100
    %Ineos Finance BV
    
    Holland
    
    
    100
    %Ineos NV
    
    Belgium
    
    
    100
    %Ineos Belgium BV
    
    Belgium
    
    
    100
    %Ineos Italia Srl
    
    Italy
    
    
    100
    %Ineos OCI Limited
    
    UK
    
    
    100
    %Ineos OCII Limited
    
    UK
    
    
    100
    %Ineos Partners (DGP)
    
    US
    
    
    100
    %Ineos Phenol Limited
    
    UK
    
    
    100
    %Ineos Phenol Verwaltungsgesellschaft mbH
    
    Germany
    
    
    100
    %Ineos Phenol GmbH & Co KG
    
    Germany
    
    
    100
    %Ineos Phenol Asia Pte Limited
    
    Singapore
    
    
    100
    %Ineos Phenol (Thailand) Limited
    
    Thailand
    
    
    100
    %Ineos Phenol Services (Thailand) Limited
    
    Thailand
    
    
    100
    %Ineos Investment Holdings (Fluor & Silicas) Limited
    
    UK
    
    
    100
    %Ineos Intermediate Holdings (Fluor & Silicas) Limited
    
    UK
    
    
    100
    %Ineos Holdings (Fluor & Silicas) Limited
    
    UK
    
    
    100
    %Ineos Fluor Holdings Limited
    
    UK
    
    
    100
    %Ineos Fluor Limited
    
    UK
    
    
    100
    %Ineos Fluor International Limited
    
    UK
    
    
    100
    %Ineos Fluor Japan Limited
    
    Japan
    
    
    100
    %IFJ Korea Limited
    
    Korea
    
    
    100
    %Ineos Fluor Canada Inc.
    
    Canada
    
    
    100
    %Ineos Fluor Partners Limited
    
    UK
    
    
    100
    %Ineos Fluor Delaware Limited
    
    UK
    
    
    100
    %Ineos Fluor Americas LLC
    
    US
    
    
    100
    %Ineos Silicas Holding Limited
    
    UK
    
    
    100
    %Ineos Silicas Limited
    
    UK
    
    
    100
    %Ineos Silicas International Limited
    
    UK
    
    
    100
    %Ineos Silicas Holdings Netherlands BV
    
    Holland
    
    
    100
    %Ineos Silicas Netherlands BV
    
    Holland
    
    
    100
    %Ineos Silicas Asia Pacific Pte Limited
    
    Singapore
    
    
    100
    %Ineos Silicas South Africa Pty Limited
    
    South Africa
    
    
    100
    %PT Ineos Silicas Indonesia
    
    Indonesia
    
    
    100
    %Ineos Brazil Limitada
    
    Brazil
    
    
    100
    %Ineos Silicas Partners Limited
    
    UK
    
    
    100
    %Ineos Silicas Delaware Limited
    
    UK
    
    
    100
    %Ineos Silicas Healthcare Limited
    
    UK
    
    
    100
    %Ineos US DSS Limited
    
    UK
    
    
    100
    %Ineos US Holding Company II LLC
    
    US
    
    
    100
    %Ineos US Intermediate Holding Company
    
    US
    
    
    100
    %Ineos Americas LLC
    
    US
    
    
    100
    %Ineos US Investment Holding Company LLC
    
    US
    
    
    100
    %
 34




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D.
    
    PROPERTY, PLANT AND EQUIPMENT We currently lease the office space for our principal executive offices,
which are located in Lyndhurst, Hampshire, England. Additionally, we also
lease administrative, technical and sales office space in various locations in
the countries in which we operate. Our production network is comprised of 16 manufacturing facilities in nine
countries throughout the world. The following chart provides information regarding our plants: Capacity (inkilotonnes per
    
    Approximate areaProperty/Location(1)
    
    Principal Products Manufactured
    
    year)
    
    (square meters)Ineos OxideAntwerp, Belgium
    
    EO, EG, EO derivatives, ENB
    
    
    1,200
    
    
    
    136,000Plaquemine, LA, US
    
    EOA and gas treating amines
    
    
    160
    
    
    
    40,000Ineos PhenolGladbeck, Germany
    
    Phenol, acetone
    
    
    1,020
    
    
    
    330,000Antwerp, Belgium(2)
    
    Phenol, acetone
    
    
    710
    
    
    
    270,000Mobile, AL, US
    
    Phenol, acetone
    
    
    710
    
    
    
    486,000Ineos FluorRocksavage, UK
    
    HFC 134a, HCFC 22, HF
    
    
    67
    
    
    
    300,000St. Gabriel, LA, US
    
    HFC 134a
    
    
    27
    
    
    
    330,000Mihara, Japan(3)
    
    HFC 134a
    
    
    18
    
    
    
    18,000Ineos SilicasWarrington, UK
    
    Silicas, silicates, zeolites
    
    
    382
    
    
    
    223,000Eijsden, Netherlands
    
    Silicates, zeolites
    
    
    330
    
    
    
    85,000Joliet, IL, US
    
    Silicas, silicates, zeolites
    
    
    230
    
    
    
    162,000Pasuran, Indonesia
    
    Silicas
    
    
    10
    
    
    
    20,000Jacana, Brazil
    
    Silicates
    
    
    175
    
    
    
    12,100Rio Claro, Brazil
    
    Silicas
    
    
    7
    
    
    
    85,000Jacobs, South Africa
    
    Silicates
    
    
    100
    
    
    
    12,100Wadeville, South Africa
    
    Silicates
    
    
    120
    
    
    
    28,000
   (1)
    
    We own all of our production facilities except where otherwise indicated.(2)
    
    Ineos Phenol owns the production assets, but leases the land under a
long-term lease that expires in 2040.(3)
    
    The Mihara facility is operated by Teijin Limited on behalf of Ineos
Fluor. Ineos Fluor owns the production assets but leases the land under a
long-term lease. 
 ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS  A.
    
    OPERATING RESULTS Overview We are a leading global chemical manufacturer of specialty and
intermediate chemicals, with leading market positions, by volume, in each of
our core products according to the belief of management. Our company is
comprised of Ineos Oxide (formerly Ineos plc) and three other chemical
businesses that have been recently acquired and combined by our principal
shareholders, the directors of Ineos Capital. Our products include a wide
range of ethylene-based, fluorine-based and inorganic specialty chemicals, as
well as intermediate chemicals, such as phenol, acetone and ethylene glycol
(EG). We believe our businesses are distinguished by the broad experience of
our shareholders and our management teams, leading market positions,
high-quality and low-cost production facilities and operating diversity. 35




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We acquired Ineos Fluor and Ineos Silicas on January 9, 2001 from ICI and our
results of operations reflect the purchase of Ineos Fluor and Ineos Silicas
from an effective acquisition date of January 1, 2001. In addition, our
results of operations include the results of operations of the EOA and gas
treating amines businesses from Dow Chemical from February 12, 2001, the
results of Ineos Phenol from May 23, 2001 and the results of the acetate esters
business from BP Belgium from March 1, 2002, the dates we acquired those
businesses. Factors Affecting Our Business Profitability in each of our businesses is affected significantly by
general economic conditions, prices of our raw materials and global supply and
demand for our products. In addition, environmental legislation and
initiatives affect demand for our products, especially chemicals manufactured
by Ineos Fluor and Ineos Silicas. One of the key parts of our business strategy is to reduce the fixed and
variable cost bases of the companies we acquire. We look to lowering our
overall manufacturing costs by targeting annual fixed cost reductions;
implementing more flexible raw material purchasing strategies and introducing
capital expenditure programs to improve manufacturing efficiency. Ineos Oxide Ineos Oxide derives its turnover and cash flow from the sale of specialty
and intermediate chemicals based on ethylene-based petrochemicals and the
provision of management and operating services to third parties with chemical
plants on the Antwerp and Plaquemine sites. The following factors have
historically affected Ineos Oxides results of operations over the periods
shown, and can be expected to continue to affect its business:  
    
    Growth in Ineos Oxides volume of sales has been affected by
production capacity increases that have been in excess of market
growth. From 1997 to 2003, Ineos Oxides design capacity for EO has
grown from approximately 140,000 tonnes per annum to 420,000 tonnes
per annum, while its design capacity for EG has grown from
approximately 180,000 tonnes per annum to 330,000 tonnes per annum.
The ENB unit was expanded in 2002 by a further 5,000 tonnes per
annum to 18,000 tonnes per annum. In addition the EOA unit in
Plaquemine has been expanded by a further 25,000 tonnes per annum in
2003 to 160,000 tonnes per annum. These increases in production
capacity have allowed Ineos Oxide to increase its turnover through
increased volumes sold, even during recent periods of decreased
selling prices. A further 20,000 tonnes per annum expansion in
Alkox capacity is planned for 2004.
    
    The gross and operating profit of Ineos Oxide is affected by
price cyclicality in its intermediate chemicals operations for both
raw materials and products produced by it. Moreover, the prices for
ethylene and EG often do not follow the same cycles, which can cause
operating margins to fluctuate from period to period. We expect
that EG prices will continue to be strong during 2004 due to a short
global demand and supply balance based on the expected growth rate
of demand for the polyester markets and the lack of new glycol
plants in the next two years. Under a long-term swap agreement
entered into with Dow Chemical as part of the EOA and gas treating
amines acquisition, Ineos Oxide will sell an increasingly
significant portion of its EG production to Dow Chemical and
therefore be able to run the unit at full capacity and at more
stable margins per tonne. 36




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Ineos Phenol Ineos Phenol derives its turnover from the manufacture of phenol and
acetone, which are primary materials in the production of a wide range of
industrial applications. Phenol and acetone are produced in fixed proportions
of one tonne of phenol and 0.62 tonnes of acetone from 1.34 tonnes of cumene,
which, in turn, is produced from fixed proportions of 0.9 tonnes of benzene and
0.49 tonnes of propylene. Reflecting this, the industry convention to measure
profitability, Margin over Raw Materials (MORM), is the price of one tonne of
phenol plus the price of 0.62 tonnes of acetone, minus the cost of 0.9 tonnes
of benzene and 0.49 tonnes of propylene and an appropriate cumene conversion
charge. The total cost of cumene accounted for 69% of Ineos Phenols cost of
sales in 2003. Market prices for phenol and acetone are routinely published by
industry consultants for both the Western Europe and the United States markets.
While price movements in its end products and raw materials reflect the
published market prices, the published prices are not necessarily indicative of
the absolute levels of Ineos Phenols product and raw material prices. The following factors have historically affected Ineos Phenols results of
operations over the periods shown, and can be expected to continue to affect
its business:  
    
    Turnover fluctuates from period to period as a result of
cyclicality of pricing for phenol and acetone. These price
movements are mostly a function of fluctuations in the benzene and
propylene market prices and changes in the MORM. Tolling and
formula contracts, which govern most of Ineos Phenols sales, allow
it to pass on to its customers a significant portion of the changes
in its raw material prices, which in turn reduces Ineos Phenols
exposure to the industrys volatility. Ineos Phenol will continue
to utilise tolling and formula contracts wherever possible. Benzene
and propylene market prices increased significantly during the
second half of 2002 and remained that way for most of 2003.
Industry MORM levels are expected to remain stable during 2004.
    
    Turnover and cost of sales are also affected by changes in
sales volumes, which are a function of market demand and available
plant capacity. Ineos Phenols available capacity has been
significantly increased by the opening in April 2000 of the Mobile
plant with a capacity of 400 kilotonnes of phenol. The Mobile plant
was expanded to 440 kilotonnes of phenol in January 2003. In
addition a number of competitors smaller plants have been closed in
2002 and 2003, bringing the North American market into a more
balanced position. In Europe, Ineos Phenol expanded its phenol
capacity at its Antwerp plant to 440 kilotonnes in 2003 and at its
Gladbeck plant to 630 kilotonnes in 2003. Some increases in
available plant capacity in the market are expected for 2004 mainly
in Asia. Market demand in 2003 was higher than expected due to
higher demand from the caprolactam segment and the BPA segment
coming back to normal levels. Market demand in 2004 is expected to
be higher than 2003 with demand from the caprolactam segment
expected to stay strong, moderate growth from the phenolic resins
segment and improved demand from the BPA segment.
    
    Cost of sales reflect mostly benzene, propylene and related
cumene conversion costs, as well as variable energy costs and fixed
production costs, including depreciation. Cost of sales fluctuate
from period to period due to the volatility in benzene and propylene
market prices and changes in volumes as discussed above. Ineos
Phenol has entered into an agreement with Dow Chemical that it
believes will significantly reduce its cumene costs. Under the
agreement Ineos Phenol has invested in the expansion of Dow
Chemical ́s European cumene plant in exchange for the right to
purchase specified amounts of cumene at preferential rates which
began in the second half of 2002.
    
    Industry MORMs have historically correlated with the ratio of
available capacity and market demand. There have been periods in
which supply has temporarily exceeded demand, which has led to
depressed MORM levels. For example, in 1999 and 2000 the US market
experienced the lowest MORM levels since 1994 due to significant
capacity additions. The European market experienced a period of
overcapacity in late 1998 and throughout 1999 when demand slowed and
failed to absorb recent capacity additions. In 37




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2001, MORM levels eroded in the European market as a result of sharply
decreased demand, which resulted from the general economic downturn
world-wide as well as negative developments in IT-related industries,
combined with slightly increased capacity. MORM levels in the US
market recovered moderately in 2001. Industry MORM levels improved
slightly during 2003 and are expected to remain stable during 2004.
    
    The markets for phenol and acetone tend to be regional due to
the difficulty and cost of storage and transportation, with regional
production catering to regional demand. As a result, a region may
have its own price and margin cycles, according to regional demand
and supply imbalances, unless there are inter-regional price
imbalances that exceed freight costs. Ineos Fluor Ineos Fluor derives its turnover and cash flow from the manufacture of
specialty fluorocarbon chemicals, particularly HFC 134a and HCFC 22, which are
used in a range of refrigeration and other applications. The following factors
have historically affected Ineos Fluors results of operations over the periods
shown, and can be expected to continue to affect its business:  
    
    Demand for Ineos Fluors products has grown due to increased
demand for HFC 134a for use in industrial and medical applications,
a shift in usage of HCFC 22 from non-feedstock to feedstock
applications and growth in demand for HFC blends in low-temperature
refrigeration. Market demand for HFC 134a and blends is expected to
grow through 2004 and Ineos Fluor is seeking additional HCFC 22
feedstock business to offset reductions in non-feedstock
applications.
    
    Environmental considerations have resulted in demand shifting
away from ozone-depleting gases towards ozone-benign gases, such as
the HFC products Ineos Fluor manufactures. The shift away from
ozone-depleting gases will continue until full phase-out of both
CFCs and HCFCs in non-feedstock uses is achieved.
    
    Raw material costs compose the largest portion of Ineos
Fluors costs. Ineos Fluor has not, however, seen historically
significant fluctuations in its gross profit margins as a result of
raw material price volatility. The market trends for raw material
costs are expected to remain within historic norms. Ineos Silicas Ineos Silicas derives its turnover and cash flow from the manufacture of
structured fine particles made from sand (impure silica) and alumina.
Silicates, zeolites and silicas are Ineos Silicas major product groups,
accounting for 32%, 29% and 39%, respectively, of Ineos Silicas turnover for
the year ended December 31, 2003. The following factors have historically
affected Ineos Silicas results of operations over the periods shown, and can
be expected to continue to affect its business:  
    
    At the time of Ineos Silicas divestiture from Unilever in
1997, an agreement was reached with Unilever on price and volume
levels for continuing zeolites sales following the separation. The
agreement provided that these prices would step-down on an annual
basis to competitive market price levels. Volumes also declined
particularly in the US as Levers production of powder detergents
fell. These step-downs decreased turnover in 1999 and 2000, but
these decreases have been increasingly offset by sales to other
customers. The final step-downs occurred at the end of 1999. In
2000, and beyond prices have been on an arms-length basis. The
Silicas business remains the sole supplier of Zeolite to Lever in
Europe and the US.
    
    Zeolite demand is driven by the detergent market, since
detergents are the primary end-use application for zeolite products.
Environmental pressure including legislation in many countries
limiting or banning phosphate usage has resulted in an on-going
shift in demand from phosphates to zeolites for use in detergents.
In addition, some important 38




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detergent manufacturers are seeking to standardise product
formulations across geographical regions, by using zeolites as
detergent builders, even in countries where phosphate use is not yet
prohibited.
    
    Profitability has been affected by increases or decreases in
sales of silica products, which although they are relatively low
volume are very high value and generate a relatively high gross
margin.
    
    In many of Ineos Silicas key detergent sales contracts for
silicates and zeolites, pass-through pricing offers protection from
price movements in key raw materials. Ineos Group LimitedResults of Operations The results of the Ineos Group Limited for the year ended December 31,
2003 are comprised of Ineos Oxide, Ineos Fluor, Ineos Silicas and Ineos Phenol.
The results of Ineos Group Limited for the year ended December 31, 2002 are
comprised of Ineos Oxide, Ineos Fluor, Ineos Silicas and Ineos Phenol as well
as the results of the acetate esters business acquired by Ineos Oxide from BP
Belgium on March 1, 2002 for the period March 1, 2002 to December 31, 2002.
The results of operations of Ineos Group Limited for the year ended December
31, 2001 include the results of operation of Ineos Fluor and Ineos Silicas with
effect from January 1, 2001, the results of operation of the EOA and GasSpecTM
gas treating amines businesses acquired by Ineos Oxide from Dow Chemical from
February 12, 2001 and the results of operation of Ineos Phenol from May 23,
2001. Discussions of the results of operations of each of Ineos Phenol, Ineos
Fluor and Ineos Silicas for the years ended December 31, 2001, 2002 and 2003
are presented herein. To facilitate an understanding of the comparative
results of Ineos Phenol, we have included supplemental disclosure under the
caption Supplemental DisclosureIneos PhenolResults of Operations for
periods prior to May 23, 2001 while under the ownership of Degussa AG. We have not included separate information with respect to the EOA and
GasSpecTM gas treating amines businesses because they are not considered
sufficiently material to us to discuss on a non-consolidated basis. From
February 12, 2001, these businesses are included in the results of the Ineos
Oxide segment. Operating costs have been allocated to specific categories in accordance
with the requirements of UK GAAP. The main categories are cost of sales,
distribution costs and administrative expenses. Cost of sales includes fixed
and variable production costs. Such production costs typically include the
costs of raw materials, packaging, utilities, direct wages and salaries,
repairs and maintenance, waste disposal and effluent treatment, consumables,
attributable depreciation charges and directly attributable overheads.
Distribution costs typically include the costs of warehousing, carriage and
freight together with sales and distribution wages and salaries and
depreciation on tangible fixed assets used for sales and distribution.
Administrative expenses typically include indirect wages and salaries and
indirect overheads. Indirect overheads would include such items as insurance
costs, legal and professional fees and office supplies. This would also
include the depreciation on tangible fixed assets not directly attributable to
production or sales and distribution, and the amortisation of intangible fixed
assets such as goodwill. 39




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The following table sets forth, for the periods indicated, turnover and
expenses and such amounts as a percentage of turnover: Year Ended December 31,2001
    
    2002
    
    2003
    
    %
    
    
    
    %
    
    
    
    %(in millions, except percentages)Turnover
    
    
    1,530.7
    
    
    
    100.0
    
    
    
    2,235.8
    
    
    
    100.0
    
    
    
    2,530.4
    
    
    
    100.0Cost of sales
    
    
    (1,255.8
    )
    
    
    (82.0
    )
    
    
    (1,833.9
    )
    
    
    (82.0
    )
    
    
    (2,130.3
    )
    
    
    (84.2
    )Gross profit
    
    
    274.9
    
    
    
    18.0
    
    
    
    401.9
    
    
    
    18.0
    
    
    
    400.1
    
    
    
    15.8Distribution costs
    
    
    (104.4
    )
    
    
    (6.8
    )
    
    
    (161.8
    )
    
    
    (7.2
    )
    
    
    (151.7
    )
    
    
    (6.0
    )Administrative expenses before exceptional items
    
    
    (68.7
    )
    
    
    (4.5
    )
    
    
    (65.9
    )
    
    
    (2.9
    )
    
    
    (45.7
    )
    
    
    (1.8
    )Exceptional administrative expenses
    
    
    (19.6
    )
    
    
    (1.3
    )
    
    
    (24.6
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    Other operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18.1
    
    
    
    0.7Operating profit
    
    
    82.2
    
    
    
    5.4
    
    
    
    149.6
    
    
    
    6.8
    
    
    
    220.8
    
    
    
    8.7Share of operating profit of associate
    
    
    0.2
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.6
    
    
    
    Profit on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    1.3
    
    
    
    Profit on disposal of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Net finance charges
    
    
    (68.7
    )
    
    
    (4.5
    )
    
    
    (79.8
    )
    
    
    (3.6
    )
    
    
    (72.3
    )
    
    
    (2.8
    )Exceptional finance charges
    
    
    (40.9
    )
    
    
    (2.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Profit/(loss) on ordinary activities
before taxation
    
    
    (27.2
    )
    
    
    (1.8
    )
    
    
    72.3
    
    
    
    3.2
    
    
    
    150.5
    
    
    
    5.9Taxation on profit/(loss) on ordinary
activities
    
    
    6.1
    
    
    
    0.4
    
    
    
    (37.1
    )
    
    
    (1.6
    )
    
    
    (5.4
    )
    
    
    (0.2
    )Profit/(loss) on ordinary activities
after taxation
    
    
    (21.1
    )
    
    
    (1.4
    )
    
    
    35.2
    
    
    
    1.6
    
    
    
    145.1
    
    
    
    5.7
 Year Ended December 31, 2003, Compared to Year Ended December 31, 2002 Turnover. Turnover increased by 294.6 million, approximately 13.2% to
2,530.4 million in 2003 as compared to 2,235.8 million in 2002. This
increase largely reflects an increase of volumes sold for intermediate
chemicals in the Ineos Phenol business segment. Ineos Phenol has also
experienced price increases in line with the increases in market prices for its
products. This has been partially offset by reductions in turnover in Ineos
Oxide, Ineos Fluor and Ineos Silicas due to the impact of exchange rate
retranslation as a result of the strong euro compared to the US dollar and
sterling, together with reduced sales volumes in Ineos Oxide. Cost of sales. Cost of sales increased by 296.4 million, approximately
16.2% to 2,130.3 million in 2003 as compared to 1,833.9 million in 2002.
This increase largely reflects increased sales volumes in the intermediate
business segment of Ineos Phenol. Ineos Phenol has also experienced increased
raw material prices in line with the increase in market prices for benzene and
propylene. This has been partially offset by reductions in cost of sales in
Ineos Oxide and Ineos Silicas due to the impact of exchange rate retranslation
as a result of the strong euro compared to the US dollar and sterling, together
with reduced sales volumes in Ineos Oxide. Gross profit. Gross profit decreased by 1.8 million, approximately 0.4%
to 400.1 million in 2003 as compared to 401.9 million in 2002. This decrease
reflects the increase in sales volumes and improved margins in Ineos Phenol,
especially in the United States, together with higher margins achieved on MEG
volumes sold by Ineos Oxide, offset by the impact of the stronger euro compared
to the US dollar across all four business segments. 40




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##### Table of Contents



Distribution costs. Distribution costs decreased by 10.1 million,
approximately 6.2% to 151.7 million in 2003 as compared to 161.8 million in
2002. This decrease is a combination of reduced distribution costs as a result
of our continuing cost saving projects together with the impact of exchange
rate retranslation as a result of a stronger euro against the US dollar and
sterling. Administrative expenses. Administrative expenses decreased by 20.2
million, approximately 30.7% to 45.7 million in 2003 as compared to 65.9
million in 2002. This decrease is primarily due to the combined impact of
lower costs incurred as a result of a number of cost saving projects across the
group, together with the impact of exchange rate retranslation as a result of a
stronger euro against the US dollar and sterling. In addition, there was an
increase of 7.5 million in negative goodwill amortisation as a result of the
accelerated amortisation of the Ineos Fluor HFC134a assets in the UK. Exceptional administrative expenses. Exceptional administrative expenses
were nil million in 2003 compared to 24.6 million in 2002. These expenses
primarily reflect severance costs incurred in 2002 in connection with our
ongoing business reorganisations in Ineos Silicas and Ineos Phenol. Other operating income.On September 9, 2002 there was an explosion and
fire at the Ineos Phenol plant in Mobile, USA. The relevant part of the plant
was subsequently rebuilt and put back into full operation by January 2003. We
have now settled our claim with our insurers and have received a final
settlement of 18.1 million in respect of business interruption as a result of
the incident. Operating profit. Operating profit increased by 71.2 million,
approximately 47.6% to 220.8 million in 2003 compared to 149.6 million in
2002. This increase primarily reflects the reduction in exceptional
restructuring charges by 24.6 million in 2003 compared to 2002, together with
the inclusion of business interruption insurance proceeds of 18.1 million in
2003 and the reduction in administrative expenses in 2003 compared to 2002 as a
result of cost saving projects across the group. Share of operating profit of associate.Share of operating profit of
associate remained constant with 0.6 million in 2003 as compared to 0.6
million in 2002. Profit on disposal of fixed assets.Profit on disposal of fixed assets
decreased by 0.6 million, approximately 31.6% to 1.3 million in 2003 as
compared to 1.9 million in 2002. Profit on disposal of fixed assets
represents the impact of the incident at our Ineos Phenol plant in Mobile, USA.
In addition to the amounts received on account in 2002, a final amount of 1.3
million has been received from the insurers for property damage. Profit on disposal of business.On April 17, 2003 contracts were signed
for the sale of Ineos Silicas Italia srl and the associated silicate business
to its management, supported financially by an Italian chemical company Marchi
Industriali spa. After expenses, 1.4 million sales proceeds have been
received by the Company. After taking into account net assets disposed of and
associated goodwill the profit on disposal was 0.1 million. Net finance charges. Net finance charges decreased by 7.5 million,
approximately 9.4% to 72.3 million in 2003 as compared to 79.8 million in
2002. This decrease primarily reflects the reduction in the variable interest
rates on the senior credit facility together with lower debt levels in 2003
compared to 2002 as a result of scheduled and voluntary debt repayments. Profit on ordinary activities before taxation. Profit on ordinary
activities increased by 78.2 million, approximately 108.2% to 150.5 million
in 2003 as compared to 72.3 million in 2002. This increase primarily reflects
the reduction in exceptional restructuring charges by 24.6 million in 2003
compared to 2002; the inclusion of business interruption insurance proceeds of
18.1 million in 2003 and the reduction in interest charges due to lower
variable interest rates and lower debt levels in 2003 compared to 2002. 41




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##### Table of Contents



Taxation. Taxation decreased by 31.7 million, approximately 85.4% to
5.4 million in 2003 as compared to 37.1 million in 2002. This decrease
primarily reflects a decrease in the deferred tax charge from 23.9 million in
2002 to a credit of 14.5 million. The movement reflects the recognition for
the first time in 2003 of deferred tax assets in respect of tax losses in the
United States which the Company now considers will be utilised in the
foreseeable future. Profit on ordinary activities after taxation. Profit on ordinary
activities after taxation increased by 109.9 million, approximately 312.2% to
145.1 million in 2003 as compared to 35.2 million in 2002. This increase
primarily reflects the reduction in exceptional restructuring charges by 24.6
million in 2003 compared to 2002; the inclusion of business interruption
insurance proceeds of 18.1 million in 2003; the reduction in interest charges
due to lower variable interest rates and lower debt levels in 2003 compared to
2002 and the overall reduction in the effective tax rate in 2003 compared to
2002. Year Ended December 31, 2002, Compared to Year Ended December 31, 2001 Turnover. Turnover increased by 705.1 million, approximately 46.1% to
2,235.8 million in 2002 as compared to 1,530.7 million in 2001. This
increase primarily reflects the full year inclusion in 2002 of the results of
Ineos Phenol which was acquired on May 23, 2001. Turnover in Ineos Phenol
increased from 576.2 million for the period May 23, 2001 to December 31, 2001
to 1,189.0 million for the year ended December 31, 2002. In addition, this
increase reflects an increase in turnover of 75.3 million in Ineos Oxide due
to increased volumes sold as well as the impact of the acquisition of the
acetate esters business which contributed 39.7 million to the increase. Cost of sales. Cost of sales increased by 578.1 million, approximately
46.0% to 1,833.9 million in 2002 as compared to 1,255.8 million in 2001.
This increase primarily reflects the full year inclusion in 2002 of Ineos
Phenol. Cost of sales in Ineos Phenol increased from 544.9 million for the
period May 23, 2001 to December 31, 2001 to 1,084.5 million for the year ended
December 31, 2002. In addition this increase reflects an increase in cost of
sales of 39.4 million in Ineos Oxide due to increased sales volumes and
additional cost of sales related to the newly acquired acetate esters business. Gross profit. Gross profit increased by 127.0 million, approximately
46.2% to 401.9 million in 2002 as compared to 274.9 million in 2001. This
increase primarily reflects the full year inclusion in 2002 of Ineos Phenol.
Gross profit in Ineos Phenol increased from 31.3 million for the period May
23, 2001 to December 31, 2001 to 104.5 million for the year ended December 31,
2002. In addition this increase reflects an increase in gross profit of 35.9
million in Ineos Oxide due to increased sales volumes and the impact of the
newly acquired acetate esters business. Distribution costs. Distribution costs increased by 57.4 million,
approximately 55.0% to 161.8 million in 2002 as compared to 104.4 million in
2001. This increase primarily reflects the full year inclusion in 2002 of
Ineos Phenol. Distribution costs in Ineos Phenol increased from 30.4 million
for the period May 23, 2001 to December 31, 2002 to 63.6 million for the year
ended December 31, 2002. In addition this increase reflects an increase in
distribution costs of 24.9 million in Ineos Oxide due to increased volumes
sold and the export of additional EOA products to Europe and Asia. Administrative expenses. Administrative expenses decreased by 2.8
million, approximately 4.1% to 65.9 million in 2002 as compared to 68.7
million in 2001. This decrease is primarily due to the net impact of lower
costs incurred as a result of a number of cost saving projects throughout Ineos
Group Holdings offset by increased administrative expenses as a result of the
full year effect in 2002 of the acquisition of Ineos Phenol. Exceptional administrative expenses. Exceptional administrative expenses
were 24.6 million in 2002 compared to 19.6 million in 2001. These expenses
primarily reflect severance and restructuring costs incurred in connection with
our ongoing business reorganisations primarily in 42




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##### Table of Contents



Ineos Silicas and Ineos Phenol. The amounts of these expenses arising
from each of Ineos Oxide, Ineos Phenol, Ineos Fluor and Ineos Silicas were 0.1
million, 6.1 million, 1.7 million and 16.7 million, respectively. Operating profit. Operating profit increased by 67.4 million,
approximately 82.0% to 149.6 million in 2002 compared to 82.2 million in
2001. This increase primarily reflects the full year inclusion in 2002 of
Ineos Phenol. Operating profit in Ineos Phenol increased from a loss of (3.4)
million for the period May 23, 2001 to December 31, 2001 to a profit of 42.2
million for the year ended December 31, 2002. Profit on disposal of fixed assets.Profit on disposal of fixed assets
represents the impact of the incident at our Ineos Phenol plant in Mobile, USA.
On September 9, 2002 the cleavage unit was destroyed by an explosion and fire.
A total of $5 million has been received on account from the insurers in
respect of the insurance claim. The amount received (net of disposal costs,
fixed assets and negative goodwill written off) has been accounted for as
proceeds on the disposal of tangible fixed assets. The claims remain to be
finalised with the insurers. Any additional amounts received will be accounted
for in the 2003 fiscal year. Net finance charges. Net finance charges increased by 11.1 million,
approximately 16.2% to 79.8 million in 2002 as compared to 68.7 million in
2001. This increase primarily reflects the full year effect in 2002 of the new
finance structure put in place to fund the acquisition of Ineos Phenol on May
23, 2001. Exceptional finance charges. Exceptional finance costs incurred in 2002
were nil million as compared to 40.9 million in 2001. These costs related to
our refinancing which took place on May 23, 2001. Profit/(loss) on ordinary activities before taxation. Profit/(loss) on
ordinary activities increased by 99.5 million, approximately 267.5% to 72.3
million in 2002 as compared to a loss of 27.2 million in 2001. This increase
primarily reflects the net impact of the full year inclusion in 2002 of Ineos
Phenol, the increased exceptional restructuring charges incurred in 2002 as
compared to 2001, and the exceptional finance costs incurred in 2001. Taxation. Taxation increased by 43.2 million, approximately 708.2% to
37.1 million in 2002 as compared to a credit of 6.1 million in 2001. The
increase reflects our improved profitability of the group together with the
implementation of FRS 19, Deferred tax for the first time. The
implementation of FRS 19 increased the tax charge by 23.9 million in 2002
compared to an increased credit of 2.1 million in 2001. Profit/(loss) on ordinary activities after taxation. Profit/(loss) on
ordinary activities after taxation increased by 56.3 million, approximately
266.8% to 35.2 million in 2002 as compared to a loss of (21.1) million in
2001. This increase primarily reflects the net impact of the full year
inclusion in 2002 of Ineos Phenol, the increased exceptional restructuring
charges incurred in 2002 as compared to 2001, increased taxation charges under
FRS 19 in 2002 and the exceptional finance costs incurred in 2001. 43




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##### Table of Contents



Supplemental Disclosure Ineos OxideResults of Operations The following table sets forth, for the periods indicated, turnover and
expenses and such amounts as a percentage of turnover: Year Ended December 31,2001
    
    2002
    
    2003
    
    %
    
    
    
    %
    
    
    
    %(in millions, except percentages)Turnover
    
    
    432.1
    
    
    
    100.0
    
    
    
    507.4
    
    
    
    100.0
    
    
    
    500.1
    
    
    
    100.0Cost of sales
    
    
    (338.7
    )
    
    
    (78.4
    )
    
    
    (378.1
    )
    
    
    (74.5
    )
    
    
    (375.2
    )
    
    
    (75.0
    )Gross profit
    
    
    93.4
    
    
    
    21.6
    
    
    
    129.3
    
    
    
    25.5
    
    
    
    124.9
    
    
    
    25.0Distribution costs
    
    
    (25.8
    )
    
    
    (6.0
    )
    
    
    (50.7
    )
    
    
    (10.0
    )
    
    
    (47.7
    )
    
    
    (9.6
    )Administrative expenses
    
    
    (10.7
    )
    
    
    (2.5
    )
    
    
    (13.4
    )
    
    
    (2.6
    )
    
    
    (7.1
    )
    
    
    (1.4
    )Exceptional
administrative
expenses
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    Operating profit
    
    
    56.5
    
    
    
    13.1
    
    
    
    65.1
    
    
    
    12.9
    
    
    
    70.1
    
    
    
    14.0
 Year Ended December 31, 2003, Compared to Year Ended December 31, 2002 Turnover. Turnover decreased by 7.3 million, approximately 1.4%, to
500.1 million in 2003, as compared to 507.4 million in 2002. This decrease reflects a 5% reduction in volume sold in 2003 compared to
2002, as a consequence of the force majeure declaration early in 2003, due to a
mechanical breakdown in the EO unit at the Antwerp plant and the fact that the
EO/EG unit was shutdown twice in 2003, for recatalyzation, as compared to only
once in 2002. This decrease in volume was partially offset by an increase in
sales prices, especially monoethylene glycol (MEG), due to the global shortage.
The average of the North Western Europe contract price for EO as per ICIS LOR
increased to 940 per tonne in 2003, as compared to 915 per tonne in 2002.
The average North Western Europe price for MEG as per ICIS LOR increased to
675 per tonne in 2003 as compared to 520 per tonne in 2002. Cost of sales. Cost of sales decreased by 2.9 million, approximately
0.8%, to 375.2 million in 2003, as compared to 378.1 million in 2002. This
decrease primarily reflects the above-mentioned volume reduction, mainly in EO
and EG, offset by increased sales volumes of Alkoxylates, EOA and ENB and
increasing raw material prices. The average of the ICIS North Western Europe
contract price for ethylene increased to 527 per tonne in 2003, as compared to
517 per tonne in 2002. Gross profit. Gross profit decreased by 4.4 million, approximately 3.4%,
to 124.9 million in 2003, as compared to 129.3 million in 2002. This
decrease primarily reflects the decreased volumes and increased raw material
prices partially offset by the increased sales prices. Due to the weak
economic environment, margins were under pressure which is reflected in the
loss of 0.5% of gross profit compared to 2002. Distribution costs. Distribution costs decreased by 3.0 million,
approximately 5.9%, to 47.7 million in 2003, as compared to 50.7 million in
2002. The decrease reflects the decrease in volumes sold and the continued
efforts to reduce distribution costs by making the supply chain more efficient.
We have reduced our outside storage facilities and also reduced the number of
suppliers we deal with. Administrative expenses. Administrative expenses decreased by 6.3
million, approximately 47.0%, to 7.1 million in 2003, as compared to 13.4
million in 2002. The decrease reflects the results of our fixed costs savings
programme by sharing services with other business and other income 44




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##### Table of Contents



recorded through the year for a one-off sale of a piece of land to a
co-siting third party and a business interruption insurance settlement related
to the ENB accident last year. Operating profit. Operating profit increased by 5.0 million,
approximately 7.7%, to 70.1 million in 2003, as compared to 65.1 million in
2002. The increase reflects the sustainable Oxide business and the efforts to
keep our cost base under control in a weak business environment. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Turnover. Turnover increased by 75.3 million, approximately 17.4%, to
507.4 million for the year ended December 31, 2002, as compared to 432.1
million for the year ended December 31, 2001. This increase reflects an
increase in volumes sold for speciality chemicals and intermediate chemicals
offset by lower selling prices. Across the business higher volumes and
increased third party services revenues have been offset by decreasing selling
prices. The increased volumes reflect the full impact of the expansion of the
EO/EG plant in Antwerp and the new alkoxylates unit and also include the
recently acquired Ethanolamine and GasSpecTM gas treating amines business
acquired in February 2001 and the acetate esters business acquired in March
2002. Volumes of EO sold or converted into glycols and alkoxylates increased
by approximately 15% in 2002 compared to 2001, largely as a result of capacity
expansions but also partly as a result of only one shutdown in 2002 compared to
two in 2001. The average of the North Western European contract price for EO as per
ICIS LOR decreased to 915 per tonne for the year ended December 31, 2002, as
compared to 967 per tonne for the year ended December 31, 2001. The average
of the North Western European contract prices for monoethylene glycol (MEG) as
per ICIS LOR decreased to 520 per tonne for the year ended December 31, 2002
as compared to 575 per tonne for the year ended December 31, 2001. Cost of sales. Cost of sales increased by 39.4 million, approximately
11.6%, to 378.1 million for the year ended December 31, 2002, as compared to
338.7 million for the year ended December 31, 2001. This primarily reflects
increased sales volumes in the speciality and intermediate business and the
additional cost of sales related to the newly acquired acetate esters business.
This increase was offset by the decreased ethylene prices. The average of the North Western European contract price for ethylene as
per ICIS LOR decreased to 517 per tonne for the year ended December 31, 2002,
as compared to 616 per tonne for the year ended December 31, 2001. Gross profit. Gross profit increased by 35.9 million, approximately
38.4%, to 129.3 million for the year ended December 31, 2002, as compared to
93.4 million for the year ended December 31, 2001. The increase reflects the
increased volumes sold of intermediate and speciality chemicals and includes
the additional volumes sold of acetate esters since March 1, 2002. In addition
higher industry margins over raw materials on speciality chemicals and stable
margins for intermediate chemicals have also been experienced. Distribution costs. Distribution costs increased by 24.9 million,
approximately 96.5%, to 50.7 million for the year ended December 31, 2002, as
compared to 25.8 million for the year ended December 31, 2001. This increase
reflects the increase in volumes sold of intermediate and speciality chemicals
and the impact of the recently acquired acetate esters business. The
distribution costs increased as a percentage of sales due to the EOA, GasSpecTM
and acetate esters businesses, which have a higher distribution charges and the
export of EOA product to Europe and Asia. Administrative expenses.Administrative expenses increased by 2.7
million, approximately 25.2%, to 13.4 million for the year ended December 31,
2002 as compared to 10.7 million for the year ended December 31, 2001. This
reflects the impact of the acquisition of the EOA and gas treating amines
business from mid-February 2001 and the acetate esters business from March
2002. 45




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##### Table of Contents



Exceptional administrative expenses.Exceptional administrative expenses
incurred in 2002 were 0.1 million as compared to 0.4 million in 2001. The
costs in 2001 related to costs incurred on disputed contracts. Operating profit.Operating profit increased by 8.6 million,
approximately 15.2%, to 65.1 million for the year ended December 31, 2002, as
compared to 56.5 million for the year ended December 31, 2001. The increase
reflects the full year effect of the acquisition of the EOA business, the
acetate esters acquisition in 2002 and higher volumes and margins in the
speciality chemical business. Ineos PhenolResults of Operations To facilitate discussion and analysis, the historical amounts for the year
ended December 31, 2001, represent an aggregation of the historical amounts of
the Ineos Phenol business for the period from January 1, 2001 to May 22, 2001,
while under the ownership of Degussa AG and for the period from May 23, 2001 to
December 31, 2001, while under the ownership of Ineos Group Limited. The
results of Ineos Phenol for the period after May 22, 2001 include the effects
of purchase accounting adjustments from the date of acquisition. The following table set forth, for the periods indicated, turnover and
expenses and such amounts as a percentage of turnover: Period from
    
    Period fromJanuary 1,
    
    May 23,2001 to
    
    2001 toMay 22,
    
    December 31
    
    Year Ended December 31,2001
    
    2001
    
    2001(1)
    
    2002
    
    2003
    
    
    
    
    
    %
    
    
    
    %
    
    
    
    %(in millions, except percentages)Turnover
    
    
    532.3
    
    
    
    576.2
    
    
    
    1,108.5
    
    
    
    100.0
    
    
    
    1,189.0
    
    
    
    100.0
    
    
    
    1,542.3
    
    
    
    100.0Cost of sales
    
    
    (503.4
    )
    
    
    (544.9
    )
    
    
    (1,048.3
    )
    
    
    (94.6
    )
    
    
    (1,084.5
    )
    
    
    (91.2
    )
    
    
    (1,397.5
    )
    
    
    (90.6
    )Gross profit
    
    
    28.9
    
    
    
    31.3
    
    
    
    60.2
    
    
    
    5.4
    
    
    
    104.5
    
    
    
    8.8
    
    
    
    144.8
    
    
    
    9.4Distribution costs
    
    
    (25.4
    )
    
    
    (30.4
    )
    
    
    (55.8
    )
    
    
    (5.0
    )
    
    
    (63.6
    )
    
    
    (5.3
    )
    
    
    (61.1
    )
    
    
    (4.0
    )Administrative expenses
    
    
    (2.0
    )
    
    
    2.2
    
    
    
    0.2
    
    
    
    
    
    
    
    7.4
    
    
    
    0.6
    
    
    
    4.3
    
    
    
    0.3Exceptional administrative expenses
    
    
    (0.6
    )
    
    
    (6.5
    )
    
    
    (7.1
    )
    
    
    (0.6
    )
    
    
    (6.1
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    Other operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18.1
    
    
    
    1.2Operating profit
    
    
    0.9
    
    
    
    (3.4
    )
    
    
    (2.5
    )
    
    
    (0.2
    )
    
    
    42.2
    
    
    
    3.6
    
    
    
    106.1
    
    
    
    6.9
   (1)
    
    Column represents the aggregation of the results of Ineos Phenol for the
period from January 1, 2001 to May 22, 2001, while under the ownership of
Degussa, and the period from May 23, 2001 to December 31, 2001, while
under the ownership of Ineos Group Limited. Year Ended December 31, 2003, Compared to Year Ended December 31, 2002 Turnover. Turnover increased by 353.3 million, approximately 29.7%, to
1,542.3 million for the year ended December 31, 2003, as compared to 1,189.0
million for the same period in 2002. This increase reflects increased sales
volumes for both phenol and acetone and increased sales prices, except for
acetone in Europe. Western European phenol prices (per CMAI) increased to 724 per tonne for
the year ended December 31, 2003, as compared to 559 per tonne for the same
period in 2002. Western European acetone prices (per CMAI) decreased to 556
per tonne for the year ended December 31, 2003, as compared to 565 per tonne
for the same period in 2002. US phenol and acetone prices (per CMAI) increased
to $901 per metric tonne and $548 per metric tonne, respectively, for the year
ended December 31, 2003, as compared to $737 per metric tonne and $374 per
metric tonne, respectively, for the same period in 2002. 46




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##### Table of Contents



Cost of sales.Cost of sales increased by 313.0 million, approximately
28.9%, to 1,397.5 million for the year ended December 31, 2003, as compared to
1,084.5 million for the same period in 2002. This increase reflects higher
raw material consumption due to higher plant utilisation (mainly in the USA)
and increased raw material prices, partially offset by lower depreciation
related to fair market value adjustments on acquisition. The utilisation
increase in the USA is mainly due to the incident on September 9, 2002, which
caused a production loss for the remainder of 2002 compared to full production
in the same period of 2003. Western European benzene and propylene contract prices (per CMAI)
increased to 415 per tonne and 476 per tonne, respectively, for the year
ended December 31, 2003, as compared to 359 per tonne and 441 per tonne,
respectively, for the same period in 2002. US benzene and propylene contract
prices (per CMAI) increased to $462 per tonne and $497 per tonne, respectively,
for the year ended December 31, 2003, as compared to $357 per tonne and $397
per tonne, respectively, for the same period in 2002. Gross profit.Gross profit increased by 40.3 million, approximately
38.6% to 144.8 million for the year ended December 31, 2003, as compared to
104.5 million for the same period in 2002. This increase reflects the increase
in sales volume and increased sales prices, combined with lower depreciation
charges related to fair market value adjustments on acquisition, partially
offset by increased costs of sales due to higher raw material consumption and
increased raw material prices. Distribution costs.Distribution costs decreased by 2.5 million,
approximately 3.9%, to 61.1 million for the year ended December 31, 2003, as
compared to 63.6 million for the same period in 2002. This decrease is a
combination of reduced distribution costs as a result of our continuing cost
saving projects together with the impact of exchange rate retranslation as a
result of a stronger euro against the US dollar, partially offset by the
increased distribution costs due to increased sales volumes. Administrative expenses.Administrative expenses, including the
amortisation of negative goodwill, decreased by 3.1 million, approximately
41.9%, to a credit of 4.3 million for the year ended December 31, 2003, as
compared to a credit of 7.4 million for the same period in 2002. This
decrease is primarily due to the reduction in negative goodwill amortisation of
3.0 million as a result of exchange rate retranslation. Exceptional administrative expenses.Exceptional administrative expenses
decreased by 6.1 million, exactly 100.0%, to nil million for the year ended
December 31, 2003, as compared to 6.1 million for the same period in 2002.
These expenses reflect severance costs incurred in 2002 in connection with our
business reorganisation following the acquisition of Ineos Phenol from Degussa. Other operating income.Other operating income increased by 18.1 million
for the year ended December 31, 2003, as compared to no such income for the
same period in 2002. This income represents the business interruption
insurance proceeds recognised in the year ended December 31, 2003, following
the incident at the Mobile plant in September 2002. Operating profit.Operating profit increased by 63.9 million,
approximately 151.4%, to 106.1 million for the year ended December 31, 2003,
as compared to 42.2 million for the same period in 2002. This increase
primarily reflects increased sales volumes and sales prices together with the
business interruption insurance proceeds recognised in 2003, following the
incident at the Mobile plant in September 2002, and costs savings as a result
of various cost saving projects. Year Ended December 31, 2002, Compared to Year Ended December 30, 2001 Turnover. Turnover increased by 80.5 million, approximately 7.3%, to
1,189.0 million for the year ended December 31, 2002, as compared to 1,108.5
million for the year ended December 31, 2001. This increase reflects increased
sales volumes partially offset by decreases in sales prices. 47




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Western European phenol and acetone prices (per CMAI) decreased/increased
to 559 per tonne and 565 per tonne, respectively, for the year ended December
31, 2002, as compared to 685 per tonne and 522 per tonne, respectively for
the year ended December 31, 2001. US phenol and acetone prices (per CMAI)
increased to $737 per metric tonne and $374 per metric tonne, respectively, for
the year ended December 31, 2002, as compared to $689 per metric tonne and $357
per metric tonne, respectively, for the same period in 2001. Cost of sales. Cost of sales increased by 36.2 million, approximately
3.5%, to 1,084.5 million for the year ended December 31, 2002, as compared to
1,048.3 million for the year ended December 31, 2001. This increase reflects
primarily the increase in raw material prices and increased raw material
consumption due to higher plant utilisations in Europe. Western European benzene and propylene contract prices (per CMAI)
increased/decreased to 359 per tonne and 441 per tonne, respectively for the
year ended December 31, 2002, as compared to 333 per tonne and 461 per tonne,
respectively, for the year ended December 31, 2001. US benzene and propylene
contract prices (per CMAI) increased to $357 per tonne and $397 per tonne,
respectively, for the year ended December 31, 2002, as compared to $305 per
tonne and $385 per tonne, respectively, for the year ended December 31, 2001. Gross profit. Gross profit increased by 44.3 million, approximately
73.6%, to 104.5 million in the year ended December 31, 2002, as compared to
60.2 million for the year ended December 31, 2001. This increase reflects an
increase in sales volumes only partially offset by decreases in sales prices
and increases in raw material costs. On September 9, 2002 the cleavage unit at
our Mobile, USA plant was destroyed by an explosion and fire. As a result of
this incident there was no further production from this plant for the remainder
of 2002. Customer commitments were maintained by shipping product over from
our European plants and purchasing product from our fellow producers in Europe
and the USA, which had an overall negative impact on gross profit. No amounts
have been received from the insurers by December 31, 2002 in respect of
increased costs of working or consequential loss of profits. The insurance
claims remain to be finalised. Amounts received in relation to business
interruption will be accounted for in the 2003 financial year. Distribution costs. Distribution costs increased by 7.8 million,
approximately 14.0%, to 63.6 million for the year ended December 31, 2002, as
compared to 55.8 million for the year ended December 31, 2001. This increase
reflects primarily the increase in sales volumes and the increased costs of
exports from Europe to the US to support our customer commitments there while
the Mobile plant was out of production. Administrative expenses. Administrative expenses, including research and
development activities, decreased by 7.2 million, approximately 3,600.0%, to a
credit of 7.4 million for the year ended December 31, 2002, as compared to a
credit of 0.2 million for the year ended December 31, 2001. The increased
credit mainly reflects the increased amortisation of negative goodwill
following the finalisation of the purchase price allocations from 14.9 million
for the period May 23, 2001 to December 31, 2001 to 22.8 million for the year
ended December 31, 2002. Exceptional administrative expenses. Exceptional administrative expenses
were 6.1 million in 2002 compared to 7.1 million in 2001. These expenses
primarily reflect severance and restructuring costs incurred in connection with
our business reorganisation following the acquisition of Ineos Phenol from
Degussa. Operating profit. Operating profit increased by 44.7 million,
approximately 1,788.0%, to 42.2 million for the year ended December 31, 2002,
as compared with a loss of 2.5 million for the year ended December 31, 2001.
This increase primarily reflects higher sales volumes and a higher amortisation
of negative goodwill partially offset by increased distribution costs. 48




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##### Table of Contents



Ineos FluorResults of Operations The following table sets forth, for the periods indicated, turnover and
expenses for Ineos Fluor and such amounts as a percentage of turnover. Year Ended December 31,2001
    
    2002
    
    2003
    
    %
    
    
    
    %
    
    
    
    %(in millions, except percentages)Turnover
    
    
    299.5
    
    
    
    100.0
    
    
    
    304.8
    
    
    
    100.0
    
    
    
    273.8
    
    
    
    100.0Cost of Sales
    
    
    (229.2
    )
    
    
    (76.5
    )
    
    
    (227.3
    )
    
    
    (74.6
    )
    
    
    (224.2
    )
    
    
    (81.9
    )Gross profit
    
    
    70.3
    
    
    
    23.5
    
    
    
    77.5
    
    
    
    25.4
    
    
    
    49.6
    
    
    
    18.1Distribution costs
    
    
    (23.6
    )
    
    
    (7.9
    )
    
    
    (22.6
    )
    
    
    (7.4
    )
    
    
    (21.1
    )
    
    
    (7.7
    )Administrative expenses
    
    
    (15.8
    )
    
    
    (5.3
    )
    
    
    (18.2
    )
    
    
    (6.0
    )
    
    
    (4.9
    )
    
    
    (1.8
    )Exceptional administrative expenses
    
    
    (5.7
    )
    
    
    (1.9
    )
    
    
    (1.7
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    Operating profit
    
    
    25.2
    
    
    
    8.4
    
    
    
    35.0
    
    
    
    11.5
    
    
    
    23.6
    
    
    
    8.6
 Year Ended December 31, 2003, Compared to Year Ended December 31, 2002 Turnover. Turnover decreased by 31.0 million, approximately 10.2%, to
273.8 million for the year ended December 31, 2003, as compared to 304.8
million for the year ended December 31, 2002. The decrease reflects increased
volumes sold of industrial grade HFC 134a and HCFCs, offset by lower prices and
a stronger euro when compared to the US dollar. Cost of sales. Cost of sales decreased by 3.1 million, approximately
1.4%, to 224.2 million for the year ended December 31, 2003, as compared to
227.3 million for the year ended December 31, 2002. The decrease reflects
increased volumes sold of industrial grade HFCs and HCFCs and additional
accelerated depreciation of 8.1 million on the UK HFC 134a asset which was
offset by a stronger euro when compared to Sterling and the US dollar. The HFC
134a plant in the UK is scheduled to be converted to an HFC 125 (blends) plant
by September 2004. Gross profit. Gross profit decreased by 27.9 million, approximately
36.0%, to 49.6 million for the year ended December 31, 2003, as compared to
77.5 million for the year ended December 31, 2002. The decrease reflects
increased volumes sold of industrial grade HFC 134a and HCFCs, offset by lower
prices, additional accelerated depreciation on the UK HFC 134a asset and by a
stronger euro when compared to the US dollar. Distribution costs. Distribution costs decreased by 1.5 million,
approximately 6.6%, to 21.1 million for the year ended December 31, 2003, as
compared to 22.6 million for the year ended December 31, 2002. The decrease
reflects the impact of the stronger euro when compared to the US dollar offset,
by additional distribution costs associated with increased volumes. Administrative expenses. Administrative expenses, including research and
development activities and other operating income, decreased by 13.3 million,
approximately 73.1%, to 4.9 million for the year ended December 31, 2003, as
compared to 18.2 million for the year ended December 31, 2002. Administrative
expenses include a 20.0 million credit for amortization of negative goodwill
for the year ended December 31, 2003 as compared to 12.5 million for the same
period in 2002. The increase in amortisation is mainly due to accelerated
amortisation of the negative goodwill associated with the UK HFC 134a asset.
The underlying decrease in administrative expenses reflects the impact of the
ongoing fixed cost reductions and the stronger euro when compared to the US
dollar. Exceptional administrative expenses. Exceptional administrative expenses
in 2003 were nil, compared to 1.7 million in 2002. The 2002 costs primarily
reflect severance payments and other redundancy-related costs incurred in
connection with business restructuring. 49




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##### Table of Contents



Operating profit. Operating profit decreased by 11.4 million,
approximately 32.6%, to 23.6 million for the year ended December 31, 2003 as
compared to 35.0 million for the year ended December 31, 2002. Year Ended December 31, 2002, Compared to Year Ended December 31, 2001 Turnover. Turnover increased by 5.3 million, approximately 1.8%, to
304.8 million for the year ended December 31, 2002, as compared to 299.5
million for the year ended December 31, 2001. This increase reflects an
increase in sales volumes of both medical and industrial grade HFC134a offset
by decreased prices for HFC134a. Cost of sales. Cost of sales decreased by 1.9 million, approximately
0.8%, to 227.3 million for the year ended December 31, 2002, as compared to
229.2 million for the year ended December 31, 2001. This decrease includes
additional income from the UK governments CO2 emissions reduction programme
offset by the cost of increased sales of HFC134a. Gross profit. Gross profit increased by 7.2 million, approximately
10.2%, to 77.5 million for the year ended December 31, 2002, as compared to
70.3 million for the year ended December 31, 2001. Average product gross
margins decreased primarily due to lower prices on most HFC and HCFC products
being offset by the income from the UK governments CO2 emissions reduction
programme. Distribution costs. Distribution costs decreased by 1.0 million,
approximately 4.2%, to 22.6 million for the year ended December 31, 2002, as
compared to 23.6 million for the year ended December 31, 2001. This decrease
reflects growth in volumes sold of HCFC134a offset by lower transportation
costs arising from increased local production of HFC134a and resulting lower
importation costs. Administrative expenses. Administrative expenses, including research and
development activities and other operating income, increased by 2.4 million,
approximately 15.2%, to 18.2 million for the year ended December 31, 2002, as
compared to 15.8 million for the year ended December 31, 2001. The increase
is mainly due to increased employee bonuses resulting from the 2002
performance. Exceptional administrative expenses. Exceptional administrative expenses
in 2002 were 1.7 million, compared to 5.7 million in 2001. These costs
primarily reflect severance payments and other redundancy-related costs
incurred in connection with business restructuring. Operating profit. Operating profit increased by 9.8 million,
approximately 38.9%, to 35.0 million for the year ended December 31, 2002 as
compared to 25.2 million for the year ended December 31, 2001. 50




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Ineos SilicasResults of Operations The following table sets forth, for the periods indicated, turnover and
expenses and such amounts as a percentage of turnover. Year Ended December 31,2001
    
    2002
    
    2003
    
    %
    
    
    
    %
    
    
    
    %(in millions, except percentages)Turnover
    
    
    222.9
    
    
    
    100.0
    
    
    
    234.6
    
    
    
    100.0
    
    
    
    214.2
    
    
    
    100.0Cost of Sales
    
    
    (143.0
    )
    
    
    (64.2
    )
    
    
    (144.0
    )
    
    
    (61.4
    )
    
    
    (133.4
    )
    
    
    (62.3
    )Gross profit
    
    
    79.9
    
    
    
    35.8
    
    
    
    90.6
    
    
    
    38.6
    
    
    
    80.8
    
    
    
    37.7Distribution costs
    
    
    (24.6
    )
    
    
    (11.0
    )
    
    
    (24.9
    )
    
    
    (10.6
    )
    
    
    (21.8
    )
    
    
    (10.2
    )Administrative expenses
    
    
    (44.4
    )
    
    
    (19.9
    )
    
    
    (41.7
    )
    
    
    (17.8
    )
    
    
    (38.0
    )
    
    
    (17.7
    )Exceptional administrative
expenses
    
    
    (7.0
    )
    
    
    (3.2
    )
    
    
    (16.7
    )
    
    
    (7.1
    )
    
    
    
    
    
    
    Operating profit
    
    
    3.9
    
    
    
    1.7
    
    
    
    7.3
    
    
    
    3.1
    
    
    
    21.0
    
    
    
    9.8
 Year ended December 31, 2003, Compared to year ended December 31, 2002 Turnover. Turnover decreased by 20.4m, approximately 8.7%, to 214.2m in
2003, as compared to 234.6m in 2002. Of the 20.4m shortfall compared to last
year, approximately 18.7m was due to the impact of exchange translation
differences in 2003 compared to 2002. The disposal of the silicate business in
Italy in April 2003 reduced sales by 1.8m as compared to 2002. At constant
exchange rates, global sales of zeolite were behind the levels achieved in
2002, despite an increase in turnover from the European assets of 2.2%. Sales
into North America declined as a result of lower demand from our key customer.
As a result of the US dollar and sterling softening against the euro in 2003,
global silicas turnover decreased in 2003. However, at constant translation
exchange rates, underlying turnover increased by 5.5%. Cost of sales. Cost of sales decreased by 10.6m, approximately 7.4%, to
133.4m in 2003, as compared to 144.0m in 2002. Most of the decrease relates
to exchange translation differences. Additionally, underlying operating costs
were lower in 2003, although the higher gas prices experienced in 2003,
particularly in North America, reduced the impact of the cost savings. Gross profit. Gross profit decreased by 9.8m, approximately 10.8%, to
80.8m in 2003, as compared to 90.6m in 2002. Exchange translation differences
account for most of the shortfall. Distribution costs. Distribution costs decreased by 3.1m, approximately
12.4%, to 21.8m in 2003, as compared to 24.9m in 2002. The decrease is
mainly due to exchange rate translation, lower global silicate sales and the
lower zeolite volumes in North America, offset by costs of additional silica
sales in 2003. Administrative expenses. Administrative expenses decreased by 3.7
million, approximately 8.9%, to 38.0 million in 2003, as compared to 41.7
million in 2002. The decrease is a result of the restructuring program and the
benefit of exchange rate translation. Exceptional administrative expenses. Exceptional administrative expenses
in 2003 were  nil, compared to 16.7 million in 2002. The costs charged in
2002 reflect the anticipated severance and other redundancy related costs of
the global restructuring program. Operating profit. Operating profit increased by 13.7 million
approximately 187.7% to 21.0 million in 2003, as compared to 7.3 million in
2002. Excluding exceptional administrative expenses, operating profit
decreased by 3.0 million, approximately 12.5%, to 21.0 million in 2003, as
compared to 24.0 million in 2002. 51




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Year Ended December 31, 2002, Compared to Year Ended December 31, 2001 Turnover. Turnover increased by 11.7 million, approximately 5.2%, to
234.6 million in 2002, as compared to 222.9 million in 2001. Sales of silica
were higher in 2002 compared to 2001, with most regions showing growth in both
volume and revenue, despite currency devaluation in South Africa and Brazil
during 2002. Zeolite sales in Europe were also ahead of last year, more than
offsetting a decline of zeolite sales in North America. The reformulation by
our key detergent customer to the use of a zeolite builder negatively affected
the sales of silicates in Europe. Silicate sales volumes in 2002 into other
regions were mostly ahead of 2001, although there was a negative impact of
currency movements in both South Africa and Brazil. Cost of sales. Cost of sales increased by 1.0 million, approximately
0.7%, to 144.0 million in 2002, as compared to 143.0 million in 2001. The
high raw material prices in 2001, mainly caustic soda in Europe and high North
American gas prices in the early part of 2001 were not repeated in 2002.
Additionally, the benefits of restructuring started to flow through into 2002. Gross profit. Gross profit increased by 10.7 million, approximately
13.4%, to 90.6 million in 2002, as compared to 79.9 million in 2001. The
increase reflects the higher sales, lower raw material prices and savings
flowing through from the restructuring plan. Distribution costs. Distribution costs increased by 0.3 million,
approximately 1.2%, to 24.9 million in 2002, as compared to 24.6 million in
2001. The increase is relatively small despite the increase in volume and
revenue. A large portion of the increase in revenue relates to zeolites sold
in the UK to our major customer who is also located on the same site. In
addition, the number of rail cars in the US has been reduced during 2002. Administrative expenses. Administrative expenses decreased by 2.7
million, approximately 6.1%, to 41.7 million in 2002, as compared to 44.4
million in 2001. The decrease is a result of the restructuring program, which
was launched, in the second half of 2001. Exceptional administrative expenses. Exceptional administrative expenses
in 2002 were 16.7 million, compared to 7.0 million in 2001. The costs
reflect anticipated severance and other redundancy related costs incurred to
complete the global restructuring program. Operating profit. Operating profit increased by 3.4 million in 2002 to
7.3 million in 2002, as compared to 3.9 million in 2001. Excluding
exceptional administrative expenses, operating profit increased by 13.1
million, approximately 120.2%, to 24.0 million in 2002, as compared to 10.9
million in 2001. Use of Estimates and Critical Accounting Policies We have reviewed our selection and application of principal accounting
policies and related financial disclosures. The preceding discussion of past
performance is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United Kingdom. Our significant accounting policies are described in note
2  Principal Accounting Policies  to the consolidated financial statements.
The application of these accounting policies requires that management make
estimates and judgements. On an ongoing basis, we evaluate our estimates,
which are based on historical experience and market and other conditions, and
on assumptions that we believe to be reasonable. Actual results may differ
from these estimates due to actual market and other conditions, and assumptions
being significantly different than was anticipated at the time of the
preparation of these estimates. Such differences may affect financial results.
We have chosen to highlight certain policies that we consider critical to the
operations of our business and understanding our consolidated financial
statements. These policies have been discussed and agreed with our audit
committee. We believe the following estimates affect the application of our
most critical accounting policies and require our most significant judgements. 52




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It is our policy to depreciate tangible fixed assets, except land, on a
straight line basis over the life of the asset. A key assumption in this
policy is the life applied to each class of fixed asset, which will in turn
determine the annual depreciation charge. In deciding the appropriate lives to
be applied to the assets, management takes into account various factors
including, amongst other things, the accumulated experience of the effective
asset lives from historical business operations. Variations in the asset lives
used could impact the earnings of the business through an increase or decrease
in depreciation charge. The amounts recognised in the financial statements related to pension and
other post-retirement benefits are determined from actuarial valuations.
Inherent in these valuations are assumptions including expected return on plan
assets, discount rates at which the liabilities could be settled at December
31, 2003, rate of increase in future compensation levels and health care cost
trend rates. These assumptions are updated annually and are disclosed in Note
30 to the financial statements. These assumptions have been discussed with the
actuaries and we believe that based on our mix of equities and bonds and the
inflation assumptions used that the rates applied are appropriate. Future
actuarial pension expense will depend on future investment performance, changes
in future discount rates and various other factors related to the population of
participants in the pension plans. We maintain an allowance for doubtful trade accounts receivable for
estimated losses resulting from the inability of our customers to make required
payments. In determining the adequacy of the allowance for doubtful accounts,
we consider historical bad debt experience, customer credit worthiness, market
conditions, and economic conditions. While we perform ongoing evaluations of
our allowance for doubtful accounts, if the financial condition of our
customers deteriorates more than expected, an increase in the allowance may be
required. We establish allowances for obsolescence of inventory equal to the
difference between the cost of inventory and the estimated market value, based
on assumptions about future demand, market conditions or estimates of costs to
dispose. Changes in economic and market conditions or estimates of costs to
dispose could result in actual inventory obsolescence being materially
different from the amounts provided for in our consolidated financial
statements. We record asset impairment charges, employee termination benefits and
other exit costs when management having the appropriate level of authority
approves and commits to the exit plan, and when the amounts are estimable.
Management uses estimated cash flows, appraisals or sales contracts in
determining asset impairment charges. Severance benefits are determined
pursuant to established company severance policies or government labor
regulations. We regularly review and reevaluate the assumptions used for
accrual of exit costs and adjust the remaining accrual balance as necessary. We provide for environmental remediation liabilities when they are
probable and reasonably estimable based on current domestic law and existing
technologies. The provisions are adjusted as further information develops or
circumstances change. Costs of future expenditures do not reflect any claims
for recoveries and are not discounted to their present value. Deferred tax assets are recognised to the extent that they are expected to
arise from short-term timing differences between the financial statements and
the tax base of the groups assets and liabilities. The extent to which we
would recognise deferred tax on losses would be dependent on the assumptions
concerning the future taxable profits of the business against which the losses
can be relieved. We have not recognised losses where we do not believe that we
will relieve them within a reasonable time horizon.  B.
    
    LIQUIDITY AND CAPITAL RESOURCES Our liquidity requirements arise primarily from the need to meet our debt
service requirements, to fund capital expenditures for the general maintenance
and expansion of our production facilities and for new facilities, and to fund
growth in our working capital. Our principal 53




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##### Table of Contents



sources of funds are cash flows from operating activities and amounts
available under the Senior Credit Facilities. In connection with the acquisitions of Ineos Fluor, Ineos Silicas and
Ineos Phenol, we incurred substantial debt. As of December 31, 2003, our total
debt is 830.8 million. Accordingly, we are highly leveraged and have
significant debt service obligations. Our debt consists mainly of amounts borrowed under the Senior Credit
Facilities as well as the Senior Notes. Borrowings under the Senior Credit
Facilities bear interest at a floating rate based on LIBOR or EURIBOR plus an
applicable margin. The Senior Notes bear interest at a fixed rate of 10 1/2%
per annum. Our net interest costs during the year ended December 31, 2003,
were 72.3 million. Under the Senior Credit Facilities, we will be required to make mandatory
prepayments in certain circumstances from the proceeds of certain vendor
payments, surplus cash, asset disposals, insurance claims and on a change of
control. We will also be permitted to make voluntary prepayments on the loans
under the Senior Credit Facilities. The Senior Notes are scheduled to be repaid in one instalment in 2010.
However, Ineos Group Holdings plc may be required to purchase the Senior Notes
in the event of a change of control. Ineos Group Holdings plc may not be able
to do so without the consent of the lenders under the Senior Credit Facilities. Over the next few years, our main capital expenditure requirements will be
for general maintenance. During the years ended December 31, 2002 and 2003,
capital expenditures in our four businesses were as follows: 2002
    
    2003( in millions)Ineos Oxide
    
    
    13.0
    
    
    
    13.8Ineos Phenol
    
    
    23.0
    
    
    
    17.8Ineos Fluor
    
    
    9.1
    
    
    
    7.3Ineos Silicas
    
    
    11.9
    
    
    
    17.757.0
    
    
    
    56.6
 The capital expenditure for Ineos Phenol in 2002 includes an investment of
16.4 million to rebuild the cleavage unit of the Mobile, USA plant after it
was destroyed by a fire on September 9, 2002. We currently anticipate that our capital expenditure will be in the
aggregate approximately 65 million through 2004. Our working capital requirements fluctuate due to changes in raw material
costs, resulting in higher inventory and accounts receivable, as well as due to
growth in sales. We intend to finance our liquidity requirements primarily with cash
generated from operating activities, as well as with borrowings under our 75
million revolving credit facility, which is governed by the Senior Credit
Facilities. The company has never used this facility to date. The
availability of amounts under the Senior Credit Facilities is subject to
compliance with financial and other covenants contained therein. 54




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During the years ended December 31, 2002 and 2003, cash flows from
operating activities in each of our businesses were as follows: 2002
    
    2003( in millions)Ineos Oxide
    
    
    77.8
    
    
    
    89.9Ineos Phenol
    
    
    44.5
    
    
    
    92.6Ineos Fluor
    
    
    50.9
    
    
    
    52.0Ineos Silicas
    
    
    37.6
    
    
    
    33.6210.8
    
    
    
    268.1
 The cash flow for Ineos Phenol in 2003 includes the benefit of the receipt
of 18.1 million in insurance settlement proceeds from the Mobile incident. On March 1, 2002 Ineos Oxide completed the acquisition of the acetate
esters business from BP Belgium for 5.0 million. The acquisition was financed
out of cash flow. We held cash balances of 153.4 million as at December 31, 2003, and had
no drawings under the 75 million revolving credit facility. The Company
repaid a total of 79.4 million of the Senior Credit Agreement in the year
ended December 31, 2003. Net debt as at December 31, 2003 was 677.4 million
(December 31, 2002: 819.0 million). We believe that our cash flows from operations, together with borrowings
under the revolving credit facility and the ancillary facilities, will be
sufficient for our operating needs (other than future acquisitions) and debt
service requirements as they become due for the foreseeable future. Our future
operating performance and ability to service or refinance our existing debt,
including the Senior Notes, will be subject to future economic conditions and
to financial, business and other factors, many of which are beyond our control.
See Item 3.D. in this annual report titled Risk Factors for additional
disclosure. We are required under the Senior Credit Facilities to hedge two-thirds of
our variable interest rate exposure. See note 34 to the Ineos Group Limited
financial statements for further information on interest rate and foreign
currency risk to which we are exposed. Recent Accounting Developments On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN 45
or the Interpretation), Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34). FIN 45 clarifies the requirements of FASB Statement
No. 5 (FAS 5), Accounting for Contingencies,relating to a guarantors
accounting for, and disclosure of, the issuance of certain types of guarantees.
The Interpretations provisions for initial recognition and measurement are to
be applied on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors fiscal year-end. The
guarantors previous accounting for guarantees that were issued before the date
of FIN 45s initial application may not be revised or restated to reflect the
effect of the recognition and measurement provisions of the Interpretation.
The requirements have been adopted by the Company for the year ended December
31, 2003 (see note 36). In January 2004, the FASB issued FASB Staff Position (FSP) 106-1,
Accounting and Disclosure Requirements Related to Medicare Prescription Drug,
Improvement and Modernization Act of 2003(the Act). This FSP addresses the
accounting implications of the newly issued Act to an entity that sponsors a
post-retirement health care plan that provides prescription drug benefits.
This Act, signed into law in December 2003 in the United States, introduces a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of certain retiree health care benefit 55




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##### Table of Contents



plans. The FSP includes an election to defer accounting for the
implications of this new law until specific authoritative guidance to address
the accounting treatment has been issued. As such, as a result of the lack of
the existence of such guidance, any measures included in these financial
statements of the accumulated post-retirement benefit obligation (APBO) or net
periodic post retirement benefit cost in the financial statements or
accompanying notes do not reflect the effects of the Act on the plan.
Authoritative guidance, when issued, could require a change in previously
reported information. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities(FIN 46), which was amended in December 2003
when the FASB issued FIN 46-R. Under the interpretation, as amended, certain
entities known as Variable Interest Entities (VIE) must be consolidated by
the primary beneficiary of the entity. The primary beneficiary is generally
defined as having the majority of the risks and rewards arising from the VIE.
FIN 46-R is effective immediately for entities created after February 1, 2003.
For entities created prior to February 1, 2003 FIN 46-R will be effective for
the Companys December 31, 2004 financial statements. The Company has
determined that the adoption of this statement will have no material impact on
its results of operations and financial position. In December 2003, the FASB issued SFAS 132 (revised) Employers
Disclosures about Pensions and Other Post Retirement Benefits(FAS 132®).
FAS 132® requires additional disclosures about the plan assets, obligations,
investment strategies and rate of return assumptions for defined benefit plans.
In 2003, we adopted the revised disclosure requirements of this standard,
except for certain disclosures about non-UK plans and estimated future benefit
payments that are not required until the year ended December 31, 2004. The European Parliament and Council of the European Union issued a
regulation in 2002 that will require all EU listed companies to prepare their
consolidated financial statements in accordance with International Financial
Reporting Standards (IFRS) rather than the existing national GAAP. This
regulation applies to Ineos Group Holdings as our Senior Notes are listed on
the Luxembourg stock exchange. The regulation takes effect for the accounting
periods beginning after January 1, 2005 and consequently the accounting
framework under which the Company reports will change. The Company will
produce its consolidated financial statements in accordance with IFRS for the
year ended December 31, 2005. We are currently evaluating the areas that will
be most affected by the adoption of IFRS, including assessing the impact on our
underlying systems and financial statements and our US GAAP reconciliations.  C.
    
    RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES Ineos Oxides research and development team develops new applications for
its specialty chemicals, provides support to Ineos Oxides customers and seeks
to improve the efficiency of its manufacturing processes. The research and
development team also leads Ineos Oxides efforts with respect to the
development and capacity expansions of its plants and maintaining and improving
safety and environmental standards. We believe that research and development plays an integral role in
maintaining and expanding Ineos Phenols cost leadership position through
process technology and optimised plant layout. Since 1995, Ineos Phenol has
filed 28 patent applications for new process technology, including acetone
recycling, improvements in product quality and process optimisation. Ineos Phenols research and development department, located in Gladbeck,
employs six experienced research and development professionals. Current
research and development efforts are focused on two areas: the optimisation of
the current cumene oxidation process and the development of proprietary process
technology for the acetone-free production of phenol. In 2003, Ineos Phenol
spent 1.8 million (2002: 1.1 million; 2001: 3.5 million) on research and
development activities. 56




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Ineos Fluors research and development team, which consists of 34
employees, developed the first HFC 134a production process, which is the
process used for most of the HFC 134a production world-wide, and serves as a
platform for Ineos Fluors growth and diversification into innovative new
products and markets. The team has received awards for its technical
achievements, including the MacRobert and Kirkpatrick awards for technical
innovation in recognition of its achievements in the development of HFCs.
Current programs include the development of a medical products business. In
2003, Ineos Fluor charged 3.2 million (2002: 3.8 million; 2001: 3.3 million)
on research and development activities. Ineos Silicas currently has approximately 55 employees involved in product
development, manufacturing support and technical service. Research and
development activities are centred at the Warrington facility, with a small
research and development facility in Eijsden and technical service specialists
located worldwide. In 2003, Ineos Silicas charged 3.8 million (2002: 4.1
million; 2001: 5.8 million) on research and development activities, which were
principally focused on developing new products for variants of A24 zeolite and
new applications for its silicas products.  D.
    
    TREND INFORMATION See Items 5.A Operating and Financial Review and ProspectsOperating
Results and 5.B Operating and Financial Review and ProspectsLiquidity and
Capital Resources for a discussion of information required by this item.  D.
    
    OFF BALANCE SHEET ARRANGEMENTS We have no off balance sheet arrangements.  E.
    
    TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS Our total committed contracts that will affect cash over the next five
years and thereafter is as follows: Expected Cash Payments by YearAfterContractual commitments
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008
    
    Total(in  millions)Senior credit facilities
    
    
    113.4
    
    
    
    74.0
    
    
    
    58.3
    
    
    
    85.1
    
    
    
    132.0
    
    
    
    52.8
    
    
    
    515.6Deferred consideration
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69.6
    
    
    
    69.6Finance lease obligations
    
    
    0.6
    
    
    
    2.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.6Senior Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260.0
    
    
    
    260.0Operating lease commitments
    
    
    13.8
    
    
    
    3.7
    
    
    
    1.7
    
    
    
    1.5
    
    
    
    0.7
    
    
    
    
    
    
    
    21.4Capital expenditure
    
    
    11.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.0Non-cancellable purchase
contracts
    
    
    697.0
    
    
    
    372.9
    
    
    
    229.0
    
    
    
    129.0
    
    
    
    70.6
    
    
    
    78.3
    
    
    
    1,576.8835.8
    
    
    
    452.6
    
    
    
    289.0
    
    
    
    215.6
    
    
    
    203.3
    
    
    
    460.7
    
    
    
    2,457.0
 Finance lease payments are stated gross of interest payable. Future
non-cancellable purchase commitments relate to raw material purchases where the
Company has entered into purchase commitments to purchase a minimum volume at
contracted rates at the time of purchase. In the table above, prices as at
December 31, 2003 have been used.  G.
    
    SAFE HARBOUR The safe harbour provided in Section 21E of the Securities Exchange Act of
1934 applies to the forward-looking information provided pursuant to Item 5.F
above. 57




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ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES  A.
    
    DIRECTORS AND SENIOR MANAGEMENT Directors and Executive Officers of Ineos Group Limited The following table sets forth the name, age (as of December 31, 2003) and
principal position of each of our directors and executive officers: Name
    
    Age
    
    PositionJames A. Ratcliffe
    
    
    51
    
    
    ChairmanAndrew Currie
    
    
    48
    
    
    DirectorAntoine Verrijckt
    
    
    56
    
    
    DirectorJohn Reece
    
    
    46
    
    
    DirectorWilliam Madden
    
    
    69
    
    
    DirectorWilliam Reid
    
    
    40
    
    
    CEO-Ineos OxidePeter Bickert
    
    
    48
    
    
    CEO-Ineos PhenolThomas Crotty
    
    
    48
    
    
    CEO-Ineos FluorBrian Foster
    
    
    46
    
    
    CEO-Ineos Silicas
 James A. Ratcliffehas been a director and the Chairman of Ineos Group
Limited and the Chairman of Ineos Capital since 1998. Mr. Ratcliffe, who has
27 years experience in the chemicals industry, is experienced in managing
buyouts of chemical companies. In 1992 he led the successful buyout of Inspec
Group plc. In 1998 he left Inspec to lead the acquisition of Ineos plc (now
Ineos Oxide) from Inspec. Mr. Ratcliffe started his career with Exxon
Chemicals before moving to Courtaulds. He then completed his MBA at London
Business School before joining Advent International and then Inspec. Andrew C. Curriehas been a director of Ineos Capital since 1999. He
serves as Chairman of Ineos Fluor and Ineos Silicas. He was previously
Managing Director, Laporte Performance Chemicals, having served as a director
of the Inspec Group from 1994 until the Laporte acquisition of Inspec in 1998.
Mr. Currie has a degree in natural sciences from Cambridge University and spent
the first 15 years of his career with BP Chemicals in various technical and
business management functions. Antoine Verrijckthas been a director of Ineos Capital since 1999. He
became a director of Ineos NV, the operating subsidiary of Ineos Oxide, in
1998. He served as Operations Director-Chemicals for Inspec Belgium from 1995
to 1998 and as Operations Manager-Chemicals for BP Chemicals Belgium from 1992
to 1995. Mr. Verrijckt is the Chairman of Ineos Oxide and Ineos Phenol. Mr.
Verrijckt has a degree in chemistry from the University of Ghent, and has over
32 years in the chemicals industry. John Reecejoined Ineos Capital as Finance Director in January 2000. He
was previously a partner with PricewaterhouseCoopers where he advised companies
in the chemicals industry. Mr. Reece has a degree in economics from Cambridge
University and is an FCA. William Maddenbecame a Non-Executive Director of Ineos Capital in 1999.
He serves as the Chairman of Ineos Chlor. Dr. Madden served as the Chief
Executive Officer of ICIs Material Business until 1995. William Reidhas been the CEO of Ineos Oxide since March 2001. Prior to
that time, he served as Business Director-Ineos Oxide from January, 2000 to
March, 2001 and as Business Manager-EO/Glycols from 1998 to 2000. Prior to
joining Ineos Oxide, Dr. Reid held various technical and business positions
with Inspec, Uniroyal, ICI and BP Chemicals. Dr. Reid holds a PhD in chemistry
from Aberdeen University and has 14 years experience in the petrochemicals
industry. 58




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##### Table of Contents



Peter Bickerthas been the CEO of Ineos Phenol since September 2001.
Prior to that time, he served as President and CEO of Ineos Phenols U.S.
subsidiary (formerly Phenolchemie Inc.) from 1997 to 2001. Prior to joining
Ineos Phenol in 1997, Dr. Bickert held various technical and business positions
with Hüls AG. Dr. Bickert holds a PhD in chemistry/chemical engineering from
the Technical University in Darmstadt, Germany, an M.B.A. from Rutgers, New
Jersey, United States, and has 18 years experience in the chemicals industry. Thomas Crottyhas been the CEO of Ineos Fluor since 1996. Prior to that
time, he held a number of senior positions within the business, which he joined
in 1992. Prior to joining Ineos Fluor, Mr. Crotty was with ICIs Plastics and
Fertiliser businesses. Mr. Crotty has a degree in agriculture from Newcastle
University and has 23 years experience in the chemicals industry. Brian Fosterhas been the CEO of Ineos Silicas since May 2001. Prior to
that time, Mr. Foster served as General Manager-Performance Chemicals for
Laporte. Mr. Foster had held various technical and business positions at BP
Chemicals and Inspec, where he was a founding member of the management team.
He has a degree in chemistry from Nottingham University and has 23 years
experience in the petrochemical industry. All of our directors and senior managers have their business address at
our principal executive offices: Hawkslease, Chapel Lane, Lyndhurst, Hampshire
SO43 7FG, United Kingdom.  B.
    
    COMPENSATION An aggregate of 1.0 million was paid to our executive officers and
directors in their capacity as directors and officers of Ineos Group Limited in
2003. Directors who are also our employees receive no remuneration for serving
as directors.  C.
    
    BOARD PRACTICES Our board meets on a regular basis to review performance and business
plans of the group. In addition, the board has established policies for the
conduct of the business within the group, including delegations of board
authority to directors and members of senior management. In addition the board
appoints committees to ensure appropriate oversight of the group companies
operations. None of the directors have service contracts that provide for
benefits upon their termination as a director. Board Committees We have an audit committee and a remuneration committee. The members of
the audit committee are James Ratcliffe, Antoine Verrijckt, Andrew Currie and
John Reece acting as chairman. The members of the remuneration committee are
James Ratcliffe, Antoine Verrijckt, Andrew Currie and William Madden acting as
chairman. The audit committee meets at least twice a year. The committee is
responsible for appointing auditors and reviewing the suitability and
effectiveness of internal control systems and the application of corporate
policies. The remuneration committee meets at least once a year. The primary
function of the remuneration committee is to determine remuneration and other
terms of employment for the directors and senior employees of the company
having due regard for performance. We anticipate that, in setting the
remuneration policy, the committee will consider a number of factors, including
the salaries and benefits available to senior management in comparable
companies and the need to ensure senior management commitment to the continued
success of the business by means of incentive schemes. 59




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##### Table of Contents



D.
    
    EMPLOYEES As of December 31, 2003, Ineos Oxide had 536 employees, Ineos Phenol had
650 employees, Ineos Fluor had 354 employees and Ineos Silicas had 902
employees. The table below shows the number of employees, including
distribution by sector, at year-end for the years indicated: At December 31,2001
    
    2002
    
    2003Ineos Group Limited employees
    
    
    2,639
    
    
    
    2,494
    
    
    
    2,442Of whichAdministrative/ Sales and marketing
    
    
    241
    
    
    
    463
    
    
    
    427Research and development
    
    
    156
    
    
    
    120
    
    
    
    118Operations and manufacturing
    
    
    2,242
    
    
    
    1,911
    
    
    
    1,897
 The following chart shows our employees by geographic distribution at the
dates indicated: At December 31,2001
    
    2002
    
    2003Ineos Group LimitedEurope
    
    
    1,926
    
    
    
    1,825
    
    
    
    1,783United States
    
    
    545
    
    
    
    385
    
    
    
    385Asia/Pacific and rest of the world
    
    
    168
    
    
    
    284
    
    
    
    274
 Each business retains separate responsibility for its employees and their
administration. Most of our employees are employed pursuant to full-time contracts. As
most operations are relatively complex and require advanced skills and
knowledge, the level of employee commitment is highly valued. Extensive
training programs exist at all locations covering all levels of the workforce,
including senior management. Historically, we have enjoyed good labor relations and we are committed to
maintaining these relationships. There have been no work stoppages or strikes
at any of our sites during the past five years. We take a constructive
approach to union relationships where there are unionised sites, and have been
able to secure the co-operation of both unions and the workforce with regard to
significant changes and the process of continuous improvement. Other than management and professional personnel, the majority of our
employees are represented by local trade unions and are covered by collective
bargaining agreements. These agreements primarily cover Ineos Oxides
employees in Belgium, Ineos Phenols employees in Germany and Belgium, Ineos
Fluors employees in the United Kingdom and Ineos Silicas employees in the
United Kingdom and Brazil. In addition, a small number of our employees in
other countries, including The Netherlands, Spain, South Africa and the United
States, are covered by collective bargaining agreements. No single collective
bargaining agreement covers a majority of our employees. 60




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##### Table of Contents



E.
    
    SHARE OWNERSHIP Ineos Group Limited has established four main categories of tracking
shares to correlate to the economic benefit attributable to each of our four
businesses. All shares of each class entitle their holders to vote for the
election of directors, or on any other matter put to a vote of the
shareholders, of Ineos Group Limited. The following table sets forth information regarding the ownership of our
share capital, as of February 28, 2004, by the following:  
    
    each person or group known by us to be the owner of 5% or
more of the share capital of Ineos Group Limited; and
    
    all directors of Ineos Group Limited. Number of
    
    Number of
    
    Number of
    
    Number of
    
    Percentage ofOxide
    
    Phenol
    
    Fluor
    
    Silicas
    
    Total IneosTracking
    
    Tracking
    
    Tracking
    
    Tracking
    
    Group LimitedShares
    
    Shares
    
    Shares
    
    Shares
    
    Share CapitalJames A. Ratcliffe
    
    
    10,125,000
    (1)
    
    
    7,972,500
    (2)
    
    
    7,972,500
    (2)
    
    
    7,972,500
    (2)
    
    
    56.7
    %(3)Antoine Verrijckt
    
    
    300,000
    
    
    
    914,980
    
    
    
    914,980
    
    
    
    914,980
    
    
    
    5.1
    %Andrew Currie
    
    
    200,000
    
    
    
    869,990
    
    
    
    869,990
    
    
    
    869,990
    
    
    
    4.7
    %John Reece
    
    
    
    
    
    
    780,000
    
    
    
    780,000
    
    
    
    780,000
    
    
    
    3.9
    %William Madden
    
    
    74,500
    
    
    
    277,220
    
    
    
    277,220
    
    
    
    277,220
    
    
    
    1.5
    %Other Shareholders
    
    
    4,360,500
    (4)
    
    
    4,185,310
    (5)
    
    
    4,185,310
    (6)
    
    
    4,185,310
    (7)
    
    
    28.1
    %TOTAL
    
    
    15,060,000
    
    
    
    15,000,000
    
    
    
    15,000,000
    
    
    
    15,000,000
    
    
    
    100.0
    %(8)
  (1)
    
    Includes 750,000 Oxide tracking shares that are held by Cannon Nominees
Limited, a trust established for the benefit of family members and other
associates of Mr. Ratcliffe and over which Mr. Ratcliffe exercises
control.(2)
    
    Includes 337,610 tracking shares that are held by Cannon Nominees
Limited.(3)
    
    Excluding the 5,550 Ineos Oxide US tracking shares, 321,456 Ineos Phenol
tracking shares, 413,904 Ineos Fluor tracking shares and 322,513 Ineos
Silicas tracking shares which have been authorised but have not yet been
issued, Mr. Ratcliffe owns 57.7% of Ineos Group Limiteds share capital,
the other directors of Ineos Group Limited own 15.4% and other
shareholders own 26.9%.(4)
    
    Includes (A) 1,626,000 Oxide tracking shares held by Ineos Trustees
Limited, trustees of a trust established for the benefit of employees of
Ineos Oxides European business in 1999, and (B) 5,550 Ineos Oxide US
tracking shares which have been authorised but have not yet been issued.(5)
    
    Includes 321,456 shares which have been authorised but have not yet been
issued.(6)
    
    Includes 413,904 shares which have been authorised but have not yet been
issued.(7)
    
    Includes 322,513 shares which have been authorised but have not yet been
issued.(8)
    
    Our share capital is held for record by two holders in the United States,
who together hold in the aggregate approximately 0.26% of our total share
capital.   61




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##### Table of Contents



ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS  A.
    
    MAJOR SHAREHOLDERS The parties who are beneficial owners of 5% or more of the ordinary share
capital of Ineos Group Limited are set out in Item 6.E titled Share
Ownership.  B.
    
    RELATED PARTY TRANSACTIONS Relationship with Ineos Capital We have entered into a nine-year management services arrangement with
Ineos Capital Partners pursuant to which we receive certain management
services, as well as strategic support and direction, in exchange for an annual
management fee of up to 8 million (index-linked). The amount paid is reduced
if we fail to achieve certain financial targets. Ineos Group Limited has entered into a service contract with Mr. Ratcliffe
pursuant to which Mr. Ratcliffe will act as Chairman of Ineos Group Limited for
annual compensation of approximately 390,000. Certain of our subsidiaries
have entered into several service contracts with Andrew Currie and Antoine
Verrijckt who are also directors of Ineos Capital. The aggregate annual
compensation paid under these service agreements is approximately 450,000. We entered into a lease for office space with Ineos Capital Limited on
terms no less favourable to us than what we would expect to negotiate with
disinterested third parties. The office space is in the new Ineos Group
headquarters at Hawkslease, Chapel Lane, Lyndhurst, for which we currently pay
market rent of approximately 90,000 per year. During 2003, Ineos Oxide paid management and directors fees to Ineos Group
Limited in the amount of 1.0 million. Relationship with Ineos Chlor In January 2001, the directors of Ineos Capital acquired Ineos Chlor, a
manufacturer of chlorine-based chemicals. The directors of Ineos Capital own a
controlling interest in Ineos Chlor. Ineos Fluor purchases trichloroethylene
and chloroform for all of its requirements in the United Kingdom from Ineos
Chlor. In addition, Ineos Fluor leases laboratory space from Ineos Chlor.
Ineos Silicas purchases all of its caustic soda requirements in the United
Kingdom and a significant position of its caustic soda requirements in the
Netherlands from Ineos Chlor. These agreements with Ineos Chlor are on terms
no less favourable to us than what we would expect to negotiate with
disinterested third parties. Other than through these relationships and
certain common directors, we are not affiliated with Ineos Chlor. As a result
of these transactions, aggregate payments from Ineos Fluor and Ineos Silicas to
Ineos Chlor were 32.2 million in the year ended December 31, 2003 and 27.6
million in the year ended December 31, 2002.  C.
    
    INTERESTS OF EXPERTS AND COUNSEL Not applicable. 
 ITEM 8.  FINANCIAL INFORMATION  A.
    
    CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See Item 18. Legal Proceedings 62




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##### Table of Contents



We are party to various proceedings instituted by governmental authorities
arising under the provisions of applicable laws or regulations relating to the
protection of the environment. In our opinion, none of the proceedings is
material to our financial condition or results of operations.  B.
    
    SIGNIFICANT CHANGES None. 
 ITEM 9.  THE OFFER AND LISTING  A.
    
    OFFER AND LISTING DETAILS All of the share capital of Ineos Group Limited is privately held as
described elsewhere in this annual report. There is no public market for the
shares of Ineos Group Limited.  B.
    
    PLAN OF DISTRIBUTION Not applicable.  C.
    
    MARKETS None.  D.
    
    SELLING SHAREHOLDERS Not applicable.  E.
    
    DILUTION Not applicable.  F.
    
    EXPENSES OF THE ISSUE Not applicable. 
 ITEM 10.  ADDITIONAL INFORMATION  A.
    
    SHARE CAPITAL Not applicable.  B.
    
    MEMORANDUM AND ARTICLES OF ASSOCIATION Our Memorandum and Articles of Association are on file with the Registrar
of Companies for England and Wales under Company Number 3534631. As set forth
in Section 4.1 of our Memorandum of Association, Ineos Group Limited was
established to carry on business as a holding company for general commercial
companies. Directors A director of our company need not be a shareholder. A director is
permitted to vote at any meeting of the directors or of a committee of the
directors on any resolution concerning a transaction or arrangement to which we
may enter and in which the director has a material interest, provided that the
director has disclosed to the directors the nature and extent of his interest.
Each member of the board of directors is appointed at the annual shareholder
meeting. 63




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Share Capital Rights of Holders of Shares Each holder of shares, other than holders of Class C Regional Tracker
Shares, is entitled to one vote per share. Holders of Class C Regional
Tracker Shares do not have voting rights. Each holder of shares is entitled to receive a dividend out of the profits
available for distribution in each financial year, and, upon a return of
capital or liquidation, capital reduction or otherwise, an amount of he surplus
assets in each case out of the profits or surplus assets, as the case may be,
attributable to the business unit corresponding to the class of shares, as
determined by a Special Committee in its absolute discretion. The Special Committee is appointed by a majority of the Holders of the
Class D shares. The main function of the Special Committee is to determine,
in its absolute discretion, the economic contribution of each business unit,
including each region thereof, to the economic performance of Ineos Group
Limited. In particular, the Special Committee will determine:  
    
    how much of Ineos Group Limiteds borrowings, interest
expense and tax charges are attributable to each of the businesses;
    
    what, if any, profits of Ineos Group Limited after attributed
interest and tax are attributable to or derived from each business;
    
    on a return of capital, whether on liquidation or capital
reduction or otherwise, what surplus assets of Ineos Group Limited
remaining after the payment of its liabilities are attributable to
or derived from each of the businesses.  C.
    
    MATERIAL CONTRACTS Debt Service Obligations In connection with the financing of the acquisitions of Ineos Phenol,
Ineos Fluor and Ineos Silicas discussed in this annual report, we have entered
into the following lending agreements. Senior Credit Facilities Senior Credit Facilities, dated May 23, 2001, among Ineos Group Limited,
Ineos Holdings Limited, Barclays Capital, Merrill Lynch International, UBS
Warburg Ltd, and Barclays Bank plc, as Facility Agent and Security Agent. Intercreditor Deed, dated May 23, 2001, among Ineos Group Limited, Ineos
Holdings Limited, Barclays Bank plc, Merrill Lynch Capital Corporation and UBS
AG. 64




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Ineos Group Limited, Ineos Holdings Limited and certain of Ineos Holdings
Limiteds subsidiaries, Barclays Capital, Merrill Lynch International and UBS
Warburg Ltd., as joint mandated lead arrangers, the lenders named therein and
Barclays Bank PLC, as facility and security agent, have entered into a
900,000,000 senior credit facilities agreement. Part of the proceeds of the
offering of the outstanding Senior Notes was used to prepay 40 million of the
Term A loan and 10 million of the Term C loan. Ineos Group Limited is not a
direct borrower under the Senior Credit Facilities. We summarise some of the
terms of the Senior Credit Facilities in the following chart. Name of Loan
    
    Borrowers
    
    Amount
    
    Interest Type
    
    Final Maturity DateTerm A
    
    Ineos Holdings
(Fluor & Silicas)
Limited and Ineos
Phenol Limited
    
    Maximum 440 million(1)
    
    Floating
    
    June 30, 2007Term B
    
    Ineos Phenol Limited
    
    Maximum 180 million
    
    Floating
    
    June 30, 2008Term C
    
    Ineos US Finance LLC
    
    Maximum of the dollar
equivalent of 180
million(2)
    
    Floating
    
    June 30, 2009Revolving
    
    Any Borrower
    
    Maximum 100 million
    
    Floating
    
    June 30, 2007
   (1)
    
    Before prepayment of 40 million from proceeds of the offering of the
Senior Notes.(2)
    
    Before prepayment of 10 million from proceeds of the offering of the
Senior Notes. Term A Loan.The Term A loan was drawn in various tranches and was made
available partially to fund the acquisition of Ineos Phenol, to refinance
certain debt of Ineos Fluor and Ineos Silicas and to settle deferred
consideration payable with respect to the acquisition of Ineos Silicas. The
Term A loan is repayable in 12 semi-annual instalments beginning on December
31, 2001, ranging from 1.14% to 9.73% of the principal amount of the loan. Term B Loan.The Term B loan was drawn in a single advance and was made
available partially to fund the acquisition of Ineos Phenol. The Term B loan
is repayable in 14 semi-annual instalments beginning on December 31, 2001,
ranging from 0.56% to 46.64% of the principal amount of the loan. Term C Loan.The Term C loan was drawn in a single advance and was made
available partially to fund the acquisition of Ineos Phenol and to refinance
the debt of Ineos Oxide, Ineos Fluor and Ineos Silicas. The Term C loan is
repayable in 16 semi-annual instalments beginning on December 31, 2001, ranging
from 0.56% to 46.08% of the principal amount of the loan. Interest Rates and Fees Loans under the Senior Credit Facilities bear interest at a rate equal to
a margin plus either EURIBOR (in the case of a loan denominated in euro) or
LIBOR (in the case of any other loan) plus certain additional costs (as defined
in the Senior Credit Facilities). The applicable per annum margin for the Term
A loan and the revolving loan is 2.25%, and the applicable per annum margin for
the Term B loan is 2.75%, in each case subject to a margin reduction based on
certain financial tests. The applicable per annum margin for the Term C loan
is 3.25% prior to July 27, 2001, and will be 3.50% from that date and
thereafter. Ineos Holdings Limited pays a commitment fee of 0.75% per annum on the
aggregate of the daily, undrawn, uncancelled amount on all of the term
facilities and the revolving facility. Prepayment All loans under the Senior Credit Facilities require prepayments upon a
change of control (as defined in the Senior Credit Facilities), the listing of
the share capital of Ineos Group Limited or one of its subsidiaries or the sale
of all or substantially all of the assets of Ineos Group Limited and its
subsidiaries. In specified circumstances, prepayments are required from the
net proceeds of asset disposals, insurance claims, certain other claims and an
amount equal to 50% of the excess cash flow 65




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(as defined in the Senior Credit Facilities) of Ineos Group Limited and
its subsidiaries. All mandatory prepayments will be applied first to the
prepayment of the term loans until the outstanding principal of such loans has
been repaid in full and then to the prepayment of the revolving credit
facility. Guarantee and Security Ineos Holdings Limited and substantially all of its material subsidiaries
are guarantors of the Senior Credit Facilities. Their obligations under the
Senior Credit Facilities are secured by fixed and floating charges over all of
the assets of Ineos Holdings Limited and substantially all of the assets of
those material subsidiaries. Representations and Warranties Each obligor under the Senior Credit Facilities undertakes to make a
number of representations from time to time, including certain customary
representations and other representations relating to litigation, the
environment, material intellectual property, ownership of assets, pensions,
margin stock, investment companies and taxation. If at any time these representations are untrue, a default will occur
unless the circumstances giving rise to the misrepresentation are capable of
being remedied and are remedied within 30 days of the earlier of the facility
agent notifying Ineos Holdings Limited of that default, and the relevant
obligor becoming aware of the relevant misrepresentation. Covenants The Senior Credit Facilities also contain customary covenants and
restrictions on the ability of Ineos Holdings Limited and its subsidiaries to,
among other things:  
    
    incur debt;
    
    give guarantees and indemnities;
    
    make loans to others;
    
    create security interests in their assets;
    
    make acquisitions and investments;
    
    dispose of assets other than in the ordinary course of business;
    
    issue shares;
    
    pay dividends and make payments to shareholders; or
    
    change their accounting policies; in each case except as permitted by the Senior Credit Facilities. The Senior
Credit Facilities also contain financial covenants requiring Ineos Holdings
Limited to, among other things, maintain minimum coverage of interest expense,
minimum coverage of total debt service and a maximum leverage ratio. Events of Default The Senior Credit Facilities also contain customary events of default,
including, among others:  (1)
    
    non-payment of principal or interest,(2)
    
    failure to observe certain undertakings set forth in
the Senior Credit Facilities,(3)
    
    making an incorrect representation, warranty or
statement, and(4)
    
    certain bankruptcy related events. 66




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Events of default will also arise under the Senior Credit Facilities where
any provision of the Senior Credit Facilities and associated documents becomes
invalid or unenforceable or it becomes unlawful for an obligor to perform its
obligations in a certain jurisdiction. Pursuant to the Senior Credit
Facilities, an event of cross default will arise under the Senior Credit
Facilities where any indebtedness of Ineos Holdings Limited and its
subsidiaries exceeding a specified amount:  
    
    is not paid when due or within originally applicable grace
period in any agreement relating to such indebtedness, or
    
    becomes due and payable or capable of becoming due and
payable or is placed on demand or a commitment for such indebtedness
is cancelled or suspended by reason of a default or an event of
default relating to this indebtedness. Senior Notes due 2010 In July 2001, Ineos Group Holdings issued 260.0 million aggregate
principal amount of Senior Notes due 2010 bearing interest at a rate
of 10 1/2% per annum guaranteed by Ineos Holdings Limited on a senior subordinated
basis, pursuant to an Indenture, dated July 19, 2001 among Ineos Group Holdings
plc, as issuer, Ineos Holdings Limited, as guarantor, and The Bank of New York,
as trustee. Interest on the Senior Notes is due on February 1 and August 1 of each
year. The Senior Notes are scheduled to be repaid in one instalment on August 1,
2010. Prior to August 1, 2004, Ineos Group Holdings may redeem all but not
less than all of the Senior Notes by paying a make-whole premium. Ineos
Group Holdings may also redeem some or all of the Senior Notes at any time on
or after August 1, 2004, at the redemption price of 110.50% of the principal
amount of the Senior Notes, declining thereafter as described in the
registration statement of Ineos Group Holdings plc filed on Form F-4 with the
Securities and Exchange Commission on May 9, 2002. In addition, before August
1, 2004, Ineos Group Holdings or one of its parent companies may redeem up to
35% of the Senior Notes with the net proceeds of a public equity offering.
Upon a change of control, each holder of Senior Notes may require Ineos Group
Holdings to repurchase all or a portion of its Senior Notes. The Senior Notes rank equally with the senior debt. Our indirect wholly
owned subsidiary, Ineos Holdings Limited, has guaranteed the Senior Notes on a
senior subordinated basis. Ineos Holdings Limiteds guarantee is unsecured.
Ineos Holdings Limiteds guarantee only becomes due 179 days after an event of
default on the Senior Notes has occurred or earlier under certain
circumstances. The Senior Notes and the guarantee are subordinated to the
secured debt of our subsidiaries as to the assets securing such debt. Covenants The Indenture also contains customary covenants and restrictions on the
ability of Ineos Group Holdings and its subsidiaries to, among other things:  
    
    incur additional debt;
    
    pay dividends on, redeem or repurchase our capital stock;
    
    make certain investments;
    
    issue or sell capital stock of restricted subsidiaries;
    
    create certain liens;
    
    transfer or sell assets;
    
    enter into sale and leaseback transactions;
    
    enter into agreements limiting the ability of our
subsidiaries to make dividend or other payments to us;
    
    in the case of our subsidiaries, guarantee debt; 67




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
    
    engage in transactions with affiliates;
    
    create unrestricted subsidiaries; and
    
    consolidate, merge or transfer all or substantially all of
our assets and the assets of our subsidiaries on a consolidated
basis. Other Agreements Purchase and Sale Agreement, dated March 30, 2001, among Degussa AG,
Creanova, Inc., Ineos Group Limited and Ineos Phenol Limited pursuant to which
we acquired Ineos Phenol for 306.0 million in cash and 51.1 million in
deferred consideration including related acquisition costs.  D.
    
    EXCHANGE CONTROLS There are no UK foreign exchange controls currently in force that restrict
the export or import of capital or that affect the remittance of interest,
dividends or other payments to non UK resident holders of the Companys
securities. There are no limitations imposed by UK law that restrict the right
of non UK resident or non UK citizen owners to hold or vote the securities of
the Company.  E.
    
    TAXATION Not applicable.  F.
    
    DIVIDENDS AND PAYING AGENTS Not applicable.  G.
    
    STATEMENT BY EXPERTS Not applicable.  H.
    
    DOCUMENTS ON DISPLAY We have filed this annual report on Form 20-F with the Securities and
Exchange Commission under the Securities Exchange Act of 1934. Statements made
in this annual report as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to this annual
report, reference is made to the exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. We are subject to the informational requirements of the Exchange Act and
file reports and other information with the Securities and Exchange Commission.
Reports and other information which we file with the Securities and Exchange
Commission, including this annual report on Form 20-F, may be inspected and
copied at the public reference facilities of the Securities and Exchange
Commission at:  450 Fifth Street N.W.
Room 1024
Washington D.C. 20549 Copies of this material may also be obtained from the Securities and
Exchange Commissions Internet site at http://www.sec.gov. The Commissions
telephone number is 1-800-SEC-0330.  I.
    
    SUBSIDIARY INFORMATION Not applicable. 68




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ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of our business, we are exposed to a variety of
market risks arising from fluctuations in foreign currency exchange rates,
interest rates and commodity prices. To manage these risks effectively, we
enter into hedging transactions and use derivative financial instruments,
pursuant to established internal guidelines and policies, to mitigate the
adverse effects of these market risks. We do not enter into financial
instruments for trading or speculative purposes. For additional information about our financial instruments that are
sensitive to changes in interest rates, see Item 5.B under the caption
Operating and Financial Review and ProspectsLiquidity and Capital Resources.
For additional information about our hedging transactions and derivative
financial instruments, see note 34 to the financial statements of Ineos Group
Limited in Item 18 of this annual report. 
 ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 
 PART II 
 ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS None. 
 ITEM 15.  CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures.Based on their
evaluation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this annual report on Form 20-F, our
Chairman and Finance Director have concluded that our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarised and reported within the time periods specified in the
SECs rules and forms, and are operating in an effective manner. Changes to internal controls.There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation. 
 ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT The Companys audit committee does not include a financial expert as
that term is defined in applicable regulations. The members of the Companys
audit committee have substantial experience in assessing the performance of
companies and in understanding financial statements, accounting issues,
financial reporting and audit committee functions. However, the Board of
Directors does not consider any of them to be a financial expert as that term
is defined in applicable regulations. Nevertheless, the Board of Directors
believes that the members of the Companys audit committee have the necessary
expertise and experience to perform the functions required of the audit
committee and, given their respective backgrounds, it would not be in the best
interests of the Company to replace any of them with another person to qualify
a member of the audit committee as a financial expert. 69




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ITEM 16B.  CODE OF ETHICS The Board of Directors has not adopted a code of ethics applicable to the
Companys principal executive officer, principal financial officer, principal
accounting officer or controller, or for persons performing similar functions.
The Board of Directors believes that the Companys existing internal control
procedures and current business practices are adequate to promote honest and
ethical conduct and to deter wrongdoing on the part of these executives. 
 ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES Year ended December 31,2002
    
    2003( in millions)Audit services fees
    
    
    0.7
    
    
    
    0.7Taxation fees(a)
    
    
    0.6
    
    
    
    0.5Total fees paid to principal accountants
    
    
    1.3
    
    
    
    1.2
 (a)
    
    Taxation fees are fees in respect of tax return preparation,
consultation on tax matters and general tax advice relating to
specific transactions and other tax planning.
 The Audit Committee pre-approved a list of services that could be rendered
by the principal accountant in 2003 pursuant to pre-approval policies and
procedures established by the Audit Committee. For services other than those
specified, approval would need to be obtained from the Audit Committee prior to
performance of such services. Services provided by the principal accountant
during 2003 were allowable services that were either pre-approved by the Audit
Committee or were provided under contracts in existence at the date of
introduction of our policy and were grandfathered under rule 20-1(e)(1) of
regulation S-X. 
 ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. 
 ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable. 
 PART III 
 ITEM 17.  FINANCIAL STATEMENTS We have responded to Item 18 Financial Statements in lieu of this item. 70




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ITEM 18.  FINANCIAL STATEMENTS The following consolidated financial statements and schedules together
with the auditors reports thereon are part of this annual report. Ineos Group Limited Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Profit and Loss Accounts for the years ended December 31, 2001, 2002 and 2003
    
    
    F-2Consolidated Balance Sheets as at December 31, 2002 and 2003
    
    
    F-3Consolidated Cash Flow Statements for the years ended December 31, 2001, 2002 and 2003
    
    
    F-4Statements of Total Recognised Gains and Losses for the years ended December 31, 2001, 2002 and 2003
    
    
    F-5Notes to the Financial Statements
    
    
    F-6
 Financial Statement Schedule for Ineos Group Limited Report of Independent Registered Public Accounting Firm
    
    
    S-1Condensed Parent Company Profit and Loss Accounts for the years ended December 31, 2001, 2002 and 2003
    
    
    S-2Condensed Parent Company Balance Sheets for the Years ended December 31, 2002 and 2003
    
    
    S-3Condensed Parent Company Cash Flow Statements for the Years ended December 31, 2001, 2002 and 2003
    
    
    S-4Notes to the Condensed Financial Statements
    
    
    S-5
 71




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ITEM 19.  EXHIBITS Exhibit No.
    
    Description of Exhibit1.1
    
    Memorandum and Articles of Association of Ineos Group Limited14.1
    
    Indenture, dated July 19, 2001, among Ineos Group Holdings
plc, as issuer, Ineos Holdings Limited, as guarantor, and The Bank
of New York, as trustee24.2
    
    Senior Credit Facilities, dated May 23, 2001, among Ineos
Group Limited, Ineos Holdings Limited, Barclays Capital, Merrill
Lynch International, UBS Warburg Ltd. and Barclays Bank plc, as
Facility Agent and Security Agent34.3
    
    Intercreditor Deed, dated May 23, 2001, among Ineos Group
Limited, Ineos Group Holdings, Ineos Holdings Limited, Barclays Bank
plc, Merrill Lynch Capital Corporation and UBS AG44.4
    
    Purchase and Sale Agreement, dated March 30, 2001, among
Degussa AG, Creanova, Inc., Ineos Group Limited and Ineos Phenol
Limited54.5
    
    Service Contract with Jim Ratcliffe68.1
    
    List of subsidiaries of Ineos Group Limited710.1
    
    Resolution, dated April 4, 1998, changing the name of the
Company from JAR Group Limited to Ineos Group Limited812.1
    
    Certification of the Chairman pursuant to Rule 13a  14(a) or
Rule 15d  14(a)912.2
    
    Certification of the Finance Director pursuant to Rule 13a 
14(a) or Rule 15d  14(a)9
   1
    
    Incorporated by reference to Exhibit 1.1 to the Registration Statement on
Form 20-F of Ineos Group Limited, File No. 000-31228, filed with the Securities
Exchange Commission.2
    
    Incorporated by reference to Exhibit 4.1 to the Registration Statement on
Form F-4 of Ineos Group Holdings plc, File No. 333-87974, filed with the
Securities and Exchange Commission.3
    
    Incorporated by reference to Exhibit 10.1 to the Registration Statement on
Form F-4 of Ineos Group Holdings plc, File No. 333-87974, filed with the
Securities and Exchange Commission.4
    
    Incorporated by reference to Exhibit 10.2 to the Registration Statement on
Form F-4 of Ineos Group Holdings plc, File No. 333-87974, filed with the
Securities and Exchange Commission.5
    
    Incorporated by reference to Exhibit 2.1 to the Registration Statement on
Form F-4 of Ineos Group Holdings plc, File No. 333-87974, filed with the
Securities and Exchange Commission.6
    
    Incorporated by reference to Exhibit 10.3 to the Registration Statement on
Form F-4 of Ineos Group Holdings plc, File No. 333-87974, filed with the
Securities and Exchange Commission.7
    
    Incorporated by reference to Exhibit 21.1 to the Registration Statement on
Form F-4 of Ineos Group Holdings plc, File No. 333-87974, filed with the
Securities and Exchange Commission.8
    
    Incorporated by reference to Exhibit 10.1 to the Registration Statement on
Form 20-F of Ineos Group Limited, File No. 000-31228, filed with the Securities
and Exchange Commission.9
    
    Filed herewith. 72




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SIGNATURE The registrant hereby certifies that it meets all the requirements for filing
on Form 20-F and has duly caused and authorised the undersigned to sign this
annual report on its behalf. Registrant: INEOS GROUP LIMITEDBy:
    /s/  John ReeceName:
    John ReeceTitle:
    Finance Director Date:  June 25, 2004 73




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Ineos Group Limited We have audited the accompanying consolidated balance sheets of Ineos
Group Limited (the Company or Ineos Group Limited) and its subsidiaries as
of December 31, 2003 and 2002, and the related consolidated profit and loss
accounts, cash flow statements and statements of total recognised gains and
losses for each of the three years in the period ended December 31, 2003, all
expressed in euros. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom and the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ineos Group
Limited and its subsidiaries at December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United Kingdom. Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. The application of the latter would have affected
the determination of the results expressed in euros for each of the three years
in the period ended December 31, 2003, and the determination of shareholders
funds also expressed in euros at December 31, 2003 and 2002, to the extent
summarised in Note 36 to the consolidated financial statements. PricewaterhouseCoopers LLP
London, United Kingdom June 25, 2004 F-1




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INEOS GROUP LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNTS Year Ended December 31,Notes
    
    2001
    
    2002
    
    2003( in millions)Turnover
    
    4
    
    
    1,530.7
    
    
    
    2,235.8
    
    
    
    2,530.4Cost of sales
    
    
    
    
    (1,255.8
    )
    
    
    (1,833.9
    )
    
    
    (2,130.3
    )Gross profit
    
    
    
    
    274.9
    
    
    
    401.9
    
    
    
    400.1Distribution costs
    
    
    
    
    (104.4
    )
    
    
    (161.8
    )
    
    
    (151.7
    )Administrative expenses
    
    5
    
    
    (68.7
    )
    
    
    (65.9
    )
    
    
    (45.7
    )Exceptional administrative expenses
    
    6
    
    
    (19.6
    )
    
    
    (24.6
    )
    
    
    (88.3
    )
    
    
    (90.5
    )
    
    
    (45.7
    )Other operating income
    
    8
    
    
    
    
    
    
    
    
    
    
    18.1Operating profit
    
    7
    
    
    82.2
    
    
    
    149.6
    
    
    
    220.8Share of operating profit of associate
    
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.6Profit on disposal of fixed assets
    
    8
    
    
    
    
    
    
    1.9
    
    
    
    1.3Profit on disposal of business
    
    27
    
    
    
    
    
    
    
    
    
    
    0.1Net finance charges
    
    9
    
    
    (68.7
    )
    
    
    (79.8
    )
    
    
    (72.3
    )Exceptional finance charges
    
    9
    
    
    (40.9
    )
    
    
    
    
    
    
    (109.6
    )
    
    
    (79.8
    )
    
    
    (72.3
    )Profit/(loss) on ordinary activities
before taxation
    
    
    
    
    (27.2
    )
    
    
    72.3
    
    
    
    150.5Taxation on profit/(loss) on ordinary
activities
    
    11
    
    
    6.1
    
    
    
    (37.1
    )
    
    
    (5.4
    )Profit/(loss) on ordinary activities
after taxation
    
    
    
    
    (21.1
    )
    
    
    35.2
    
    
    
    145.1Equity dividends
    
    12
    
    
    
    
    
    
    
    
    
    
    (9.9
    )Profit/(loss) for the financial year
    
    25
    
    
    (21.1
    )
    
    
    35.2
    
    
    
    135.2
 The accompanying notes are an integral part of these financial statements. F-2




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INEOS GROUP LIMITED
CONSOLIDATED BALANCE SHEETS As atDecember 31,Notes
    
    2002
    
    2003( in millions)Fixed assetsInvestments
    
    13
    
    
    1.8
    
    
    
    5.2Tangible fixed assets
    
    14
    
    
    987.8
    
    
    
    855.8Intangible fixed assets
    
    15
    
    
    14.0
    
    
    
    12.1Negative goodwill
    
    15
    
    
    (282.3
    )
    
    
    (217.4
    )721.3
    
    
    
    655.7Current assetsCash at bank and in hand
    
    
    
    
    109.0
    
    
    
    153.4Stocks
    
    16
    
    
    162.4
    
    
    
    151.0Debtors: amounts due within one year
    
    17
    
    
    326.3
    
    
    
    369.9Debtors: amounts due after one year
    
    17
    
    
    48.7
    
    
    
    58.4646.4
    
    
    
    732.7Creditorsamounts falling due within one year
    
    18
    
    
    (437.4
    )
    
    
    (504.3
    )Net current assets
    
    
    
    
    209.0
    
    
    
    228.4Total assets less current liabilities
    
    
    
    
    930.3
    
    
    
    884.1Creditorsamounts falling due after more than one year
    
    19, 20, 21
    
    
    (847.9
    )
    
    
    (720.2
    )Provisions for liabilities and charges
    
    22
    
    
    (70.1
    )
    
    
    (50.4
    )Net assets
    
    
    
    
    12.3
    
    
    
    113.5Capital and reservesCalled up equity share capital
    
    24
    
    
    0.2
    
    
    
    0.2Share premium account
    
    25
    
    
    2.4
    
    
    
    2.4Capital redemption reserve
    
    25
    
    
    0.1
    
    
    
    0.1Profit and loss account
    
    25
    
    
    9.6
    
    
    
    110.8Equity shareholders funds
    
    26
    
    
    12.3
    
    
    
    113.5
 The accompanying notes are an integral part of these financial statements. F-3




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INEOS GROUP LIMITED
CONSOLIDATED CASH FLOW STATEMENTS Year Ended December 31,Notes
    
    2001
    
    2002
    
    2003( in millions)Operating profit
    
    
    
    
    82.2
    
    
    
    149.6
    
    
    
    220.8Depreciation of tangible assets
    
    
    
    
    110.9
    
    
    
    114.8
    
    
    
    114.4Amortisation of intangibles
    
    
    
    
    (33.5
    )
    
    
    (33.4
    )
    
    
    (36.8
    )(Increase)/decrease in stocks
    
    
    
    
    0.5
    
    
    
    (18.7
    )
    
    
    (0.9
    )(Increase)/decrease in debtors
    
    
    
    
    16.5
    
    
    
    (61.6
    )
    
    
    (62.5
    )Increase/(decrease) in creditors and provisions
    
    
    
    
    1.3
    
    
    
    60.1
    
    
    
    33.5(Profit)/loss on sale of tangible fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Net cash flow from operating activities
    
    
    
    
    177.9
    
    
    
    210.8
    
    
    
    268.1Dividend received from associate undertaking
    
    
    
    
    
    
    
    
    0.4
    
    
    
    Returns on investments and servicing of financeInterest received
    
    
    
    
    2.5
    
    
    
    3.0
    
    
    
    2.9Interest paid
    
    
    
    
    (68.4
    )
    
    
    (63.2
    )
    
    
    (64.0
    )Interest element of finance lease rentals
    
    
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.2
    )Issue cost of debt finance raised
    
    
    
    
    (48.7
    )
    
    
    (0.7
    )
    
    
    (115.0
    )
    
    
    (61.3
    )
    
    
    (61.3
    )Taxation paid
    
    
    
    
    (11.9
    )
    
    
    (11.1
    )
    
    
    (12.3
    )Capital expenditureAcquisition of fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    Payments to acquire tangible fixed assets
    
    
    
    
    (42.9
    )
    
    
    (51.2
    )
    
    
    (58.2
    )Receipts from sales of tangible fixed assets
    
    
    
    
    
    
    
    
    3.7
    
    
    
    3.2(42.9
    )
    
    
    (47.5
    )
    
    
    (55.0
    )Acquisitions and disposalAcquisition of business
    
    
    
    
    (800.2
    )
    
    
    (5.0
    )
    
    
    Cash received on acquisitions
    
    
    
    
    23.2
    
    
    
    
    
    
    
    Disposals of businesses
    
    27
    
    
    
    
    
    
    
    
    
    
    1.4(777.0
    )
    
    
    (5.0
    )
    
    
    1.4Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    (9.9
    )Net cash inflow/(outflow) before financing
    
    
    
    
    (768.9
    )
    
    
    86.3
    
    
    
    131.0FinancingCapital repayment of finance leases
    
    
    
    
    (2.2
    )
    
    
    (3.5
    )
    
    
    (2.1
    )Repurchase of ordinary share capital
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    New loans:Senior credit facilities
    
    
    
    
    800.0
    
    
    
    
    
    
    
    Bridge Loan
    
    
    
    
    210.0
    
    
    
    
    
    
    
    Senior loan notes
    
    
    
    
    260.0
    
    
    
    
    
    
    
    Other bank loans
    
    
    
    
    433.9
    
    
    
    
    
    
    
    0.31,703.9
    
    
    
    
    
    
    
    0.3Repayment of loans:Senior credit facilities
    
    
    
    
    (56.5
    )
    
    
    (85.3
    )
    
    
    (79.4
    )Bridge Loan
    
    
    
    
    (210.0
    )
    
    
    
    
    
    
    Senior secured notes
    
    
    
    
    (95.5
    )
    
    
    (1.6
    )
    
    
    Other bank loans
    
    
    
    
    (459.9
    )
    
    
    
    
    
    
    Loan to associate undertaking
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    0.1(821.9
    )
    
    
    (87.9
    )
    
    
    (79.3
    )Increase/(decrease) in cash
    
    31
    
    
    108.5
    
    
    
    (5.1
    )
    
    
    49.9
 The accompanying notes are an integral part of these financial statements. F-4




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INEOS GROUP LIMITED
STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES Year Ended December 31,2001
    
    2002
    
    2003( in millions)Profit/(loss) for the financial year
    
    
    (21.1
    )
    
    
    35.2
    
    
    
    145.1Foreign currency translation movements
    
    
    
    
    
    
    (40.5
    )
    
    
    (37.0
    )Total recognised gains and losses for the period
    
    
    (21.1
    )
    
    
    (5.3
    )
    
    
    108.1
 The accompanying notes are an integral part of these financial statements. F-5




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  1.
    
    BASIS OF PREPARATION Ineos Group Limited (Ineos Group Limited or the Company) is a holding
company which houses the ownership interests in certain chemical businesses
acquired and controlled by a common owner. These businesses are comprised of
Ineos Oxide (formerly Ineos plc), Ineos Fluor, Ineos Silicas and Ineos Phenol.
Ineos Fluor and Ineos Silicas were acquired on January 9, 2001. Our results of
operations reflect the purchase of Ineos Fluor and Ineos Silicas from an
effective acquisition date of January 1, 2001. Ineos Group Limited acquired
Ineos Phenol on May 23, 2001 and the financial statements include the results
of operations of Ineos Phenol from that date. Ineos Oxide Limited (formerly Ineos plc) was acquired on April 14, 1998
from Inspec Group plc (Inspec) and Inspec Group BV, an affiliate of Inspec
Group plc (the Original Acquisition). The consolidated financial statements include all subsidiaries of the
Company. Intragroup transactions and balances have been eliminated on
consolidation. The financial and operating results for any period less than a year are
not necessarily indicative of the results that may be expected for a full year.  2.
    
    PRINCIPAL ACCOUNTING POLICIES The financial statements have been prepared using accounting policies in
accordance with generally accepted principles in the United Kingdom (UK
GAAP). The financial statements have been prepared under the historical cost
convention. Basis of consolidation The financial statements represent a consolidation of the Company and its
subsidiary undertakings (the Group) as at the balance sheet date. All
intercompany transactions are eliminated, including any intercompany profits
included in the Group which were not realised at the balance sheet date.
Subsidiaries acquired during the year are included in the consolidated
financial statements from the effective date of acquisition. Subsidiaries
disposed of during the year are included in the consolidated financial
statements up to the effective date of disposal. Associates Associated undertakings are companies in which the Group has a particular
interest (usually from 20% to 50%) which is held for the long term and over
whose operating and financial policies it exercises a significant influence.
The consolidated profit and loss account includes the Groups share of profits
less losses of associated undertakings. The consolidated balance sheet
includes interests in associated undertakings at the value of the Groups share
of the net assets of those undertakings. Turnover Turnover represents the invoiced value of products sold or services
provided to third parties net of sales discounts and value added taxes. F-6




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  2.
    
    PRINCIPAL ACCOUNTING POLICIES (Continued) The pricing for products sold is determined by market prices (market
contracts and arrangements) or is linked by a formula to published raw material
prices plus an agreed additional amount (formula contracts). Revenue is
recognised when the goods are shipped, when the prices are determinable and
when collectability is considered probable. Services provided to third parties include administrative and operational
services provided to other chemical companies with units on our sites and
services under tolling arrangements. Under tolling arrangements, customers pay
for or provide raw materials to be converted into a certain specified product,
for which the Group charges a toll fee. The Group only recognises the toll fee
as revenue earned under such arrangements upon shipment of the converted
product to the customer. For all other services, revenue is recognised upon
completion of the service provided. Tangible fixed assets Tangible fixed assets are stated at cost less accumulated depreciation and
are depreciated on a straight line basis at the following rates: Annual chargeLand
    
    NilFreehold buildings
    
    2.5-10%Plant, machinery and equipment
    
    2.5-33.3%Assets in the course of construction
    
    Nil
 Reviews are made annually of the estimated remaining lives of individual
productive assets, taking account of commercial and technological obsolescence
as well as normal wear and tear. Intangible fixed assets Goodwill arising on acquisition, which represents the excess of cost of
acquisitions of subsidiary undertakings and businesses over the fair value
attributed to their net assets, is capitalised and amortised over periods up to
a maximum of 20 years. Negative goodwill is amortised over the periods in which
the non-monetary assets of acquisitions made are recovered, whether through
depreciation or sale. The Group is amortising negative goodwill over periods
of 5 to 15 years. The Group periodically reviews the amortisation period to determine if
events and circumstances warrant revised estimates of the useful lives. Also,
at each balance sheet date, management assesses whether there has been a
permanent impairment in the value of goodwill by comparing anticipated
undiscounted future cash flows from operating activities with the carrying
value of goodwill. The factors considered by management in the assessment
include operating results, trends and prospects, as well as the effects of
obsolescence, demand, competition and other economic factors. For pre-existing non-compete agreements and licences acquired in
connection with an acquisition, the fair value of these separable intangible
assets is capitalised and amortised over the period of the agreement. Investments Fixed asset investments are stated at cost less provision for any
impairment. Research and development The cost of research and development is written off in the year incurred. F-7




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  2.
    
    PRINCIPAL ACCOUNTING POLICIES (Continued) Stocks and work in progress Stocks and work in progress are stated at the lower of cost and net
realisable value. Cost includes an appropriate proportion of the relevant
production overheads and is attributed to stocks on a first in, first out
(FIFO) basis. Grants Capital grants are recognised in the profit and loss account on a straight
line basis over the useful economic life of the related asset acquired. Debt issue costs Fees incurred in the raising of finance are capitalised and allocated to
periods over the term of the relevant financing at a constant rate on the
carrying amount. Foreign currencies The functional currency of the Group is the local currency of its
principal operating environment. The Groups primary products are sold in an
international commodities market priced and invoiced primarily in euros;
therefore the euro is the Groups functional currency. Transactions are translated at the exchange rate ruling at the date of the
transaction. Monetary assets and liabilities in the balance sheet are
translated at the closing rate for the period. All translation gains or losses
on the settlement of monetary assets and liabilities are included in the
determination of profit for the year. Assets and liabilities of overseas subsidiaries are translated into euros
at the rates of exchange ruling at the balance sheet date. Trading results of
overseas subsidiaries and associated undertakings have been translated at the
average exchange rate for the relevant accounting period. Exchange differences
arising on consolidation of overseas subsidiaries and associates, and on
matching foreign currency loans, are taken to reserves. Deferred taxation Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions that
result in an obligation to pay more tax in the future or a right to pay less
tax in the future have occurred at the balance sheet date. An asset is not
recognised to the extent that the transfer of economic benefits in the future
is uncertain. Deferred tax is measured at the average tax rates that are
expected to apply in the periods in which the timing differences are expected
to reverse, based on tax rates and laws that have been enacted by the balance
sheet date. Deferred tax assets and liabilities which have been recognised
have not been discounted. F-8




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  2.
    
    PRINCIPAL ACCOUNTING POLICIES (Continued) Pensions Employees of the Group participate in a number of funded defined benefit
pension plans. The Group pays contributions to the plans on behalf of the
employees. The cost of providing pensions is charged against profits on a
systematic basis with pension surpluses and deficits arising allocated over the
expected remaining service lives of the current members. Differences between
the amounts charged to the profit and loss account and payments made to the
pension fund are treated as assets or liabilities. Funded arrangements are in
place to bring forward the retirement date for employees in Belgium by up to
seven years. The Group operates a number of unfunded defined benefit pension schemes
which cover the majority of its employees in Germany. The expected cost of
pensions is charged to the profit and loss account so as to spread the cost of
pensions over the average remaining service period of the employees. The Group
also provides unfunded early retirement benefits and long service awards for
employees in Germany. The benefit cost is charged to the profit and loss
account based on actuarial valuations. Pension charges related to the defined benefit schemes are assessed in
accordance with the advice of a qualified independent actuary using the
projected unit method. Post-retirement benefits other than pensions The Group provides health care insurance to eligible retired employees and
their dependants. These benefits relate mainly to employees in the United
States and Belgium. Provision has been made in these financial statements for
the estimated future costs of the related insurance premiums. Environmental liabilities The Group is exposed to environmental liabilities relating to its past
operations, principally in respect of soil and groundwater remediation costs.
Provision for these costs is made when expenditure on remedial work is probable
and the cost can be estimated within a reasonable range of possible outcomes. Restructuring provisions Estimated costs to be incurred in connection with restructuring measures
are provided for when the Group has a constructive obligation, which is
generally the announcement date. The announcement date is the date at which
the plan is announced in sufficient detail to enable employees to estimate the
redundancy payments to which they are entitled. Leases Where assets are financed by leasing agreements that give rights
approximating to ownership, the assets are treated as if they had been
purchased outright. The amount capitalised is the present value of the minimum
lease payment payable during the lease term. The corresponding lease
commitments are shown as obligations to the lessor. Lease payments are split
between capital and interest elements using the annuity method. All other
leases are operating leases and the annual rentals are charged to operating
profit on a straight line basis over the lease term. F-9




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  2.
    
    PRINCIPAL ACCOUNTING POLICIES (Continued) Finance lease receivables Receivables under finance leases represent outstanding amounts due under
these agreements less finance charges allocated to future periods. Finance
lease interest is recognised over the term of the lease so as to produce a
constant return on the net cash investment. Financial instruments Amounts payable or receivable in respect of interest rate cap, floor and
swap agreements are recognised in the interest payable charge on an accruals
basis. The interest differential amounts due to/from the counterparty on such
agreements are accrued until settlement date and are recognised as an
adjustment to interest expense. Emission trading scheme The Group is a member of the UK Government Emissions Trading Scheme. The
Scheme encourages companies to reduce carbon emissions by offering financial
incentives if they achieve their annual reduction targets. If a company
reduces emissions beyond their target then the government also allows the
surplus to be traded in the form of emissions permits. The incentive money due from the UK Government is recognised in the profit
and loss account once the reduction targets have been met. The emissions
permits allocated by the Government are at nil cost. The Group recognises the
revenue from such permits upon their sale to third parties. Employee share ownership plan The Group operates an Employee Share Ownership Plan (ESOP) in separately
administered trusts. The assets of the ESOP mainly comprise of either shares
in the Company or investments made with any surplus made from the sale of those
shares to the employees. Assets of the trusts are held as investments in the
Group balance sheet. The carrying value of shares in the Company held by the
trusts is included as part of Group shareholders equity. Gains or losses
arising on transactions in the shares of the Company are recognised as a
movement in the Group profit and loss reserve. Investment income and
administrative expenses of the trusts are recognised in the Group profit and
loss account in the period to which they relate. Dividend income arising on
shares in the Company held by the trusts are excluded in arriving at profit
before tax and deducted from the aggregate of dividends paid and proposed. Reclassifications Certain prior year amounts have been reclassified to conform with the
current years presentation. F-10




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  3.
    
    RECENT ACCOUNTING DEVELOPMENTS On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN 45
or the Interpretation), Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an
interpretation of FASB Statements No. 5, 57 , and 107 and rescission of FASB
Interpretation No. 34). FIN 45 clarifies the requirements of FASB Statement
No. 5 (FAS 5), Accounting for Contingencies,relating to a guarantors
accounting for, and disclosure of, the issuance of certain types of guarantees.
The Interpretations provisions for initial recognition and measurement are to
be applied on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors fiscal year-end. The
guarantors previous accounting for guarantees that were issued before the date
of FIN 45s initial application may not be revised or restated to reflect the
effect of the recognition and measurement provisions of the Interpretation.
The requirements have been adopted by the Company for the year ended December
31, 2003 (see note 36). In January 2004, the FASB issued FASB Staff Position (FSP) 106-1,
Accounting and Disclosure Requirements Related to Medicare Prescription Drug,
Improvement and Modernization Act of 2003(the Act). This FSP addresses the
accounting implications of the newly issued Act to an entity that sponsors a
postretirement health care plan that provides prescription drug benefits. This
Act, signed into law in December 2003 in the United States, introduces a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of certain retiree health care benefit plans. The FSP includes an
election to defer accounting for the implications of this new law until
specific authoritative guidance to address the accounting treatment has been
issued. As such, as a result of the lack of the existence of such guidance,
any measures included in these financial statements of the accumulated
postretirement benefit obligation (APBO) or net periodic post retirement
benefit cost in the financial statements or accompanying notes do not reflect
the effects of the Act on the plan. Authoritative guidance, when issued, could
require a change in previously reported information. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities(FIN 46), which was amended in December 2003
when the FASB issued FIN 46-R. Under the interpretation, as amended, certain
entities known as Variable Interest Entities (VIE) must be consolidated by
the primary beneficiary of the entity. The primary beneficiary is generally
defined as having the majority of the risks and rewards arising from the VIE.
FIN 46-R is effective immediately for entities created after February 1, 2003.
For entities created prior to February 1, 2003 FIN 46-R will be effective for
the Companys December 31, 2004 financial statements. The Company has
determined that the adoption of this statement will have no material impact on
its results of operations and financial position. In December 2003, the FASB issued SFAS 132 (revised) Employers
Disclosures about Pensions and Other Post Retirement Benefits(FAS 132®).
FAS 132® requires additional disclosures about the plan assets, obligations,
investment strategies and rate of return assumptions for defined benefit plans.
In 2003, we adopted the revised disclosure requirements of this standard,
except for certain disclosures about non-UK plans and estimated future benefit
payments that are not required until the year ended December 31, 2004. F-11




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  3.
    
    RECENT ACCOUNTING DEVELOPMENTS (Continued) The European Parliament and Council of the European Union issued a
regulation in 2002 that will require all EU listed companies to prepare their
consolidated financial statements in accordance with International Financial
Reporting Standards (IFRS) rather than the existing national GAAP. This
regulation applies to Ineos Group Limited as Ineos Group Holdings Senior Notes
are listed on the Luxembourg stock exchange. The regulation takes effect for
the accounting periods beginning after January 1, 2005 and consequently the
accounting framework under which the Company reports will change. The Company
will produce its consolidated financial statements in accordance with IFRS for
the year ended December 31, 2005. We are currently evaluating the areas that
will be most affected by the adoption of IFRS, including assessing the impact
on our underlying systems and financial statements and our US GAAP
reconciliations. F-12




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  4.
    
    SEGMENT INFORMATION Class of business The Companys business comprises the production and distribution of
intermediate and speciality chemicals, and is made up of four business
segments: Ineos Oxide, Ineos Fluor, Ineos Silicas and Ineos Phenol. The turnover, operating profit, net assets and capital expenditures
attributable to each different class of business as measured under UK GAAP is
as follows: Year Ended December 31,2001
    
    2002
    
    2003( in millions)TurnoverIneos Oxide
    
    
    432.1
    
    
    
    507.4
    
    
    
    500.1Ineos Phenol
    
    
    576.2
    
    
    
    1,189.0
    
    
    
    1,542.3Ineos Fluor
    
    
    299.5
    
    
    
    304.8
    
    
    
    273.8Ineos Silicas
    
    
    222.9
    
    
    
    234.6
    
    
    
    214.21,530.7
    
    
    
    2,235.8
    
    
    
    2,530.4EBITDAIneos Oxide
    
    
    68.3
    
    
    
    76.5
    
    
    
    82.8Ineos Phenol
    
    
    29.6
    
    
    
    80.7
    
    
    
    128.8Ineos Fluor
    
    
    53.0
    
    
    
    57.9
    
    
    
    48.9Ineos Silicas
    
    
    28.5
    
    
    
    41.1
    
    
    
    38.5179.4
    
    
    
    256.2
    
    
    
    299.0
 Reconciliation of earnings before operating exceptional items, interest,
taxes, depreciation and amortisation (EBITDA) to operating profit: Year Ended December 31,2001
    
    2002
    
    2003( in millions)EBITDA
    
    
    179.4
    
    
    
    256.2
    
    
    
    299.0Exceptional administrative expenses
    
    
    (19.6
    )
    
    
    (24.6
    )
    
    
    Depreciation
    
    
    (110.9
    )
    
    
    (114.8
    )
    
    
    (114.4
    )Amortisation
    
    
    33.5
    
    
    
    33.4
    
    
    
    36.8Operating profit (including share
of operating profit of associate)
    
    
    82.4
    
    
    
    150.2
    
    
    
    221.4
 Year Ended December 31,2002
    
    2003( in millions)Net assetsIneos Oxide
    
    
    114.2
    
    
    
    151.9Ineos Phenol
    
    
    21.4
    
    
    
    89.6Ineos Fluor
    
    
    (23.8
    )
    
    
    (21.7
    )Ineos Silicas
    
    
    (20.2
    )
    
    
    (3.7
    )Ineos Holdings
    
    
    (79.3
    )
    
    
    (102.6
    )12.3
    
    
    
    113.5
 F-13




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  4.
    
    SEGMENT INFORMATION (Continued) Year Ended December 31,2002
    
    2003( in millions)Capital expenditureIneos Oxide
    
    
    13.0
    
    
    
    13.8Ineos Phenol
    
    
    23.0
    
    
    
    17.8Ineos Fluor
    
    
    9.1
    
    
    
    7.3Ineos Silicas
    
    
    11.9
    
    
    
    17.757.0
    
    
    
    56.6
 Geographical analysis The directors of the Company are of the opinion that disclosure of
operating profit and net assets by geographical location would be seriously
prejudicial to the interests of the Company. Accordingly, they have elected to
exercise the exemption from such disclosure permitted by Statement of Standard
Accounting Practice No. 25 (SSAP 25) Segmental Reporting. Turnover by geographical destination is as follows: Year Ended December 31,2001
    
    2002
    
    2003( in millions)Europe
    
    
    978.6
    
    
    
    1,534.1
    
    
    
    1,680.6Americas
    
    
    318.6
    
    
    
    450.0
    
    
    
    569.1Rest of World
    
    
    233.5
    
    
    
    251.7
    
    
    
    280.71,530.7
    
    
    
    2,235.8
    
    
    
    2,530.4
 Turnover by geographical origin is as follows: Year Ended December 31,2001
    
    2002
    
    2003( in millions)Europe
    
    
    1,063.0
    
    
    
    1,642.5
    
    
    
    1,787.9Americas
    
    
    389.7
    
    
    
    511.5
    
    
    
    651.9Rest of World
    
    
    78.0
    
    
    
    81.8
    
    
    
    90.61,530.7
    
    
    
    2,235.8
    
    
    
    2,530.4
 Long lived assets by geographical location is as follows: Year Ended December 31,2002
    
    2003( in millions)Europe
    
    
    451.5
    
    
    
    432.1Americas
    
    
    204.2
    
    
    
    163.2Rest of World
    
    
    63.8
    
    
    
    55.2719.5
    
    
    
    650.5
 F-14




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  4.
    
    SEGMENT INFORMATION (Continued) Major customers No single customer represented more than ten percent of the Companys
turnover in any of the three years ended December 31, 2003.  5.
    
    ADMINISTRATIVE EXPENSES Year Ended December 31,2001
    
    2002
    
    2003( in millions)Administrative expenses
    
    
    103.4
    
    
    
    100.7
    
    
    
    83.7Amortisation of negative goodwill
    
    
    (34.7
    )
    
    
    (34.8
    )
    
    
    (38.0
    )68.7
    
    
    
    65.9
    
    
    
    45.7
  6.
    
    EXCEPTIONAL ADMINISTRATIVE EXPENSES The Company incurred nil million (2002: 24.6 million; 2001: 19.6
million) of exceptional administrative expenses, which mainly related to
business restructuring and the provision for severance payments. These
expenses were incurred by our business segments as shown below: Year Ended December 31,2001
    
    2002
    
    2003( in millions)Ineos Oxide
    
    
    0.4
    
    
    
    0.1
    
    
    
    Ineos Phenol
    
    
    6.5
    
    
    
    6.1
    
    
    
    Ineos Fluor
    
    
    5.7
    
    
    
    1.7
    
    
    
    Ineos Silicas
    
    
    7.0
    
    
    
    16.7
    
    
    
    19.6
    
    
    
    24.6
    
    
    
    
  7.
    
    OPERATING PROFIT This is stated after charging/(crediting): Year Ended December 31,2001
    
    2002
    
    2003( in millions)Depreciation of tangible fixed assets: owned assets
    
    
    109.8
    
    
    
    114.1
    
    
    
    114.0 finance leased assets
    
    
    1.1
    
    
    
    0.7
    
    
    
    0.4Amortisation of goodwill
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.6Write back of negative goodwill
    
    
    (34.7
    )
    
    
    (34.8
    )
    
    
    (38.0
    )Amortisation of other intangibles
    
    
    0.6
    
    
    
    0.6
    
    
    
    0.6Profit on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Employee costs (see Note 10)
    
    
    158.2
    
    
    
    188.1
    
    
    
    164.6Research and development expenditure
    
    
    11.6
    
    
    
    9.7
    
    
    
    9.8Auditors remuneration: audit services
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.7 non audit services
    
    
    1.3
    
    
    
    0.6
    
    
    
    0.5Operating lease rental charges: other
    
    
    7.4
    
    
    
    1.4
    
    
    
    2.3 plant, machinery and equipment
    
    
    5.0
    
    
    
    8.2
    
    
    
    6.6Amortisation of government grants
    
    
    (1.3
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
 F-15




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  7.
    
    OPERATING PROFIT (Continued) Directors emoluments Year Ended December 31,2001
    
    2002
    
    2003( in millions)Aggregate emoluments
    
    
    0.8
    
    
    
    1.1
    
    
    
    1.0
 The total amount of emoluments payable to the highest paid director for
the year ended December 31, 2001, the year ended December 31, 2002 and for the
year ended December 31, 2003, are as follows: Year Ended December 31,2001
    
    2002
    
    2003( in millions)Highest paid director
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4
 Retirement benefits are accruing to two (2002: two; 2001: two) directors
under a money purchase scheme. One (2002: two; 2001: two) director has
retirement benefits accruing under a defined benefit scheme. The Company paid
pension contributions of 38,000 (2002: 38,000; 2001: 39,000) into a personal
pension scheme in respect of the highest paid director.  8.
    
    PROFIT ON DISPOSAL OF FIXED ASSETS Year Ended December 31,2001
    
    2002
    
    2003( in millions)Write off of tangible fixed assets
    
    
    
    
    
    
    (7.0
    )
    
    
    Write off of associated negative goodwill
    
    
    
    
    
    
    5.2
    
    
    
    Net proceeds received
    
    
    
    
    
    
    3.7
    
    
    
    1.3
    
    
    
    1.9
    
    
    
    1.3
 On September 9, 2002 the cleavage unit of the Ineos Phenol plant in
Mobile, USA was destroyed by an explosion and fire. A total of 5 million was
received on account from the insurers in respect of the insurance claim in
2002. The claims with the insurers have now been settled. A further 1.3
million has been received from the insurers in 2003 in respect of property
damage and has been accounted for as proceeds on the disposal of tangible fixed
assets. A total of 18.1 million has also been received from the insurers in
respect of increased costs of working and consequential loss of profits and
this has been disclosed as other operating income. F-16




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  9.
    
    NET FINANCE CHARGES Year Ended December 31,2001
    
    2002
    
    2003( in millions)Interest payable on senior secured notes
    
    
    2.8
    
    
    
    
    
    
    
    Interest payable on senior notes
    
    
    12.4
    
    
    
    27.2
    
    
    
    27.3Interest payable on bank loans and overdrafts
    
    
    51.3
    
    
    
    44.0
    
    
    
    33.5Interest payable on deferred consideration
    
    
    3.8
    
    
    
    6.9
    
    
    
    7.8Amortisation of issue costs
    
    
    1.9
    
    
    
    6.8
    
    
    
    4.5Interest payable on finance leases
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.2Other
    
    
    2.2
    
    
    
    
    
    
    
    74.8
    
    
    
    85.3
    
    
    
    73.3Exchange movements
    
    
    (3.8
    )
    
    
    (2.5
    )
    
    
    1.9Interest receivable
    
    
    (2.5
    )
    
    
    (3.0
    )
    
    
    (2.9
    )68.7
    
    
    
    79.8
    
    
    
    72.3
 Exceptional finance charges Year Ended December 31,2001
    
    2002
    
    2003( in millions)Exceptional finance charges
    
    
    40.9
    
    
    
    
    
    
    
    
 The exceptional finance charges in 2001 related to the early repayment of
previous financing and bridge loan break costs, the write off of the associated
unamortised debt issue costs and bridge facility costs, the Tender Offer
premium and the write off of unamortised debt issue costs on the partial early
repayment of the senior credit facility.  10.
    
    EMPLOYEE COSTS Year Ended December 31,2001
    
    2002
    
    2003( in millions)Staff costs comprise:Wages and salaries
    
    
    125.2
    
    
    
    155.6
    
    
    
    133.8Social security and other benefits
    
    
    23.0
    
    
    
    20.4
    
    
    
    20.3Pension and early retirement costs
    
    
    10.0
    
    
    
    12.1
    
    
    
    10.5Total
    
    
    158.2
    
    
    
    188.1
    
    
    
    164.6The average number of employees was:Operations
    
    
    2,274
    
    
    
    1,904
    
    
    
    1,897Administration
    
    
    273
    
    
    
    471
    
    
    
    444Research and development
    
    
    159
    
    
    
    120
    
    
    
    118Total
    
    
    2,706
    
    
    
    2,495
    
    
    
    2,459
 F-17




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  11.
    
    TAXATION Analysis of charge/(credit) in period: Year Ended December 31,2001
    
    2002
    
    2003( in millions)United KingdomCorporation tax at 30%
    
    
    0.1
    
    
    
    7.2
    
    
    
    11.9Adjustments in respect of previous periods
    
    
    
    
    
    
    
    
    
    
    Double taxation relief
    
    
    (0.1
    )
    
    
    (7.2
    )
    
    
    (11.9
    )
    
    
    
    
    
    
    
    Foreign taxCorporation taxes
    
    
    7.7
    
    
    
    16.1
    
    
    
    19.8Adjustments in respect of previous periods
    
    
    
    
    
    
    (2.9
    )
    
    
    0.1Total current tax
    
    
    7.7
    
    
    
    13.2
    
    
    
    19.9Deferred taxOrigination and reversal of timing differences
    
    
    (13.8
    )
    
    
    18.8
    
    
    
    11.1Adjustments in respect of previous periods
    
    
    
    
    
    
    5.1
    
    
    
    (25.6
    )Total deferred tax
    
    
    (13.8
    )
    
    
    23.9
    
    
    
    (14.5
    )Tax on profit/(loss) on ordinary activities
    
    
    (6.1
    )
    
    
    37.1
    
    
    
    5.4
 The tax for the period is lower (2002: lower; 2001: higher) than the
standard rate of corporation tax in the UK (30%). The differences are
explained below: Year Ended December 31,2001
    
    2002
    
    2003( in millions)Profit/(loss) on ordinary activities before tax
    
    
    (27.2
    )
    
    
    72.3
    
    
    
    150.5Profit on ordinary activities multiplied by standard rate of corporation tax in the UK of 30% (2001: 30%)
    
    
    (8.2
    )
    
    
    21.7
    
    
    
    45.2Effects of:Expenses not deductible for tax purposes
    
    
    3.2
    
    
    
    1.9
    
    
    
    2.7Non taxable credits
    
    
    (12.4
    )
    
    
    (24.6
    )
    
    
    (22.7
    )Capital allowances in excess of depreciation
    
    
    (2.3
    )
    
    
    (8.0
    )
    
    
    3.2Other short term timing differences
    
    
    15.9
    
    
    
    (10.8
    )
    
    
    (14.4
    )Adjustment in respect of foreign tax rates
    
    
    1.3
    
    
    
    7.4
    
    
    
    3.8Deferred tax not provided
    
    
    10.2
    
    
    
    28.5
    
    
    
    2.0Adjustments in respect of previous periods
    
    
    
    
    
    
    (2.9
    )
    
    
    0.1Tax charge for the year
    
    
    7.7
    
    
    
    13.2
    
    
    
    19.9
 No deferred tax is recognised on the unremitted earnings of overseas
subsidiaries and associates. As the earnings are continually reinvested by the
group, no tax is expected to be payable on them in the foreseeable future.
Deferred tax has been recognised in respect of certain taxation losses as
indicated in note 23. Future tax charges may be affected by the realisation of
other taxable losses not recognised at the balance sheet date.  12.
    
    DIVIDENDS Year Ended December 31,2001
    
    2002
    
    2003( in millions)Equity dividends paid and proposed
    
    
    
    
    
    
    
    
    
    
    9.9
 F-18




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  13.
    
    INVESTMENTS Associated
    
    OtherUndertakings
    
    Investments
    
    Total( in millions)At December 31, 2002
    
    
    0.4
    
    
    
    1.4
    
    
    
    1.8Exchange movements
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.2
    )Additions
    
    
    
    
    
    
    3.0
    
    
    
    3.0Share of profits retained
    
    
    0.6
    
    
    
    
    
    
    
    0.6At December 31, 2003
    
    
    0.9
    
    
    
    4.3
    
    
    
    5.2
 The other investments relate to a 1% investment in ELA GmbH, a 0.1%
investment in ChemConnect, Inc and a 4.1% shareholding in Indaver NV. Indaver
NV is a company registered in Belgium which specialises in the treatment and
disposal of chemical waste and environmental cleaning. Other investments also
includes investments held by the ESOP of 3.0 million. There are no readily available quoted market prices for the investments in
ELA GmbH and ChemConnect, Inc. Details of the investment in associated undertakings is set out below: Associate/Company
    
    Class of shares held
    
    Percentage held
    
    Principal ActivitiesQuaker Chemical South Africa (Proprietary)
LimitedSouth Africa
    
    20,000 Ordinary 1 Rand
    
    
    49
    %
    
    Formulates and markets chemicals and
specialised lubricants
 F-19




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  14.
    
    TANGIBLE FIXED ASSETS Plant,Machinery,Freehold
    
    Fixtures,
    
    Assets in theLand and
    
    Fittings and
    
    course ofBuildings
    
    Motor Vehicles
    
    construction
    
    Total( in millions)CostAt December 31, 2001
    
    
    214.2
    
    
    
    1,526.6
    
    
    
    38.6
    
    
    
    1,779.4Acquisitions
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    1.2Additions
    
    
    0.6
    
    
    
    36.1
    
    
    
    20.3
    
    
    
    57.0Disposals
    
    
    
    
    
    
    (20.9
    )
    
    
    (0.5
    )
    
    
    (21.4
    )Transfers
    
    
    0.7
    
    
    
    25.2
    
    
    
    (25.9
    )
    
    
    Exchange adjustments
    
    
    (9.4
    )
    
    
    (91.1
    )
    
    
    (0.9
    )
    
    
    (101.4
    )At December 31, 2002
    
    
    206.1
    
    
    
    1,477.1
    
    
    
    31.6
    
    
    
    1,714.8Acquisitions
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Additions
    
    
    1.4
    
    
    
    23.1
    
    
    
    32.1
    
    
    
    56.6Disposals
    
    
    (1.5
    )
    
    
    (3.7
    )
    
    
    
    
    
    
    (5.2
    )Transfers
    
    
    0.4
    
    
    
    23.2
    
    
    
    (23.6
    )
    
    
    Exchange adjustments
    
    
    (8.7
    )
    
    
    (85.9
    )
    
    
    (2.2
    )
    
    
    (96.8
    )At December 31, 2003
    
    
    197.7
    
    
    
    1,434.3
    
    
    
    37.9
    
    
    
    1,669.9Accumulated DepreciationAt December 31, 2001
    
    
    55.7
    
    
    
    588.1
    
    
    
    
    
    
    
    643.8Charge for the period
    
    
    5.6
    
    
    
    109.2
    
    
    
    
    
    
    
    114.8Effects of disposals in the period
    
    
    
    
    
    
    (13.2
    )
    
    
    
    
    
    
    (13.2
    )Exchange adjustments
    
    
    (0.6
    )
    
    
    (17.8
    )
    
    
    
    
    
    
    (18.4
    )At December 31, 2002
    
    
    60.7
    
    
    
    666.3
    
    
    
    
    
    
    
    727.0Charge for the period
    
    
    4.9
    
    
    
    109.5
    
    
    
    
    
    
    
    114.4Effects of disposals in the period
    
    
    
    
    
    
    (3.7
    )
    
    
    
    
    
    
    (3.7
    )Exchange adjustments
    
    
    (0.8
    )
    
    
    (22.8
    )
    
    
    
    
    
    
    (23.6
    )At December 31, 2003
    
    
    64.8
    
    
    
    749.3
    
    
    
    
    
    
    
    814.1Net Book AmountAt December 31, 2003
    
    
    132.9
    
    
    
    685.0
    
    
    
    37.9
    
    
    
    855.8At December 31, 2002
    
    
    145.4
    
    
    
    810.8
    
    
    
    31.6
    
    
    
    987.8
 Included in the above are assets held under hire purchase and finance
leases with a net book value of 0.1 million (2002: 0.5 million). F-20




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  15.
    
    INTANGIBLE FIXED ASSETS Goodwill
    
    NonCompete
    
    LicensesFees
    
    Total
    
    NegativeGoodwill( in millions)CostAt December 31, 2001
    
    
    13.7
    
    
    
    2.3
    
    
    
    2.6
    
    
    
    18.6
    
    
    
    (401.3
    )Additions
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.0Acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.7Exchange adjustments
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    41.8At December 31, 2002
    
    
    14.2
    
    
    
    2.3
    
    
    
    2.4
    
    
    
    18.9
    
    
    
    (344.8
    )Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Exchange adjustments
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.4
    )
    
    
    (0.7
    )
    
    
    38.0At December 31, 2003
    
    
    13.9
    
    
    
    2.3
    
    
    
    2.0
    
    
    
    18.2
    
    
    
    (308.2
    )Aggregate AmortisationAt December 31, 2001
    
    
    2.1
    
    
    
    1.3
    
    
    
    0.1
    
    
    
    3.5
    
    
    
    (34.9
    )Charge for the period
    
    
    0.8
    
    
    
    0.4
    
    
    
    0.2
    
    
    
    1.4
    
    
    
    (34.8
    )Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.4At December 31, 2002
    
    
    2.9
    
    
    
    1.7
    
    
    
    0.3
    
    
    
    4.9
    
    
    
    (62.5
    )Charge for the period
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.2
    
    
    
    1.2
    
    
    
    (38.0
    )Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.7At December 31, 2003
    
    
    3.5
    
    
    
    2.1
    
    
    
    0.5
    
    
    
    6.1
    
    
    
    (90.8
    )Net Book AmountAt December 31, 2003
    
    
    10.4
    
    
    
    0.2
    
    
    
    1.5
    
    
    
    12.1
    
    
    
    (217.4
    )At December 31, 2002
    
    
    11.3
    
    
    
    0.6
    
    
    
    2.1
    
    
    
    14.0
    
    
    
    (282.3
    )
 Goodwill arising on the acquisitions of Inspec Belgium NV, the Antifreeze
business from BP Amoco in 1999, the Ethanolamines business from The Dow
Chemical Company and the Acetate Esters business from BP Belgium is being
amortised on a straight line basis over 20 years. This period is that over
which the directors estimate that the value of the underlying businesses
acquired are expected to exceed the value of the underlying assets. The license fees represent amounts paid for the process of homogeneous
cleavage of cumene hydroperoxide into its products. These license fees are
being amortised by equal annual installments over 15 years, being the period of
the agreement. The non-compete intangible asset relates to the Antifreeze acquisition and
is being amortised on a straight line basis over 5 years, being the period of
the non-compete agreement which started in 1999. Negative goodwill arising on the acquisition of Ineos Fluor and Ineos
Silicas, and Ineos Phenol is being amortised on a straight line basis over 5 to
15 years. This period represents that over which the non monetary assets are
recovered, whether through depreciation or sale. As a result of the incident at the Mobile, USA plant, negative goodwill
with a net book value of 5.2 million was written off in 2002. See note 8 for
further details. The Ineos Fluor HFC 134a plant in Runcorn, UK is scheduled to be converted
for use in the production of HFC125 in 2004. The useful economic life of this
plant has therefore been reduced to the period up to when it will cease in its
existing use. This has resulted in additional negative goodwill amortisation
of 8.1 million in 2003. F-21




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  16.
    
    STOCKS 2002
    
    2003( in millions)Raw materials and consumables
    
    
    54.5
    
    
    
    47.2Work in progress
    
    
    12.7
    
    
    
    13.1Finished products
    
    
    95.2
    
    
    
    90.7162.4
    
    
    
    151.0
  17.
    
    DEBTORS 2002
    
    2003( in millions)Amounts due within one yearTrade debtors
    
    
    292.7
    
    
    
    339.2Amounts owed by related parties
    
    
    0.5
    
    
    
    0.3Other debtors
    
    
    21.7
    
    
    
    22.5Prepayments and accrued income
    
    
    11.4
    
    
    
    7.9326.3
    
    
    
    369.9Amounts due after more than one yearAmounts owed by group undertakings
    
    
    14.0
    
    
    
    14.0Other debtors
    
    
    0.4
    
    
    
    0.2Prepayments and accrued income
    
    
    30.4
    
    
    
    25.8Deferred taxation
    
    
    3.9
    
    
    
    18.448.7
    
    
    
    58.4
 Trade debtors at December 31, 2003, are stated net of an allowance for
doubtful trade debtors of 9.5 million (2002: 8.3 million).  18.
    
    CREDITORSAMOUNTS FALLING DUE WITHIN ONE YEAR 2002
    
    2003( in millions)Bank overdraft
    
    
    0.1
    
    
    
    Senior credit agreement
    
    
    77.9
    
    
    
    110.1Obligations under finance leases
    
    
    2.1
    
    
    
    0.5Trade creditors
    
    
    211.9
    
    
    
    238.8Amounts due to related parties
    
    
    6.6
    
    
    
    12.8Other creditors
    
    
    47.1
    
    
    
    18.4Corporation tax
    
    
    7.1
    
    
    
    15.2Other accruals
    
    
    84.6
    
    
    
    108.5437.4
    
    
    
    504.3
  19.
    
    CREDITORSAMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 2002
    
    2003( in millions)Senior notes
    
    
    254.7
    
    
    
    255.4Senior credit agreement
    
    
    529.2
    
    
    
    393.2Deferred consideration
    
    
    61.8
    
    
    
    69.6Obligations under finance leases
    
    
    2.2
    
    
    
    1.7Other loans
    
    
    
    
    
    
    0.3847.9
    
    
    
    720.2
 F-22




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  20.
    
    FINANCE LEASES 2002
    
    2003( in millions)Obligations under finance leases comprise:Rentals due within 1 year:
    
    
    2.4
    
    
    
    0.6Rentals due after more than 1 year:from 1 to 2 years
    
    
    1.1
    
    
    
    2.0from 2 to 5 years
    
    
    1.4
    
    
    
    4.9
    
    
    
    2.6Less amounts representing interest relating to future periods
    
    
    (0.6
    )
    
    
    (0.4
    )Present value of net minimum lease payments
    
    
    4.3
    
    
    
    2.2Less current lease obligations
    
    
    (2.1
    )
    
    
    (0.5
    )Non current obligations
    
    
    2.2
    
    
    
    1.7
  21.
    
    LOANS Future maturities of long-term obligations as of December 31, 2003 are as
follows: Senior credit
    
    Senior
    
    Deferredagreement
    
    Notes
    
    Consideration
    
    Total( in millions)Total debtGross borrowings
    
    
    515.6
    
    
    
    260.0
    
    
    
    69.6
    
    
    
    845.2Less debt issue costs
    
    
    (12.3
    )
    
    
    (4.6
    )
    
    
    
    
    
    
    (16.9
    )Net bank and other borrowings
    
    
    503.3
    
    
    
    255.4
    
    
    
    69.6
    
    
    
    828.3
 Gross borrowings are repayable as follows: Senior credit
    
    Senior
    
    Deferredagreements
    
    Notes
    
    Consideration
    
    Total( in millions)In one year or less
    
    
    113.4
    
    
    
    
    
    
    
    
    
    
    
    113.4Between one and two years
    
    
    74.0
    
    
    
    
    
    
    
    
    
    
    
    74.0Between two and five years
    
    
    275.4
    
    
    
    
    
    
    
    
    
    
    
    275.4In five years or more
    
    
    52.8
    
    
    
    260.0
    
    
    
    69.6
    
    
    
    382.4515.6
    
    
    
    260.0
    
    
    
    69.6
    
    
    
    845.2
 F-23




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  21.
    
    LOANS (Continued) Senior Notes On July 19, 2001, the Company issued 260 million in 10 1/2% Senior Notes
due 2010 pursuant to a private offering. On 21 June 2002 the Company issued
260 million 10 1/2% Senior Notes due 2010 pursuant to an exchange offer
whereby holders of the original notes received new notes which have been
registered under the US Securities Act 1933 as amended, but are otherwise
identical to the original notes. The Senior Notes are listed on the Luxembourg
Stock Exchange. The
Senior Notes bear interest at 10 1/2% per annum, payable semi
annually in arrears on February 1 and August 1 of each year. Unless previously
redeemed as noted below, the Senior Notes will be redeemed by the Company at
their principal amount on August 1, 2010. The Senior Notes will be subject to redemption at any time prior to August
1, 2004, at the option of the Company, in whole but not in part, at a
redemption price equal to 100% of the principal amount thereof, plus the
applicable redemption premium and accrued and unpaid interest to the redemption
date. The Senior Notes will be subject to redemption at any time on or after
August 1, 2004, at the option of the Company, in whole or in part, at the
following redemption prices (expressed as percentages of the principal amount),
if redeemed during the 12-month period beginning August 1 of the years
indicated below: RedemptionYear
    
    Price2004
    
    
    110.500
    %2005
    
    
    107.788
    %2006
    
    
    105.250
    %2007
    
    
    102.625
    %2008 and thereafter
    
    
    100.000
    %
 In each case, the redemption premium will be in addition to accrued and unpaid
interest, if any, to the redemption date (subject to the rights of holders of
record on relevant record dates to receive interest due on an interest payment
date). In addition, at any time on or prior to August 1, 2004, the Company, at
its option, may use the net cash proceeds of one or more public equity
offerings to redeem Senior Notes in an amount up to an aggregate of 35% of the
sum of the initial aggregate principal amount of Senior Notes originally issued
under the Indenture at a redemption price equal to 110.50% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date; provided that Senior Notes in an amount equal to at least
65% of the sum of the initial aggregate principal amount of Notes originally
issued under the Indenture remains outstanding immediately after the occurrence
of such redemption. The Senior Notes are unsecured. The Senior Notes are guaranteed by Ineos
Holdings Limited on a senior subordinated basis. Such a guarantee only becomes
due 179 days after an event of default on the Senior Notes has occurred or
earlier under certain circumstances. F-24




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  21.
    
    LOANS (Continued) The Senior Notes are stated net of debt issue costs of 4.6 million (2002:
5.3 million) in the balance sheet. These costs are allocated to the profit
and loss account over the term of the Senior Notes in accordance with FRS 4. The Indenture contains a number of operating and financial covenants
including limitations on indebtedness, restricted payments, transactions with
affiliates, liens, sale of assets and dividend payments. Senior Credit Agreement The Company has outstanding borrowings under a credit agreement (the
Senior Credit Agreement) which consists of Term Loans (Term Loan A, Term
Loan B and Term Loan C) and a revolving credit facility (the Revolving
Credit Facility). The Term Loans outstanding at December 31, 2003 were 515.6
million (2002: 623.2 million), of which 113.4 million (2002: 81.9 million)
is due within one year. The total amounts outstanding on Term Loan A were
233.7 million (2002: 312.4 million), Term Loan B were 168.6 million (2002:
172.4 million) and Term Loan C were 113.3 million (2002: 138.4 million). Term Loan A is repayable in 12 semi-annual installments beginning on
December 31, 2001 ranging from 1.14% to 9.73% of the principal amount of the
loan up until the final repayment in June 2007. Term Loan B is repayable in 14
semi-annual installments beginning on December 31, 2001 ranging from 0.56% to
46.64% of the principal amount of the loan up until the final repayment in June
2008. Term Loan C is repayable in 16 semi-annual installments beginning on
December 31, 2001 ranging from 0.56% to 46.08% of the principal amount of the
loan up until the final repayment in June 2009. The Term Loans bear interest at a rate equal to a margin plus either
EURIBOR or LIBOR. The applicable per annum margins for the Term Loan A, Term
Loan B and Term Loan C are 2.25%, 2.75% and 3.50% respectively. The margins on
Term Loans A and B are subject to a reduction based on certain financial tests.
The Company pays a commitment fee of 0.75% per annum on the undrawn amounts of
the revolving credit facility. Ineos Holdings Limited and substantially all of its material subsidiaries
are guarantors of the Senior Credit Agreement. Their obligations are secured
by fixed and floating charges over all of the assets of Ineos Holdings Limited
and substantially all of the assets of those material subsidiaries. The Senior Credit Agreement contains numerous operating and financial
covenants including requirements to maintain minimum coverage of interest
expense, minimum coverage of total debt service and a maximum leverage ratio.
In addition, the Senior Credit Agreement includes covenants relating to, among
other things, limitations on indebtedness, ability to give guarantees, creation
of security interests, making acquisitions and investments, disposing of assets
and paying dividends. The most restrictive covenants relating to the payment of dividends by the
Company are as follows:  
    
    The ratio of Net Debt to EBITDA shall not be greater than 2:1
after payment of the dividend.
    
    The annual cash payment may not exceed 50.0 million.
    
    No dividend may be paid prior to December 31, 2004. The Company obtained specific bank consent to make the dividend payment
made in the year ended December 31, 2003 (see note 12). F-25




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  21.
    
    LOANS (Continued) The Term Loans are stated net of unamortised debt issue costs of 12.3
million (2002: 16.1 million). These costs are allocated to the profit and
loss account in accordance with FRS 4. Deferred consideration The deferred consideration relates to a vendor loan note issued to Degussa
AG on 23 May 2001 to partially fund the purchase of the Phenolchemie Group by
Ineos Phenol Limited, a wholly owned subsidiary. This group comprised of
Phenolchemie GmbH & Co KG, Phenolchemie Verwaltungsgesellschaft mbH,
Phenolchemie Asia Pte Limited and Phenolchemie Thailand Limited. The compound interest on this loan note accrues semi-annually at 12% per
annum up to and including 30 June 2006 and at a rate of 14% per annum for any
periods thereafter until final maturity or until the date of any prepayment of
the loan. The loan is due for repayment in full on 30 June 2011, however the Group
is entitled to repay the loan at any time prior to that date.  22.
    
    PROVISIONS FOR LIABILITIES AND CHARGES The movement in the provisions is as follows: Other
    
    Severance andRetirement
    
    Retirement
    
    RestructuringCosts
    
    Benefits
    
    Costs
    
    Remediation
    
    Other
    
    Total( in millions)Balance at December 31, 2001
    
    
    31.1
    
    
    
    7.4
    
    
    
    8.6
    
    
    
    4.8
    
    
    
    1.3
    
    
    
    53.2Acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    0.8Reclassifications
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8Charged to the profit and loss account
    
    
    5.5
    
    
    
    0.6
    
    
    
    24.6
    
    
    
    
    
    
    
    9.7
    
    
    
    40.4Utilised in the year
    
    
    (2.7
    )
    
    
    (0.3
    )
    
    
    (18.7
    )
    
    
    (0.6
    )
    
    
    (0.7
    )
    
    
    (23.0
    )Released in the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exchange adjustments
    
    
    (0.6
    )
    
    
    (0.9
    )
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (2.1
    )Balance at December 31, 2002
    
    
    33.3
    
    
    
    6.8
    
    
    
    15.0
    
    
    
    4.9
    
    
    
    10.1
    
    
    
    70.1Reclassifications
    
    
    0.6
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    (4.6
    )
    
    
    (5.0
    )Charged to the profit and loss account
    
    
    7.4
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    5.5
    
    
    
    14.5Utilised in the year
    
    
    (7.5
    )
    
    
    (0.4
    )
    
    
    (9.4
    )
    
    
    (0.1
    )
    
    
    (10.5
    )
    
    
    (27.9
    )Released in the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exchange adjustments
    
    
    (1.3
    )
    
    
    (0.9
    )
    
    
    1.7
    
    
    
    (0.3
    )
    
    
    (0.5
    )
    
    
    (1.3
    )Balance at December 31, 2003
    
    
    32.5
    
    
    
    7.1
    
    
    
    6.3
    
    
    
    4.5
    
    
    
    
    
    
    
    50.4
 Retirement costs The provision for retirement costs represents the legal obligation for the
companies various defined benefit pension schemes, unfunded pension schemes in
Germany and the legal obligation under Belgian law to meet the pension costs of
any employee taking early retirement until the employee achieves the recognised
pensionable age. Other retirement benefits The provision for other retirement benefits represents the estimated
future costs of health care insurance payable relating to eligible retired
former employees, mainly in the United States and Belgium. F-26




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  22.
    
    PROVISIONS FOR LIABILITIES AND CHARGES (Continued) Severance and restructuring costs The provision for severance and restructuring costs represents costs
provided for as a result of a restructuring of the Ineos Silicas, Ineos Fluor
and Ineos Phenol business segments upon their acquisition by the Group. In
June 2001, the Board of Directors approved the restructuring plan for these
business segments, which followed a thorough review of each segments
activities and overhead bases. Execution of the plan commenced in the third
quarter of 2001 with the announcement of the termination of approximately 308
employment contracts and the planned closures of the Groups leased premises in
Atlanta and Chadds Ford, USA. The restructuring plan was extended in 2002 with
the announcement of a further 250 employment contracts to be terminated. The
restructuring was substantially complete by the end of 2003, except where local
employment laws have delayed this. As at December 31, 2003, the Group had
incurred 9.4 million (2002: 18.7 million) against the restructuring
provision. Remediation costs The Group has provided for the cost of remediation works where there is a
legal or constructive obligation for such work to be carried out. The
provision was established to meet the clean up costs of contaminated soil and
groundwater and the removal of potentially hazardous substances. These costs
relate mainly to the groups production facilities at Runcorn, Warrington and
Eijsden. The provision only covers items of specific work for which a
reasonable estimate can be determined. The required work is expected to be
completed within the next two years. Other provisions Other provisions includes a provision for by-product disposal costs which
were established when the hydroxyethyl-cellulose (HEC) plant on the Antwerp
Site was sold by BP Chemicals to Union Carbide in 1987. BP Chemicals undertook
to dispose of the HEC waste which is a by-product of the chemical process until
2003. This agreement was passed on to Inspec Belgium NV following the
acquisition of Inspec Belgium NV by Inspec in 1995. The provision represents
the excess of the estimated disposal costs over the contributions to be
received from Union Carbide. This provision was fully utilised during 2003.
Other provisions also includes amounts for Ineos Fluors commercial disputes
with third parties and includes managements estimate of both the final cost of
settling the disputes and the associated legal costs. These disputes were
settled during 2003.  23.
    
    DEFERRED TAXATION Deferred tax (asset)/liability provided for: 2002
    
    2003( in millions)Accelerated capital allowances
    
    
    29.0
    
    
    
    18.3Losses
    
    
    (23.2
    )
    
    
    (22.5
    )Short term timing differences
    
    
    (6.9
    )
    
    
    (11.4
    )Other
    
    
    (2.8
    )
    
    
    (2.8
    )(3.9
    )
    
    
    (18.4
    )
 F-27




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  23.
    
    DEFERRED TAXATION (Continued) Deferred tax (asset)/liability not provided for: 2002
    
    2003( in millions)Losses
    
    
    (48.5
    )
    
    
    (19.8
    )
 The unprovided deferred tax asset has not been recognised as it is not
considered more likely than not that the losses will be utilised in the
foreseeable future. Analysis of movement in the period: ( in millions)At January 1, 2002
    
    
    (27.8
    )Charged to profit and loss account
    
    
    23.9At December 31, 2002
    
    
    (3.9
    )Credited to profit and loss account
    
    
    (14.5
    )At December 31, 2003
    
    
    (18.4
    )
  24.
    
    SHARE CAPITAL Authorised
    
    2002
    
    2003( in thousands)3,225,000 (2002: 3,225,000) B Oxide ordinary shares of 1p each
    
    
    50
    
    
    
    502,201,250 (2002: 2,201,250) B Fluor ordinary shares of 0.001p each
    
    
    
    
    
    
    2,201,250 (2002: 2,201,250) B Silicas ordinary shares of 0.001p each
    
    
    
    
    
    
    2,201,250 (2002: 2,201,250) B Phenol ordinary shares of 0.001p each
    
    
    
    
    
    
    1,650,000 (2002: 1,650,000) C Oxide ordinary shares of 1p each
    
    
    26
    
    
    
    2660,000 (2002: 60,000) C Oxide US ordinary shares of 1p each
    
    
    
    
    
    
    742,500 (2002: 742,500) C Fluor ordinary shares of 0.001p each
    
    
    
    
    
    
    742,500 (2202: 742,500) C Silicas ordinary shares of 0.001p each
    
    
    
    
    
    
    742,500 (2202: 742,500) C Phenol ordinary shares of 0.001p each
    
    
    
    
    
    
    1,500,000 (2002: 1,500,000) C Fluor Regional Tracker ordinary shares of 0.001p each
    
    
    
    
    
    
    1,500,000 (2002: 1,500,000) C Silicas Regional Tracker ordinary shares of 0.001p each
    
    
    
    
    
    
    1,500,000 (2002: 1,500,000) C Phenol Regional Tracker ordinary shares of 0.001p each
    
    
    
    
    
    
    10,125,000 (2002: 10,125,000) D Oxide ordinary shares of 1p each
    
    
    155
    
    
    
    15510,556,250 (2002: 10,556,250) D Fluor ordinary shares of 0.001p each
    
    
    
    
    
    
    10,556,250 (2002: 10,556,250) D Silicas ordinary shares of 0.001p each
    
    
    
    
    
    
    10,556,250 (2002: 10,556,250) D Phenol ordinary shares of 0.001p each
    
    
    
    
    
    
    231
    
    
    
    231
 Allotted, issued and fully paid
    
    2002
    
    2003( in thousands)3,225,000 (2002: 3,225,000) B Oxide ordinary shares of 1p each
    
    
    50
    
    
    
    502,138,750 (2002: 2,126,250) B Fluor ordinary shares of 0.001p each
    
    
    
    
    
    
    2,138,750 (2002: 2,126,250) B Silicas ordinary shares of 0.001p each
    
    
    
    
    
    
    2,138,750 (2002: 2,126,250) B Phenol ordinary shares of 0.001p each
    
    
    
    
    
    
    1,650,000 (2002: 1,650,000) C Oxide ordinary shares of 1p each
    
    
    26
    
    
    
    26742,500 (2002: 742,500) C Fluor ordinary shares of 0.001p each
    
    
    
    
    
    
    742,500 (2202: 742,500) C Silicas ordinary shares of 0.001p each
    
    
    
    
    
    
    742,500 (2202: 742,500) C Phenol ordinary shares of 0.001p each
    
    
    
    
    
    
    54,450 (2002: Nil) C Oxide US ordinary shares of 1p each
    
    
    
    
    
    
    1,148,596 (2002: 944,798) C Fluor Regional Tracker ordinary shares of 0.001p each
    
    
    
    
    
    
    1,239,987 (2002: 1,044,462) C Silicas Regional Tracker ordinary shares of 0.001p each
    
    
    
    
    
    
    1,241,044 (2002: Nil) C Phenol Regional Tracker ordinary shares of 0.001p each
    
    
    
    
    
    
    10,125,000 (2002: 10,125,000) D Oxide ordinary shares of 1p each
    
    
    155
    
    
    
    15510,556,250 (2002: 10,556,250) D Fluor ordinary shares of 0.001p each
    
    
    
    
    
    
    10,556,250 (2002: 10,556,250) D Silicas ordinary shares of 0.001p each
    
    
    
    
    
    
    10,556,250 (2002: 10,556,250) D Phenol ordinary shares of 0.001p each
    
    
    
    
    
    
    231
    
    
    
    231
 F-28




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  24.
    
    SHARE CAPITAL (Continued) As the reporting currency of the Company is the Euro, share capital has
been converted to Euros at the effective rate of exchange ruling at the date of
issuance. During the year the Company issued 203,798 C Fluor Regional Tracker
ordinary shares, 195,525 C Silicas Regional Tracker ordinary shares,
1,241,044 C Phenol Regional Tracker ordinary shares, and 54,450 C Oxide US 
ordinary shares. The Company also issued 12,500 B Fluor ordinary shares,
12,500 B Silicas ordinary shares and 12,500 B Phenol ordinary shares. A summary of the rights that attach to each class of shares is as follows: B, C and D Shares The Oxide shares represent the B Oxide shares, the C Oxide shares and
the D Oxide shares. The holders of the Oxide shares shall be entitled to
receive dividends as determined by the Company out of the profits derived from
the Oxide business segment. On a return of capital the holders of the Oxide
shares shall be entitled to receive amounts derived from the Oxide business
segment. The Fluor shares represent the B Fluor shares, the C Fluor shares and
the D Fluor shares. The holders of the Fluor shares shall be entitled to
receive dividends as determined by the Company out of the profits derived from
the Fluor business segment. On a return of capital the holders of the Fluor
shares shall be entitled to receive amounts derived from the Fluor business
segment. The Silicas shares represent the B Silicas shares, the C Silicas
shares and the D Silicas shares. The holders of the Silicas shares shall be
entitled to receive dividends as determined by the Company out of the profits
derived from the Silicas business segment. On a return of capital the holders
of the Silicas shares shall be entitled to receive amounts derived from the
Silicas business segment. The Phenol shares represent the B Phenol shares, the C Phenol shares
and the D Phenol shares. The holders of the Phenol shares shall be entitled
to receive dividends as determined by the Company out of the profits derived
from the Phenol business segment. On a return of capital the holders of the
Phenol shares shall be entitled to receive amounts derived from the Phenol
business segment. The holders of Oxide shares, Fluor shares, Silicas shares and Phenol
shares are entitled to one vote per share at any general meeting. Regional Tracker Shares The
Regional Tracker Shares represent the C Oxide US shares, the C
Fluor Regional Tracker shares, the C Silicas Regional
Tracker shares and the
C Phenol Regional Tracker shares. The holders of the Regional Tracker Shares
shall be entitled to receive dividends as determined by the Company out of the
profits derived from the business segment they relate to up to a maximum of 10%
of such profits available for distribution. On a return of capital the holders
of the Regional Tracker Shares shall be entitled to receive amounts derived
from the business segment they relate to up to maximum of 10%. The holders of
the Regional Tracker Shares are not entitled to vote. F-29




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  25.
    
    RESERVES Capital
    
    ProfitShare
    
    Redemption
    
    and LossPremium
    
    Reserve
    
    Account( in millions)At December 31, 2001
    
    
    2.4
    
    
    
    0.1
    
    
    
    14.9Retained profit for the year
    
    
    
    
    
    
    
    
    
    
    39.0Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    (40.5
    )At December 31, 2002
    
    
    2.4
    
    
    
    0.1
    
    
    
    9.6Retained profit for the year
    
    
    
    
    
    
    
    
    
    
    135.2Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    (37.0
    )Gain on sale of shares by ESOP
    
    
    
    
    
    
    
    
    
    
    3.0At December 31, 2003
    
    
    2.4
    
    
    
    0.1
    
    
    
    110.8
  26.
    
    RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS FUNDS Year EndedDecember 31,2002
    
    2003( in millions)Profit on ordinary activities after taxation
    
    
    39.0
    
    
    
    145.1Dividends
    
    
    
    
    
    
    (9.9
    )Other recognised gains/(losses) in the year
    
    
    (40.5
    )
    
    
    (37.0
    )Gain on sale of shares by ESOP
    
    
    
    
    
    
    3.0Net (decrease)/increase in equity shareholders funds
    
    
    (1.5
    )
    
    
    101.2Opening equity shareholders funds
    
    
    87.9
    
    
    
    12.3Closing equity shareholders funds
    
    
    86.4
    
    
    
    113.5
  27.
    
    DISPOSALS Ineos Silicas Italia Srl On April 17, 2003 the Group disposed of its shareholding in Ineos Silicas
Italia Srl for 1.4 million (net of expenses) to the subsidiarys management,
as supported financially by Marchi Industriali Spa. The net assets disposed of, together with the resultant profit on
disposal, are set out below: ( in millions)Tangible fixed assets
    
    
    0.1Goodwill
    
    
    1.0Stocks
    
    
    0.3Debtors
    
    
    0.9Creditors
    
    
    (1.0
    )1.3Profit on disposal
    
    
    0.1Cash consideration
    
    
    1.4
 F-30




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  28.
    
    OPERATING LEASE COMMITMENTS Annual commitments under non-cancellable operating leases comprise: 2002
    
    2003( in millions)Plant and equipment:Expiring within one year
    
    
    4.4
    
    
    
    5.3Expiring between 1 to 2 years
    
    
    3.6
    
    
    
    3.0Expiring between 2 to 5 years
    
    
    4.0
    
    
    
    3.3Expiring in more than 5 years
    
    
    2.2
    
    
    
    14.2
    
    
    
    11.6Land and buildings:Expiring within one year
    
    
    1.0
    
    
    
    1.0Expiring between 1 to 2 years
    
    
    0.1
    
    
    
    0.2Expiring between 2 to 5 years
    
    
    0.2
    
    
    
    1.01.3
    
    
    
    2.2
 The Company leases plant and equipment under a number of operating leases
that expire at various dates through to 2008. Future minimum lease payments
under operating leases with initial or remaining non-cancellable terms of one
or more years at December 31, 2003 totalled 21.4 million and were as follows: LeasePayments( in millions)2004
    
    
    13.82005
    
    
    3.72006
    
    
    1.72007
    
    
    1.52008 and after
    
    
    0.721.4
  29.
    
    CAPITAL COMMITMENTS 2002
    
    2003( in millions)Contracted capital expenditure
    
    
    5.9
    
    
    
    11.0
  30.
    
    PENSION SCHEMES The group operates a number of pension plans throughout the world, devised
in accordance with local conditions and practices. The plans are generally of
the defined benefit type and are funded by payments to separately administered
funds or insurance companies. The principal funded plans are in the United
Kingdom, United States and Belgium. The group also operates a number of unfunded pension schemes in Germany.
Provision is made in the financial statements for the benefits accruing to
members of unfunded pension schemes in accordance with the advice of
independent actuaries. The Group has continued to account for pensions and other post employment
benefits in accordance with SSAP 24. FRS17 is not expected to be fully
mandatory for the group until the year ending 31 December 2005. Prior to this,
transitional disclosures are required as set out below. F-31




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  30.
    
    PENSION SCHEMES (Continued) Valuations are carried out annually for the UK, US, Belgium and Germany
pension plans. All valuations were performed by independent actuaries using
the projected unit method to determine pension costs. The principal
assumptions for the calculation under SSAP 24, for the year ended December 31,
2003 were: return on investment 6%; average salary growth 4.75% and inflation
2% to 2.5%. Surpluses or deficits on the pension plans arising from the
actuarial valuations are spread over the expected average service lives of the
members of the relevant plan on a straight line basis using the single
variation method. The actuarial value of the assets of the plans outside the United States
was sufficient to cover approximately 111% of the benefits that had accrued to
members after allowing for expected future increases in wages and salaries. The
actuarial value of the assets of the plans in the U.S. cover approximately 58%
of the benefits accrued to the members. The market value at December 31, 2003
of the assets of the principal funds is set out in the FRS 17 disclosures
below. The most recent full valuations of the significant defined benefits plans
were carried out as follows: United Kingdom on January 1, 2002; United States
on January 1, 2002; Belgium on December 31, 2002 and Germany on December 31,
2002. These valuations have been updated where appropriate to December 31,
2003 by independent qualified actuaries. The additional disclosures required by FRS 17 for the Companys principal
pension plans are set out below: United Kingdom
    
    United States
    
    Belgium
    
    Germany2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001%
    
    %
    
    %
    
    %
    
    %
    
    %
    
    %
    
    %
    
    %
    
    %
    
    %
    
    %Major assumptionsRate of general increase in salaries
    
    
    4.10
    
    
    
    3.75
    
    
    
    3.90
    
    
    
    4.50
    
    
    
    4.50
    
    
    
    4.50
    
    
    
    3.50
    
    
    
    3.50
    
    
    
    3.75
    
    
    
    2.00
    
    
    
    3.50
    
    
    
    3.75Rate of increase to pension in payment
    
    
    2.60
    
    
    
    2.25
    
    
    
    2.50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.00
    
    
    
    2.25
    
    
    
    1.50
    
    
    
    2.00
    
    
    
    2.25Discount rate for scheme liabilities
    
    
    5.60
    
    
    
    5.60
    
    
    
    5.80
    
    
    
    6.25
    
    
    
    6.75
    
    
    
    7.25
    
    
    
    5.50
    
    
    
    5.75
    
    
    
    6.50
    
    
    
    5.50
    
    
    
    5.50
    
    
    
    6.50Inflation
    
    
    2.60
    
    
    
    2.25
    
    
    
    2.50
    
    
    
    3.00
    
    
    
    3.00
    
    
    
    3.00
    
    
    
    2.00
    
    
    
    2.00
    
    
    
    2.25
    
    
    
    1.50
    
    
    
    2.00
    
    
    
    2.25
 F-32




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  30.
    
    PENSION SCHEMES (Continued) The expected long term rate of returns and market values of the assets of
the Companys principal defined benefit plans were as follows: As at December 31, 2003 United Kingdom
    
    United States
    
    Belgium
    
    GermanyExpected
    
    
    
    
    
    Expected
    
    
    
    
    
    Expected
    
    
    
    
    
    Expectedlong term
    
    
    
    
    
    long term
    
    
    
    
    
    long term
    
    
    
    
    
    long termrate of
    
    Market
    
    rate of
    
    Market
    
    rate of
    
    Market
    
    rate of
    
    Marketreturn
    
    value
    
    return
    
    value
    
    return
    
    value
    
    return
    
    value%
    
    m
    
    %
    
    m
    
    %
    
    m
    
    %
    
    mMarket value of assetsEquities
    
    
    8.0
    
    
    
    69.0
    
    
    
    8.75
    
    
    
    4.1
    
    
    
    8.00
    
    
    
    22.1
    
    
    
    
    
    
    
    Bonds
    
    
    5.0
    
    
    
    9.6
    
    
    
    6.25
    
    
    
    1.7
    
    
    
    5.25
    
    
    
    11.8
    
    
    
    
    
    
    
    Other
    
    
    3.5
    
    
    
    2.6
    
    
    
    4.25
    
    
    
    
    
    
    
    5.50
    
    
    
    2.5
    
    
    
    
    
    
    
    81.2
    
    
    
    
    
    
    
    5.8
    
    
    
    
    
    
    
    36.4
    
    
    
    
    
    
    
    Present value of liabilities
    
    
    
    
    
    
    (113.7
    )
    
    
    
    
    
    
    (12.9
    )
    
    
    
    
    
    
    (53.1
    )
    
    
    
    
    
    
    (21.1
    )Surplus/(deficit) in the plans
    
    
    
    
    
    
    (32.5
    )
    
    
    
    
    
    
    (7.1
    )
    
    
    
    
    
    
    (16.7
    )
    
    
    
    
    
    
    (21.1
    )Related deferred tax asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.8
    
    
    
    
    
    
    
    5.7
    
    
    
    
    
    
    
    Net pension liability
    
    
    
    
    
    
    (32.5
    )
    
    
    
    
    
    
    (4.3
    )
    
    
    
    
    
    
    (11.0
    )
    
    
    
    
    
    
    (21.1
    )
 As at December 31, 2002 United Kingdom
    
    United States
    
    Belgium
    
    GermanyExpected
    
    
    
    
    
    Expected
    
    
    
    
    
    Expected
    
    
    
    
    
    Expectedlong term
    
    
    
    
    
    long term
    
    
    
    
    
    long term
    
    
    
    
    
    long termrate of
    
    Market
    
    rate of
    
    Market
    
    rate of
    
    Market
    
    rate of
    
    Marketreturn
    
    value
    
    return
    
    value
    
    return
    
    value
    
    return
    
    value%
    
    m
    
    %
    
    m
    
    %
    
    m
    
    %
    
    mMarket value of assetsEquities
    
    
    8.0
    
    
    
    46.0
    
    
    
    8.50
    
    
    
    2.8
    
    
    
    8.00
    
    
    
    22.0
    
    
    
    
    
    
    
    Bonds
    
    
    5.0
    
    
    
    9.8
    
    
    
    6.25
    
    
    
    1.4
    
    
    
    5.25
    
    
    
    11.8
    
    
    
    
    
    
    
    Other
    
    
    5.0
    
    
    
    8.5
    
    
    
    4.25
    
    
    
    0.2
    
    
    
    5.75
    
    
    
    3.3
    
    
    
    
    
    
    
    64.3
    
    
    
    
    
    
    
    4.4
    
    
    
    
    
    
    
    37.1
    
    
    
    
    
    
    
    Present value of liabilities
    
    
    
    
    
    
    (96.2
    )
    
    
    
    
    
    
    (14.1
    )
    
    
    
    
    
    
    (43.1
    )
    
    
    
    
    
    
    (20.9
    )Surplus/(deficit) in the plans
    
    
    
    
    
    
    (31.9
    )
    
    
    
    
    
    
    (9.7
    )
    
    
    
    
    
    
    (6.0
    )
    
    
    
    
    
    
    (20.9
    )Related deferred tax asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    Net pension liability
    
    
    
    
    
    
    (31.9
    )
    
    
    
    
    
    
    (9.7
    )
    
    
    
    
    
    
    (4.0
    )
    
    
    
    
    
    
    (20.9
    )
 F-33




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  30.
    
    PENSION SCHEMES (Continued) As at December 31, 2001 United Kingdom
    
    United States
    
    Belgium
    
    GermanyExpected
    
    
    
    
    
    Expected
    
    
    
    
    
    Expected
    
    
    
    
    
    Expectedlong term
    
    
    
    
    
    long term
    
    
    
    
    
    long term
    
    
    
    
    
    long termrate of
    
    Market
    
    rate of
    
    Market
    
    rate of
    
    Market
    
    rate of
    
    Marketreturn
    
    value
    
    return
    
    value
    
    return
    
    value
    
    return
    
    value%
    
    m
    
    %
    
    m
    
    %
    
    m
    
    %
    
    mMarket value of assetsEquities
    
    
    7.3
    
    
    
    83.7
    
    
    
    9.50
    
    
    
    4.7
    
    
    
    8.25
    
    
    
    31.7
    
    
    
    
    
    
    
    Bonds
    
    
    5.0
    
    
    
    9.3
    
    
    
    7.00
    
    
    
    3.1
    
    
    
    6.00
    
    
    
    16.9
    
    
    
    
    
    
    
    Other
    
    
    7.3
    
    
    
    
    
    
    
    7.25
    
    
    
    0.7
    
    
    
    5.25
    
    
    
    3.0
    
    
    
    
    
    
    
    93.0
    
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    51.6
    
    
    
    
    
    
    
    Present value of liabilities
    
    
    
    
    
    
    (106.2
    )
    
    
    
    
    
    
    (16.2
    )
    
    
    
    
    
    
    (42.4
    )
    
    
    
    
    
    
    (20.5
    )Surplus/(deficit) in the plans
    
    
    
    
    
    
    (13.2
    )
    
    
    
    
    
    
    (7.7
    )
    
    
    
    
    
    
    9.2
    
    
    
    
    
    
    
    (20.5
    )Related deferred tax asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.8
    )
    
    
    
    
    
    
    Net pension (liability)/asset
    
    
    
    
    
    
    (13.2
    )
    
    
    
    
    
    
    (7.7
    )
    
    
    
    
    
    
    6.4
    
    
    
    
    
    
    
    (20.5
    )
 Deferred tax assets and liabilities in relation to pension liabilities
have only been recognised where it is more likely than not that they would not
be recoverable in the foreseeable future. The group also operates a number of plans, primarily in the United States
and Belgium, which provide employees with other post-employment benefits in
respect of health care. The plans are generally unfunded and the liability in
respect of these benefits is included in provisions. The liability is assessed
by qualified independent actuaries under the projected unit method, assuming a
liability discount rate of 6.25% (2002: 6.75%) in the US and 5.5% (2002: 5.75%)
in Belgium, and a long-term health care trend rate of 4.5%. F-34




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  30.
    
    PENSION SCHEMES (Continued) Post-retirement healthcare plans2002
    
    2003( in millions)Market value of assets
    
    
    
    
    
    
    Present value of liabilities
    
    
    (5.4
    )
    
    
    (4.0
    )Surplus/(deficit) in the plans
    
    
    (5.4
    )
    
    
    (4.0
    )
 The costs of the plans for the years ended December 31, 2003 and 2002
would have been as follows: Analysis of amount charged to operating profit (i) Year ended December 31, 2003
    
    United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Current service cost
    
    
    5.1
    
    
    
    1.0
    
    
    
    3.3
    
    
    
    0.3Past service cost
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    Total operating charge
    
    
    9.3
    
    
    
    1.0
    
    
    
    3.3
    
    
    
    0.3
 (ii) Year ended December 31, 2002
    
    United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Current service cost
    
    
    5.1
    
    
    
    1.2
    
    
    
    3.1
    
    
    
    0.3Past service cost
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    Total operating charge
    
    
    6.6
    
    
    
    1.2
    
    
    
    3.1
    
    
    
    0.3
 Analysis of amount credited/(charged) to other finance income (i) Year ended December 31, 2003
    
    United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Interest on pension scheme liabilities
    
    
    (5.3
    )
    
    
    (0.7
    )
    
    
    (2.6
    )
    
    
    (1.1
    )Expected return on pension scheme assets
    
    
    4.8
    
    
    
    0.4
    
    
    
    2.5
    
    
    
    Net return
    
    
    (0.5
    )
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (1.1
    )
 (ii) Year ended December 31, 2002
    
    United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Interest on pension scheme liabilities
    
    
    (5.9
    )
    
    
    (1.0
    )
    
    
    (2.7
    )
    
    
    (1.3
    )Expected return on pension scheme assets
    
    
    6.2
    
    
    
    0.6
    
    
    
    3.8
    
    
    
    Net return
    
    
    0.3
    
    
    
    (0.4
    )
    
    
    1.1
    
    
    
    (1.3
    )
 Analysis of amount recognised in statement of total recognised gains and
losses (i) Year ended December 31, 2003
    
    United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Actual return less expected
return on pension scheme assets
    
    
    9.2
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    Experience gains and losses
arising on scheme liabilities
    
    
    (0.6
    )
    
    
    0.5
    
    
    
    (4.7
    )
    
    
    (0.5
    )Changes in assumptions
    
    
    (9.8
    )
    
    
    (0.4
    )
    
    
    (6.2
    )
    
    
    0.6Actuarial gain/(loss)
recognised in statement of
total recognised gains and
losses
    
    
    (1.2
    )
    
    
    0.6
    
    
    
    (10.4
    )
    
    
    0.1
 F-35




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  30.
    
    PENSION SCHEMES (Continued) (ii) Year ended December 31, 2002
    
    United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Actual return less expected
return on pension scheme assets
    
    
    (33.1
    )
    
    
    (1.6
    )
    
    
    (17.0
    )
    
    
    Experience gains and losses
arising on scheme liabilities
    
    
    14.8
    
    
    
    0.7
    
    
    
    1.0
    
    
    
    3.7Changes in assumptions
    
    
    
    
    
    
    (1.1
    )
    
    
    2.5
    
    
    
    (3.3
    )Actuarial gain/(loss) recognised
in statement of total recognised
gains and losses
    
    
    (18.3
    )
    
    
    (2.0
    )
    
    
    (13.5
    )
    
    
    0.4
 Movement in surplus/(deficit) during the year United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Surplus/(deficit) in schemes at January 1, 2002
    
    
    (13.2
    )
    
    
    (7.7
    )
    
    
    9.2
    
    
    
    (20.5
    )Current service cost
    
    
    (5.1
    )
    
    
    (1.2
    )
    
    
    (3.1
    )
    
    
    (0.3
    )Past service cost
    
    
    (1.5
    )
    
    
    
    
    
    
    
    
    
    
    Contributions
    
    
    5.9
    
    
    
    0.6
    
    
    
    0.3
    
    
    
    0.8Other finance income
    
    
    0.3
    
    
    
    (0.4
    )
    
    
    1.1
    
    
    
    (1.3
    )Actuarial gain/(loss)
    
    
    (18.3
    )
    
    
    (2.0
    )
    
    
    (13.5
    )
    
    
    0.4Exchange adjustments
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    Deficit in schemes at December 31, 2002
    
    
    (31.9
    )
    
    
    (9.7
    )
    
    
    (6.0
    )
    
    
    (20.9
    )Current service cost
    
    
    (5.1
    )
    
    
    (1.0
    )
    
    
    (3.3
    )
    
    
    (0.3
    )Past service cost
    
    
    (4.2
    )
    
    
    
    
    
    
    
    
    
    
    Contributions
    
    
    7.9
    
    
    
    1.9
    
    
    
    3.1
    
    
    
    1.1Other finance income
    
    
    (0.5
    )
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (1.1
    )Actuarial gain/(loss)
    
    
    (1.2
    )
    
    
    0.6
    
    
    
    (10.4
    )
    
    
    0.1Exchange adjustments
    
    
    2.5
    
    
    
    1.4
    
    
    
    
    
    
    
    Deficit in schemes at December 31, 2003
    
    
    (32.5
    )
    
    
    (7.1
    )
    
    
    (16.7
    )
    
    
    (21.1
    )
 History of experience gains and losses (i) Year ended December 31, 2003
    
    United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Difference between the actual
and expected return on scheme
assets
    
    
    9.2
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    Percentage of scheme assets
    
    
    11.3
    %
    
    
    8.6
    %
    
    
    1.4
    %
    
    
    Experience gains and losses on
scheme liabilities
    
    
    (0.6
    )
    
    
    0.5
    
    
    
    (4.7
    )
    
    
    (0.5
    )Percentage of present value of
scheme liabilities
    
    
    0.5
    %
    
    
    3.9
    %
    
    
    8.9
    %
    
    
    2.4
    %Total amount recognised in
statement of total recognised
gains and losses
    
    
    (1.2
    )
    
    
    0.6
    
    
    
    (10.4
    )
    
    
    0.1Percentage of present value of
scheme liabilities
    
    
    1.1
    %
    
    
    4.7
    %
    
    
    19.6
    %
    
    
    0.5
    %
 F-36




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  30.
    
    PENSION SCHEMES (Continued) (ii) Year ended December 31, 2002
    
    United Kingdom
    
    United States
    
    Belgium
    
    Germany( in millions)Difference between the actual
and expected return on scheme
assets
    
    
    (33.1
    )
    
    
    (1.6
    )
    
    
    (17.0
    )
    
    
    Percentage of scheme assets
    
    
    51.5
    %
    
    
    36.4
    %
    
    
    45.8
    %
    
    
    Experience gains and losses on
scheme liabilities
    
    
    14.8
    
    
    
    0.7
    
    
    
    1.0
    
    
    
    3.7Percentage of present value of
scheme liabilities
    
    
    15.4
    %
    
    
    0.5
    %
    
    
    2.3
    %
    
    
    17.7
    %Total amount recognised in
statement of total recognised
gains and losses
    
    
    (18.3
    )
    
    
    (2.0
    )
    
    
    (13.5
    )
    
    
    0.4Percentage of present value of
scheme liabilities
    
    
    19.0
    %
    
    
    14.2
    %
    
    
    31.3
    %
    
    
    1.9
    %
 If the above amounts had been recognised in the financial statements, the
Groups net assets and profit and loss reserve at December 31, 2003 and 2002
would be as follows: 2002
    
    2003( in millions)Net assets:Group net assets
    
    
    12.3
    
    
    
    113.5Pension prepayments
    
    
    
    
    
    
    Pension provisions
    
    
    (40.1
    )
    
    
    (39.6
    )Add: net pension liability under SSAP24
    
    
    40.1
    
    
    
    39.6Related deferred tax asset
    
    
    (1.6
    )
    
    
    (6.0
    )Group net assets excluding net pension liability under SSAP24
    
    
    50.8
    
    
    
    147.1Net pension liability under FRS 17
    
    
    (71.9
    )
    
    
    (72.9
    )Group net assets including net pension liability under FRS 17
    
    
    (21.1
    )
    
    
    74.2Reserves:Group profit and loss reserves
    
    
    9.6
    
    
    
    110.8Add: net pension liability under SSAP24 (net of deferred taxes)
    
    
    38.5
    
    
    
    33.6Group reserves excluding net pension liability under SSAP24
    
    
    48.1
    
    
    
    144.4Net pension liability under FRS 17
    
    
    (71.9
    )
    
    
    (72.9
    )Group profit and loss reserves including net pension liability under FRS 17
    
    
    (23.8
    )
    
    
    71.5
  31.
    
    RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Year ended December 31,2001
    
    2002
    
    2003( in millions)Increase/(decrease) in cash in the period
    
    
    108.5
    
    
    
    (5.1
    )
    
    
    49.9Cash outflow/(inflow) from increase in debt financing
    
    
    (849.3
    )
    
    
    91.1
    
    
    
    81.1Change in net debt resulting from cash flows
    
    
    (740.8
    )
    
    
    86.0
    
    
    
    131.0Acquisitions
    
    
    (10.2
    )
    
    
    
    
    
    
    Other net non-cash transactions
    
    
    (69.3
    )
    
    
    12.9
    
    
    
    10.6Net debt at start of period
    
    
    (97.6
    )
    
    
    (917.9
    )
    
    
    (819.0
    )Net debt at end of period
    
    
    (917.9
    )
    
    
    (819.0
    )
    
    
    (677.4
    )
 F-37




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  32.
    
    ANALYSIS OF NET DEBT OtherAt January 1,
    
    
    
    
    
    Non-Cash
    
    At December 31,2003
    
    Cash Flow
    
    Charges
    
    2003( in millions)Cash at bank and in hand
    
    
    109.0
    
    
    
    49.8
    
    
    
    (5.4
    )
    
    
    153.4Cash overdrafts
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    
    
    
    
    108.9
    
    
    
    49.9
    
    
    
    (5.4
    )
    
    
    153.4Debt due within one year
    
    
    (77.9
    )
    
    
    77.9
    
    
    
    (110.1
    )
    
    
    (110.1
    )Debt due after more than one year
    
    
    (845.7
    )
    
    
    1.1
    
    
    
    126.1
    
    
    
    (718.5
    )Finance leases
    
    
    (4.3
    )
    
    
    2.1
    
    
    
    
    
    
    
    (2.2
    )(927.9
    )
    
    
    81.1
    
    
    
    16.0
    
    
    
    (830.8
    )Net debt
    
    
    (819.0
    )
    
    
    131.0
    
    
    
    10.6
    
    
    
    (677.4
    )
 Non cash changes relate primarily to exchange movements, reclassifications
between debt due after more than one year and debt due within one year,
amortisation of debt issue costs and accrued interest on the deferred
consideration.  33.
    
    RELATED PARTY TRANSACTIONS The Group has a management services agreement with Ineos Capital Partners
(Ineos Capital). The partners of Ineos Capital own a controlling interest in
the share capital of Ineos Group Limited. Ineos Capital management fees of 8.3
million (2002 : 8.1 million) were charged in the year. At December 31, 2003
amounts owed to Ineos Capital were 6.1 million (2002 : 6.0 million). The partners of Ineos Capital also own a controlling interest in Ineos
Chlor Group Limited. Ineos Chlor Group Limited has certain common directors
with Ineos Group Limited. The Group has made sales to Ineos Chlor Limited, a
subsidiary of Ineos Chlor Group Limited, of 0.3 million (2002 : 0.9
million), recovered costs of 4.6 million and made purchases from Ineos Chlor
Limited of 32.2 million (2002 : 27.6 million) during the year. At December
31, 2003 6.6 million (2002 : 0.6 million) was owed to Ineos Chlor Limited.  34.
    
    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS Set out below are the narrative and numerical disclosures required by
Financial Reporting Standard 13 Derivatives and other financial instruments
(FRS 13). The Group has taken advantage of the exemption available under FRS 13
not to provide numerical disclosures in relation to short term debtors and
creditors, other than for foreign currency risk disclosures.  (a)
    
    Financial instruments The Groups financial instruments, other than derivatives, comprise
borrowings, cash and liquid resources, and various items such as trade debtors
and trade creditors etc, that arise from its operations. The main purpose of
these financial instruments is to manage the Groups operations. It is, and has
been throughout the period under review, the policy of the Group that no
trading in financial instruments shall be undertaken. F-38




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  34.
    
    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (Continued) The main risks from the Groups financial instruments are interest rate
risk, liquidity risk and foreign exchange risk. The board reviews and agrees
policies for managing each of these risks and they are summarised below.  (b)
    
    Interest risk The Group finances its operations through a mixture of retained profits,
term loans under the Senior Credit Agreement and Senior Notes. The Groups
exposure to market risk for changes in interest rates relates primarily to its
borrowings under the Senior Credit Agreement upon which interest is paid at
variable rates and to its cash resources which are invested at variable rates. The Group has entered into a number of interest rate derivative financial
instruments during the year, such as interest rate swaps, caps and floors, in
order to manage its interest rate risk on the senior credit agreement. These
include:  
    
    Pay fixed swap with an initial notional amount of Japanese
Yen 8.1 billion amortising to Yen 5.6 billion, with a swap rate of
0.305% payable quarterly, maturing in January 2004;
    
    Amortising interest rate collar with an initial notional
amount of US$96.4 million amortising to US$83.4 million, with a cap
rate of 7.0%, maturing in January 2004. The floor rate of 3.755%
only applies to a notional principal of US $46.4 million.
    
    Amortising interest rate collar with an initial notional
amount of 285.6 million amortising to 231.6 million, with a cap
rate of 5.45%, and a floor rate of 3.69%, maturing in June 2004;
    
    Amortising interest rate collar with an initial notional
amount of £32.9 million amortising to £22.7 million with a cap rate
of 7.0%, maturing in June 2004. Under interest rate swaps, we agree with other counterparties to exchange,
at specified intervals, the difference between fixed-rate and floating interest
amounts calculated by reference to an agreed notional principal amount. Our
interest rate collars entitle us to receive from counterparties the amounts, if
any, by which our interest payments on certain of our floating rate borrowings
exceed 5.45% (Euro denominated) and 7.0% (US$ denominated) or pay to
counterparties the amounts, if any, by which our interest payments fall below
3.69% (Euro denominated) and 3.755% (US$ denominated).  (c)
    
    Liquidity risk The Groups exposure to liquidity risk is limited by the fact that it
operates with significant cash resources, and it maintains the most appropriate
mix of short, medium and long-term borrowings from the Groups lenders.  (d)
    
    Foreign currency risk The currencies most important to the Groups financial position and
results of operations were those which are now linked at fixed exchange rates
to the Euro as well as U.S. Dollars, Sterling and Yen. To mitigate the effect of the currency exposures arising from its overseas
operations, the Group borrows in the local currencies of its main operating
units. F-39




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  34.
    
    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (Continued)  (e)
    
    Interest rate and currency profile of financial assets and liabilities After taking into account interest rate swaps as entered into by the
Group, the interest rate and currency profile of the Groups gross financial
liabilities at December 31, 2003 and 2002 were: At December 31, 2003 Fixed rate interest financial liabilitiesWeightedFloating rate
    
    
    
    
    
    Weighted
    
    average periodfinancial
    
    
    
    
    
    average
    
    for which rateTotal
    
    liabilities
    
    Principal
    
    interest rate
    
    is fixedm
    
    m
    
    m
    
    %
    
    YearsEuros
    
    
    676.0
    
    
    
    344.3
    
    
    
    331.7
    
    
    
    10.8
    
    
    
    6.7US Dollars
    
    
    113.3
    
    
    
    113.3
    
    
    
    
    
    
    
    
    
    
    
    Sterling
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    3.5
    
    
    
    1.0Yen
    
    
    58.3
    
    
    
    58.3
    
    
    
    
    
    
    
    
    
    
    
    847.7
    
    
    
    515.9
    
    
    
    331.8
    
    
    
    10.5
    
    
    
    6.7
 The floating rate liabilities comprise the Euro, Yen and US Dollar
portions of the Senior Credit Agreement which are floating but subject to
interest rate floor and caps. At December 31, 2002 Fixed rate interest financial liabilitiesWeightedFloating rate
    
    
    
    
    
    Weighted
    
    average periodfinancial
    
    
    
    
    
    average
    
    for which rateTotal
    
    liabilities
    
    Principal
    
    interest rate
    
    is fixedm
    
    m
    
    m
    
    %
    
    YearsEuros
    
    
    729.9
    
    
    
    404.3
    
    
    
    325.6
    
    
    
    10.8
    
    
    
    7.7US Dollars
    
    
    138.4
    
    
    
    138.4
    
    
    
    
    
    
    
    
    
    
    
    Sterling
    
    
    17.8
    
    
    
    17.3
    
    
    
    0.5
    
    
    
    5.0
    
    
    
    1.5Yen
    
    
    63.3
    
    
    
    
    
    
    
    63.3
    
    
    
    0.305
    
    
    
    2.0949.4
    
    
    
    560.0
    
    
    
    389.4
    
    
    
    9.06
    
    
    
    6.75
 The floating rate financial liabilities comprise Sterling bank overdrafts
which bear interest at prevailing market rates and the Euro, Sterling and U.S.
Dollar portions of the Senior Credit Agreement which are floating but subject
to interest rate floor and caps. The Group has cash balances of 153.4 million (2002: 109.0 million) which
earn interest at prevailing variable market rates. 59.0 million (2002: 42.7
million) were denominated in US dollars, 2.4 million (2002: 4.5 million) were
denominated in Yen, and 11.5 million (2002: 4.8 million) were denominated in
Sterling. F-40




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  34.
    
    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (Continued)  (f)
    
    Maturity of financial liabilities and undrawn committed facilities The maturity profile of the Groups financial liabilities and undrawn
committed facilities at December 31, 2003 and 2002 was as follows: 2002
    
    2003
    
    2002
    
    2003Financial
    
    Financial
    
    Undrawn
    
    UndrawnLiabilities
    
    Liabilities
    
    Facilities
    
    Facilities( in millions)In one year or less, or on demand
    
    
    77.9
    
    
    
    109.9
    
    
    
    113.2
    
    
    
    77.5In more than one year, but not
more than two years
    
    
    71.4
    
    
    
    72.2
    
    
    
    
    
    
    
    In more than two years, but not
more than five years
    
    
    250.4
    
    
    
    267.9
    
    
    
    
    
    
    
    In more than five years
    
    
    528.3
    
    
    
    380.8
    
    
    
    
    
    
    
    928.0
    
    
    
    830.8
    
    
    
    113.2
    
    
    
    77.5
 The Group has committed overdraft facilities of 2.5 million (2002: 13.2
million) and committed revolving credit facilities of 75.0 million (2002:
100.0 million) at December 31, 2003.  (g)
    
    Fair values of financial assets and liabilities Set out below is as comparison by category of book values and fair values
of the Groups financial assets and liabilities as at December 31, 2002 and at
of December 31, 2003. 2002
    
    2003Book Value
    
    Fair Value
    
    Book Value
    
    Fair Value( in millions)
    
    ( in millions)Primary financial instruments held to finance the
Groups operations:Cash at bank and in hand
    
    
    109.0
    
    
    
    109.0
    
    
    
    153.4
    
    
    
    153.4Amounts owed by group undertakings
    
    
    14.0
    
    
    
    14.0
    
    
    
    14.0
    
    
    
    14.0Bank overdrafts
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    Bank and other loans repayable within one year
    
    
    81.9
    
    
    
    81.9
    
    
    
    113.4
    
    
    
    113.4Bank and other loans repayable after more than one year
    
    
    603.1
    
    
    
    603.1
    
    
    
    472.1
    
    
    
    472.1Senior notes
    
    
    260.0
    
    
    
    274.3
    
    
    
    260.0
    
    
    
    295.1Derivative financial instruments held to manage the
Groups currency profile:Interest rate swaps, floors and caps
    
    
    
    
    
    
    (4.4
    )
    
    
    
    
    
    
    (1.8
    )
 The fair value of cash, bank overdrafts, amounts owed by group
undertakings and bank loans approximate their respective book values as they
have floating interest rates. The fair value of the Senior Notes, interest rate swaps, caps and floors
has been calculated by reference to available market prices. F-41




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  34.
    
    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (Continued) Changes in the fair value of instruments used as hedges are not recognised
in the financial statements until the hedged position matures. An analysis of
these unrecognised gains and losses is as follows: Total netGains
    
    Losses
    
    gains/(losses)( in millions)Unrecognised gains and losses on hedges at January 1, 2003
    
    
    
    
    
    
    (4.4
    )
    
    
    (4.4
    )Gains and losses arising in previous years that were recognised
in 2003
    
    
    
    
    
    
    2.6
    
    
    
    2.6Gains and losses arising before January 1, 2003 that were not
recognised in 2003
    
    
    
    
    
    
    (1.8
    )
    
    
    (1.8
    )Gains and losses arising in 2002 that were not recognised in 2003
    
    
    
    
    
    
    
    
    
    
    Unrecognised gains and losses on hedges at December 31, 2003
    
    
    
    
    
    
    (1.8
    )
    
    
    (1.8
    )Of which:Gains losses expected to be recognised in 2004
    
    
    
    
    
    
    (1.8
    )
    
    
    (1.8
    )Gains losses expected to be recognised in 2005 or later
    
    
    
    
    
    
    
    
    
    
    
  (h)
    
    Currency exposure of the Groups net monetary assets/(liabilities) The principal currency exposure of the Groups net monetary
assets/(liabilities) is shown below for the years ending December 31, 2003 and
December 31, 2002. Such exposures comprise the monetary assets and monetary
liabilities that are not denominated in the operating currency of the operating
unit involved. Foreign exchange differences on retranslation of these assets
and liabilities are taken to the profit and loss account of the companies and
the group. Net foreign currency monetary assets/(liabilities)( in millions)2003:
    
    Euros
    
    US Dollars
    
    Sterling
    
    Yen
    
    Other
    
    TotalEuros
    
    
    
    
    
    
    27.7
    
    
    
    3.6
    
    
    
    (0.2
    )
    
    
    1.3
    
    
    
    32.4US Dollars
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    0.5Sterling
    
    
    8.1
    
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    11.1Yen
    
    
    
    
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.6Other
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5Total
    
    
    8.1
    
    
    
    33.4
    
    
    
    3.6
    
    
    
    (0.2
    )
    
    
    2.2
    
    
    
    47.1
 Net foreign currency monetary assets/(liabilities)( in millions)2002:
    
    Euros
    
    US Dollars
    
    Sterling
    
    Yen
    
    Other
    
    TotalEuros
    
    
    
    
    
    
    19.9
    
    
    
    (12.6
    )
    
    
    0.6
    
    
    
    0.1
    
    
    
    8.0US Dollars
    
    
    (35.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    (35.0
    )Sterling
    
    
    27.4
    
    
    
    4.8
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    32.4Yen
    
    
    
    
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.2Total
    
    
    (8.0
    )
    
    
    27.9
    
    
    
    (12.6
    )
    
    
    0.7
    
    
    
    0.6
    
    
    
    8.6
 F-42




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  35.
    
    LIST OF PRINCIPAL SUBSIDIARY COMPANIES INCLUDED IN THE INEOS GROUP
LIMITED CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2003. Country ofIncorporation and
    
    PercentageCompany
    
    operation
    
    HoldingIneos Trustees Limited *
    
    UK
    
    
    100
    %Ineos Investment Holdings Limited *
    
    UK
    
    
    100
    %Ineos Intermediate Holdings Limited
    
    UK
    
    
    100
    %Ineos Group Holdings plc
    
    UK
    
    
    100
    %Ineos Holdings Limited
    
    UK
    
    
    100
    %Ineos US Finance Inc.
    
    US
    
    
    100
    %Ineos Oxide Limited
    
    UK
    
    
    100
    %Ineos UK Holding Finance Company Limited
    
    UK
    
    
    100
    %Ineos US Finance Company Limited
    
    UK
    
    
    100
    %Ineos Finance BV
    
    Holland
    
    
    100
    %Ineos NV
    
    Belgium
    
    
    100
    %Ineos Belgium BV
    
    Belgium
    
    
    100
    %Ineos Italia Srl
    
    Italy
    
    
    100
    %Ineos OCI Limited
    
    UK
    
    
    100
    %Ineos OCII Limited
    
    UK
    
    
    100
    %Ineos Partners (DGP)
    
    US
    
    
    100
    %Ineos Phenol Limited
    
    UK
    
    
    100
    %Ineos Phenol Verwaltungsgesellschaft mbH
    
    Germany
    
    
    100
    %Ineos Phenol GmbH & Co KG
    
    Germany
    
    
    100
    %Ineos Phenol Asia Pte Limited
    
    Singapore
    
    
    100
    %Ineos Phenol (Thailand) Limited
    
    Thailand
    
    
    100
    %Ineos Phenol Services (Thailand) Limited
    
    Thailand
    
    
    100
    %Ineos Investment Holdings (Fluor & Silicas) Limited
    
    UK
    
    
    100
    %Ineos Intermediate Holdings (Fluor & Silicas) Limited
    
    UK
    
    
    100
    %Ineos Holdings (Fluor & Silicas) Limited
    
    UK
    
    
    100
    %Ineos Fluor Holdings Limited
    
    UK
    
    
    100
    %Ineos Fluor Limited
    
    UK
    
    
    100
    %Ineos Fluor International Limited
    
    UK
    
    
    100
    %Ineos Fluor Japan Limited
    
    Japan
    
    
    100
    %IFJ Korea Limited
    
    Korea
    
    
    100
    %Ineos Fluor Canada Inc.
    
    Canada
    
    
    100
    %Ineos Fluor Partners Limited
    
    UK
    
    
    100
    %Ineos Fluor Delaware Limited
    
    UK
    
    
    100
    %Ineos Fluor Americas LLC
    
    US
    
    
    100
    %Ineos Silicas Holding Limited
    
    UK
    
    
    100
    %Ineos Silicas Limited
    
    UK
    
    
    100
    %Ineos Silicas International Limited
    
    UK
    
    
    100
    %Ineos Silicas Holdings Netherlands BV
    
    Holland
    
    
    100
    %Ineos Silicas Netherlands BV
    
    Holland
    
    
    100
    %Ineos Silicas Asia Pacific Pte Limited
    
    Singapore
    
    
    100
    %Ineos Silicas South Africa Pty Limited
    
    South Africa
    
    
    100
    %PT Ineos Silicas Indonesia
    
    Indonesia
    
    
    100
    %Ineos Brazil Limitada
    
    Brazil
    
    
    100
    %Ineos Silicas Partners Limited
    
    UK
    
    
    100
    %Ineos Silicas Delaware Limited
    
    UK
    
    
    100
    %Ineos Silicas Healthcare Limited
    
    UK
    
    
    100
    %Ineos US DSS Limited
    
    UK
    
    
    100
    %Ineos US Holding Company II LLC
    
    US
    
    
    100
    %Ineos US Intermediate Holding Company
    
    US
    
    
    100
    %Ineos Americas LLC
    
    US
    
    
    100
    %Ineos US Investment Holding Company LLC
    
    US
    
    
    100
    %
   *
    
    Held directly by the Company F-43




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP  (a)
    
    Differences in measurement methods The financial statements are prepared in accordance with UK GAAP which
differs in certain significant respects from accounting principles generally
accepted in the United States (US GAAP). These differences principally relate
to the following items and the effect on net income and shareholders equity is
shown in the following tables. All significant differences between UK GAAP and
US GAAP affecting Ineos Group Limited have been addressed.  (i)
    
    Goodwill adjustments upon the Original Acquisition The Original Acquisition has been accounted for under the purchase method
in accordance with UK and US GAAP. Under UK GAAP the fair value of the
identifiable assets and liabilities acquired was 115.9 million (excluding
assumed debts of 86.7 million) resulting in goodwill on acquisition of 9.9
million. Under US GAAP the fair values of the identifiable assets and liabilities
acquired have been determined in accordance with the provisions of APB 16. The
resulting differences in determination of the fair values compared to UK GAAP
are illustrated below: ( in millions)Fair values under UK GAAP
    
    
    29.2Additional fair value adjustments under US GAAP:Tangible fixed assets
    
    
    (16.5
    )Pension obligations (see (vii) below)
    
    
    23.6Acquisition date
    
    
    1.8Inventories
    
    
    1.0Fair values under US GAAP
    
    
    39.1
 The initial negative goodwill on acquisition as determined on a US GAAP
basis has been allocated to non-current, non-monetary assets in accordance with
APB 16. This allocation has resulted in a reduction in the fair value of
freehold land, which is not subject to depreciation. Accordingly, no further
adjustments to the depreciation charge are required under US GAAP as a result
of this allocation. The amortisation of goodwill reflected in the UK GAAP financial statements
has been reversed for US GAAP. Under UK GAAP the date of acquisition of a subsidiary is the date that
control passes. Control is defined as the ability of an undertaking to direct
the financial and operating policies of another undertaking with a view to
gaining economic benefits from its activities. In relation to the Original
Acquisition control was deemed to pass on April 6, 1998 for UK GAAP purposes. For US GAAP purposes the acquisition date is ordinarily the date the
acquisition is completed and consideration passes. For convenience, the end of
the accounting period before the completion date may be used as the effective
date of acquisition where this falls between the dates a business combination
is initiated and consummated. In relation to the Original Acquisition the Stock Acquisition Agreement
was entered into on April 14, 1998 and the consideration was paid upon
completion of the Acquisition on May 5, 1998. Accordingly the date of April 30,
1998, being the end of an accounting period, has been utilised as the effective
date of acquisition for US GAAP purposes. F-44




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP (Continued) The change in net assets acquired of 1.8 million between the two
acquisition dates, being the net income for the period concerned has been
reflected as an increase in net assets with a corresponding increase in the
amount of negative goodwill allocated. Under UK GAAP finished goods and work in progress are fair valued as part
of an acquisition at the lower of replacement cost and net realisable value.
Replacement cost for this purpose is the current cost of bringing inventories
to their present location and condition. Under US GAAP such inventories should be fair valued at estimated selling
prices less costs to complete where appropriate, the costs of disposal and a
reasonable profit allowance for the selling effort of the acquiring company.
Accordingly, for US GAAP purposes, there has been an uplift in the fair value
of the inventories acquired of 1.0 million. This has been reflected in the
gross cost of goodwill as noted above.  (ii)
    
    Purchase accounting adjustments upon the acquisitions of Ineos Fluor and Ineos Silicas The acquisitions have been accounted for under the purchase method in
accordance with UK and US GAAP. Under UK GAAP the fair value of the
identifiable assets and liabilities acquired was 570.6 million resulting in
negative goodwill on acquisition of 121.9 million. Under US GAAP the fair values of the identifiable assets and liabilities
acquired have been determined in accordance with the provisions of APB 16. The
resulting differences in the determination of the fair values compared to UK
GAAP are illustrated below: ( in millions)Fair values under UK GAAP
    
    
    570.6Additional fair value adjustments under US GAAP:Tangible fixed assets
    
    
    (194.7
    )Research and development in process
    
    
    2.2Trade names/trade marks
    
    
    3.1Existing technology
    
    
    9.5Customer contracts
    
    
    5.5Non-compete agreements
    
    
    4.5Pensions (see (vii) below)
    
    
    4.6Inventories (see (vi) below)
    
    
    17.4Restructuring provision (see (x) below)
    
    
    (12.7
    )Deferred taxation (see (xi) below)
    
    
    38.7Fair values under US GAAP
    
    
    448.7
 The initial negative goodwill as determined on a US GAAP basis has been
allocated on a pro-rata basis to all non-current, non-monetary assets in
accordance with APB 16. This has resulted in a reduction in the fair value of
tangible fixed assets acquired and a reduction in the fair value of intangible
assets acquired. As a result of the reduction in tangible fixed assets
acquired, the depreciation charge is lower under US GAAP as compared to UK
GAAP. F-45




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP (Continued) Under US GAAP, acquired separately identifiable intangible assets have
been recognised as intangible assets and are being amortised over estimated
useful lives of between 4 and 20 years. The identified intangibles have been
determined based on an independent appraisal. As a result of the recognition
of identifiable intangible assets the annual amortisation charge is higher
under US GAAP than under UK GAAP. Under UK GAAP, these intangibles did not
meet the requirements under FRS 10 to be recognised separately and were
therefore considered as part of goodwill. The assessment of intangible fixed assets above includes approximately
2.2 million (after the allocation of negative goodwill) for acquired
in-process research and development for projects that did not have future
alternative uses. At the date of the acquisition, the development of these
projects had not yet reached technological feasibility and the in-process
research and development had no alternative future uses. Accordingly these
costs were expensed to the profit and loss account in the period ended December
31, 2001.  (iii)
    
    Purchase accounting adjustments on the acquisition of the Ethanolamines and GAS/SPEC businesses The acquisition has been accounted for under the purchase method in
accordance with UK and US GAAP. Under UK GAAP the fair value of the
identifiable assets and liabilities acquired were 43.8 million resulting in
goodwill of 1.6 million. Under US GAAP the fair values of the identifiable assets and liabilities
acquired have been determined in accordance with the provisions of APB 16. The
resulting differences in the determination of the fair values compared to UK
GAAP are illustrated below: ( in millions)Fair values under UK GAAP
    
    
    43.8Additional fair value adjustments under US GAAP:Tangible fixed assets
    
    
    (7.4
    )Customer contracts
    
    
    3.0Existing technology
    
    
    2.4Trade names/trade marks
    
    
    1.0Inventories (see (vi) below)
    
    
    3.3Deferred taxation (see (xi) below)
    
    
    (0.7
    )Fair values under US GAAP
    
    
    45.4
 The initial negative goodwill as determined on a US GAAP basis has been
allocated on a pro rata basis to all non-current, non-monetary assets in
accordance with APB 16. This has resulted in a reduction in the fair value of
tangible fixed assets acquired and a reduction in the fair value of intangible
fixed assets acquired. As a result of the reduction in tangible fixed assets
acquired, the depreciation charge is lower under US GAAP as compared to UK
GAAP. Under US GAAP, acquired separately identifiable intangible assets have
been recognised as intangible assets and are being amortised over estimated
useful lives of between 7 and 40 years. The identified intangibles have been
determined based on an independent appraisal. As a result of the recognition
of identifiable intangible assets the annual amortisation charge is higher
under US GAAP than under UK GAAP. Under UK GAAP, these intangibles did not
meet the requirements under FRS 10 to be recognised separately and were
therefore considered as part of goodwill. F-46




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued)  (iv)
    
    Purchase accounting adjustments upon the acquisition of Ineos
Phenol The acquisition of Ineos Phenol has been accounted for under the purchase
method in accordance with UK and US GAAP. Under UK GAAP the fair value of the
identifiable assets and liabilities acquired was 623.6 million, resulting in
negative goodwill on acquisition of 266.5 million. Under US GAAP the fair values of the identifiable assets and liabilities
acquired have been determined in accordance with the provisions of APB 16. The
resulting differences in the determination of the fair values compared to UK
GAAP are illustrated below: ( in millions)Fair values under UK GAAP
    
    
    623.6Additional fair value adjustments under US GAAP:Tangible fixed assets
    
    
    (327.3
    )Existing technology
    
    
    7.4Customer contracts
    
    
    19.0Inventories (see (vi) below)
    
    
    0.7Restructuring provision (see (x) below)
    
    
    (6.5
    )Deferred taxation (see (xi) below)
    
    
    40.2Fair values under US GAAP
    
    
    357.1
 The initial negative goodwill as determined on a US GAAP basis has been
allocated on a pro rata basis to all non-current, non-monetary assets in
accordance with APB 16. This has resulted in a reduction in the fair value of
tangible fixed assets acquired and a reduction in the fair value of intangible
fixed assets acquired. As a result of the reduction in tangible fixed assets
acquired, the depreciation charge is lower under US GAAP as compared to UK
GAAP. Under US GAAP, acquired separately identifiable intangible assets have
been recognised as intangible assets and are being amortised over estimated
useful lives of between 4 and 10 years. The identified intangibles have been
determined based on an independent appraisal. As a result of the recognition
of identifiable intangible assets the annual amortisation charge is higher
under US GAAP than under UK GAAP. Under UK GAAP, these intangibles did not
meet the requirements under FRS 10 to be recognised separately and were
therefore considered as part of goodwill. F-47




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued)  (v)
    
    Purchase accounting adjustments on the acquisition of the acetate
esters business The acquisition has been accounted for under the purchase method in
accordance with UK and US GAAP. Under UK GAAP the fair value of the
identifiable assets and liabilities acquired were 4.4 million resulting in
goodwill of 0.6 million. Under US GAAP the fair values of the identifiable assets and liabilities
acquired have been determined in accordance with the provisions of FAS 141.
The resulting differences in the determination of the fair values compared to
UK GAAP are illustrated below: ( in millions)Fair values under UK GAAP
    
    
    4.4Inventories (see (vi) below)
    
    
    0.6Fair values under US GAAP
    
    
    5.0
  (vi)
    
    Inventories Under UK GAAP finished goods and work in progress are fair valued as part
of an acquisition at the lower replacement cost and net realisable value.
Replacement cost for this purpose is the current cost of bringing inventories
to their present location and condition. Under US GAAP such inventories should be fair valued at estimated selling
prices less costs to complete where appropriate, the costs of disposal and a
reasonable profit allowance for the selling effort of the acquiring company.
Accordingly, for US GAAP purposes, there has been an uplift in the fair value
of the inventories acquired of nil million (2002: 0.6 million; 2001: 21.4
million). This has been reflected in the purchase accounting adjustments as
noted in (ii), (iii), (iv) and (v) above. This non recurring uplift is
utilised as the stock is sold and was fully utilised during the period ended
December 31, 2002.  (vii)
    
    Pensions In respect of defined benefit pension obligations, US GAAP requires the
use of a discount rate, which reflects current market conditions in determining
the provision for pension benefits. UK GAAP permits the use of longer-term
discount rates. Furthermore, the amortisation procedure required under US GAAP
applies a corridor approach for recognising gains and losses in the
determination of periodic pension expense. Additionally, for UK funding and
accounting purposes it is satisfactory to carry out actuarial valuations on a
three year interval whereas annual valuations are required under US GAAP. In accordance with FAS No. 87 the assignment of the purchase consideration
to the individual assets acquired shall include an asset for plan assets in
excess of the projected benefit obligation of a single employer defined benefit
pension plan, thereby eliminating any previously unrecognised net gain existing
at the date of acquisition. The excess of the plan assets over the projected
benefit obligation at the date of the Original Acquisition (as determined in
accordance with US GAAP) was 23.6 million. This has been reflected in
calculating the purchase accounting adjustments noted in (i) above. In relation to the acquisitions of Ineos Fluor and Ineos Silicas, an
additional asset for pension plan assets as determined in accordance with FAS
No. 87 of 4.6 million has been recognised. This has been reflected in the
purchase accounting adjustments noted in (ii) above. F-48




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued)  (viii)
    
    Derivative financial instruments In May 2001, the Company entered into an interest rate swap to exchange,
at specified intervals, the differences between fixed-rate and floating rate
interest amounts calculated by reference to an agreed notional principal
amount. In addition, in May 2001 the Company entered into two interest rate
cap and collars related to the Senior Credit Agreement. For purposes of the US
GAAP these derivative financial instruments are recorded on the balance sheet
with the related gain or loss recorded in the profit and loss account. At
December 31, 2003, the fair value of the derivative financial instruments was a
loss of 1.8 million (2002: loss of 4.4 million; 2001: loss of 2.1 million).  (ix)
    
    Capitalisation of interest The capitalisation of interest is optional under UK GAAP. Accordingly,
Ineos Group Limited does not capitalise interest in its financial statements.
Under US GAAP, SFAS No. 34, Capitalisation of Interest Cost, requires
interest incurred as part of the cost of constructing fixed assets to be
capitalised and amortised over the life of the asset. Interest capitalised
less amortisation in the year ended December 31, 2003 was 2.0 million (2002:
2.3 million; 2001 : 1.4 million).  (x)
    
    Restructuring provisions Under UK GAAP costs incurred in restructuring the operations of businesses
that have been acquired are expensed to the profit and loss account. Under US GAAP such restructuring costs are recognised as liabilities in a
purchase business combination and included in the allocation of the purchase
price. If certain specified conditions are met then the costs to terminate and
relocate employees together with the costs of exiting leased properties would
be recognised on acquisition. Total restructuring charges of 19.2 million
have been recognised on the acquisitions of Ineos Fluor, Ineos Silicas and
Ineos Phenol.  (xi)
    
    Deferred tax The Group adopted FRS 19 Deferred Tax in 2002 for UK GAAP purposes. FRS
19 requires that full provision for deferred tax is recognised in the financial
statements. The adoption of FRS 19 has eliminated virtually all of the
differences that previously existed between UK GAAP and US GAAP. As a result,
the adjustment for taxation now primarily relates to the tax effect of other US
GAAP adjustments. Deferred income taxes have been provided at the statutory tax rate for
differences between the book and tax bases of assets and liabilities. A
valuation allowance has been established for deferred tax assets that are more
likely than not to expire unutilised. The deferred tax adjustments included in
the reconciliation also contains the tax effects of the above US GAAP
adjustments where appropriate.  (xii)
    
    Foreign currency translation differences Under US GAAP any negative goodwill on acquisitions is allocated to
non-current non-monetary assets. In relation to the acquisitions in notes
(ii), (iii) and (iv) above, tangible fixed assets have been reduced accordingly
and the negative goodwill recognised under UK GAAP has been reversed. These
balances would have been included in the determination of foreign currency
translation differences on consolidation under UK GAAP, and an adjustment is
therefore required to reflect the changes to fixed assets and negative goodwill
under US GAAP on those translation differences on consolidation. F-49




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued)  (xiii)
    
    Netting Amounts receivable from Union Carbide in respect of the Companys
liability for waste disposal costs as described in note 22 have been presented
in the accompanying UK GAAP financial statements netted from the provision
made. Under US GAAP such amounts cannot be offset and therefore an adjustment
to gross up the liability and show the nil million (2002: 0.7 million)
receivable separately in debtors would have to be made.  (xiv)
    
    Debt issue costs Under UK GAAP issued debt is stated on the balance sheet net of the
associated unamortised issue costs. Under US GAAP such debt issue costs are capitalised as an asset and
reported as deferred charges in the balance sheet. Therefore an adjustment to
gross up the debt liability and to show the 16.9 million asset as at December
31, 2003 (2002: 21.4 million), separately in debtors would have to be made.  (xv)
    
    Current assets and liabilities Provisions for liabilities and charges under UK GAAP includes nil million
(2002: 1.6 million) due within one year which would be classified as current
liabilities and nil million (2002: 0.7 million) receivable within one year
which would be classified as current assets under US GAAP. In addition, current
assets under UK GAAP includes a receivable from the ultimate parent undertaking
in the amount of 29.3 million (2002: 29.3 million) and other debtors and
prepayments of 44.4 million (2002: 34.7 million) which would be classified
as non-current under US GAAP.  (xvi)
    
    Emissions credits and incentive receivables Amounts receivable under the UK Emissions Trading Scheme are recorded as a
reduction to cost of sales in the period in which revenue is earned. Under UK GAAP, no entries are made to record Emission Credits received
under the scheme and held by the Company at the balance sheet date or to record
Emission Credits payable at the balance sheet date. Under US GAAP, Emission Credits received under the scheme and held by the
Company at the balance sheet date are classified as available-for-sale
securities. Accordingly, Emission Credits are recorded as financial assets and
held at fair value. Unrealised gains and losses arising at the balance sheet
date are initially recorded within Other Comprehensive Income with subsequent
recognition in income upon eventual sale. Emission Credits payable at the
balance sheet date are recorded at their fair value as financial liabilities.
Emission Credits that would be included within financial assets under US GAAP
as at December 31, 2003 totalled 2.9 million (2002: 8.0 million) with net
unrealised gains of 1.2 million (2002: 2.9 million). Emission Credits that
would be included within financial liabilities under US GAAP as at December 31,
2003 totalled 1.7 million (2002: 5.1 million). F-50




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) Effects on net income of differences between UK GAAP and US GAAP: Year Ended December 31,Notes
    
    2001
    
    2002
    
    2003( in millions)Profit/(loss) for the financial year
Profit/(loss) for the financial year under UK GAAP
    
    
    
    
    
    
    (21.1
    )
    
    
    35.2
    
    
    
    145.1Goodwill adjustments on acquisitions
    
    (i), (ii), (iii), (iv), (v)
    
    
    (34.2
    )
    
    
    (39.4
    )
    
    
    (36.4
    )Inventories
    
    (vi)
    
    
    (21.4
    )
    
    
    (0.6
    )
    
    
    Depreciation of tangible fixed assets
    
    (ii), (iii), (iv)
    
    
    29.0
    
    
    
    41.7
    
    
    
    44.7Amortisation of intangibles
    
    (ii), (iii), (iv)
    
    
    (6.6
    )
    
    
    (8.6
    )
    
    
    (8.5
    )In process research and development
    
    (ii)
    
    
    (2.2
    )
    
    
    
    
    
    
    Pensions
    
    (vii)
    
    
    (0.7
    )
    
    
    (2.0
    )
    
    
    (11.6
    )Derivative financial instruments
    
    (viii)
    
    
    (2.1
    )
    
    
    (2.3
    )
    
    
    2.6Capitalisation of interest less amortisation
    
    (ix)
    
    
    1.4
    
    
    
    2.3
    
    
    
    2.0Restructuring provisions
    
    (x)
    
    
    19.2
    
    
    
    
    
    
    
    Deferred taxation arising on UK GAAP results
    
    (xi)
    
    
    (3.9
    )
    
    
    
    
    
    
     arising on US GAAP adjustments
    
    (xi)
    
    
    (2.9
    )
    
    
    (3.3
    )
    
    
    (6.8
    )Profit/(loss) for the financial year under US GAAP
    
    
    
    
    
    
    (42.0
    )
    
    
    23.0
    
    
    
    131.1
 Effects on shareholders equity between UK GAAP and US GAAP: As at December 31,Notes
    
    2002
    
    2003( in millions)Shareholders equityShareholders equity under UK GAAP
    
    
    
    
    
    
    12.3
    
    
    
    113.5Goodwill adjustments on acquisition
    
    (i), (ii), (iii), (iv)
    
    
    304.0
    
    
    
    268.0Tangible fixed assets
    
    (i), (ii), (iii), (iv)
    
    
    (471.4
    )
    
    
    (425.1
    )Intangible fixed assets
    
    (ii), (iii), (iv)
    
    
    40.2
    
    
    
    31.7Pensions
    
    (vii)
    
    
    19.7
    
    
    
    14.6Derivative financial instruments
    
    (viii)
    
    
    (4.4
    )
    
    
    (1.8
    )Deferred taxation
    
    (xi)
    
    
    71.7
    
    
    
    64.9Foreign currency translation differences
    
    (xii)
    
    
    7.2
    
    
    
    15.9Shareholders equity under US GAAP
    
    
    
    
    
    
    (20.7
    )
    
    
    81.7
  Cash flow information The definition of cash flows differs between UK and US GAAP. Cash flow
under UK GAAP represents increases or decreases in cash, which is comprised
of cash in hand and repayable on demand less overdrafts. Under US GAAP cash
flow represents increases or decreases in cash and cash equivalents, which
include short term, highly liquid investments with remaining maturities of less
than 90 days when acquired, and exclude overdrafts. There are also certain differences in classification of items within the
cash flow statement between UK and US GAAP. Under UK GAAP, cash flows are
presented in the following categories: (i) operating activities; (ii) returns
on investments and servicing of finance; (iii) taxation; (iv) capital
expenditure; (v) acquisitions and disposals; (vi) equity dividends paid; (vii)
management of liquid resources; and (viii) financing activities. F-51




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) Cash flows from taxation, returns on investments, and servicing of finance
would be, with the exception of any interest paid but capitalised and equity
dividends paid, included as operating activities under US GAAP. Capitalised
interest would be included under investing activities for US GAAP.
Additionally, under US GAAP, cash flows from the purchase and sale of tangible
fixed assets and the acquisition of businesses would be shown within investing
activities. The payment of equity dividends and debt issue costs and financing
from overdrafts would be included under financing activities. Under US GAAP, the following amounts would have been reported: Year Ended December 31,2001
    
    2002
    
    2003( in millions)Net cash provided by operating activities:Under UK GAAP
    
    
    177.9
    
    
    
    210.8
    
    
    
    268.1Interest received
    
    
    2.5
    
    
    
    3.0
    
    
    
    2.9Interest paid
    
    
    (68.8
    )
    
    
    (63.6
    )
    
    
    (64.2
    )Dividend received from associate
    
    
    
    
    
    
    0.4
    
    
    
    Taxation paid
    
    
    (11.9
    )
    
    
    (11.1
    )
    
    
    (12.3
    )Under US GAAP
    
    
    99.7
    
    
    
    139.5
    
    
    
    194.5Net cash used in investing activities:Acquisition of fixed asset investments
    
    
    
    
    
    
    
    
    
    
    Payments to acquire tangible fixed assets
    
    
    (42.9
    )
    
    
    (51.2
    )
    
    
    (58.2
    )Receipts from sales of tangible fixed assets
    
    
    
    
    
    
    3.7
    
    
    
    3.2Acquisitions and disposals of businesses
    
    
    (777.0
    )
    
    
    (5.0
    )
    
    
    1.4(819.9
    )
    
    
    (52.5
    )
    
    
    (53.6
    )Net cash provided by financing activities:Under UK GAAP
    
    
    877.4
    
    
    
    (91.4
    )
    
    
    (81.1
    )Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    (9.9
    )Debt issue costs
    
    
    (48.7
    )
    
    
    (0.7
    )
    
    
    Cash overdraft
    
    
    0.6
    
    
    
    (1.7
    )
    
    
    (0.1
    )Under US GAAP
    
    
    829.6
    
    
    
    (93.8
    )
    
    
    (91.1
    )Net increase/(decrease) in cash and cash
equivalents under US GAAP
    
    
    109.1
    
    
    
    (6.8
    )
    
    
    49.8
  (b)
    
    Additional US GAAP disclosuresGoodwill and intangible assets The Company adopted Statement of Financial Accounting Standard (SFAS)
No. 142, Goodwill and Other Intangible Assets (SFAS 142) effective January
1, 2002. In accordance with SFAS 142, goodwill is no longer amortised to
income. Goodwill is subject to an impairment test to be performed at least
annually, whereby impairment reviews may result in annual goodwill write-downs.
Under the transitional provisions of SFAS 142, all goodwill existing as of
December 31, 2001 ceased to be amortised as of January 1, 2002. The Company has completed its annual goodwill impairment analysis under
SFAS 142 as of January 1, 2004, whereby goodwill was deemed not to be impaired. F-52




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) A reconciliation of the US GAAP net income amounts reported in the income
statement for the year ended December 31, 2001 to the amounts that would have
been reported under SFAS 142 is presented below: Year EndedDecember 31, 2001( in millions)Net loss as reported
    
    
    (42.0
    )Amortisation of goodwill, net of tax
    
    
    0.1Net loss as adjusted for SFAS 142
    
    
    (41.9
    )
 Goodwill on a US GAAP basis of 1.7, 1.7 and 1.7 million as of December
31, 2001, 2002 and 2003, respectively, related to the Ineos Oxide antifreeze
reporting unit. The Company does not have any intangible assets that would be classified
as indefinite-lived under FAS 142. Accordingly, the transitional provisions of
FAS 142 and the requirements to test indefinite-lived intangible assets on
January 1, 2004 for impairment are not applicable. The following table sets forth the carrying values and accumulated
amortisation under US GAAP for each major class of intangible asset at December
31, 2003: As at December 31, 2003Gross carrying
    
    Accumulated
    
    Weighted averagevalue
    
    amortisation
    
    amortisation period( in millions)
    
    YearsAmortised intangible assetsTrade names
    
    
    4.1
    
    
    
    1.0
    
    
    
    17Existing technology
    
    
    19.3
    
    
    
    5.5
    
    
    
    10Customer contracts
    
    
    27.5
    
    
    
    14.5
    
    
    
    8Non compete agreements
    
    
    6.8
    
    
    
    4.8
    
    
    
    5Licence fees
    
    
    2.0
    
    
    
    0.5
    
    
    
    1559.7
    
    
    
    26.3Unamortised intangible assetsGoodwill
    
    
    1.7
    
    
    
    61.4
    
    
    
    26.3
 The amortisation expense for the year ended December 31, 2003, together
with the estimated aggregate amortisation expense for each of the next 5 years
is as follows: ( in millions)2003
    
    
    9.12004
    
    
    8.92005
    
    
    5.82006
    
    
    3.12007
    
    
    3.12008
    
    
    2.9
 There were no changes to the carrying value of goodwill during the year
ended December 31, 2003. F-53




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued)Pensions and post retirement benefits The Company maintains a number of defined benefit pension plans. The
principal pension plans within the Company are the plans in the United Kingdom,
the United States, Germany and Belgium. Provision has also been made for the
benefit obligation of a small number of funded pension plans in other parts of
the group. The principal post retirement plans are for the Companys employees
in Belgium and the United States. The cost of pension benefits granted to
employees is accrued as an expense over the period in which the employee
renders services and becomes eligible to receive benefits. The cost of these
plans for current and future retirees is determined using the projected unit
credit actuarial method.  (i)
    
    Year ended December 31, 2003 The following table sets forth the reconciliation of projected benefit
obligation and plan assets, the funded status of the principal plans and
amounts recognised in the Companys balance sheet. UK
    
    Germany
    
    Belgium
    
    USA
    
    Total( in millions)Change in benefit obligationProjected benefit obligation at the
beginning of the year
    
    
    98.2
    
    
    
    20.9
    
    
    
    43.1
    
    
    
    14.1
    
    
    
    176.3Service cost
    
    
    5.0
    
    
    
    0.3
    
    
    
    3.3
    
    
    
    1.0
    
    
    
    9.6Interest cost
    
    
    5.4
    
    
    
    1.1
    
    
    
    2.6
    
    
    
    0.7
    
    
    
    9.8Employee contributions
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9Plan amendments
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.2Benefits paid
    
    
    (0.8
    )
    
    
    (1.1
    )
    
    
    (5.8
    )
    
    
    (0.4
    )
    
    
    (8.1
    )Actuarial (gain)/loss
    
    
    11.4
    
    
    
    (0.1
    )
    
    
    9.9
    
    
    
    (0.1
    )
    
    
    21.1Exchange adjustments
    
    
    (8.2
    )
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    (10.6
    )Projected benefit obligation at the end of
the year
    
    
    116.1
    
    
    
    21.1
    
    
    
    53.1
    
    
    
    12.9
    
    
    
    203.2Change in plan assetsFair value of plan assets at beginning of
the year
    
    
    64.3
    
    
    
    
    
    
    
    37.1
    
    
    
    4.4
    
    
    
    105.8Actual return on plan assets
    
    
    14.6
    
    
    
    
    
    
    
    2.0
    
    
    
    0.9
    
    
    
    17.5Employer contributions
    
    
    7.9
    
    
    
    
    
    
    
    3.1
    
    
    
    1.9
    
    
    
    12.9Employee contributions
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9Benefits paid
    
    
    (0.8
    )
    
    
    
    
    
    
    (5.8
    )
    
    
    (0.4
    )
    
    
    (7.0
    )Exchange adjustments
    
    
    (5.7
    )
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    (6.7
    )Fair value of plan assets at end of the year
    
    
    81.2
    
    
    
    
    
    
    
    36.4
    
    
    
    5.8
    
    
    
    123.4Funded statusFunded status at end of the year
    
    
    (34.9
    )
    
    
    (21.1
    )
    
    
    (16.7
    )
    
    
    (7.1
    )
    
    
    (79.8
    )Unrecognised net actuarial (gain)/loss
    
    
    35.8
    
    
    
    1.5
    
    
    
    31.4
    
    
    
    (0.1
    )
    
    
    68.6Additional minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prepaid benefit/(accrued cost)
    
    
    0.9
    
    
    
    (19.6
    )
    
    
    14.7
    
    
    
    (7.2
    )
    
    
    (11.2
    )
 The accumulated benefit obligation of the domestic UK pension plans as at
December 31, 2003 was 68.3 million. F-54




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) The principal actuarial assumptions used are as follows: UK
    
    Germany
    
    Belgium
    
    USADiscount rate
    
    
    5.60
    %
    
    
    5.50
    %
    
    
    5.50
    %
    
    
    6.25
    %Expected long term rate of return
    
    
    7.45
    %
    
    
    
    %
    
    
    7.00
    %
    
    
    8.00
    %Expected increase in future salary levels
    
    
    4.10
    %
    
    
    2.00
    %
    
    
    3.50
    %
    
    
    4.50
    %
 The components of the net periodic pension costs which arise under FAS No.
87 are as follows: UK
    
    Germany
    
    Belgium
    
    USA
    
    Total( in millions)Service cost
    
    
    5.0
    
    
    
    0.3
    
    
    
    3.3
    
    
    
    1.0
    
    
    
    9.6Interest cost
    
    
    5.4
    
    
    
    1.1
    
    
    
    2.6
    
    
    
    0.7
    
    
    
    9.8Expected return on assets
    
    
    (4.6
    )
    
    
    
    
    
    
    (2.5
    )
    
    
    (0.4
    )
    
    
    (7.5
    )Amortisation amounts
    
    
    6.3
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    7.8Net periodic pension expense
    
    
    12.1
    
    
    
    1.4
    
    
    
    4.9
    
    
    
    1.3
    
    
    
    19.7
 The Company provides post retirement health care benefits for most of its
employees in Belgium and the United States. The following table sets forth the reconciliation of the accumulated post
retirement benefit obligations (APBO), the funded status of the plan and the
amounts recognised in the Companys balance sheet. Year endedDecember 31, 2003( in millions)Change in benefit obligationProjected benefit obligation at the beginning of the year
    
    
    5.4Service cost
    
    
    0.2Interest cost
    
    
    0.2Actuarial (gain)/loss
    
    
    (1.0
    )Benefits paid
    
    
    (0.2
    )Exchange movements
    
    
    (0.6
    )Projected benefit obligation at the end of the year
    
    
    4.0Funded statusFunded status at end of the year
    
    
    (4.0
    )Unrecognised net actuarial (gain)/loss
    
    
    (1.0
    )Prepaid benefit/(accrued cost)
    
    
    (5.0
    )
 The principal actuarial assumption used is a discount rate of 6.25%. F-55




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) The components of the net periodic pension cost are as follows: Year endedDecember 31, 2003( in millions)Service cost
    
    
    0.2Interest cost
    
    
    0.2Expected return on assets
    
    
    Net periodic pension cost
    
    
    0.4
 Assumed health care cost trend rates have a significant effect on the
amounts reported for the Companys health care plans. A 1% change in the
assumed health care cost trend will have the following effects: 1% increase
    
    1% decrease( in thousands)Effect on total service and interest cost components
    
    
    82
    
    
    
    (67
    )Effect on the post retirement benefit obligations
    
    
    769
    
    
    
    (629
    )
 The actual asset allocations for the domestic UK pension plans, as at
December 31, 2003 together with the target allocation were as follows: At December 31, 2003Actual
    
    Target%
    
    %Equity securities
    
    
    85.0
    
    
    
    40-80Debt securities
    
    
    11.8
    
    
    
    0-40Other
    
    
    3.2
    
    
    
    0100
    
    
    
    100
 The expected rate of return on plan assets in the domestic UK plans has
been determined by weighted averages of actual holdings in equities, bonds and
other assets as at December 31, 2003. We have assumed the expected returns on
equities, bonds and other assets to be 8.0% pa, 5.0% pa and 3.5% pa
respectively as at December 31, 2003. The investment objectives of the domestic UK plans are as follows:  a)
    
    the acquisition of suitable assets of appropriate liquidity
which will generate income and capital growth to meet, together with
new contributions from members and the employer, the cost of current
and future benefits from the plans.b)
    
    to limit the risk of the assets failing to meet the
liabilities over the long term, in particular in relation to the
Minimum Funding Requirement.c)
    
    to minimise the long term costs of the plans by maximising
the return on the assets whilst having regard to the objective shown
under b. The expected employer pension contribution to the domestic UK plans for
the year ended December 31, 2004 is 3.8m. F-56




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued)  (ii)
    
    Year ended December 31, 2002 The following table sets forth the reconciliation of projected benefit
obligation and plan assets, the funded status of the principal plans and
amounts recognised in the Companys balance sheet. UK
    
    Germany
    
    Belgium
    
    USA
    
    Total( in millions)Change in benefit obligationProjected benefit obligation at the
beginning of the year
    
    
    106.1
    
    
    
    20.5
    
    
    
    42.4
    
    
    
    16.2
    
    
    
    185.2Service cost
    
    
    5.0
    
    
    
    0.3
    
    
    
    3.1
    
    
    
    1.2
    
    
    
    9.6Interest cost
    
    
    5.9
    
    
    
    1.3
    
    
    
    2.7
    
    
    
    1.0
    
    
    
    10.9Employee contributions
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8Benefits paid
    
    
    (1.1
    )
    
    
    (0.8
    )
    
    
    (1.6
    )
    
    
    (2.6
    )
    
    
    (6.1
    )Actuarial (gain)/loss
    
    
    (11.0
    )
    
    
    (0.4
    )
    
    
    (3.5
    )
    
    
    0.6
    
    
    
    (14.3
    )Exchange adjustments
    
    
    (7.5
    )
    
    
    
    
    
    
    
    
    
    
    (2.3
    )
    
    
    (9.8
    )Projected benefit obligation at the end of
the year
    
    
    98.2
    
    
    
    20.9
    
    
    
    43.1
    
    
    
    14.1
    
    
    
    176.3Change in plan assetsFair value of plan assets at beginning of
the year
    
    
    91.8
    
    
    
    
    
    
    
    51.6
    
    
    
    8.5
    
    
    
    151.9Actual return on plan assets
    
    
    (27.0
    )
    
    
    
    
    
    
    (13.2
    )
    
    
    (0.8
    )
    
    
    (41.0
    )Employer contributions
    
    
    5.9
    
    
    
    
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    6.8Employee contributions
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8Benefits paid
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.6
    )
    
    
    (2.6
    )
    
    
    (5.3
    )Exchange adjustments
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (7.4
    )Fair value of plan assets at end of the year
    
    
    64.3
    
    
    
    
    
    
    
    37.1
    
    
    
    4.4
    
    
    
    105.8Funded statusFunded status at end of the year
    
    
    (33.9
    )
    
    
    (20.9
    )
    
    
    (6.0
    )
    
    
    (9.7
    )
    
    
    (70.5
    )Unrecognised net actuarial (gain)/loss
    
    
    39.3
    
    
    
    1.7
    
    
    
    25.8
    
    
    
    4.9
    
    
    
    71.7Additional minimum pension liability
    
    
    (6.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.5
    )Prepaid benefit/(accrued cost)
    
    
    (1.1
    )
    
    
    (19.2
    )
    
    
    19.8
    
    
    
    (4.8
    )
    
    
    (5.3
    )
 The principal actuarial assumptions used are as follows: UK
    
    Germany
    
    Belgium
    
    USADiscount rate
    
    
    5.60
    %
    
    
    5.50
    %
    
    
    5.75
    %
    
    
    6.75
    %Expected long term rate of return
    
    
    7.10
    %
    
    
    
    %
    
    
    8.00
    %
    
    
    8.00
    %Expected increase in future salary levels
    
    
    3.75
    %
    
    
    3.50
    %
    
    
    3.50
    %
    
    
    4.50
    %
 The components of the net periodic pension costs which arise under FAS No.
87 are as follows: UK
    
    Germany
    
    Belgium
    
    USA
    
    Total( in millions)Service cost
    
    
    5.0
    
    
    
    0.3
    
    
    
    3.1
    
    
    
    1.2
    
    
    
    9.6Interest cost
    
    
    5.9
    
    
    
    1.3
    
    
    
    2.7
    
    
    
    1.0
    
    
    
    10.9Expected return on assets
    
    
    (6.1
    )
    
    
    
    
    
    
    (3.8
    )
    
    
    (0.7
    )
    
    
    (10.6
    )Amortisation amounts
    
    
    2.2
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    2.6Net periodic pension expense
    
    
    7.0
    
    
    
    1.6
    
    
    
    2.4
    
    
    
    1.5
    
    
    
    12.5
 F-57




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) The Company provides post retirement health care benefits for most of its
employees in Belgium and the United States. The following table sets forth the reconciliation of the accumulated post
retirement benefit obligations (APBO), the funded status of the plan and the
amounts recognised in the Companys balance sheet. Year endedDecember 31, 2002( in millions)Change in benefit obligationProjected benefit obligation at the beginning of the year
    
    
    5.4Service cost
    
    
    0.3Interest cost
    
    
    0.3Actuarial (gain)/loss
    
    
    0.1Benefits paid
    
    
    (0.2
    )Exchange movements
    
    
    (0.5
    )Projected benefit obligation at the end of the year
    
    
    5.4Funded statusFunded status at end of the year
    
    
    (5.4
    )Unrecognised net actuarial (gain)/loss
    
    
    0.4Prepaid benefit/(accrued cost)
    
    
    (5.0
    )
 The principal actuarial assumption used is a discount rate of 6.75%. The components of the net periodic pension cost are as follows: Year endedDecember 31, 2002( in millions)Service cost
    
    
    0.3Interest cost
    
    
    0.3Expected return on assets
    
    
    Net periodic pension cost
    
    
    0.6
 Assumed health care cost trend rates have a significant effect on the
amounts reported for the Companys health care plans. A 1% change in the
assumed health care cost trend will have the following effects: 1% increase
    
    1% decrease( in thousands)Effect on total service and interest cost components
    
    
    85
    
    
    
    (71
    )Effect on the post retirement benefit obligations
    
    
    694
    
    
    
    (570
    )
 F-58




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##### Table of Contents



INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) The actual asset allocations for the domestic UK pension plans as at
December 31, 2002, together with the target allocation is as follows: At December 31, 2002Actual
    
    Target%
    
    %Equity securities
    
    
    71.5
    
    
    
    40-80Debt securities
    
    
    15.3
    
    
    
    0-40Other
    
    
    13.2
    
    
    
    0100
    
    
    
    100
  (iii)
    
    Year ended December 31, 2001 The principal actuarial assumptions used are as follows: UK
    
    Germany
    
    Belgium
    
    USADiscount rate
    
    
    5.90
    %
    
    
    6.25
    %
    
    
    6.00
    %
    
    
    7.50
    %Expected long term rate of return
    
    
    6.90
    %
    
    
    
    
    
    
    6.00
    %
    
    
    8.00
    %Expected increase in future salary levels
    
    
    3.90
    %
    
    
    2.75
    %
    
    
    4.75
    %
    
    
    4.50
    %
 The components of the net periodic pension costs which arise under FAS No.
87 are as follows: UK
    
    Germany
    
    Belgium
    
    USA
    
    Total( in millions)Service cost
    
    
    6.4
    
    
    
    0.2
    
    
    
    2.8
    
    
    
    1.7
    
    
    
    11.1Interest cost
    
    
    5.1
    
    
    
    0.6
    
    
    
    2.2
    
    
    
    1.4
    
    
    
    9.3Expected return on assets
    
    
    (6.6
    )
    
    
    
    
    
    
    (3.6
    )
    
    
    (0.8
    )
    
    
    (11.0
    )Net periodic pension expense
    
    
    4.9
    
    
    
    0.8
    
    
    
    1.4
    
    
    
    2.3
    
    
    
    9.4
 The Company provides post retirement health care benefits for most of its
employees in Belgium and the United States. The principal actuarial assumption
used is a discount rate of 7.50%. The components of the net periodic pension cost are as follows: Year endedDecember 31, 2001( in millions)Service cost
    
    
    0.4Interest cost
    
    
    0.4Expected return on assets
    
    
    Net periodic pension cost
    
    
    0.8
 F-59




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) Assumed health care cost trend rates have a significant effect on the
amounts reported for the Companys health care plans. A 1% change in the
assumed health care cost trend will have the following effects: 1% increase
    
    1% decrease( in thousands)Effect on total service and interest cost components
    
    
    28
    
    
    
    (33
    )Effect on the post retirement benefit obligations
    
    
    269
    
    
    
    (318
    )
 Income taxes The US GAAP provision for income taxes differs from the amount of income
taxes determined by applying the applicable UK statutory income tax rate to
pre-tax income, as a result of the following differences: Year Ended December 31,2001
    
    2002
    
    2003Statutory UK rate
    
    
    (30.0
    )%
    
    
    30.0
    %
    
    
    30.0
    %Foreign rate differential
    
    
    2.4
    )%
    
    
    13.7
    )%
    
    
    2.6
    %Effect of non-deductible items
    
    
    (6.7
    )%
    
    
    (11.7
    )%
    
    
    (13.9
    )%Valuation allowance for deferred tax assets
    
    
    27.4
    )%
    
    
    42.2
    %
    
    
    (8.8
    )%Effect of a change in statutory rate
    
    
    
    %
    
    
    
    %
    
    
    
    %(6.9
    )%
    
    
    74.2
    %
    
    
    10.0
    %
 US GAAP deferred tax assets and liabilities at December 31, 2002 and 2003
are summarised as follows: As at December 31,2002
    
    2003( in millions)Deferred tax assets:Operating loss carry forwards
    
    
    71.7
    
    
    
    42.3Post-retirement benefits
    
    
    2.4
    
    
    
    2.4Provisions for expenses
    
    
    3.0
    
    
    
    3.0Accelerated depreciation and amortisation
    
    
    91.7
    
    
    
    92.7Differences between book and tax expense for other current assets
    
    
    2.5
    
    
    
    7.3Gross deferred tax assets
    
    
    171.3
    
    
    
    144.2Valuation allowance
    
    
    (94.9
    )
    
    
    (63.6
    )76.4
    
    
    
    84.1Deferred tax liabilities:Accelerated depreciation and amortisation
    
    
    
    
    
    
    Differences between book and tax expense for other current assets
    
    
    
    
    
    
    Pension benefits
    
    
    (0.8
    )
    
    
    (0.8
    )(0.8
    )
    
    
    (0.8
    )Net deferred tax asset
    
    
    75.6
    
    
    
    83.3
 F-60




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) The net operating loss carry forwards are not subject to expiration. A
valuation allowance has been provided for deferred tax assets that are more
likely than not to expire unutilised. The valuation allowance includes 0.9 million that represents a 100%
provision against net operating losses arising as a result of foreign exchange
losses incurred on intra-group loans. In order to be utilised, such losses
must be accepted by the relevant tax authority. At this time it is considered
more likely than not that the losses will not be accepted by such authority. A valuation allowance of 31.3 million against operating loss carry
forwards and other timing differences has been reversed in 2003. It is now
anticipated that such operating losses and other timing differences, primarily
in the USA, will be utilised in the foreseeable future and accordingly a
valuation allowance is no longer required. Segment information See Note 4 for the disclosure of segment information. The Company is
organised on the basis of four business segments  Ineos Oxide, Ineos Fluor,
Ineos Silicas and Ineos Phenol. The accounting policies of the segments are
the same as those described in Note 2, Principal accounting policies.
Inter-segment turnover are not considered material. The Company evaluates the performance of its segments and allocates
resources to them based upon EBITDA. Reconciliations of total segment sales to
total consolidated sales and of total EBITDA to consolidated operating profit
are disclosed in Note 4. Accounting estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of turnover and expenses during the
reporting period. Actual results could differ from those estimates. Current vulnerability due to certain concentrations The prices for Ineoss main products have historically been cyclical and
sensitive to overall supply relative to demand, the level of general business
activity and the availability and price of ethylene, and cumene the main
feedstocks and commodity products. Future prices are expected to fluctuate and
any prolonged or severe market downturn would affect operating results
adversely. The Company currently buys the majority of its feedstocks (ethylene and
cumene) from its four largest suppliers. Any significant increase in the cost
of these feedstocks, that Ineos was unable to pass onto its customers, or
interruption in the supply of these feedstocks would affect operating results
adversely. Certain of the Companys largest customers account for a significant
percentage of turnover. Loss of a significant customer or a number of
significant customers would affect operating results adversely. The Company maintains cash balances in excess of local insurance limits at
certain large financial institutions. The Company monitors the financial
condition of such institutions and considers the potential risk of loss to be
remote. F-61




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) Unaudited pro forma information The following unaudited pro forma information reflects the results of
operations under UK GAAP of the Company for the year ended December 31, 2001 as
though the acquisitions of Ineos Fluor, Ineos Silicas and Ineos Phenol had been
completed on January 1, 2001 and assumes there are no other changes in the
operations of the Company. Such pro forma information includes adjustments to
interest expense; changes in amortisation of goodwill relating to the
allocation of the purchase price and related adjustments to income tax. Year EndedDecember 31, 2001( in millions)Turnover
    
    
    2,063.0(Loss)/profit on ordinary activities after taxation
    
    
    (5.8
    )
 These unaudited pro forma results of operations have been prepared for
comparative purposes only. In managements opinion these results are not
necessarily indicative of the actual results that would have occurred had the
acquisition actually taken place on January 1, 2001 or of the future results of
operations. Fair value of financial instruments The fair values of cash, accounts receivable and accounts payable
approximate to the respective book values as a result of the short-term nature
of these assets and liabilities. The fair value of the Companys long-term debt is estimated based on the
current rates offered to the Company for debt of similar terms and maturities
as disclosed in note 34. All other long-term debt approximates to the carrying
value at December 31, 2003. Investment in equity securities The investment in Indaver NV is carried in the balance sheets as at
December 31, 2002 and 2003 at its historical cost of 0.7 million. The
directors are of the opinion that the fair value of this investment is not
readily determinable. Consolidation In January 2003, the FASB issued FIN 46. This pronouncement modifies the
framework for determining consolidation of certain entities that meet the
definition of a variable interest entity. This is met where the entity
either does not have sufficient equity of the appropriate nature to support its
expected losses, or the third party equity capital lacks certain
characteristics which would be expected to be present within a controlling
financial interest. Entities which do not meet this definition would continue to apply the
voting interest model and the Company would generally consolidate when it has a
controlling financial interest. Under the variable interest model promulgated by FIN 46, all ownership,
contractual and other pecuniary interests in the entity are evaluated to
determine which of the holders, if any, hold a variable interest which will
absorb the majority of the expected losses, expected residual returns, or both.
This holder is the primary beneficiary of the variable interest entity and
would be required to consolidate the entity. F-62




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  36.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) The provisions of FIN 46 are immediately effective for variable interest
entities created after January 31, 2003. However, FIN 46 requires disclosures in financial statements issued after
January 31, 2003 about variable interest entities that, when FIN 46 becomes
effective, it is reasonably possible that the reporting entity will consolidate
or about which the entity will disclose information in accordance with FIN 46.
The Group has undertaken a review to identify variable interest entities in
which it is the primary beneficiary or in which it has a significant variable
interest. The Group has concluded that it does not have any interests in
variable interest entities for which it would be either the primary beneficiary
in the arrangement or for which it would have a significant variable interest. Product warranty liability The Company warrants to the original purchaser of its products that it
will, at its option, repair or replace, without charge, such products if they
fail due to a manufacturing defect. The term of these warranties are typically
up to twelve months after sale. The Company accrues for product warranties
when, based on available information, it is probable that customers will make
claims under warranties relating to products that have been sold, and a
reasonable estimate of the costs (based on historical claims experience
relative to sales) can be made. The cost of claims made under product
warranties for the year ended December 31, 2003 were not material to the
business, consequently we have not provided a reconciliation of the movement of
product warrant liabilities for the year ended December 31, 2003. Contingencies and commitments The Company has various purchase commitments for materials and supplies
incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market. Future non-cancellable purchase commitments over the next five years are
set out in the table below. Beyond 2003 these relate to raw material purchases
where the Company has entered into purchase commitments to purchase a minimum
volume at the contract price ruling at the time of purchase. In the table
below, prices as at December 31, 2003 have been used. Year EndedDecember 31,( in millions)2004
    
    
    697.02005
    
    
    372.92006
    
    
    229.02007
    
    
    129.02008
    
    
    70.6After 2008
    
    
    78.31,576.8
 The Company is subject to various proceedings instituted by governmental
authorities arising under the provisions of applicable laws or regulations
relating to the discharge of materials into the environment or otherwise
relating to the protection of the environment. In managements opinion, none of
the proceedings is material to the financial condition or results of operation
of the Company. F-63




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INEOS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS  37.
    
    ULTIMATE CONTROLLING PARTY The ultimate controlling party is Mr. James Ratcliffe, director and
majority shareholder of Ineos Group Limited.  38.
    
    COMPANIES ACT 1985 The consolidated financial statements included herein do not comprise the
Companys statutory accounts within the meaning of section 240 of the Companies
Act 1985 of Great Britain. Statutory accounts for the year ended December 31,
2003 have not yet been delivered to the Registrar of Companies for England and
Wales. F-64




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SCHEDULE 1  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE To the Board of Directors
of Ineos Group Limited: Our audits of the consolidated financial statements referred to in our report
dated June 25, 2004 appearing in this 20-F Annual Report of Ineos Group
Limited also included an audit of the financial statement Schedule 1 included
in this Form 20-F. In our opinion, the financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP
London, United Kingdom
June 25, 2004 S-1




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##### Table of Contents



SCHEDULE 1  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (continued) INEOS GROUP LIMITED
CONDENSED PARENT COMPANY PROFIT AND LOSS ACCOUNTS Year Ended December 31,2001
    
    2002
    
    2003( in millions)Operating profit
    
    
    1.9
    
    
    
    
    
    
    
    10.7Net finance charges
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    Profit/(loss) on ordinary activities before taxation
    
    
    1.6
    
    
    
    (0.2
    )
    
    
    10.7Taxation on profit/(loss) on ordinary activities
    
    
    
    
    
    
    0.2
    
    
    
    (0.1
    )Profit/(loss) on ordinary activities after taxation.
    
    
    1.6
    
    
    
    
    
    
    
    10.6Equity dividends
    
    
    
    
    
    
    
    
    
    
    (10.0
    )Profit/(loss) for the financial year
    
    
    1.6
    
    
    
    
    
    
    
    0.6
 See notes to the condensed financial statements. S-2




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SCHEDULE 1  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (continued) INEOS GROUP LIMITED
CONDENSED PARENT COMPANY BALANCE SHEETS As at December 31,2002
    
    2003( in millions)Fixed assets investments
    
    
    17.7
    
    
    
    17.7Current assetsCash at bank and in hand
    
    
    0.1
    
    
    
    0.1Debtors: amounts due within one year
    
    
    0.2
    
    
    
    1.2Debtors: amounts due after more than one year
    
    
    14.0
    
    
    
    14.0Creditors: amounts due within one year
    
    
    (0.4
    )
    
    
    (0.8
    )Net current assets
    
    
    13.9
    
    
    
    14.5Total assets less current liabilities
    
    
    31.6
    
    
    
    32.2Creditors: amounts falling due after more than one year
    
    
    (29.3
    )
    
    
    (29.3
    )Net assets
    
    
    2.3
    
    
    
    2.9Share capital and reservesCalled up share capital
    
    
    0.2
    
    
    
    0.2Share premium account
    
    
    2.4
    
    
    
    2.4Capital redemption reserve
    
    
    0.1
    
    
    
    0.1Profit and loss account
    
    
    (0.4
    )
    
    
    0.2Equity shareholders funds
    
    
    2.3
    
    
    
    2.9
 See notes to the condensed financial statements. S-3




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SCHEDULE 1  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (continued) INEOS GROUP LIMITED
CONDENSED PARENT COMPANY CASH FLOW STATEMENTS Year Ended December 31,2001
    
    2002
    
    2003( in millions)Net cash flow from operating activities
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    (0.6
    )Equity dividends received
    
    
    2.1
    
    
    
    
    
    
    
    10.6Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    (10.0
    )Net cash inflow/(outflow) before financing
    
    
    2.3
    
    
    
    (0.2
    )
    
    
    Financing repurchase of ordinary share capital
    
    
    (2.4
    )
    
    
    
    
    
    
    Increase/(decrease) in cash
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    
 See notes to the condensed financial statements. S-4




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##### Table of Contents



SCHEDULE 1  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (continued) INEOS GROUP LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS  1.
    
    BASIS OF PREPARATION These condensed parent company financial statements have been prepared in
accordance with Rule 12-04, Schedule 1 of Regulation S-X, as the restricted net
assets of the subsidiaries of Ineos Group Limited exceed 25% of the
consolidated net assets of Ineos Group Limited. As disclosed in Note 21 to the
Ineos Group Limited consolidated financial statements, in order to repay its
obligations, Ineos Group Limited is dependent upon either dividends from its
subsidiary companies, which are restricted by terms contained in the indenture
governing the Senior Subordinated Notes and the Senior Secured Credit Facility
as described in Note 21 to the Ineos Group Limited consolidated financial
statements, or through a refinancing or equity transaction. Dividends received from subsidiary companies were 10.6 million (2002:
nil million; 2001: 2.1 million).  2.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP The financial statements are prepared in accordance with UK GAAP which
differs in certain significant respects from accounting principles generally
accepted in the United States (US GAAP). These differences principally relate
to the following items and the effect on net income and shareholders equity is
shown in the following tables. All significant differences between UK GAAP and
US GAAP affecting Ineos Group Limited have been addressed.  (i)
    
    Effect of equity accounting for subsidiary undertakings Under UK GAAP investments in subsidiary undertakings are stated in the
financial statements using the historical cost basis of measurement.
Consequently, such investments are stated at their historical cost less
provision for diminution in value of 17.7 million (2002: 17.7 million). For US GAAP purposes such investments in subsidiary undertakings are
stated in the balance sheet using the equity method pursuant to Rule 12-04,
Schedule 1 of Regulation S-X such that the carrying value would be 110.6
million (2002: 10.0 million).  (ii)
    
    Effect of applying US GAAP to equity method investments The adjustments include the aggregate effect on profit and loss and
shareholders equity of applying US GAAP to the subsidiary undertakings
accounted for under the equity method of accounting. See footnote 36 to the
Ineos Group Limited consolidated financial statements for a detailed discussion
of the individual differences. S-5




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##### Table of Contents



SCHEDULE 1  CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (continued) INEOS GROUP LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS  2.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
(Continued) Effects on net income of differences between UK GAAP and US GAAP: Year Ended December 31,Notes
    
    2001
    
    2002
    
    2003( in millions)Profit/(loss) for the financial yearProfit/(loss) for the financial year under UK GAAP
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    0.6Effect of equity accounting for subsidiary undertakings
    
    (i)
    
    
    (22.7
    )
    
    
    35.2
    
    
    
    144.5Effect of applying US GAAP to equity method investments
    
    (ii)
    
    
    (20.9
    )
    
    
    (21.3
    )
    
    
    (14.0
    )Profit/(loss) for the financial year under US GAAP
    
    
    
    
    
    
    (42.0
    )
    
    
    13.9
    
    
    
    131.1
 Effects on shareholders equity between UK GAAP and US GAAP: As at December 31,Notes
    
    2002
    
    2003( in millions)Shareholders equityShareholders equity under UK GAAP
    
    
    
    
    
    
    2.3
    
    
    
    2.9Effect of equity accounting for subsidiary undertakings
    
    (i)
    
    
    10.0
    
    
    
    110.6Effect of applying US GAAP to equity method investments
    
    (ii)
    
    
    (42.1
    )
    
    
    (31.8
    )Shareholders equity under US GAAP
    
    
    
    
    
    
    (29.8
    )
    
    
    81.7
 There are no differences in cash flows between UK and US GAAP. S-6